SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended February 29, 1996 Commission File Number 0-1738
------
GENERAL KINETICS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14130-C Sullyfield Circle, Chantilly, VA 22021
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-9300
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by checkmark whether the Registrant
(1) has filed all reports required to be
filed by Section 13 or 15(d) of the
Securities 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__
(* Further amendment may be required to Form 8-K to add audit
report regarding acquisition financial statements previously
filed)
The number of shares of Registrant's Common Stock outstanding
as of March 31, 1996 6,508,925 Shares
<PAGE>
INDEX
PAGE NO.
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
February 29, 1996, and May 31, 1995.................................. 4
Condensed Consolidated Statements of Operations -
Nine months and Three Months Ended February 29, 1996, and
February 28, 1995, respectively...................................... 5
Condensed Consolidated Statements of Cash Flows -
Nine months and Three Months Ended February 29, 1996, and
February 28, 1995, respectively ..................................... 6
Notes to Condensed Consolidated Financial Statements................. 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K........................... 13
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
The unaudited interim consolidated financial statements of General
Kinetics Incorporated ("GKI" or the "Company") set forth below have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations. The Company believes that the disclosures made are adequate to make
the information presented not misleading.
In the opinion of management of the Company, the accompanying
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that are necessary for a fair presentation of
results for the periods presented. It is suggested that these consolidated
financial statements be read in conjunction with the audited financial
statements for the fiscal years ended May 31, 1995 and 1994 set forth in the
Company's annual report on Form 10-K for the fiscal year ended May 31, 1995.
3
<PAGE>
<TABLE>
<CAPTION>
February 29, May, 31
1996 1995
(Unaudited) (Audited)
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 61,600 $ 212,200
Accounts receivable, net of allowance of $181,400 1,965,800 3,045,000
Inventories 3,002,300 3,201,000
Prepaid expenses and other 28,300 69,300
------------ ------------
Total Current Assets 5,058,000 6,527,500
------------ ------------
Property, Plant and Equipment 6,841,200 6,697,700
Less: Accumulated Depreciation (5,280,200) (4,950,300)
------------ ------------
1,561,000 1,747,400
Other Assets, principally capitalized software of
$366,500 and $300,600 508,700 419,400
------------ ------------
Total Assets $ 7,127,700 $ 8,694,300
============ ============
Liablilities and Stockholders' Deficit
Current Liabilities:
Advances from factor $ -- $ 407,000
Current maturities of long-term debt 252,000 364,500
Accounts payable, trade 1,359,900 2,189,100
Accrued expenses and other payables 1,361,600 1,162,300
------------ ------------
Total Current Liabilities 2,973,500 4,122,900
------------ ------------
Long-Term debt - less current maturities (including
$8,950,600 and $8,885,900 due to controlling shareholder) 9,825,000 9,765,700
Other long-term liabilities 271,800 297,400
------------ ------------
Total Long-Term Liabilities 10,096,800 10,063,100
------------ ------------
Total Liabilities 13,070,300 14,186,000
------------ ------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 and 10,000,000 1,759,000 1,759,000
shares authorized, 7,035,557 shares issued, 6,508,925
shares outstanding
Additional Contributed Capital 7,256,900 7,466,400
Accumulated Deficit (14,433,300) (13,966,900)
------------ ------------
(5,417,400) (4,741,500)
Less: Unearned ESOP shares (75,000) (300,000)
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (5,942,600) (5,491,700)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 7,127,700 $ 8,694,300
============ ============
</TABLE>
The accompanying notes are an integral part of the above statements.
4
<PAGE>
GENERAL KINETICS INCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
Nine Months Ended Three Months Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $ 11,946,700 $ 8,197,900 $ 2,607,100 $ 3,400,500
Cost of Sales 9,209,100 6,564,900 2,049,300 2,662,400
------------ ------------ ------------ ------------
Gross Profit 2,737,600 1,633,000 557,800 738,100
------------ ------------ ------------ ------------
Selling, General & Administrative 2,354,600 2,233,100 772,900 806,900
Product Research, Development & Improvement 585,900 783,000 135,600 271,200
------------ ------------ ------------ ------------
Total Operating Expenses 2,940,500 3,016,100 908,500 1,078,100
------------ ------------ ------------ ------------
Operating Loss (202,900) (1,383,100) (350,700) (340,000)
Interest Expense 263,500 314,600 76,800 112,100
------------ ------------ ------------ ------------
Net Loss $ (466,400) $ (1,697,700) $ (427,500) $ (452,100)
============ ============ ============ ============
Net Loss per share $ (0.07) $ (0.26) $ (0.07) $ (0.07)
============ ============ ============ ============
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,508,925 6,508,925 6,508,925 6,508,925
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the above statements.
