<TABLE>
<CAPTION>
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
<S> <C> <C> <C>
For Quarter Ended August 31, 1999 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)
</TABLE>
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, 1999
6,718,925 Shares
<PAGE>
<TABLE>
<CAPTION>
INDEX
PAGE NO.
--------
<S> <C> <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 -
August 31, 1999 and May 31, 1999....................................................4
Condensed Consolidated Statements of Operations -
Three Months Ended August 31, 1999 and August 31, 1998,
respectively.........................................................................5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 1999 and
August 31, 1998, 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............................................................14
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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 that the Company may not be able to continue the necessary
development of its operations, including maintaining or increasing sales and
production levels, on a profitable basis; 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; 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 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, 1999 and 1998 set forth in the
Company's annual report on Form 10-K for the fiscal year ended May 31, 1999.
3
<PAGE>
General Kinetics Incorporated
Balance Sheet
August 31, 1999
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
(Unaudited) (Audited)
----------- ---------
Assets
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 215,600 $ 307,400
Accounts receivable, net of allowance of $208,000 1,580,500 1,502,800
Inventories 1,385,100 1,285,600
Prepaid expenses and other 23,500 59,300
Note Receivable, current 70,000 70,000
Note Receivable, affiliate, net of allowance of $87,500 87,500 87,500
----------- -----------
Total Current Assets 3,362,200 3,312,600
----------- -----------
Property, Plant and Equipment 2,988,400 2,942,800
Less: Accumulated Depreciation (1,975,500) (1,926,800)
----------- -----------
1,012,900 1,016,000
Note Receivable, less current portion, net of allowance of $150,000 330,000 330,000
Other Assets 92,700 26,600
----------- -----------
Total Assets $ 4,797,800 $ 4,685,200
----------- -----------
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Advances from Factor $ 273,300 $ 79,000
Current maturities of long-term debt 66,200 66,200
Accounts payable, trade 1,224,600 958,800
Accrued expenses and other payables 592,400 638,900
----------- -----------
Total Current Liabilities 2,156,500 1,742,900
----------- -----------
Long-Term debt - less current maturities (including
$8,685,600 and $8,654,700 of convertible debentures) 9,309,400 9,304,400
Other long-term liabilities 265,800 275,400
----------- -----------
Total Long-Term Liabilities 9,575,200 9,579,800
----------- -----------
Total Liabilities 11,731,700 11,322,700
----------- -----------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 and 10,000,000 1,811,500 1,811,500
shares authorized, 7,245,557 shares issued, 6,718,925
shares outstanding
Additional Contributed Capital 7,239,400 7,239,400
Accumulated Deficit (15,534,600) (15,238,200)
----------- -----------
(6,483,700) (6,187,300)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
----------- -----------
Total Stockholders' Deficit (6,933,900) (6,637,500)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 4,797,800 $ 4,685,200
----------- -----------
</TABLE>
The accompanying notes are an integral part of the above statements.
Page 4
<PAGE>
General Kinetics Incorporated
Statement of Operations
(Unaudited)
Three Months Ended
August 31, August 31,
1999 1998
---- ----
Net Sales $ 2,448,900 $ 785,500
Cost of Sales 2,223,500 599,800
----------- -----------
Gross Profit 225,400 185,700
----------- -----------
Selling, General & Administrative 426,100 484,800
----------- -----------
Total Operating Expenses 426,100 484,800
----------- -----------
Operating Income (loss) (200,700) (299,100)
Interest Expense 95,700 45,900
----------- -----------
Net Income (loss) $ (296,400) $ (345,000)
----------- -----------
Basic Earnings per Share:
Basic Earnings (loss) per share ($0.04) ($0.05)
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925
Diluted Earnings per Share:
Diluted Earnings (loss) per share ($0.04) ($0.05)
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 6,718,925
The accompanying notes are an integral part of the above statements.
