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 28, 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-C Sullyfield Circle, Chantilly, VA 20151
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-9300
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 April 5, 1997
6,508,925 Shares
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
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 -
February 28, 1997 and May 31, 1996...............................................................4
Condensed Consolidated Statements of Operations -
Nine Months and Three Months Ended February 28, 1997 and February 29, 1996,
respectively......................................................................................5
Condensed Consolidated Statements of Cash Flows -
Nine Months and Three Months Ended February 28, 1997 and
February 29, 1996, respectively...................................................................6
Notes to Condensed Consolidated Financial Statements...............................................7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................................11
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K..........................................................................14
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
Statements in this Quarterly Report on Form 10-Q under the caption "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
maintain its listing on the American Stock Exchange; and the risk that the
Company may not be able to continue the necessary development of its operations
on a profitable basis. 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, 1996, 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, 1996 and 1995 set forth in the
Company's annual report on Form 10-K, as amended, for the fiscal year ended May
31, 1996.
3
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General Kinetics Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28, May, 31
1997 1996
---- ----
(Unaudited) (Audited)
----------- ---------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,149,300 $ 364,100
Accounts receivable, net of allowance of $168,000 and $249,700 1,394,700 1,325,500
Inventories 835,900 3,505,900
Prepaid expenses and other 58,300 24,600
Note receivable, current 200,000
Note receivable, affiliate 125,000 --
------------- -------------
Total Current Assets 3,763,200 5,220,100
------------- -------------
Property, Plant and Equipment 4,916,200 6,869,300
Less: Accumulated Depreciation (3,645,400) (5,387,600)
------------- -------------
1,270,800 1,481,700
Note Receivable, less current portion 550,000 --
Other Assets, principally capitalized software of
$206,100 at May 31, 1996 14,600 324,000
------------- -------------
Total Assets $ 5,598,600 $ 7,025,800
============= =============
Liablilities and Stockholders' Deficit
Current Liabilities:
Advances from factor $ -- $ 146,500
Current maturities of long-term debt 186,700 244,800
Accounts payable, trade 745,200 1,541,600
Accrued expenses and other payables 815,300 1,224,400
------------- -------------
Total Current Liabilities 1,747,200 3,157,300
------------- -------------
Long-Term debt - less current maturities (including
$9,015,200 and $8,966,700 due to controlling shareholder) 9,764,500 9,800,100
Other long-term liabilities 263,000 292,300
------------- -------------
Total Long-Term Liabilities 10,027,500 10,092,400
------------- -------------
Total Liabilities 11,774,700 13,249,700
------------- -------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 1,759,000 1,759,000
shares authorized, 7,035,557 shares issued, 6,508,925
shares outstanding
Additional Contributed Capital 7,186,900 7,186,900
Accumulated Deficit (14,671,800) (14,719,600)
------------- -------------
(5,725,900) (5,773,700)
Less:
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------- -------------
Total Stockholders' Deficit (6,176,100) (6,223,900)
------------- -------------
Total Liabilities and Stockholders' Deficit $ 5,598,600 $ 7,025,800
============= =============
</TABLE>
The accompanying notes are an integral part of the above statements.
Page 4
<PAGE>
General Kinetics Incorporated
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Net Sales $ 6,204,200 $ 5,942,500 $ 1,477,300 $ 964,900
Cost of Sales 4,483,700 4,927,900 1,055,400 916,300
----------- ----------- ----------- -----------
Gross Profit 1,720,500 1,014,600 421,900 48,600
----------- ----------- ----------- -----------
Selling, General & Administrative 1,198,700 1,398,800 333,100 490,700
Product Research, Development & Improvement 81,400 (13,900) 14,800 --
----------- ----------- ----------- -----------
Total Operating Expenses 1,280,100 1,384,900 347,900 490,700
----------- ----------- ----------- -----------
Operating Income (Loss) 440,400 (370,300) 74,000 (442,100)
Interest Expense 268,900 263,400 66,900 76,800
----------- ----------- ----------- -----------
Income (loss) from continuing operations 171,500 (633,700) 7,100 (518,900)
Gain on sale of division 117,000 117,000
Income(loss) from discontinued operations (240,700) 167,300 -- 91,400
----------- ----------- ----------- -----------
Net income/(loss) $ 47,800 $ (466,400) $ 124,100 $ (427,500)
=========== =========== =========== ===========
Earnings per share
Primary
Income (loss) from continuing operations 0.01 (0.10) 0.00 (0.08)
Income (loss) from discontinued operations (0.01) 0.03 0.01 0.01
----------- ----------- ----------- -----------
Net income/(loss) per share $ 0.00 $ (0.07) $ 0.01 $ (0.07)
=========== =========== =========== ===========
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 25,508,925 6,508,925 25,508,925 6,508,925
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the above statements.
