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 August 31, 1997 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-A Sullyfield Circle, Chantilly, VA 20151
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-4848
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 _
The number of shares of Registrant's Common Stock outstanding
as of October 5, 1997 6,718,925 Shares
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INDEX
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PAGE NO.
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Cautionary Statement Under the Private Securities Litigation Reform Act of 1996........3
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 1997 and May 31, 1997......................................................4
Condensed Consolidated Statements of Operations -
Three Months Ended August 31, 1997 and August 31, 1996,
respectively...........................................................................5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 1997 and
August 31, 1996, 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
</TABLE>
2
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CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
Statements in this Quarterly Report on Form 10-Q under the caption "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including, but not limited to, the
risk that the Company may not be able to obtain additional financing if
necessary; the risk the Company may in the future have to comply with more
stringent environmental laws or regulations, or more vigorous enforcement
policies of regulatory agencies, and that such compliance could require
substantial expenditures by the Company; the risk that the Company may not be
able to continue the necessary development of its operations on a profitable
basis; and the risk that the Company's Common Stock will not continue to be
quoted on the NASD OTC Bulletin Board services. In addition, the Company's
business, operations and financial condition are subject to substantial risks
which are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission, including the Company's annual
report of Form 10-K, as amended, for the fiscal year ended May 31, 1997, and
this Report.
PART I FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
The unaudited 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, 1997 and 1996 set forth in the
Company's annual report on Form 10-K, as amended, for the fiscal year ended May
31, 1997.
3
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GENERAL KINETICS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
1997 1997
(Unaudited) (Audited)
----------- ---------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,310,600 $ 1,482,300
Accounts receivable, net of allowance, $208,000 and $208,000 661,600 1,011,000
Inventories 834,100 649,500
Prepaid expenses and other 11,900 20,000
Note Receivable, current 200,000 200,000
Note Receivable, affiliate 175,000 150,000
-------- -------
Total Current Assets 3,193,200 3,512,800
---------- ---------
Property, Plant and Equipment 4,798,300 4,712,100
Less: Accumulated Depreciation (3,502,600) (3,463,100)
----------- -----------
1,295,700 1,249,000
Note Receivable, less current potion 550,000 550,000
Other Assets 58,600 22,100
------- ------
Total Assets $ 5,097,500 $ 5,333,900
=========== ===========
Liablilities and Stockholders' Deficit
Current Liabilities:
Current maturities of long-term debt 129,200 160,300
Accounts payable, trade 552,000 635,500
Accrued expenses and other payables 621,400 646,600
----------- -----------
Total Current Liabilities 1,302,600 1,442,400
----------- -----------
Long-Term debt - less current maturities (including
$8,942,500 and $8,956,400 due to controlling shareholder) 9,659,300 9,679,300
Other long-term liabilities 275,400 285,000
----------- -----------
Total Long-Term Liabilities 9,934,700 9,964,300
----------- -----------
Total Liabilities 11,237,300 11,406,700
----------- -----------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 and 10,000,000 1,811,500 1,796,500
shares authorized, 7,245,557 shares issued, 6,718,925
shares outstanding
Additional Contributed Capital 7,239,400 7,224,400
Accumulated Deficit (14,740,500) (14,643,500)
----------- -----------
(5,689,600) (5,622,600)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
----------- -----------
Total Stockholders' Deficit (6,139,800) (6,072,800)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 5,097,500 $ 5,333,900
=========== ===========
</TABLE>
The accompanying notes are an integral part of the above statements.
4
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GENERAL KINETICS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
August 31, August 31,
1997 1996
---- ----
<S> <C>
Net Sales $ 1,278,700 $ 2,568,400
Cost of Sales 951,200 1,854,300
----------- -----------
Gross Profit 327,500 714,100
----------- -----------
Selling, General & Administrative 356,600 448,900
Product Research, Development & Improvement - 59,200
----------- -----------
Total Operating Expenses 356,600 508,100
----------- -----------
Operating Income (loss) (29,100) 206,000
Interest Expense 67,900 105,400
----------- -----------
Income (loss) from continuing operations (97,000) 100,600
Loss from discontinued operations - (36,800)
----------- -----------
Net Income (loss) $ (97,000) $ 63,800
============ ===========
Net Income (loss) per share
Income (loss) from continuing operations $ (0.01) $ 0.004
Income (loss) from discontinued operations - (0.001)
----------- -----------
Net Income (loss) per share $ (0.01) $ 0.003
=========== ===========
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 25,508,925
=========== ===========
</TABLE>
The accompanying notes are an integral part of the above statements.