Page 5
<PAGE>
General Kinetics Incorporated
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
August 31, August 31,
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ (296,400) $ (345,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 48,700 28,700
Amortization of bond discount 15,500 15,500
(Increase) Decrease in Assets:
Accounts Receivable (77,700) 17,600
Inventories (99,500) (415,600)
Prepaid Expenses 35,800 (2,600)
Other assets (66,100) (11,300)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 265,800 (46,900)
Accrued Expenses (85,500) 57,500
Other Long Term Liabilities (9,600) (9,600)
Net cash provided by/(used) in Operating Activites (269,000) (711,700)
----------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment -45,600 (68,700)
Issuance of Notes Receivable - -
Net cash provided by/(used) in Investing Activities (45,600) (68,700)
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 921,600 -
Repayments of advannces from Factor/
Demand Notes Payable (678,300) -
Borrowings on Long Term Debt - -
Repayments on Long Term Debt (20,500) (19,600)
----------- -----------
Net cash provided by/(used) in Financing Activities 222,800 (19,600)
----------- -----------
Net (decrease) increase in cash and cash equivalents (91,800) (800,000)
Cash and Cash Equivalents: Beginning of Period 307,400 1,923,300
----------- -----------
Cash and Cash Equivalents: End of Period $ 215,600 $ 1,123,300
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 44,400 $ 23,100
Income Taxes - 6,800
</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, 1999, and
for the three months ended August 31, 1999, and August 31, 1998, 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. 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, 1999 and May 31, 1999 convertible debentures initially issued to
clients of Gutzwiller & Partner, AG ("Gutzwiller") have an aggregate principal
amount of approximately $9.0 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
<PAGE>
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, 1999,
however, the lender has agreed to waive the violations through May 31, 2000.
Note 4 - Income Taxes
The Company's estimated effective tax rate for fiscal 2000 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
8
<PAGE>
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended August 31, 1999, Compared to Three Months Ended August 31,
- -----------------------------------------------------------------------------
1998
- ----
Continuing Operations
Net sales for continuing operations for the three months ended August 31, 1999
were approximately $2.4 million compared to net sales of approximately $0.8
million for the quarter ended August 31, 1998. The increase in sales was due
primarily to an increase in demand for the three months ended August 31, 1998 as
compared to the same period of the prior fiscal year.
The gross margin percentage decreased from 23.6% for the quarter ended August
31, 1997 to 9.2% for the quarter ended August 31, 1998. The primary reasons for
the decrease in gross profits were additional manufacturing costs associated
with a large increase in monthly production requirements during the last quarter
of fiscal 1999 and the first quarter of fiscal 2000. The Company significantly
increased payroll, overtime, and overhead costs in order to scale up to the
higher production volume. There were significant manufacturing inefficiencies
created as the Company increased production. The Company is taking steps to
address these production issues through changes and additions to plant
supervision and by adding new scheduling and planning procedures.
Sales, General & Administrative costs were approximately $426,100 in the first
quarter of fiscal 2000 as compared to approximately $484,800 in the first
quarter of the prior fiscal year. This decrease was principally due to an
decrease in marketing costs of approximately $57,000 related to the development
of a new commercial catalog and product line in fiscal 1999.
For the three months ended August 31, 1999, the Company had an operating loss of
$296,400 compared to an operating loss of $345,000 for the comparable quarter of
the prior year. The decreased loss was due principally to the increase in sales,
offset by the decrease in gross profit margin discussed above.
Interest expense increased from $45,900 in the first quarter of fiscal 1999 to
$95,700 in the first quarter of fiscal 2000. This increase was primarily due to
interest on accounts receivable financing of $30,900 in fiscal 2000 as compared
to $0 in fiscal 1999.
9
<PAGE>
The Company's estimated effective tax rate for fiscal 2000 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied upon internally generated funds and accounts receivable
financing, plus cash from sales of two of its operating companies, to finance
its operations. The Company's capital requirements primarily result from working
capital needed to support increases in inventory and accounts receivable. During
the second half of fiscal 1999, and the first quarter of fiscal 2000, the
Company's expenditures for material and equipment, as well as payroll and
related costs, rose substantially as the level of booked and anticipated orders
increased. In order to generate the additional working capital required for
these purposes, the Company must continue to generate orders and increase its
level of shipments, which did not keep pace with the increased level of orders
and expenditures in the first two months of fiscal 2000. As a result, the
Company faces severe liquidity problems.
The Company must continue to market electronic enclosure products to government
and commercial markets, enter into contracts which the Company can complete with
favorable profit margins, ship the orders in a timely manner, and control its
increased costs in order to recover from its liquidity problems and seek to
operate profitably in the remainder fiscal 2000.
As of August 31, 1999, the Company had cash of approximately $215,600. The
Company's liquidity was substantially diminished during the first quarter of
fiscal 2000 because of two months in which the level of shipments was
significantly lower than anticipated, while expenditures for payroll and
materials remained high. The Company is taking steps to address these production
issues through changes and additions to plant supervision and by adding new
scheduling and planning procedures. August shipments were back in line with
anticipated levels.