5
<PAGE>
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited Nine Months Ended
February 29, February 28,
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (466,400) $(1,697,700)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 375,500 400,100
Loss/(Gain) on disposal of equipment 1,200 (3,400)
ESOP compensation 15,500 18,900
Amortization of bond discount 48,500 78,200
(Increase) Decrease in Assets:
Accounts Receivable 1,079,200 (592,400)
Inventories 198,700 (374,600)
Prepaid Expenses 41,000 71,800
Other assets - Software Development Costs (101,000) (287,800)
Other assets (22,800) (111,400)
Increase (Decrease) in Liabilities: --
Accounts Payable - Trade (829,200) 80,300
Accrued Expenses 199,300 (3,300)
Other Long Term Liabilities (25,600) 1,400
----------- -----------
Net cash provided by/(used) in Operating Activites 513,900 (2,419,900)
----------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (156,800) (137,800)
Net proceeds from sale of property, plant and equipment 1,000 5,800
----------- -----------
Net cash used in Investing Activities (155,800) (132,000)
----------- -----------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 820,500 818,500
Repayments of Advances from Factor/ --
Demand Notes Payable (1,227,500) (446,600)
Borrowings on Long Term Debt 90,000 9,552,600
Repayments on Long Term Debt (191,700) (7,883,500)
----------- -----------
Net cash provided by/(used) in Financing Activities (508,700) 2,041,000
----------- -----------
Net (decrease) increase in cash and cash equivalents (150,600) (510,900)
Cash and Cash Equivalents: Beginning of Period 212,200 765,200
----------- -----------
Cash and Cash Equivalents: End of Period $ 61,600 $ 254,300
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 305,700 $ 305,300
Income Taxes -- 65,500
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $ 209,500 206,000
</TABLE>
The accompanying notes are an integral part of the above statements.
6
<PAGE>
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The condensed consolidated financial statements at May 31, 1995, and
for the three months and nine months ended February 29, 1996, and February 28,
1995, include the accounts of General Kinetics Incorporated and its wholly-owned
subsidiary, Food Technology Corporation. All material intercompany accounts and
transactions have been eliminated.
The financial information included herein is unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles in that certain note information
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
presentation of the results of the interim periods.
The results of operations for the three and nine month period ended
February 29, 1996, are not necessarily indicative of the results to be expected
for the full year.
Note 2 - Inventory
All inventories are valued at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Consolidated inventories are as follows:
February 29, 1996 May 31, 1995
----------------- ------------
Raw Material $1,561,800 $1,353,000
Work in Process 1,440,500 1,848,000
--------- ---------
Totals $3,002,300 $3,201,000
========== ==========
7
<PAGE>
Note 3 - Commitments and Contingencies
The Company will continue to review, as appropriate, the environmental status
of its Orlando property, previously noted in its Form 10-Q for the period ended
August 31, 1995.
Note 4 - Loss Per Share
Loss per share has been computed using the weighted average number of common
shares and common equivalent shares, to the extent dilutive, outstanding during
the periods. Common equivalent shares are calculated using the treasury stock
method and consist of shares issuable upon exercise of stock options that have
been granted. Due to the losses for the nine months and three months ended
February 29, 1996 and February 28, 1995, the outstanding stock options and
convertible debentures issued to the Company's majority stockholder, Gutzwiller
& Partner, AG ("Gutzwiller") are not considered dilutive and therefore no effect
is given to any common stock equivalents.
Note 5 - Notes Payable
At May 31, 1995 and February 29, 1996 convertible debentures issued to
Gutzwiller have an aggregate principal amount of $9.5 million, mature in August
2004, are convertible into common stock at a conversion price of 50 cents per
share, and bear interest at 1% per annum, which is payable annually beginning
August 1995. The convertible debentures shall be subject to the terms of a
Pledge and Security Agreement providing for a security interest in substantially
all the assets of the Company, with certain exceptions (including without
limitation exceptions for accounts receivable and other financing), to secure
the obligations in respect of the debentures. Shares issuable upon conversion
are also subject to certain rights to registration under the Securities Act of
1933, as amended.
Other Real Estate Mortgage Loans
The Company was in violation of certain loan covenants of the real estate
mortgage agreement on the Company's Johnstown facility as of February 29, 1996,
however, the lender has agreed to waive the violations through May 31, 1996.
