<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 0-21899
KENWICK INDUSTRIES, INC.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0596319
--------------------------------------- --------------------------------------
(State or other jurisdiction
of incorporation or organization) (IRS Employer Identification No.)
KENWICK INDUSTRIES, INC.
660 LINTON BOULEVARD, SUITE 202
DELRAY BEACH, FLORIDA 33445
--------------------------------------------------------------------------------
(Address of principal executive offices)
(561) 278-6090
--------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes /X/ No / /
As of June 30, 2000, Kenwick Industries, Inc. had 10,946,683 shares of $.01 par
value common stock outstanding.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following table sets forth revenues and expenses in aggregate dollars and as
a percentage of net sales for the Company for the six months ended June 30, 1999
and 2000.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30
---------------------------------------------------------------------
Unaudited 2000 Unaudited 1999
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net Sales 4,747,672 100.0% 3,186,079 100.0%
Cost of Goods Sold 4,155,303 87.5% 2,113,957 66.3%
Interest and Other Income 778,650 16.4% 535,914 16.8%
General and Administrative Expenses 868,549 18.3% 931,545 29.2%
Income before Income Tax 461,220 9.7% 495,276 15.5%
Net Income 286,864 6.0% 203,175 6.4%
</TABLE>
NET SALES. The Company's revenues increased approximately $1.6 million, or 50%
from approximately $3.2 million for the six months ended June 30, 1999 to
approximately $4.8 million for the six months ended June 30, 2000. Kenwick's
sales of language tapes decreased approximately $2,000 while Automax's sales of
automobiles and related income increased approximately $1.6 million.
COSTS. Costs of goods sold were approximately $4.2 million for the six months
ended June 30, 2000 compared to approximately $2.1 million during the same
period in 1999, representing an increase of approximately $2.0 million, or 96%.
This is due to increased Automax activity.
INTEREST INCOME. Interest income increased from approximately $536,000 for the
six months ended June 30, 1999 to approximately $779,000 for the six months
ended June 30, 2000, an increase of 45%. The increase in interest income is
attributable to increased activity at Automax. Automax's primary business
activity is buying, selling and financing used cars and interest income is a
significant source of income.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
(including depreciation and amortization) decreased approximately $63,000 from
approximately $932,000 for the six months ended June 30, 1999 to approximately
$869,000 for the six months ended June 30, 2000. Increased interest expense of
nearly $55,000 and additional rent expense of approximately $43,000 were offset
by reductions of approximately $71,000 of salaries and commissions, $27,000 of
advertising, $28,000 reserve for bad debt and nearly $25,000 of general office
administration costs.
2
<PAGE>
Liquidity and Capital Resources
The following table sets forth the major components of the increase/(decrease)
in the cash and cash equivalents of the combined predecessor companies:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30
------------------------------------------
Unaudited 2000 Unaudited 1999
------------------------------------------
<S> <C> <C>
Net cash (used) by operating activities (585,386) (64,363)
Net cash (used) by investing activities (6,701) (18,687)
Net cash provided by financing activities 572,331 612,634
Net increase (decrease) in cash (19,756) 529,584
</TABLE>
Net cash flows used in operating activities were approximately $64,000 and
$585,000 during the six months ended June 30, 1999 and 2000, respectively. Cash
used in operating activities during the six months ended June 30, 1999 can be
primarily attributed to approximately $150,000 of interest imputed to discounts
on the Company's convertible debentures, an increase of about $1.5 million of
accounts receivable, and an increase of $192,000 in inventory offset by an
increase of $1.2 million of accounts payable and accrued liabilities. Cash used
in operating activities for the six months ended June 30, 2000 can be primarily
attributed to approximately $287,000 in operating income and an increase of over
$1.7 million of accounts receivable offset by a decrease of over $430,000 in
inventory and an increase of approximately $331,000 of accounts payable and
accrued liabilities.
Cash used in investing activities was approximately $19,000 and $7,000 during
the six months ended June 30, 1999 and 2000, respectively. The 1999 and 2000
amounts reflect the acquisition of property and equipment consisting of office
equipment and leasehold improvements.
Cash provided by financing activities was approximately $613,000 and $572,000
during the six months ended June 30, 1999 and 2000 respectively. During the six
months ended June 30, 1999, about $126,000 was raised through increases in
related party loans and $487,000 was raised by the sale of convertible
debentures. During the six months ended June 30, 2000, about $293,000 was raised
through increases in related party loans, $115,000 was raised through the sale
of convertible debentures and $192,000 was contributed capital from
shareholders.
The activities described above resulted in a net increase in cash of about
$530,000 for the six months ended June 30, 1999 and a net decrease of about
$20,000 for the six months ended June 30, 2000.
Revenue and Expenses by Segment
The following table sets forth the unaudited revenues and expenses of the
Company by segment for the six months ended June 30, 2000.
