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, 1998 Commission File Number 0-1738
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GENERAL KINETICS INCORPORATED
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(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14130-A Sullyfield Circle, Chantilly, VA 20151
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-4848
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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
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The number of shares of Registrant's Common Stock outstanding
as of October 5, 1998 6,718,925 Shares
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INDEX
<TABLE>
<CAPTION>
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, 1998 and May 31, 1998........................................................... 4
Condensed Consolidated Statements of Operations -
Three Months Ended August 31, 1998 and August 31, 1997,
respectively................................................................................ 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 1998 and
August 31, 1997, respectively............................................................... 6
Notes to Condensed Consolidated Financial Statements........................................ 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 9
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K........................................................... 12
</TABLE>
2
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CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
Statements in this Annual Report on Form 10-K 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 U.S. defense spending may
be substantially reduced; the risk that the Company may not be able to continue
the necessary development of its operations on a profitable basis; the risk that
the Company's Common Stock will not continue to be quoted on the NASD OTC
Bulletin Board services, and the risk of a negative outcome in the pending
litigation between the Company and Cryptek. 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 on
Form 10-K for the fiscal year ended May 31, 1998, 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, 1998 and 1997 set forth in the Company's annual
report on Form 10-K for the fiscal year ended May 31, 1998.
3
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General Kinetics Incorporated
Consolidated Balance Sheets
As of August 31 and May 31, 1998
<TABLE>
<CAPTION>
August 31, May 31,
1998 1998
(Unaudited) (Audited)
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<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,123,300 $ 1,923,300
Accounts receivable, net of allowance of $208,000 543,100 560,700
Inventories 1,156,100 740,500
Prepaid expenses and other 7,500 4,900
Note Receivable, affiliate 175,000 175,000
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Total Current Assets 3,005,000 3,404,400
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Property, Plant and Equipment 2,849,500 2,780,800
Less: Accumulated Depreciation (1,794,800) (1,766,100)
------------ ------------
1,054,700 1,014,700
Note Receivable, less current portion, net of allowance of 350,00000 350,000
Other Assets 12,500 1,200
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Total Assets $ 4,422,200 $ 4,770,300
============ ============
Liablilities and Stockholders' Deficit
Current Liabilities:
Current maturities of long-term debt 103,000 103,000
Accounts payable, trade 170,500 217,400
Accrued expenses and other payables 649,400 591,900
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Total Current Liabilities 922,900 912,300
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Long-Term debt - less current maturities (including
$8,723,700 of convertible debentures) 9,365,200 9,369,300
Other long-term liabilities 267,500 277,100
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Total Long-Term Liabilities 9,632,700 9,646,400
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Total Liabilities 10,555,600 10,558,700
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Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 shares authorized, 1,811,500 1,811,500
7,245,557 shares issued, 6,718,925 shares outstanding
Additional Contributed Capital 7,239,400 7,239,400
Accumulated Deficit (14,734,100) (14,389,100)
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(5,683,200) (5,338,200)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
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Total Stockholders' Deficit (6,133,400) (5,788,400)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 4,422,200 $ 4,770,300
============ ============
</TABLE>
The accompanying notes are an integral part of the above statements.
4
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General Kinetics Incorporated
Consolidated Statement of Operations
For the Quarters Ended August 31, 1998, 1997
<TABLE>
<CAPTION>
Three Months Ended
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August 31, August 31,
1998 1997
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<S> <C> <C>
Net Sales $ 785,500 $1,278,700
Cost of Sales 599,800 951,200
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Gross Profit 185,700 327,500
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Selling, General & Administrative 484,800 356,600
Product Research, Development & Improvement - -
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Total Operating Expenses 484,800 356,600
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Operating Loss (299,100) (29,100)
Interest Expense 45,900 67,900
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Net Loss $ (345,000) $ (97,000)
========== ==========
Basic and Diluted Loss per Share: ($0.051) ($0.014)
======== =======
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925
</TABLE>
The accompanying notes are an integral part of the above statements.