Additionally, as previously reported, the Company has entered into a
Forbearance Agreement with the holder of the real estate mortgage on the
Company's Orlando facility (under which $194,800 was outstanding at February 29,
1996). Pursuant to the Forbearance Agreement, a redemption notice with respect
to the bonds originally issued to finance the facility, previously delivered by
the mortgage holder, was withdrawn and the Company
8
<PAGE>
has agreed to make accelerated payments of $10,000 per month in principal and
interest until the remaining principal is paid in full.
Note 6 - Other Assets
Costs incurred to establish the technological feasibility of a computer software
product are considered research and development costs and are expensed as
incurred. When the technological feasibility of a software product has been
established, development costs subsequent to that date are capitalized.
Capitalization of these costs ceases when the product is considered available
for general release to customers. During the fiscal quarter ended February 29,
1996, the Company capitalized $28,000 in internally developed software costs
relating to certain software being developed for the TS-21 ruggedized facsimile
machine. Amortization of capitalized software development costs is computed on a
product-by-product basis over the estimated economic lives of the products. The
products that are currently being amortized have an estimated life of three
years. Amortization of capitalized costs was $16,400 in the third quarter of
fiscal 1996.
9
<PAGE>
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Nine months Ended February 29, 1996, Compared to Nine months Ended February 28,
1995
Net sales for the nine months ended February 29, 1996 were $11.9 million as
compared to net sales of $8.2 million for the nine months ended February 28,
1995. In the Secure Communications Division ("SCD"), net sales increased by
approximately $2.0 million, from $4.0 million for the first nine months of
fiscal 1995 to $6.0 million in the first nine months of fiscal 1996. The
increase in SCD sales was primarily attributable to deliveries totaling $3.0
million on a contract to Bosch Telecom, a supplier of fax machines to the German
Government. Deliveries on this contract with Bosch Telecom were substantially
complete at February 29, 1996.
The Electronic Enclosure Division ("EED") net sales increased from $3.9
million for the nine months ended February 28, 1995, to $5.5 million for the
nine months ended February 29, 1996. This increase was due primarily to an
increase in demand for the nine months ending February 29, 1996 as compared to
the same period in the prior fiscal year.
Operating expenses for the nine months ended February 29, 1996 were
approximately $2.9 million compared with $3.0 million for the comparable nine
months in fiscal year 1995.
For the nine months ended February 29, 1996, the Company showed an operating
loss of approximately $202,900 compared to a $1.4 million operating loss for the
comparable nine months of the prior fiscal year. The improvement in operating
results was primarily due to the increase in sales discussed above as well as a
significant increase in gross margins in EED. Productivity improvements which
started in the second half of fiscal 1995 along with efforts to target new
contracts with higher profit margins resulted in the significant improvement in
EED gross profits for the first nine months of fiscal 1996 as compared to the
corresponding period of the prior fiscal year.
Interest expense for the nine months ended February 29, 1996 was $263,500
compared to an interest expense of $314,600 for the nine months ended February
28, 1995.
10
<PAGE>
Three Months Ended February 29, 1996, Compared to Three Months Ended February
28, 1995
Net sales for the three months ended February 29, 1996 were $2.6 million as
compared to net sales of $3.4 million for the three months ended February 28,
1995. In SCD, net sales decreased from $1.7 million for the third quarter of
fiscal 1995 to $1.6 million in the third quarter of fiscal 1996.
EED's net sales decreased from $1.5 million for the quarter ended February
28, 1995 to $0.9 million for the quarter ended February 29, 1996. This decrease
in sales was due to a decline in customer demand for the third quarter of fiscal
1996 as compared to the corresponding quarter of the prior fiscal year.
Operating expenses were approximately $1.1 million in the third quarter of
fiscal 1995 as compared to approximately $0.9 million in the third quarter of
the current fiscal year.
For the three months ended February 29, 1996, the Company showed an operating
loss of approximately $350,700 compared to a $340,000 operating loss for the
comparable quarter of the prior year. The decline in operating results was
primarily due to the decrease in sales discussed above, partially offset by the
lower operating expenses.
Interest expense for the three months ended February 29, 1996, was $76,800
compared to an interest expense of $112,000 for the three months ended February
28, 1995. The decrease in interest expense was due to a decrease in the use of
accounts receivable factoring during the third quarter of fiscal 1996 as
compared to the corresponding quarter of fiscal 1995.