3
<PAGE>
<TABLE>
<CAPTION>
FOR THE 6 MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
---------------------------------------------------------------------
Eliminating Total/
Kenwick Automax Entries Consolidated
---------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 37,299 4,710,373 4,747,672
Interest Income 58,657 757,519 (37,526) 778,650
Interest Expense - Regular 24,075 124,778 (37,526) 111,327
Interest Expense - Discount 28,750 - 28,750
On Convertible Debentures
Depreciation and 3,421 6,989 10,410
Amortization
Net Income (Loss) (91,759) 378,623 286,864
Total Assets At 6/30/2000 981,770 6,450,673 (889,676) 6,542,767
</TABLE>
4
<PAGE>
The following table sets forth the unaudited revenues and expenses of the
Company by segment for the six months ended June 30, 1999.
<TABLE>
<CAPTION>
FOR THE 6 MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
-------------------------------------------------------------------
Eliminating Total/
Kenwick Automax Entries Consolidated
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue 39,350 3,146,729 3,186,079
Interest Income 4 535,910 535,914
Interest Expense - Regular 19,874 36,590 56,464
Interest Expense - Discount 149,825 - 149,825
On Convertible Debentures
Depreciation and 11,670 5,121 16,791
Amortization
Net Income (Loss) (242,422) 445,597 203,175
Total Assets At 12/31/1999 108,018 5,216,254 5,324,272
</TABLE>
5
<PAGE>
FINANCIAL STATEMENTS
KENWICK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
6/30/00 12/31/99
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
Cash $ 9,799 $ 29,555
Installment loans receivable, net 5,193,230 3,515,095
Inventory 1,201,576 1,633,631
Property and equipment, net 93,604 96,273
Intangible assets 16,014 29,554
Security deposits and other assets 28,544 20,164
----------- -----------
Total assets $ 6,542,767 $ 5,324,272
=========== ===========
Accounts payable and accrued expenses $ 473,920 $ 297,075
Payroll tax payable 27,858 48,509
Due to related parties 2,744,028 2,450,976
Note payable 209,191 244,691
Income tax payable 507,356 333,000
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 11,946,700 and 9,471,683
shares issued and outstanding at
June 30, 2000 and and December 31, 1999,
respectively 104,717 94,717
Additional paid in capital 2,801,742 2,468,213
Retained (deficit) (326,045) (612,909)
=========== ===========
Total liabilities and stockholders' equity $ 6,542,767 $ 5,324,272
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
FS-1
<PAGE>
KENWICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
NET SALES $ 2,079,311 1,445,595
COST OF GOODS SOLD 1,963,777 777,426
----------- -----------
GROSS PROFIT 115,534 668,169
INTEREST AND OTHER INCOME 341,988 117,522
----------- -----------
INCOME BEFORE OPERATING EXPENSES 457,522 785,691
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising 14,253 23,189
Provision for doubtful accounts 5,710 117,488
Depreciation and amortization 4,837 8,407
Interest 49,165 19,756
Insurance 17,273 12,700
Rent 79,038 56,309
Debentures and other fees 160 28,068
Officers salaries 12,500 47,793
Other general & administrative expenses 187,425 151,793
----------- -----------
Total general and administrative expenses 370,361 465,503
----------- -----------
INCOME FROM OPERATIONS 87,161 320,188
----------- -----------
OTHER EXPENSES
Interest - discount on convertible debentures - 49,315
Impairment loss 12,500 15,695
----------- -----------
Total other expenses 12,500 65,010
----------- -----------
INCOME BEFORE INCOME TAXES 74,661 255,178
INCOME TAXES (BENEFIT) (60,987) 149,066
----------- -----------
NET INCOME $ 135,648 $ 106,112
=========== ===========
BASIC EARNINGS PER SHARE:
Weighted average shares outstanding 11,438,350 4,598,251
=========== ===========
Earnings per share:
Income from operations $ 0.01 $ 0.07
=========== ===========
Net income $ 0.01 $ 0.02
=========== ===========
DILUTED EARNINGS PER SHARE:
Adjusted weighted average shares outstanding 11,438,350 4,813,251
=========== ===========
Earnings per share:
Income from operations $ 0.01 $ 0.07
Net income $ 0.01 $ 0.02
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
FS-2
<PAGE>
KENWICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
NET SALES $ 4,747,672 3,186,079
COST OF GOODS SOLD 4,155,303 2,113,957
----------- -----------
GROSS PROFIT 592,369 1,072,122
INTEREST AND OTHER INCOME 778,650 535,914
----------- -----------
INCOME BEFORE OPERATING EXPENSES 1,371,019 1,608,036
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Advertising 26,363 53,099
Provision for doubtful accounts 207,508 234,976
Depreciation and amortization 10,410 16,791
Interest 111,327 56,464
Insurance 33,617 37,381
Rent 154,331 111,591
Debentures and other fees 20,622 63,340
Officers salaries 25,000 53,545
Other general & administrative expenses 279,371 304,358
----------- -----------
Total general and administrative expenses 868,549 931,545
----------- -----------
INCOME FROM OPERATIONS 502,470 676,491
----------- -----------