5
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GENERAL KINETICS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
August 31, August 31,
1997 1996
---- ----
<S> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ (97,000) $ 63,800
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 39,500 100,800
Amortization of bond discount 16,200 16,200
(Increase) Decrease in Assets:
Accounts Receivable 349,400 (910,900)
Inventories (184,600) 599,500
Prepaid Expenses 8,100 (4,300)
Other assets (36,500) -
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (83,500) (112,600)
Accrued Expenses (25,200) (29,000)
Other Long Term Liabilities (9,600) (10,100)
----------- ---------
Net cash provided by/(used) in Operating Activites (23,200) (286,600)
----------- ---------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (86,200) (30,200)
Issuance of Notes Receivable (25,000) -
----------- ---------
Net cash provided by/(used) in Investing Activities (111,200) (30,200)
----------- ---------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable - 733,600
Repayments of Advances from Factor/
Demand Notes Payable - (563,100)
Borrowings on Long Term Debt - -
Repayments on Long Term Debt (37,300) (64,200)
----------- ---------
Net cash provided by/(used) in Financing Activities (37,300) 106,300
----------- ---------
Net (decrease) increase in cash and cash equivalents (171,700) (210,500)
Cash and Cash Equivalents: Beginning of Period 1,482,300 364,100
----------- ---------
Cash and Cash Equivalents: End of Period $ 1,310,600 $ 153,600
=========== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 82,600 $ 105,400
Income Taxes 800 -
</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, 1997, and
for the three months ended August 31, 1997, and August 31, 1996, respectively,
include the accounts of General Kinetics Incorporated ("GKI").
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 month period ended August 31,
1997, are not necessarily indicative of the results to be expected for the full
year.
Note 2 - Discontinued Operations
As of December 5, 1996, GKI completed the sale of the business of its
secure communications division ("SCD") to Cryptek Secure Communications, LLC, a
Delaware limited liability company, the majority of whose equity interests are
owned by affiliates of Angelo Gordon & Co., L.P. As of May 30, 1997, the Company
sold the stock in its wholly owned Food Technology Corporation ("FTC")
subsidiary to the former Vice President and general manager of FTC. Both SCD and
FTC had experienced operating losses during the prior fiscal year.
The statements of operations for the quarter ended August 31, 1996 has been
restated and the operating results of SCD and FTC are shown separately as part
of discontinued operations. The net loss for SCD was $34,800 on net sales of
approximately $851,000, and the net loss for FTC was $2,000 on net sales of
approximately $71,000 for the quarter ended August 31, 1996. The total net loss
from discontinued operations was $36,800 for the three months ended August 31,
1996.
7
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Note 3 - Net Income/(Loss)Per Share
Primary and fully diluted net earnings/(loss) per share have been computed
using the weighted average number of common shares and common equivalent shares
outstanding, to the extent dilutive. Common equivalent shares consist of
approximately 19 million shares issuable upon conversion of Convertible
Subordinated Debentures issued to the Company's principal shareholder, Rabo
Investment Management Ltd. ("Rabo"), formerly Gutzwiller & Partner, AG. Due to
the loss for the three months ended August 31, 1997, the outstanding stock
options and convertible debentures issued to Rabo are not considered dilutive
and therefore no effect is given to them as common stock equivalents during that
period. Net income for the period was adjusted for the elimination of interest
expense for the convertible debt, net of applicable income taxes, while the
average number of shares of common stock and common stock equivalents were
increased.
Note 4 - Notes Payable
At August 31, 1997 and May 31, 1997 convertible debentures initially issued to
Rabo have an aggregate principal amount of $9.4 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. 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 August 31, 1997,
however, the lender has agreed to waive the violations through May 31, 1998.