5
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General Kinetics Incorporated
Consolidated Statement of Cash Flows
For the Quarters Ended August 31, 1998, 1997
<TABLE>
<CAPTION>
Three Months Ended
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August 31, August 31,
1998 1997
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<S> <C> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ (345,000) $ (97,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 28,700 39,500
Amortization of bond discount 15,500 16,200
(Increase) Decrease in Assets:
Accounts Receivable 17,600 349,400
Inventories (415,600) (184,600)
Prepaid Expenses (2,600) 8,100
Other assets (11,300) (36,500)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (46,900) (83,500)
Accrued Expenses 57,500 (25,200)
Other Long Term Liabilities (9,600) (9,600)
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Net cash provided by/(used) in Operating Act (711,700) (23,200)
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Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (68,700) (86,200)
Issuance of Notes Receivable - (25,000)
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Net cash provided by/(used) in Investing Activities (68,700) (111,200)
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Cash Flows from Financing Activities:
Repayments on Long Term Debt (19,600) (37,300)
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Net cash provided by/(used) in Financing Activities (19,600) (37,300)
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Net (decrease) increase in cash and cash equivalents (800,000) (171,700)
Cash and Cash Equivalents: Beginning of Period 1,923,300 1,482,300
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Cash and Cash Equivalents: End of Period $ 1,123,300 $ 1,310,600
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 23,100 $ 82,600
Income Taxes 6,800 800
</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, 1998, and for
the three months ended August 31, 1998, and August 31, 1997, 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,
1998, are not necessarily indicative of the results to be expected for the full
year.
Note 2 - Net Income/(Loss)Per Share
The Company implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", at May 31, 1998. SFAS 128 replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share and requires a reconciliation of the numerator and
denominator of basic earnings per share to diluted earnings per share. The 1997
earnings per share amount has been restated in accordance with SFAS No. 128.
Earnings per share have been computed using the weighted average number of
common shares outstanding. The Company has excluded the effects of outstanding
options and convertible securities as the effect would have been anti-dilutive.
Note 3 - Notes Payable
At August 31, 1998 and May 31, 1998 convertible debentures initially issued to
clients of Gutzwiller & Partner, AG ("Gutzwiller") have an aggregate principal
amount of approximately $9.1 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
7
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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, 1998,
however, the lender has agreed to waive the violations through May 31, 1999.
Note 4 - Income Taxes
The Company's estimated effective tax rate for fiscal 1999 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
8
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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, 1998, Compared to Three Months Ended
August 31, 1997
Continuing Operations
Net sales for continuing operations for the three months ended August 31,
1998 were approximately $0.8 million compared to net sales of approximately $1.3
million for the quarter ended August 31, 1997. The decrease in sales was due
primarily to a decrease in demand for the three months ended August 31, 1998 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
1999 represents a continuing trend. The contract backlog increased from
approximately $1.9 million at May 31, 1998 to approximately $3.1 million at
August 31, 1998. The gross margin percentage decreased from 25.6% for the
quarter ended August 31, 1997 to 23.6% for the quarter ended August 31, 1998.
The decrease in gross margin was primarily due to the decrease in net sales for
the corresponding periods.
Sales, General & Administrative costs were approximately $484,800 in the
first quarter of fiscal 1999 as compared to approximately $356,600 in the first
quarter of the prior fiscal year. This increase was principally due to an
increase in marketing costs of approximately $57,000 related to the development
of a new commercial catalog and product line, along with increases in legal,
communications, travel and salary expenses.
For the three months ended August 31, 1998, the Company had an operating loss
from continuing operations of $345,000 compared to an operating loss of $98,000
for the comparable quarter of the prior year. The increased loss was due
principally to the decrease in sales and a small decrease in the gross profit
margin in the first quarter of fiscal 1999 in the as compared to the
corresponding period in the prior fiscal year.
Interest expense decreased from $67,900 in the first quarter of fiscal 1998
to $45,900 in the first quarter of fiscal 1999. This decrease occurred
principally because in fiscal 1999 the Company did not pay mortgage interest on
a building in Orlando, Florida that was sold during the fourth quarter of fiscal
1998.
The Company's estimated effective tax rate for fiscal 1999 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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LIQUIDITY AND CAPITAL RESOURCES
The Company has relied upon internally generated funds, plus cash from sales of
two of its operating companies and the sale of its Orlando facility to finance
its operations. The Company's capital requirements primarily result from working
capital needed to support increases in inventory and accounts receivable.