Page 5
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General Kinetics Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 29,
------------ ------------
1997 1996
---- ----
<S> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ 47,800 $ (466,400)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 168,700 375,500
Gain on disposition of discontinued operations (117,000) --
Gain on disposal of equipment -- 1,200
ESOP compensation -- 15,500
Amortization of bond discount 48,500 48,500
(Increase) Decrease in Assets:
Accounts Receivable (434,700) 1,079,200
Inventories 278,800 198,700
Prepaid Expenses (35,200) 41,000
Other assets - Software Development Costs -- (101,000)
Other assets 82,400 (22,800)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (214,400) (829,200)
Accrued Expenses (21,200) 199,300
Other Long Term Liabilities (29,300) (25,600)
--------------- ------------
Net cash provided by/(used) in Operating Activites (225,600) 513,900
--------------- ------------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (113,100) (156,800)
Convertible note receivable from affiliate (125,000)
Net proceeds from sale of property, plant and equipment -- 1,000
Net proceeds from dispostition of discontinued operations 1,535,800 --
--------------- ------------
Net cash provided by/(used) in Investing Activities 1,297,700 (155,800)
--------------- ------------
Cash Flows from Financing Activities:
Advances from Factor 1,543,900 820,500
Repayments of Advances from Factor (1,690,400) (1,227,500)
Borrowings on Long Term Debt -- 90,000
Repayments on Long Term Debt (140,400) (191,700)
--------------- ------------
Net cash provided by/(used) in Financing Activities (286,900) (508,700)
--------------- ------------
Net (decrease) increase in cash and cash equivalents 785,200 (150,600)
Cash and Cash Equivalents: Beginning of Period 364,100 212,200
--------------- ------------
Cash and Cash Equivalents: End of Period $ 1,149,300 $ 61,600
============== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 334,274 $ 305,700
Income Taxes 800 --
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $ -- $ 209,500
Note received upon disposition of discontinued operations $ 750,000 $ --
</TABLE>
The accompanying notes are an integral part of the above statements.
Page 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, 1996, and
for the three months and nine months ended February 28, 1997, and February 29,
1996, respectively, include the accounts of General Kinetics Incorporated
("GKI") 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 month and nine month periods
ended February 28, 1997, are not necessarily indicative of the results to be
expected for the full year.
Note 2 - Sale of the Secure Communications Business
As of December 5, 1996, GKI completed the sale of its secure
communications business to Cryptek Secure Communications, LLC (the "Purchaser"),
a Delaware limited liability company, the majority of whose equity interests are
owned by affiliates of Angelo Gordon & Co., L.P.
In the transaction GKI received $1.75 million in cash, a $750,000
secured promissory note payable over three years (bearing interest at 1% over
the prime rate) and $1.5 million face amount of 6% convertible preferred equity
of the Purchaser which must be redeemed by the Purchaser within five years
(unless previously converted). Such preferred equity interest is convertible, at
GKI's option, into 4.2% of the regular membership interests in the Purchaser on
a diluted basis. The Purchaser also assumed certain liabilities related to the
secure communications business, subject to the terms and conditions of the
agreement of sale. The cash proceeds from the sale were offset by estimated
disposal costs and a provision for operating losses during the phase out period
of approximately $214,200. The foregoing summary is not a complete description
of the terms and conditions of the reported transaction; reference is made to
the copy of the agreement between the Purchaser and GKI attached as Exhibit 2.1
to
7
<PAGE>
GKI's Form 8-K dated December 20, 1996. Such summary is qualified in all
respects by such reference.