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 $38,100 was outstanding at August 31,
1997). 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. The Company has made accelerated payments of
$10,000 per month in principal and interest and has agreed to continue such
payments until the remaining principal is paid in full.
8
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Note 5 - Recent Accounting Pronouncements
On March 3, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)". SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, Basic earnings
per share would have been ($0.01) per share for the three months ended August
31, 1997, and $0.01 for the three months ended August 31, 1996. Diluted earnings
per share would have been ($0.004) for the three months ended August 31, 1997,
and $0.003 per share for the three months ended August 31, 1996.
Note 6 - Income Taxes
The Company's estimated effective tax rate for fiscal 1998 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
9
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GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended August 31, 1997, Compared to Three Months Ended August 31,
1996
Continuing Operations
Net sales for continuing operations for the three months ended August
31, 1997 were approximately $1.3 million compared to net sales of approximately
$2.6 million for the quarter ended August 31, 1996. The decrease in sales was
due primarily to a decrease in demand for the three months ended August 31, 1997
as compared to the same period of the prior fiscal year. Management does not
believe that the decrease in demand experienced in the first quarter of fiscal
1998 represents a continuing trend. The contract backlog increased from
approximately $1.3 million at May 31, 1997 to approximately $2.3 million at
August 31, 1997. The gross margin percentage decreased from 27.8% for the
quarter ended August 31, 1996 to 25.6% for the quarter ended August 31, 1997.
The decrease in gross margin was primarily due to the decrease in net sales for
the corresponding periods.
Sales, General & Administrative costs were approximately $356,600 in the
first quarter of fiscal 1998 as compared to approximately $448,900 in the first
quarter of the prior fiscal year. This decrease was principally due to a
decrease in corporate overhead due to the sale of the secure communications
business.
For the three months ended August 31, 1997, the Company had an operating loss
from continuing operations of ($97,000) compared to a operating income of
$100,600 for the comparable quarter of the prior year. The decrease was due
principally to the decrease in sales and a small decrease in the gross profit
margin in the first quarter of fiscal 1998 in the as compared to the
corresponding period in the prior fiscal year.
Interest expense decreased from $105,400 in the first quarter of fiscal 1997
to $67,900 in the first quarter of fiscal 1998. This decrease occurred
principally because the Company factored accounts receivable in the prior fiscal
year, but did not factor accounts receivable in the quarter ended August 31,
1997.
The Company's estimated effective tax rate for fiscal 1998 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
10
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Discontinued Operations
The three months ended August 31, 1996 included losses from discontinued
operations totaling $36,800. The net loss for in the secure communications
division was $34,800 on net sales of approximately $851,000, and the net loss
for Food Technology Corporation was $2,000 on net sales of approximately $71,000
for the quarter ended August 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 5, 1996, GKI completed the sale of the business of its secure
communications division ("SCD") to Cryptek Secure Communications, LLC, a
Delaware limited liability company, the majority of whose equity interests are
owned by affiliates of Angelo Gordon & Co., L.P. As of May 30, 1997, the Company
sold the stock in its wholly owned Food Technology Corporation ("FTC")
subsidiary to the former Vice President and general manager of FTC. Both SCD and
FTC had experienced operating losses during the 1997 fiscal year.
The Company has suffered recurring losses from operations, including losses for
the quarter ended August 31, 1997, and has a net capital deficiency that raise
substantial doubt about the Company's ability to continue as a going concern.
However, the operating results for fiscal 1997 showed significant improvement
over the prior three fiscal years. In addition, Company received $1.75 million
in cash from the sale of SCD, which improved the Company's short-term liquidity.
There was a net loss in the quarter ended August 31, 1997, which was primarily
caused by lower net sales than in the corresponding quarter of the prior fiscal
year. Management believes that the results of operations for the three month
period ended August 31, 1997 are not necessarily indicative of the results to be
expected for the full year. The contract backlog has increased from
approximately $1.3 million at May 31, 1997 to approximately $2.3 million at
August 31, 1997. The Company must continue to market electronic enclosure
products to government and commercial markets, and enter into contracts which
the Company can complete with favorable profit margins in order to return to
profitably for the remainder of fiscal 1998.