The Company had a net loss of $345,000 for the first quarter of fiscal 1999. The
Company must continue to market electronic enclosure products to government and
commercial markets, and enter into contracts that the Company can complete with
favorable profit margins in order to operate profitably for the remainder of
fiscal 1999. The Company also intends to introduce and begin marketing a catalog
of commercial enclosures during the second quarter of fiscal 1999 targeting
markets such as the broadcast and security industries.
The Company has outstanding debentures originally issued to clients of
Gutzwiller & Partner, A.G. totaling $9.1 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.
As of August 31, 1998, the Company had cash of approximately $1.1 million.
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, 1999.
In May 1998, the Company cancelled 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 Company did not draw on this
facility during fiscal 1998. The Company does not expect to draw on the facility
during fiscal 1999, however, the Company believes that similar facilities will
be available if it becomes necessary to alleviate short-term cash requirements.
While the Company does not believe that it should be found to have any liability
to Cryptek pending litigation between Cryptek and the Company arising out of the
1996 sale of the Company's SCD business, there can be no assurance that the
Company will prevail on all issues. There can be no assurance that the Company's
liquidity and capital resources might not be materially affected by a negative
outcome in such litigation.
10
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Year 2000
Many existing computer systems and software products, including many used by the
Company, accept only two digit entries in the date code field. Beginning in the
year 2000, and in certain instances prior to the year 2000, these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, the Company's date critical functions may
be adversely affected unless these computer systems and software products are or
become able to accept four digit entries ("year 2000 compliant").
During the first quarter of fiscal 1998, the Company began updating its
accounting software package to a version that contains modifications intended to
make them year 2000 compliant. Management does not believe the Company will
suffer any material loss of customers or other material adverse effects as a
result of these modifications. There was no additional cost to the Company for
the accounting software upgrade to be year 2000 compliant. Most other software
programs used within the Company are considered to be year 2000 compliant. The
Company expects to develop and implement a plan during fiscal 1999 to test year
2000 compliance in all of its systems, and to examine the effect of compliance
by major vendors and customers. There can be no assurance, however, that the
Company's systems will be rendered year 2000 compliant in a timely manner, or
that the Company might not incur significant unforeseen additional expenses to
assure such compliance. Failure to successfully complete and implement these
modification projects on a timely basis could have a material adverse effect on
the Company's operations.
Analysis of Cash Flows
Operating activities used approximately $711,700 in the first quarter of fiscal
1999, which reflects a net loss of $345,000 and a decrease of $410,900 in cash
provided to fund changes in working capital items offset by an increase of
$44,200 in non-cash expenses. The decrease in cash to fund changes in working
capital items was primarily due to an increase in inventories of $412,600. The
increase in inventories was principally due to the increase in contract backlog
on August 31, 1998 as compared to May 31, 1998.
Investing activities used $68,700 in the first quarter of fiscal 1999. These
activities consisted primarily of the acquisition of property, plant and
equipment.
Financing activities used $19,600 in the quarter ended August 31, 1998.
Financing activities consisted principally of repayments of long term real
estate debt.
11
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PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports of Form 8-K
None
12
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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 15, 1998 /s/ Larry M. Heimendinger
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Chairman of the Board
(Principal Executive Officer)
Date: October 15, 1998 /s/ Sandy B. Sewitch
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Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> AUG-31-1998
<CASH> 1,123,300
<SECURITIES> 0
<RECEIVABLES> 1,276,100
<ALLOWANCES> 208,000
<INVENTORY> 1,156,100
<CURRENT-ASSETS> 3,005,000
<PP&E> 2,849,500
<DEPRECIATION> 1,794,800
<TOTAL-ASSETS> 4,422,200
<CURRENT-LIABILITIES> 922,900
<BONDS> 9,365,200
0
0
<COMMON> 1,811,500
<OTHER-SE> (7,944,900)
<TOTAL-LIABILITY-AND-EQUITY> 4,422,200
<SALES> 785,500
<TOTAL-REVENUES> 785,500
<CGS> 599,800
<TOTAL-COSTS> 599,800
<OTHER-EXPENSES> 484,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,900
<INCOME-PRETAX> (345,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (345,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
</TABLE>