The consideration received by GKI for its secure communications
business was determined in arms-length negotiations with the Purchaser. GKI is
not aware of any material relationship between it or any of its directors and
officers, or between any affiliate or the directors or officers of any affiliate
and the Purchaser, that existed at the date of the disposition.
Operating results of the Secure Communications Division ("SCD") for the
nine months and three months ended February 28, 1997 are shown separately in the
accompanying statement of operations. The statementS of operations for the nine
months and three months ended February 29, 1996 have been restated and operating
results of SCD are also shown separately. Net sales of SCD for the period ended
December 5, 1996 and the nine months ended February 29, 1996 were approximately
$1.6 million and $6.0 million, respectively. The net income/(loss) for the
division for the period ended December 5, 1996 and the nine months ended
February 29, 1996 were approximately ($240,700) and $167,300 respectively. These
amounts are included as a discontinued operation in the accompanying statement
of operations.
Assets and liabilities of the SCD consisted of the following at
December 5 and May 31, 1996:
December 5, 1996 May 31, 1996
---------------- ------------
Accounts receivable $ 365,532 $ 429,839
Inventories 2,391,214 2,490,382
Prepaid expenses 1,547 6,910
Property, plant and Equip. 180,981 198,567
Other assets 201,269 304,429
--------- ----------
Total assets 3,140,543 3,429,667
--------- ----------
Accounts payable 582,023 692,798
Accrued expenses 387,936 419,163
--------- ----------
Net assets sold $2,170,584 $2,317,716
========== ==========
The accompanying balance sheet at May 31, 1996 has not been restated.
The Company realized a gain of approximately $117,000 on the sale of
the secure communications business, net of estimated disposal costs and a
provision for operating losses during the phase-out period. As of February 28,
1997, the Company has recorded approximately $10,000 in deferred closing costs
related to the sale of the secure communications business.
Note 3 - Commitments and Contingencies
No significant changes.
8
<PAGE>
Note 4 - 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 19
million shares issuable upon conversion of Convertible Subordinated Debentures
issued to the Company's majority shareholder, RABO Investment Management AG
("RABO"), formerly Gutzwiller & Partner, AG. Outstanding stock options were not
determined to be dilutive, and therefore no effect was given to them for the
current 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. For the Nine months ended February 28, 1997 and February 29, 1996,
both primary and fully diluted earnings/(loss) per share from continuing
operations were approximately $0.01 and ($0.07), respectively.
Note 5 - Notes Payable
At May 31, 1996 and February 28, 1997 convertible debentures initially issued to
RABO 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
1996. 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 28, 1997,
however, the lender has agreed to waive the violations through May 31, 1997. The
debt has been classified as a current liability at February 28, 1997 in the
accompanying financial statements.
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 $85,900 was outstanding at February 28,
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 and the Company has agreed to make
accelerated payments of $10,000 per month in principal and interest until the
remaining principal is paid in full.
9
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Note 6 - Related Party Transactions
During the three months ended February 28, 1997 the Company made loans, which it
has the option of converting into equity interests, in the amount of $125,000 to
LINK2IT L.L.C., a company formed by Messrs. Heimendinger and McConnell, who are
directors of the Company. The Company presently holds 19% of the equity
interests in LINK2IT. Such loans consist of convertible promissory notes due one
year from the date of issuance, bearing interest at 9-1/4% per annum, in form
substantially similar to the Company's outstanding convertible debentures. The
notes are presently convertible, at the Company's option, into additional equity
interests in LINK2IT totaling 10% of the aggregate. The Company agreed to make a
potential further investment in LINK2IT of up to $125,000, upon the satisfaction
of certain conditions, under the same term as the loans described above. See
Exhibit 10.1.
Note 7 - 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 and $0.02 per share for the nine months and
three months ended February 28, 1997, respectively, and $(0.07) and $(0.07) for
the nine months and three months ended February 29, 1996, respectively. Diluted
earnings per share would have been $0.00 and $0.01 per share for the nine months
and three months ended February 28, 1997, respectively, and $(0.07) and $(0.07)
per share for the nine months and three months ended February 29, 1996,
respectively.