The Company has outstanding debentures originally issued to Gutzwiller &
Partner, A.G., now Rabo Investment Management Ltd. ("Rabo") totaling $9.4
million. The debentures 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
payable annually.
In June 1993, the Company entered into a factoring agreement with Reservoir
Capital Corporation ("Reservoir") in which Reservoir agreed to purchase eligible
Accounts Receivable from the Company at an assignment price equal
11
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to 80% of the outstanding amount of such accounts receivable. The factoring
agreement with Reservoir was renewed in December 1994, and continues on a
month-to-month basis. At August 31, 1997, there was no balance due Reservoir.
The Company does not expect to continue to draw on this credit facility, but it
is available in the future to alleviate short-term cash requirements.
As discussed above, the Company received $1,750,000 in cash proceeds from the
sale of the Secure Communications Division. During the second half of fiscal
1997, the Company paid expenses associated with the sale, significantly reduced
accounts payable, and repaid all outstanding advances from the accounts
receivable factor. As of August 31, 1997, the Company had a balance of
approximately $1.3 million in cash and cash equivalents. Management believes
that cash on hand and careful management of operating costs and cash
disbursements should enable the Company to meet its cash requirements through
May 31, 1998.
Analysis of Cash Flows
Operating activities used approximately $23,200 in the first quarter of fiscal
1998, as compared to using approximately $286,600 in the first quarter of fiscal
1997. The improvement of $263,400 reflects an increase of $485,500 in cash
provided to fund changes in working capital items offset by a decrease of
$61,300 in non-cash expenses and an increase of $160,800 in net losses. In the
first quarter of fiscal 1997 there was an increase in accounts receivable of
$910,900 as compared to a decrease of $349,400 in the first quarter of fiscal
1998. The decrease is primarily due to the decrease in sales during the first
quarter of fiscal 1998 as compared to the first quarter of fiscal 1997.
Inventories decreased by $599,500 in the first quarter of fiscal 1997 and
increased by $$184,600 during the first quarter of the current fiscal year. The
fiscal year 1998 increase is principally due to the increase in contract backlog
on August 31, 1997 as compared to May 31, 1997.
Investing activities used $111,200 in the first quarter of fiscal 1998, as
compared to using $30,200 in the first quarter of fiscal 1997. The increase was
primarily caused by an increase in $56,200 in the acquisition of property, plant
and equipment, and the issuance of a $25,000 note receivable in the current
fiscal year.
Financing activities used $37,300 in the quarter ended August 31, 1997 as
compared to providing $106,300 in the quarter ended August 31, 1996. The change
in cash used by financing activities was principally due to the Company
borrowing a net of $170,500 on accounts receivable during the first quarter of
fiscal 1997, while not using advances from the accounts receivable factor during
the first quarter of fiscal 1998.
12
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PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports of Form 8-K
None
13
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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: October 14, 1997 /s/ Larry M. Heimendinger
___________________ ___________________________________
Chairman of the Board
(Principal Executive Officer)
Date: October 14, 1997 /s/ 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-31-1998
<PERIOD-END> AUG-31-1997
<CASH> 1,310,600
<SECURITIES> 0
<RECEIVABLES> 1,594,600
<ALLOWANCES> 208,000
<INVENTORY> 834,100
<CURRENT-ASSETS> 3,193,200
<PP&E> 4,798,300
<DEPRECIATION> 3,502,600
<TOTAL-ASSETS> 5,097,500
<CURRENT-LIABILITIES> 1,302,600
<BONDS> 9,659,300
0
0
<COMMON> 1,811,500
<OTHER-SE> (7,951,300)
<TOTAL-LIABILITY-AND-EQUITY> 5,097,500
<SALES> 1,278,700
<TOTAL-REVENUES> 1,278,700
<CGS> 951,200
<TOTAL-COSTS> 951,200
<OTHER-EXPENSES> 356,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,900
<INCOME-PRETAX> (97,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (97,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> .00
</TABLE>
