U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from --------- to ---------
Commission file number: 0-2917
KMS INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 38-1842108
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
101 North Main Street, Ann Arbor, Michigan 48104
(Address of principal executive offices)
(313) 769-1100
(Issuer's telephone number)
Former address:
(Former name, former address, former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the reistrant 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 outstanding of the issuer's common stock, $0.08 par
value as of October 31, 1996 was 2,958,726.
<PAGE>
PART I
FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. The unaudited
quarterly consolidated financial statements should be read in conjunction
with the summary of accounting policies and notes to the financial
statements included in the Annual Report of the Registrant to its
stockholders for the year ending December 31, 1995.
The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1996; however, in the opinion of management, all adjustments
consisting of normal recurring adjustments necessary for a fair presentation
of the information in this filing have been made.
<PAGE>
CONSOLIDATED BALANCE SHEET
KMS INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited)
(In thousands)
September 30 December 31
1996 1995
------------ -----------
Assets
Current assets
Cash and cash equivalents $ 34 $463
Receivables (Note A) 0 41
Other 39 48
----- -----
Total Current Assets 73 552
Property and equipment
Leasehold improvements 6 6
Machinery and equipment 268 261
Less accumulated depreciation (242) (233)
----- -----
Net Property and Equipment 32 34
Other assets 30 53
----- -----
Total Assets $135 $639
===== =====
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $195 $258
Accrued compensation and benefit costs 46 70
Other accrued liabilities (Note B) 97 104
---- ----
Total Current Liabilities 338 432
Stockholders' equity
Common stock - $0.08 par value
Authorized - 10,000,000 shares
Issued - 2,992,561 shares in 1996 and
2,492,561 shares in 1995 239 199
Additional paid-in capital 29,266 29,216
Accumulated deficit (29,580) (29,080)
Treasury stock at cost - 33,835 shares in
1996 and 33,772 shares in 1995 (128) (128)
------- -------
Total Stockholders' Equity (203) 207
------- -------
Total Liabilities and Stockholders' Equity $135 $639
======= =======
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
KMS INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited)
(In thousands except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
---------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Net Operating Revenues
Gross operating revenues $0 $14 $0 $154
Allowances and adjustments 24 25 105 (107)
----- ----- ----- -----
Net Operating Revenues 24 39 105 47
Costs and Expenes
Cost of revenue 0 25 0 32
Selling, general and administrative 156 171 661 648
----- ----- ----- -----
Total Costs and Expenses 156 196 661 680
Other Income (Expense)
Interest income 1 1 2 5
Other (Note D) 0 22 54 109
----- ----- ----- -----
Total Other Income 1 23 56 114
----- ----- ----- -----
Loss Before Income Taxes (131) (134) (500) (519)
Provision for Income Taxes 0 0 0 0
----- ----- ----- -----
Net Loss ($131) ($134) ($500) ($519)
===== ===== ===== =====
Net Loss Per Common and Common
Equivalent Share ($0.04) ($0.05)($0.19) ($0.21)
===== ===== ===== =====
Weighted Average Common and Common
Equivalent Shares Outstanding 2,959 2,459 2,653 2,460
===== ===== ===== =====
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
KMS INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited)
(In thousands)
Nine Months Ended
September 30
-----------------
1996 1995
---- ----
From Operating Activities
Net loss from operations ($500) ($519)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 9 6
Change in assets and liabilities which
provided (used) cash:
Receivables 41 32
Other current assets 9 0
Accounts payable (63) (23)
Accrued liabilities (31) (169)
----- -----
Total adjustments (35) (154)
----- -----
Net cash used in operating activities (535) (673)
From Investing Activities
Purchases of property and equipment (7) 0
Other 23 14
----- -----
Net cash provided by investing activities 16 14
----- -----
From Financing Activities
Proceeds from sale of stock 90 0
----- -----
Net cash provided by financing activities 90 0
----- -----
Decrease in cash and cash equivalents (429) (659)
Cash and cash equivalents at January 1 463 1,081
----- -----
Cash and cash equivalents at September 30 $34 $422
===== =====
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $0 $0
Income taxes 0 25
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - RECEIVABLES
Receivables consist of the following September 30 December 31
(in thousands): 1996 1995
------------ ----------
Due from the U.S. Government under long-term contracts:
Billed $34 $57
Unbilled 9,427 9,521
----- -----
Subtotals- Billed and Unbilled Receivables 9,461 9,578
Other 6 28
----- -----
Subtotals- Gross Receivables 9,467 9,606
Less allowances (9,467) (9,565)
----- -----
Totals- Net Receivables $0 $41
===== =====
The decrease in the billed accounts receivable from December 31,
1995 to September 30, 1996 was primarily due to the collection of
approximately $19,000 of billed receivables generated by the Company's
management consulting services in 1995. The remainder of the decrease in
billed accounts receivable relate to the collection of small amounts owed to
KMS Fusion, Inc. on completed Government contracts.