10
<PAGE>
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Nine Months Ended February 28, 1997, Compared to Nine Months Ended February 29,
1996
Net sales for continuing operations for the nine months ended February 28,
1997 were approximately $6.2 million compared to net sales of approximately $5.9
million for the nine months ended February 29, 1996. The Electronic Enclosure
Division's net sales increased from approximately $5.5 million for the nine
months ended February 29, 1996 to approximately $6.0 million for the nine months
ended February 28, 1997. The increase was due primarily to an increase in demand
for the nine months ended February 28, 1997 as compared to the same period of
the prior fiscal year. There was a decrease in sales in Food Technology
Corporation of approximately $250,000 primarily due to a decrease in demand for
sorting equipment in the Nine months ended February 28, 1997 as compared to the
corresponding period of the prior fiscal year.
Selling, General & Administrative costs were approximately $1.2 million in
the first nine months of fiscal 1997 as compared to approximately $1.4 in the
first nine months of the prior fiscal year, and total operating expenses
decreased from approximately $1.4 million to $1.3 million. This decrease was
principally due to a decrease in corporate overhead due to the sale of the
secure communications business.
For the nine months ended February 28, 1997, the Company showed operating
income of approximately $440,400 compared to an operating loss of approximately
$370,300 for the comparable nine months of the prior year. The increase was
principally due to an increase in gross profit margin of over 10% in the first
three quarters of fiscal 1997 in the Electronic Enclosure Division as compared
to the same period in the prior fiscal year.
There was a net loss from discontinued operations (the Secure Communications
Division) of approximately $240,700 on net sales of approximately $1.6 million
from June 1, 1996 through November 30, 1996. During the prior fiscal year, the
Secure Communications Division had net income of approximately $167,300 on net
sales of approximately $6.0 million for the nine months ended February 29, 1996.
Net sales and net income for the nine months ended February 29, 1996 included
deliveries totaling $3.0 million on a contract to Bosch Telecom, a supplier of
fax machines to the German Government. Deliveries on the contract with Bosch
Telecom were substantially complete at February 29, 1996.
11
<PAGE>
There was a gain on the sale of the secure communications business of
approximately $117,000 recorded in the quarter ended February 28, 1997.
Three Months Ended February 28, 1997, Compared to Three Months Ended February
29, 1996
Net sales for continuing operations for the three months ended February 28,
1997 were approximately $1.5 million compared to net sales of approximately $1.0
million for the quarter ended February 29, 1996. The Electronic Enclosure
Division's net sales increased from approximately $0.9 million for the quarter
ended February 29, 1996 to approximately $1.4 million for the quarter ended
February 28, 1997. The increase was due primarily to an increase in demand for
the three months ended February 28, 1997 as compared to the same period of the
prior fiscal year.
Sales, General & Administrative costs were approximately $333,100 in the
third quarter of fiscal 1997 as compared to approximately $490,700 in the third
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 February 28, 1997, the Company showed operating
income of $74,000 compared to an operating loss of $442,100 for the comparable
quarter of the prior year. The improvement was due principally to the increase
in sales and a significant increase in the gross profit margin in the third
quarter of fiscal 1997 in the Electronic Enclosure Division as compared to the
corresponding period in the prior fiscal year.
There was a gain on the sale of the secure communications business of
approximately $117,000 recorded in the quarter ended February 28, 1997.
Liquidity and Capital Resources
As of December 5, 1996, GKI completed the sale of its secure
communications business to the Purchaser identified above. In the transaction
GKI received $1.75 million in cash, a $750,000 secured promissory note payable
over three years (bearing interest at 1% over the prime rate) and $1.5 million
face amount of 6% convertible preferred equity of the Purchaser which must be
redeemed by the Purchaser within five years (unless previously converted). Such
preferred equity interest is
12
<PAGE>
convertible, at GKI's option, into 4.2% of the regular membership interests in
the Purchaser on a diluted basis. The Purchaser also assumed certain liabilities
related to the secure communications business, subject to the terms and
conditions of the agreement of sale. The foregoing summary is not a complete
description of the terms and conditions of the reported transaction; reference
is made to the copy of the agreement between the Purchaser and GKI attached as
Exhibit 2.1 to the Form 8-K dated December 5, 1996. Such summary is qualified
in all respects by such reference.
