<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
AMENDMENT 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 0-21899
KENWICK INDUSTRIES, INC.
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(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0596319
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
KENWICK INDUSTRIES, INC.
660 LINTON BOULEVARD, SUITE 202
DELRAY BEACH, FLORIDA 33445
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(Address of principal executive offices)
(561) 278-6090
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(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 [ ] No [X]
As of March 31, 2000, Kenwick Industries, Inc. had 10,946,683 shares of $.01
par value common stock outstanding.
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FINANCIAL INFORMATION
FINANCIAL STATEMENTS
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
3/31/00 12/31/99
(UNAUDITED) (AUDITED)
-------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 39,093 $ 29,555
Installment loans receivable, net 5,521,610 3,515,095
Inventory 637,827 1,633,631
Property and equipment, net 94,939 96,273
Intangible assets 28,618 29,554
Security deposits & other assets 27,543 20,164
----------- -----------
Total Assets $ 6,349,630 $ 5,324,272
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 813,773 $ 345,584
Due to related parties 2,480,354 2,450,976
Note payable 229,191 244,691
Income tax payable 568,344 333,000
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,946,683 and 9,471,683 shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 109,467 94,717
Additional paid in capital 2,610,193 2,468,213
Retained (deficit) (461,692) (612,909)
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,349,630 $ 5,324,272
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
<S> <C> <C>
NET SALES 2,668,360 1,740,484
Cost of goods sold 2,190,825 1,447,530
---------- ----------
GROSS PROFIT 477,535 292,954
Interest and other income 436,661 418,393
---------- ----------
Income before operating expenses 914,196 711,347
---------- ----------
General and administrative expenses
Advertising 12,111 29,909
Provision for doubtful accounts 201,798 117,488
Interest 62,161 43,421
Insurance 16,344 24,682
Rent 75,293 55,281
Salaries and commissions 21,162 35,273
Officers salaries 12,500 18,998
Taxes and licenses 1,994 4,712
Other general & admin. expenses 95,523 153,237
---------- ----------
Total general and administrative expenses 498,886 483,001
---------- ----------
INCOME FROM OPERATIONS 415,310 228,346
---------- ----------
OTHER EXPENSES
Interest - discount on convertible debentures 28,750 100,510
Impairment loss -- 15,695
---------- ----------
TOTAL OTHER EXPENSES 28,750 116,205
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 386,560 112,141
Income taxes 235,343 91,852
---------- ----------
NET INCOME (LOSS) $ 151,217 $ 20,289
========== ==========
BASIC EARNINGS PER SHARE:
Weighted average shares outstanding 10,930,016 4,402,609
========== ==========
Earnings per share:
Income from operations $ 0.04 $ 0.05
========== ==========
Net income (loss) $ 0.01 $ 0.00
========== ==========
DILUTED EARNINGS PER SHARE:
Adjusted weighted average shares outstanding 10,930,016 4,971,205
========== ==========
Earnings per share:
Income from operations $ 0.04 $ 0.05
========== ==========
Net income (loss) $ 0.01 $ 0.00
========== ==========
</TABLE>
Notes to financial statements are an integral part of this statement.
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flow
(Unaudited)
Three Months Ended March 31
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITY
Net income $ 151,217 $ 20,289
Adjustments to reconcile net income
to net cash provided (used) by operating activity:
Depreciation & amortization 5,569 8,349
Impairment loss -- 15,695
Interest - discount on convertible debentures 28,750 100,510
Non-Cash Charitable Contribution 2,500 --
Changes in operating assets and liabilities:
Accounts receivable, net (2,024,069) (929,607)
Inventory 995,804 191,087
Prepaid expenses and other assets (7,379) 373
Accounts payable and accrued liabilities 703,533 (70,415)
----------- -----------
Net cash used by operating activity (144,075) (663,719)
INVESTING ACTIVITY
Additions to property and equipment (3,299) (3,441)
----------- -----------
Net cash provided (used) by investing activity (3,299) (3,441)
FINANCING ACTIVITY
Principal payments to reduce notes payable (15,500) (25,000)
Proceeds from related parties 46,932 323,077
Proceeds from sale of common stock -- --
Proceeds from sale of convertible debenture 115,000 400,000
Increase in contributed capital -- 172,352
Costs incurred in Private Placement Memo (2,020) --
Capital contribution by shareholder 12,500 (12,500)
----------- -----------
Net cash provided by financing activity 156,912 857,929
=========== ===========
Net increase in cash and cash equivalents 9,538 190,769
Cash and cash equivalents at beginning of period 29,555 12,037
----------- -----------
Cash and cash equivalents at end of period $ 39,093 $ 202,806
=========== ===========
</TABLE>
Notes to financial statements are an integral part of this statement.
<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 three months ended March 31, 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.
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KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 March 31, 2000
AUTOMAX KENWICK COMBINED
---------- ------- ----------
Retail Trade Receivables $6,173,559 $15,614 $6,189,173
Less: allowance for doubtful
accounts (667,563) -- (667,563)
---------- ------- ----------
$5,505,996 $15,614 $5,521,610
========== ======= ==========
As of December 31, 1999
AUTOMAX KENWICK COMBINED
---------- ------- ----------
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
========== ======= ==========
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.
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 March 31, 2000 and December 31, 1999 is
as follows:
3/31/00 12/31/99
--------- ---------
Furniture, fixtures and
equipment $ 77,984 $ 77,984
Machinery and equipment 26,834 26,834
Leasehold improvements 58,419 55,119
--------- ---------
Subtotal 163,237 159,937
Less: accumulated depreciation (68,298) (63,664)
--------- ---------
$ 94,939 $ 96,273
========= =========
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 First Quarter 1999, management reviewed its intangible assets for
impairment based on assessments of future operations and recorded an impairment
loss of $15,695.