The decrease in the unbilled accounts receivable from December 31,
1995 to September 30, 1996 was primarily the result of the Company invoicing
approximately $71,000 of previously unbilled costs as a result of
negotiations between Management and the National Aeronautics and Space
Administration ("NASA") to close out a contract. The remainder of the
decrease in the unbilled accounts receivable since December 31, 1995 was due
to negotiated settlements on two smaller completed Government contracts
during the third quarter of 1996.
The decrease in other receivables from December 31, 1995 to
September 30, 1996 was due to the collection during 1996 of approximately
$22,000 of royalties earned by KMS Advanced Products, Inc. in 1995.
The decrease in receivable allowances from December 31, 1995 to
September 30, 1996 represented adjustments made to remove reserves placed on
Government contract receivables that were collected during the second and
third quarters of 1996.
NOTE B - OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the September 30 December 31
following (in thousands): 1996 1995
------------ -----------
Accrued lease obligations $53 $53
Accrued EPA expense (Note C) 5 5
Other accrued expenses 39 46
--- ---
Totals- Other Accrued Liabilities $97 $104
=== ====
<PAGE>
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - CONTINGENCIES
Department of Energy Claims
BREACH CASE: ON JUNE 26, 1996, THE UNITED STATES COURT OF FEDERAL
CLAIMS (the "Claims Court") ISSUED ITS DECISION THAT KMS FUSION, INC., A
WHOLLY-OWNED SUBSIDIARY OF KMS INDUSTRIES, INC., HAD FAILED TO PROVE THAT
THE DOE BREACHED THE CONTRACT BETWEEN THE PARTIES WHEN, AT THE END OF 1991,
DOE REFUSED TO EXTEND THE SUBJECT CONTRACT TO COVER THE COMPLETION OF CLOSE-
OUT WORK AT THE KMS FACILITY IN ANN ARBOR, MICHIGAN. ACCORDINGLY, THE
CLAIMS COURT ENTERED A JUDGMENT AGAINST THE COMPANY AND DISMISSED THE
COMPANY'S COMPLAINT. THE COMPANY HAD COMMENCED LITIGATION ON THIS CLAIM ON
SEPTEMBER 9, 1994 SEEKING $15,400,000 PLUS INTEREST FROM FEBRUARY 18, 1992
PLUS LEGAL FEES PURSUANT TO THE EQUAL ACCESS TO JUSTICE ACT. IN AUGUST
1995, DOE OBTAINED A PARTIAL SUMMARY JUDGMENT IN ITS FAVOR WITH RESPECT TO
THE COMPANY'S CLAIMS FOR LOST PROFITS PURSUANT TO WHICH THE CLAIMS COURT
REDUCED THE AMOUNT OF THE CLAIM TO APPROXIMATELY $6,900,000. THE COMPANY
HAS FILED AN APPEAL OF THE CLAIMS COURT'S DECISION. ALTHOUGH THE COMPANY
STILL BELIEVES ITS CLAIM IS WELL-FOUNDED, NO PREDICTION CAN BE MADE AS TO
WHETHER THE COMPANY WILL PREVAIL ON THE APPEAL OF THE CLAIMS COURT'S
DECISION ON THE BREACH OF CONTRACT CLAIM AND, IF SO, AS TO WHEN AN AWARD OF
DAMAGES MAY ACTUALLY BE RECEIVED BY THE COMPANY.
Cost Case: This matter, filed in January 1995, alleges that the DOE
underpaid amounts owed to the Company for cost reimbursement under the
Contract during the period May 1, 1987 though December 31, 1991. Damages
claimed are in excess of $3,000,000. The Government filed its answer in
April 1995, denying the Company's claims. By letter, dated March 7, 1996,
the DOE Contracting Officer issued a unilateral decision to the effect that
the Company had been overpaid approximately $5,800,000 for the period in
question, and is demanding reimbursement. Management believes that the
decision by the DOE Contracting Officer is unfounded, and intends to
vigorously defend against the DOE's claim for reimbursement. The trial on
the claim for disallowed costs is now scheduled to commence in February
1997.
Any recovery by the Company against the DOE is subject to a
$2,000,000 offset pursuant to the terms of the partial settlement agreement
entered into in November 1993 between the Company and the DOE. In addition,
the Company has negotiated an arrangement with its legal counsel to provide
legal services for the prosecution of its claims against the DOE at half-
rates pursuant to which such counsel will receive a 15% contingent interest
in the net recovery above $2,000,000, if any. The arrangement also calls
for a $250,000 cap on legal fees, excluding appellate services or
disbursements, resulting from the litigation of the two claims against the
DOE, until a net recovery of at least $500,000 is received by the Company.
The $250,000 cap on legal fees has been reached and legal fees are being
deferred until an aggregate recovery of at least $500,000 is received by the
Company. As a result, the deferred legal fees have created a contingent
liability at September 30, 1996 of approximately $84,000 which would be owed
to the Company's legal counsel should at least $500,000 be received from the
Government.