As discussed above, the Company received $1,750,000 in cash proceeds
from the sale of the Secure Communications Division. During the three months
ended February 28, 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 February 28, 1997, the Company had a
balance of $1,149,300 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, 1997.
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. However, the operating loss for fiscal 1996 showed
significant improvement over the prior three fiscal years, and there was a small
operating profit from continuing operations in the first three quarters of
fiscal 1997. In the Electronic Enclosure Division, productivity improvements
along with efforts to target new contracts with higher profit margins for the
Company resulted in a significant improvement in gross profits for the 1996
fiscal year and the first three quarters of fiscal 1997 as compared to the prior
three fiscal years. The Company must continue to market electronic enclosure
products to government and commercial markets, and enter into contracts which
the division can complete with favorable profit margins to continue to operate
profitably in fiscal 1997. Management believes that it has taken appropriate
steps to return 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 in fiscal 1997.
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 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. The Company does not expect to continue to draw on
this credit facility in the short term and plans to use the proceeds from the
sale of the secure communications business to alleviate any short-term cash
requirements.
13
<PAGE>
The Company continues to be out of compliance with certain listing
requirements of the American Stock Exchange by virtue of recent trading prices
of its common stock as well as stockholders' equity and working capital
deficits, historical losses and other factors. However, the Company has actively
taken steps to address the Exchange's guidelines, and has discussed with
representatives of the Exchange its situation and the basis on which a
termination of listing might continue to be deferred. The Exchange has agreed to
defer consideration of termination in light of, among other things, the sale of
the secure communications business; however, there can be no assurance that a
return to compliance will be accomplished or that the listing will be continued.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) The following exhibits accompany this report:
Exhibit Number Description of Exhibit
-------------- ----------------------
10.1 Agreement between GKI and Link2It,
L.L.C., dated as of January 21, 1997
(b) Reports of Form 8-K
None
14
<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 18, 1997 /s/ Larry M. Heimendinger
----------------------- -----------------------------
Chairman of the Board
(Principal Executive Officer)
Date: April 18, 1997 /s/ Sandy B. Sewitch
----------------------- -----------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
15
<PAGE>
Index to Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
10.1 Agreement between GKI and Link2It,
L.L.C. dated as of January 21, 1997
16
<PAGE>
As of January 21, 1997
LINK2IT, L.L.C.
4256 Beck Avenue
Studio City, CA 91604
Ladies and Gentlemen:
This letter will confirm our agreement regarding the basis on
which General Kinetics Incorporated ("GKI") has made an investment in LINK2IT
L.L.C. ("L2") and is contemplated to make further investments in the future. The
terms set forth herein are not intended to be all-inclusive and are to be
supplemented by more detailed further documents, but shall nevertheless be
binding on the parties as to the matters specifically addressed below.
The basic terms and conditions of our understanding are as
follows:
1. Formation of L2. L2 has been organized as a Delaware
limited liability company by Larry M. Heimendinger and Richard J. McConnell, who
hold all or substantially all of the membership interests therein.
2. Investment. a. Initial Investment. GKI has previously
advanced certain amounts to and/or incurred certain costs on behalf of L2. In
consideration of any and all amounts so advanced and/or costs so incurred
through January 21, 1997, and the release and assignment to L2 of such interest,
if any, as GKI might claim in any intellectual or other property or other items
relating to L2 or its proposed products or services, GKI shall receive (i) a
common membership interest in L2 representing 10% of the aggregate membership
interests and (ii) a convertible preferred membership interest in L2 with a face
amount of $112,500 convertible into 9% of the total membership interests on a
fully diluted basis (subject to adjustment under certain circumstances as
described in 3. below) and otherwise having terms (except as to voting)
substantially equivalent to the common interests, but having a preference in
liquidation to be mutually agreed upon in good faith.