Liquidity and Capital Resources
The Company has suffered recurring losses from operations and has a net
capital deficiency that raise substantial doubt about the Company's ability to
continue as a going concern. The unaudited net loss of approximately $466,400
for the first nine months of fiscal 1996 showed significant improvement over the
unaudited net loss of approximately $1.7 million for the same period in the
prior fiscal year. However, to achieve profitability, the Company must continue
to increase revenues and gross profit margins. In the SCD, successful operations
would depend, to a large extent, on the division's ability to market the secured
communications products both overseas and to domestic markets. This division
completed the initial development of a new product introduced into the market
during the third quarter of fiscal 1996, a secure tactical facsimile machine
which it hopes will contribute to an increase in net sales. SCD must continue to
update its secure product line in order to meet current market demands and
develop an adequate sales level for profitable operations.
11
<PAGE>
In EED, productivity improvements in the second half of fiscal 1995 along
with efforts to target new contracts with higher profit margins resulted in a
significant improvement in gross profits for the 1995 fiscal year and the first
nine months of fiscal 1996 as compared to the prior two fiscal years. Although
sales for EED decreased by approximately $0.6 million during the third quarter
of fiscal 1996 as compared to the corresponding quarter of fiscal 1995,
management believes that existing contracts are at a level sufficient for EED
revenues in the fourth quarter of fiscal 1996 to return to levels which are more
comparable to revenue levels achieved by EED in the first two quarters of the
current fiscal year. The division must continue to market electronic enclosure
products to government and commercial markets, and enter into contracts with
favorable profit margins which can be produced within budget to achieve
profitability in fiscal 1996.
Management believes that it has taken significant steps towards returning the
Company to profitability; however, there can be no assurance that revenues will
increase or that the Company will be able to generate revenues or margins
sufficient to achieve profitability.
On December 12, 1995, the Company reached a preliminary understanding in
principle to sell its Secure Communications Division to an undisclosed third
party. Discussion has been ongoing, and the proposed transaction remains subject
to conclusion and execution of a definitive agreement, receipt of any required
approvals, and other contingencies. The Company anticipates that implementation
of the 1-for-3 reverse stock split approved by shareholders at the Annual
Meeting held November 14, 1995 would be delayed until after the closing of the
proposed transaction.
With the passage of time in completing this potential sale, the Defense
Investigative Service ("DIS") has withdrawn the facility clearance which it had
earlier revalidated for GKI pending the closing of the proposed transaction.
Accordingly, GKI would expect to proceed with implementation of its previous
understanding with the DIS regarding the resolution of foreign ownership issues
affecting the Company, by conducting any business relating to or requiring
certain security clearances through its GKI Tempest Services, Inc. subsidiary,
all subject to the pending SCD sale and to the Company's review and evaluation
of the relevant circumstances.
The Company has allocated certain amounts to additional research and
development costs currently being incurred with respect to the feasibility of
potential new products or services outside the Company's present operating
divisions. The Company will continue to review and evaluate the status of this
research and development activity.
Management believes that cash on hand as of February 29, 1996 ($61,600), careful
management of operating costs and cash disbursements, and accounts receivable
financing to alleviate short-term cash requirements should enable the Company to
meet its cash requirements through May 31, 1996.
12
<PAGE>
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were filed by the Company during the fiscal
quarter ended February 29, 1996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL KINETICS INCORPORATED
Date: April 15, 1996 /s/ Larry M. Heimendinger
--------------- -----------------------------
Larry M. Heimendinger
Chairman of the Board
(Principal Executive Officer)
Date: April 15, 1996 /s/ Sandy B. Sewitch
--------------- ------------------------------
Sandy B. Sewitch
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> FEB-29-1996
<CASH> 61,600
<SECURITIES> 0
<RECEIVABLES> 2,147,200
<ALLOWANCES> 181,400
<INVENTORY> 3,002,300
<CURRENT-ASSETS> 5,058,000
<PP&E> 6,841,200
<DEPRECIATION> 5,280,200
<TOTAL-ASSETS> 7,127,700
<CURRENT-LIABILITIES> 2,973,500
<BONDS> 9,825,000
0
0
<COMMON> 1,759,000
<OTHER-SE> (7,701,600)
<TOTAL-LIABILITY-AND-EQUITY> 7,127,700
<SALES> 11,946,700
<TOTAL-REVENUES> 11,946,700
<CGS> 9,209,100
<TOTAL-COSTS> 9,209,100
<OTHER-EXPENSES> 2,940,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 263,500
<INCOME-PRETAX> (466,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (466,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (466,400)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