Management believes that cash on hand, borrowings from the factoring of accounts
receivable, and careful management of operating costs and cash disbursements can
enable the Company to meet its cash requirements through May 31, 2000. The
Company will also seek additional funding sources to provide a cushion to handle
variances in cash requirements if sales and shipment levels fluctuate throughout
the fiscal year. However, there is no assurance the Company will be successful
in pursuing its plans or in obtaining additional financing to meet those cash
requirements. The Company must maintain its level of sales, consistently make
timely shipments and produce their products at adequate profit margins, or the
Company will continue to face severe liquidity problems, and may be left without
sufficient cash to meet its ongoing requirements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As explained above, the Company has
sustained significant operating losses and cash flow deficits in fiscal 1999 and
the first quarter of fiscal 2000. In addition, the Company has
11
<PAGE>
significant short-term cash commitments and additional short-term borrowing to
fund these commitments is limited to accounts receivable. These factors raise
significant doubt about the Company's ability to continue as a going concern.
The financial statements do not contain any adjustment that might result from
the outcome of these uncertainties.
The Company is party to 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. At August 31, 1999, the balance of advances due to
Reservoir was $273,300. The Company expects to draw on this facility through
fiscal 2000 as necessary to alleviate cash requirements, although, as discussed
above, the Company will also need to reduce and control expenses, maintain the
sales backlog at appropriate levels, and keep shipment levels in line with
booked orders in order to meet these requirements.
The Company has outstanding debentures originally issued to clients of
Gutzwiller & Partner, A.G. totaling approximately $9.0 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.
On August 14, 1999, interest payments on the debentures totaling approximately
$90,000 were scheduled to be payable. Pending, and subject to, final agreement
and definitive documentation, the Company has reached an understanding in
principal for the funding of such interest payments through additional borrowing
of approximately $90,000 bearing interest at a rate to be determined, and
maturing in approximately nine months.
ANALYSIS OF CASH FLOWS
Operating activities used $269,000 in cash in the first quarter of fiscal 2000.
This reflects a net loss of $296,400 plus $64,200 in non-cash expenses, offset
by $36,800 in cash to fund changes in working capital items. There was an
increase in accounts receivable of $77,700 and an increase in inventories of
$99,500, offset by a net increase in accounts payable of $265,800 during the
fiscal quarter ended August 31, 1999.
Investing activities used $45,600 in the first quarter of fiscal 2000. These
activities consisted principally of acquired property, plant and equipment.
Financing activities provided $222,800 in the first quarter of fiscal 2000.
These activities consisted primarily of net factored accounts receivable
advances totaling $243,300, offset by repayments of long term debt of $20,500.
12
<PAGE>
Management believes that inflation did not have a material effect on the
operations of the Company during fiscal 2000.
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 1999, 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 has developed and has begun to implement a plan to test year 2000
compliance in all of its systems, and to examine the effect of compliance by
major vendors and customers. The Company will, within the next 90 days, develop
a contingency plan to be utilized in the event that its management information
systems fail due to a year 2000 related issue. This plan will focus on temporary
manual procedures to be used while the system issues are addressed. 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.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of the Company may be exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the cost of financing, investing, and operating transactions. Because the
Company has only fixed rate long-term convertible debentures and no foreign
currency transactions, there is no material impact on earnings from fluctuations
in interest and currency exchange rates.
13
<PAGE>
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(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: October 15, 1999 /s/ Larry M. Heimendinger
- ----------------------- ----------------------------------
Chairman of the Board
(Principal Executive Officer)
Date: October 15, 1999 /s/ Sandy B. Sewitch
- ----------------------- ----------------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> AUG-31-1999
<CASH> 215,600
<SECURITIES> 0
<RECEIVABLES> 2,513,500
<ALLOWANCES> 445,500
<INVENTORY> 1,385,100
<CURRENT-ASSETS> 3,362,200
<PP&E> 2,988,400
<DEPRECIATION> 1,975,500
<TOTAL-ASSETS> 4,797,800
<CURRENT-LIABILITIES> 2,156,500
<BONDS> 9,309,400
0
0
<COMMON> 1,811,500
<OTHER-SE> (8,745,400)
<TOTAL-LIABILITY-AND-EQUITY> 4,797,800
<SALES> 2,448,900
<TOTAL-REVENUES> 2,448,900
<CGS> 2,223,500
<TOTAL-COSTS> 2,223,500
<OTHER-EXPENSES> 426,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,700
<INCOME-PRETAX> (296,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (296,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (296,400)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