b. Further Investment and Promissory Note. In addition, GKI
agrees to provide make a potential further investment in L2 as a loan which may
be converted at GKI's option, into additional equity interest. That agreement
shall take the form of a line of credit under which L2 may draw up to an
aggregate of $250,000 from time to time. Of this total, an aggregate of $150,000
shall be available immediately. The promissory note payable to GKI dated
December 11, 1996 in the principal amount of $35,000 shall be cancelled and
shall be deemed to constitute a drawing of $35,000 under such line of credit,
leaving a balance of $115,000 presently available. Of that available balance,
$65,000 shall be advanced as of the date of this letter (with such advance and
GKI's prior loan of $35,000 to be evidenced by a new promissory note in the
combined principal amount of $100,000). $50,000 shall remain available to be
drawn as L2 may request from time to time. Based on the satisfaction of certain
conditions, an additional $100,000 shall become available in such amounts and at
such times as are set forth in a schedule to be mutually agreed upon in good
faith. L2's obligation with respect to all sums so advanced shall be evidenced
in a convertible promissory note in substantially the form delivered herewith,
providing, among other things, that such note is convertible into additional
common membership
17
<PAGE>
interests in L2 at the rate of 1% of the aggregate interests for each of $12,500
principal amount of the note so converted (subject to adjustment under certain
circumstances as described in 3. below).
3. Conversion Adjustment. It is hoped and intended that one or
more third parties will provide substantial additional investment capital for L2
on terms to be negotiated by L2 in its sole discretion with a view to securing
funds necessary or desirable for research, development, marketing, sales,
production or other purposes from time to time. Accordingly, the conversion
price at which both the Note described in 2.b. above and the preferred
membership interest described in 2.a. above shall be convertible into common
membership interests in L2 shall be subject to adjustment, from 1% of the
aggregate membership interests for each $12,500 principal or face amount so
converted, to such lesser percentage as the principal or face amount so
converted could have then purchased at a purchase price proportionate to the
lowest price actually paid for membership interests by an independent
third-party investor less a discount, for the benefit of GKI, of 15%. To the
extent, if any, that conversion of the Note or preferred membership interest has
preceded such third-party investment, the membership interests issued upon such
conversion shall be adjusted to equal that percentage of the aggregate
membership interests which the principal or face amount previously converted
could have purchased at such price, less such discount. Such interests may also
be subject to dilution by reason of option or ownership rights granted to L2
employees, consultants or others in an amount not to exceed 5% of the aggregate
membership interests on a fully diluted basis, such dilution to be shared pro
rata among membership interests issued or issuable upon conversion and existing
membership interests.
4. Public Announcements. The parties hereto agree that neither
of them shall issue any press release or otherwise make any public statements
with respect to the transactions contemplated hereby, except as may be required
by law (in which case the party required to make such public statement shall
give reasonable advance notice thereof to the other party), without the prior
consent of the other party, which consent shall not be unreasonably withheld.
If the foregoing properly sets forth our understanding, please
so indicate by signing a copy of this letter of intent in the space provided
below and returning it to us.
Very truly yours,
GENERAL KINETICS INCORPORATED
By:
__________________________
LINK2IT, L.L.C.
By:
_____________________________
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 1,149,300
<SECURITIES> 0
<RECEIVABLES> 2,437,700
<ALLOWANCES> 168,000
<INVENTORY> 835,900
<CURRENT-ASSETS> 3,763,200
<PP&E> 4,916,200
<DEPRECIATION> 3,645,400
<TOTAL-ASSETS> 5,598,600
<CURRENT-LIABILITIES> 1,747,200
<BONDS> 9,764,500
0
0
<COMMON> 1,759,000
<OTHER-SE> (7,935,100)
<TOTAL-LIABILITY-AND-EQUITY> 5,598,600
<SALES> 6,204,200
<TOTAL-REVENUES> 6,204,200
<CGS> 4,483,700
<TOTAL-COSTS> 4,483,700
<OTHER-EXPENSES> 1,280,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,900
<INCOME-PRETAX> 171,500
<INCOME-TAX> 0
<INCOME-CONTINUING> 171,500
<DISCONTINUED> (240,700)
<EXTRAORDINARY> 117,000
<CHANGES> 0
<NET-INCOME> 47,800
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