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
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KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
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 C
corporation tax return for the pre-acquisition periods.
The components of the provision for income taxes for the three months ended
March 31 are as follows:
2000 1999
---- ----
Current:
Federal $200,000 $ 78,000
State 35,000 14,000
-------- --------
Provision for income taxes $235,000 $ 92,000
======== ========
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 March 31, 2000, the Company's financial instruments included cash,
receivables, accounts payable and borrowings.
At March 31, 2000, the fair values of the above financial instruments
approximated carrying values because of the short-term nature of these
instruments.
<PAGE>
KENWICK INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 $2,480,354 and
$2,450,976 at March 31, 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.
<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 three months ended March 31,
1999 and 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
UNAUDITED 2000 UNAUDITED 1999
-------------- --------------
<S> <C> <C> <C> <C>
Net Sales 2,668,360 100.0% 1,740,484 100.0%
Cost of Goods Sold 2,190,825 82.1% 1,447,530 83.2%
Interest Income 436,661 16.4% 418,393 24.0%
General and Administrative Expenses 498,886 18.7% 483,001 27.8%
Income before Income Tax 386,560 14.5% 112,141 6.4%
Net income 151,217 5.7% 20,289 1.2%
</TABLE>
NET SALES. The Company's revenues increased approximately $930,000, or 53% from
approximately $1.7 million for the three months ended March 31, 1999, to under
$2.7 million for the three months ended March 31, 2000. Kenwick's sales of
language tapes increased approximately $6,000 while Automax's sales of
automobiles and related income increased approximately $920,000.
COSTS. Costs of goods sold were approximately $2.2 million for the three
months ended March 31, 2000 compared to approximately $1.4 million during the
same period in 1999, representing an increase of $0.8 million, or 51%. This
is due to increased Automax activity.
INTEREST INCOME. Interest income increased from approximately $418,000 for the
three months ended March 31, 1999 to approximately $437,000 for the three months
ended March 31, 2000, an increase of 5%. 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), increased approximately $16,000
from approximately $483,000 for the three months ended March 31, 1999 to
about $499,000 for the three months ended March 31, 2000. An increased
provision for doubtful accounts of approximately $84,000 for 2000 over 1999
was offset by reductions of approximately $18,000 of advertising expense,
$14,000 of salaries and commissions and nearly $36,000 of general office
administration costs.
<PAGE>
Liquidity and Capital Resources
The following table sets forth the major components of the increase in the cash
and cash equivalents of the combined predecessor companies:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
UNAUDITED 2000 UNAUDITED 1999
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Net cash (used) by operating activities (144,075) (663,719)
Net cash (used) by investing activities (3,299) (3,441)
Net cash provided by financing activities 156,912 857,929
Net increase in cash 9,538 190,769
Net cash flows used in operating activities were approximately $664,000 and
$144,000 during the three months ended March 31, 1999 and 2000, respectively.
Cash used in operating activities during the three months ended March 31,
1999 can be primarily attributed about $100,000 in interest imputed to
discounts on the Company's convertible debentures, and a $191,000 decrease in
inventory, offset by a $930,000 increase in accounts receivable and a $70,000
decrease in accounts payable. Cash used in operating activities in the three
months ended March 31, 2000 can be primarily attributed to about $151,000 in
net operating income, a $996,000 decrease in inventory and a $704,000
increase in accounts payable, offset by a $2 million increase in accounts
receivable. The increases are primarily due to the Automax segment.
Cash used in investing activities was approximately $3,400 and $3,300 during the
three months ended March 31, 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 $858,000 and $157,000
during the three months ended March 31, 1999 and 2000, respectively. During the
three months ended March 31, 1999, about $323,000 was raised through increases
in related party loans and $400,000 was raised by the sale of convertible
debentures. During the three months ended March 31, 2000, about $47,000 was
raised through increases in related party loans and $115,000 was raised by the
sale of convertible debentures.
The activities described above resulted in net increase in cash of about
$191,000 and $10,000 for the three month period ended March 31, 1999 and 2000,
respectively.
<PAGE>
Revenues and Expenses by Segment
The following table sets forth the unaudited revenues and expenses of the
Company by segment for the three months ended March 31, 2000.
FOR THE 3 MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
-------------------------------------------------
ELIMINATING TOTAL/
KENWICK AUTOMAX ENTRIES CONSOLIDATED
------- ------- ---------- ------------
Revenue 24,390 2,643,970 2,668,360
Interest and Other Income 29,397 424,683 (17,419) 436,661
Interest Expense--Regular 7,500 72,080 17,419 62,161
Interest Expense--Discount 28,750 -- 28,750
Convertible Debentures
Depreciation and
Amortization 2,127 3,444 5,571
Net Income (loss) (47,107) 198,324 151,217
Total Assets At 3/31/00 869,010 6,251,369 (770,749) 6,349,630
The following table sets forth the unaudited revenues and expenses of the
Company by segment for the three months ended March 31, 1999.
FOR THE 3 MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
-------------------------------------------------
ELIMINATING TOTAL/
KENWICK AUTOMAX ENTRIES CONSOLIDATED
------- ------- ---------- ------------
Revenue 18,632 1,721,852 1,740,484
Interest and Other Income 6,174 412,219 418,393
Interest Expense--Regular 658 42,763 43,421
Interest Expense--Discount -- 100,510 100,510
Convertible Debentures
Depreciation and
Amortization 5,832 2,518 8,350
Net Income (loss) (129,930) 150,219 20,289
Total Assets At 12/31/99 861,213 5,216,254 (753,195) 5,324,272
<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 1, 2000
By:
/s/ Kenneth S. Wulwick
----------------------
Kenneth S. Wulwick Chief Executive Officer, President and
Director