OTHER EXPENSES
Interest - discount on convertible debentures 28,750 149,825
Impairment loss 12,500 31,390
----------- -----------
Total other expenses 41,250 181,215
----------- -----------
INCOME BEFORE INCOME TAXES 461,220 495,276
INCOME TAXES 174,356 292,100
=========== ===========
NET INCOME $ 286,864 $ 203,175
=========== ===========
BASIC EARNINGS PER SHARE:
Weighted average shares outstanding 11,438,350 4,598,251
=========== ===========
Earnings per share:
Income from operations $ 0.04 $ 0.15
=========== ===========
Net income $ 0.03 $ 0.04
=========== ===========
DILUTED EARNINGS PER SHARE:
Adjusted weighted average shares outstanding 11,438,350 4,813,251
=========== ===========
Earnings per share:
Income from operations $ 0.04 $ 0.14
Net income $ 0.03 $ 0.04
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
FS-3
<PAGE>
KENWICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income 286,864 203,175
Adjustments to reconcile net income to
cash (used in) operating activities:
Depreciation and amortization 10,410 16,791
Impairment loss 12,500 31,390
Interest - discount on convertible debentures 28,750 149,825
(Increase) in accounts receivable (1,678,135) (1,485,154)
(Increase) in security deposits and other assets (8,380) (8,000)
(Increase)/decrease in inventory 432,055 (191,644)
Increase in accounts payable 176,845 909,740
Increase/(decrease) in payroll tax payable (20,651) 14,464
Increase in income tax payable 174,356 295,050
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (585,386) (64,363)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (6,701) (18,687)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (6,701) (18,687)
----------- -----------
FINANCING ACTIVITIES
Principal reduction on note payable (35,500) (47,500)
Sale of debenture bonds 115,000 487,000
Increase in contributed capital 192,269 56,921
Increase in related party loans 293,052 126,383
Costs incurred in private placement (2,490) (10,170)
Sale of common stock 10,000 -
----------- -----------
NET CASH PROVIDED IN FINANCING ACTIVITIES 572,331 612,634
----------- -----------
NET INCREASE/(DECREASE) IN CASH (19,756) 529,584
CASH AT BEGINNING OF THE PERIOD 29,555 12,037
----------- -----------
CASH AT THE END OF THE PERIOD $ 9,799 $ 541,621
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 15,000 $ 119
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
FS-4
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals), which are necessary for a fair presentation of the results
for the periods presented. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the Company's Annual Report for the year ended December 31, 1999. The
results of operations for the six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company operates in two business segments:
In August 1995, upon organization, the Company acquired the assets of American
Video Language Institute, Inc. These assets consisted of the trade name,
trademarks and copyrights needed to produce the English language courses. The
cost of the acquisition was $725,000, which exceeded the fair value of the net
tangible assets acquired by $655,000.
In August 1998, the Company acquired all of the issued and outstanding shares of
the common stock of Automax USA, Inc., Automax International, Inc. and Automax
USA Finance, Inc. (collectively referred to as "Automax") in exchange for
1,000,000 shares of Kenwick's common stock. This acquisition is being accounted
for by the pooling-of-interest method. These financial statements have been
restated to reflect the acquisition.
Automax is a Florida corporation organized in 1997, and is engaged in the
business of buying, selling and financing used cars in West Palm Beach, Florida.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
The Company and its subsidiaries utilizes the accrual basis of accounting. Sales
are recorded when products are shipped or when cars are delivered. The Company
recognizes interest on its installment loans receivable over the term of the
loan using the interest method.
FS-5
<PAGE>
INSTALLMENT LOANS RECEIVABLE
The installment loans receivable are stated at the amount of unpaid principal
reduced by an allowance for doubtful accounts as follows:
As of June 30, 2000
<TABLE>
<CAPTION>
Automax Kenwick Combined
------- ------- --------
<S> <C> <C> <C>
Retail Trade Receivables $5,619,338 $14,326 $5,633,664
Less: allowance for doubtful accounts (440,434) - (440,434)
---------- ------- ----------
$5,178,904 $14,326 $5,193,230
---------- ------- ----------
As of December 31, 1999
<CAPTION>
Automax Kenwick Combined
---------- ------- ----------
<S> <C> <C> <C>
Retail Trade Receivables $3,977,851 $ 3,008 $3,980,859
Less: allowance for doubtful accounts ( 465,764) - ( 465,764)
---------- ------- ----------
$3,512,087 $ 3,008 $3,515,095
---------- ------- ----------
</TABLE>
The receivables are collateralized by automobiles. If payments are delinquent,
the Company repossesses the automobiles which are then resold.
The allowance for doubtful accounts is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The Company makes
continuous credit reviews of the loan portfolios and considers current economic
conditions, review of specific problem loans, and other factors in determining
the adequacy of its allowances. The Company's charge-off policy is based on a
loan-by-loan review. Since the Company has a short history, historical
information is being developed.
INVENTORIES
Kenwick's inventories consist of blank and completed video tapes and shipping
materials. Inventories are stated at the lower of cost (determined on a
first-in-first-out basis) or market.
Automax's inventories consist of used automobiles held for sale using the
specific identification method. Cost includes acquisition expenses, including
reconditioning and transportation costs. Inventories including parts and
accessories are valued at the lower of cost (first-in, first-out) or market.
FS-6
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Expenditures for major additions and
improvements are capitalized, while minor replacements, maintenance and repairs
are charged to expense as incurred. When property is retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in the Consolidated Statement of
Income.
Depreciation is computed using the straight line method for financial reporting
purposes, and modified accelerated cost recovery system for income tax purposes.
For both methods, the useful lives are 5-7 years.
Deferred income taxes on the difference between tax and book depreciation is
insignificant.
A summary of property and equipment at June 30, 2000 and December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
6/30/00 12/31/99
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment $ 77,984 $ 77,984
Machinery and equipment 29,634 26,834
Leasehold improvements 59,019 55,119
-------- --------
Subtotal 166,637 159,937
Less: accumulated depreciation (73,033) (63,664)
-------- --------
93,604 96,273
======== ========
</TABLE>
Intangible Assets
Intangible assets consist primarily of the cost of the acquired business in
excess of the fair value of the net tangible assets acquired (goodwill). These
costs also include copyrights, trademarks and customer lists.
The intangible assets were being amortized over 15 years, straight line method,
for both financial reporting and federal income taxes.
During the first six months of 2000, management reviewed its intangible assets
for impairment based on assessments of future operations and recorded an
impairment loss of $12,500.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FS-7
<PAGE>
ADVERTISING
Advertising costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, deferred income would be provided to
show the effect of temporary differences between the recognition of revenue an
expenses for financial and income tax reporting purposes and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
The acquired business in 1998, which was accounted for under the
pooling-of-interests method of accounting was an S corporation for income tax
purposes. The S corporation status of this company was terminated in 1998.
For purposes of these consolidated financial statements, federal and state
income taxes, have been recorded as if this company had filed a conventional
Corporation tax return for the pre-acquisition periods.
The components of the provision for income taxes for the six months ended June
30 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current:
Federal $148,000 $248,000
State 26,000 44,000
-------- --------
Provision for income taxes $174,000 $292,000
======== ========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced sale or liquidation.
At June 30, 2000, the Company's financial instruments included cash,
receivables, accounts payable and borrowings.
At June 30, 2000, the fair values of the above financial instruments
approximated carrying values because of the short-term nature of these
instruments.
FS-8
<PAGE>
EARNINGS (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statements No.
128, "Earnings Per Share", which simplifies the standards for computing earnings
per share ("EPS") previously found in APR No. 15, "Earnings Per Share". It
replaces the presentation of primary EPS with a presentation basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
The Company adopted SFAS No. 128 in 1997 and its implementation did not have a
material effect on the financial statements. EPS has been restated for all prior
periods presented.
Basic and dilutive net income (loss) per common share is based on the net income
(loss) divided by the weighted average number of common shares outstanding
during each year.
The Company's potential issuable shares of common stock pursuant to outstanding
stock purchase warrants and employee stock options are excluded from the
Company's diluted computation as their effect would be antidilutive. However,
the Company's convertible debentures are included in the computation of diluted
earnings per share since they are dilutive.
NOTE 3 - DUE TO RELATED PARTIES
The Company has loans with various shareholders in the amount of $2,744,028 and
$2,450,976 at June 30, 2000 and December 31, 1999 respectively. The note calls
for principal payments of $20,000 per month commencing November 1, 1998 and on
the first day of each month thereafter. The note matures on March 1, 2009. The
notes were non-interest bearing until March 1, 1999, at which time interest is
payable at prime plus 1/2%. For the two months, January and February 1999,
interest expense of $36,590 was imputed along with a corresponding credit to
additional paid in capital. This charge is in accordance with Staff Accounting
Bulletin Topics 1B and 5T. Interest was calculated at prime plus 1/2%.
The Company is in default regarding the above payments and has obtained a waiver
from the Holder while the terms are being renegotiated.
FS-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KENWICK INDUSTRIES, INC.
(Registrant)
Date: August 3, 2000
By:
/s/ Kenneth S. Wulwick
------------------------- Chief Executive Officer, President and Director
Kenneth S. Wulwick