The employment agreements between the Company and each of Mr. Long
and Mr. Liddy provide, as an incentive for them to continue to assist in the
litigation, a 12.5% interest in the net recovery above $2,000,000, if any.
Thus, any amounts payable to the Company as a result of a judgment against
or settlement with the DOE will be subject to reduction to satisfy the
foregoing obligations.
<PAGE>
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Environmental Protection Agency Cleanup
The Company, along with three other parties, has been named a
potentially responsible party ("PRP") by the U.S. Environmental Protection
Agency ("EPA") with respect to apparent chemical contamination at a Florida
site where a former division of the Company operated from 1967 to 1976.
Several other businesses operated on the site, both before and after the
Company's former division; the time period during which the contamination
occurred has not been determined. The PRPs entered into an Administrative
Order by Consent with the EPA, pursuant to which the PRPs conducted a study
of the site. The study was completed in 1992, and removal of all currently
known alleged soil contaminants has been completed. In September 1992, the
EPA issued a Record of Decision for the groundwater remedy at the site which
calls for no action, with limited monitoring, for a period of one year. The
PRP's have subsequently entered into an Administrative Order with EPA to
implement the "no action with monitoring" remedy. During 1995, 1994, and
1993, the Company contributed approximately $4,000, $22,000, and $90,000,
respectively, under an interim cost-sharing arrangement among the PRPs. The
Company anticipates that its 1996 contributions under this interim agreement
will be approximately $5,000. This amount has been accrued in the financial
statements at December 31, 1995 and at September 30, 1996. The PRPs have
received from the EPA a request for payment of response and oversight costs
incurred at the Florida site in the aggregate amount of approximately
$780,000, of which approximately one-third would be the Company's share,
pursuant to the terms of the Participation Agreement among the PRPs. The
PRPs are collectively contesting both the amount of the demand and the EPA's
entitlement to recover any such amounts. The PRPs are further requesting,
in any event, that the EPA forego its demand against the entire group under
policies recently issued by the EPA, particularly, in light of the financial
inability of the Company to pay any amounts to the EPA.
Employment Agreements
The Company's Chairman and Chief Executive Officer, Mr. Long and
President, Mr. Liddy, are each employed under employment agreements expiring
December 31, 1996. In addition, with stockholder approval, each officer
purchased 250,000 shares of common stock for $45,000 in June 1996. The
employment agreements provide for substantial severance payments under
certain circumstances and for a bonus of 12.5% interest in the net recovery
from the Company's litigation with the DOE in excess of $2,000,000.
Payments for such severance, if an officer made a claim for severance and
establishes his entitlement thereto, would have a material adverse effect on
the Company's financial condition.
<PAGE>
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - FUTURE PROSPECTS AND MANAGEMENT'S PLAN
Management's main objective is to aggressively pursue the Company's
claims against the DOE. Absent collection of a significant portion of its
claims and accounts receivable from the Government, the Company may have
insufficient cash to continue operations through 1996. The Company has very
limited financial and human resources to devote to the pursuit of its appeal
of the Breach of Contract claim decision and the Cost Case. The future of
the Company is largely dependent upon the outcome of its pursuit of these
claims against the DOE. Any recovery by the Company against the DOE is
subject to offset by the DOE in the amount of $2,000,000 and reduction for
significant obligations to its legal counsel and pursuant to employment
agreements. Unless either or both of the following occurs, there exists a
substantial doubt about the Company's ability to continue as a going
concern: (1) a favorable judgment or negotiated settlement is achieved in
the litigation with the DOE or (2) the Company secures a new source for
financing. The possibility that damages will be recovered in the Breach of
Contract claim has been rendered less likely by virtue of the Claims Court's
dismissal of the Company's complaint in June 1996. Management is unable to
predict when, if at all, either of the foregoing events may occur as each is
dependent upon the agreement or cooperation of a party or entity other than
the Company or factors otherwise outside of the Company's control. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
KMS has no laboratory or manufacturing facilities and limited
financial resources with which to develop its technological assets. To
facilitate future research and development efforts, a new wholly-owned
subsidiary, KMS Technology, Inc. ("KMST"), was incorporated in December
1995. Management has transferred the development efforts of certain
promising technologies from KMS Fusion, Inc. to KMST with the hope that
additional funding can be more readily secured from outside sources. KMST
has already entered into an agreement with a California-based company to
license one of its technologies for an initial license fee of $50,000 with
additional royalty payments to be received through April 24, 2009 based on
the number and type of applications. To the extent its resources permit,
KMST is actively pursuing the development of other technologies which appear
promising.
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
The Company generated no gross operating revenue for the three- and
nine-month periods ending September 30, 1996, compared with $14,000 and
$154,000 during the respective 1995 periods. The gross operating revenue
during the first three quarters of 1995 was generated primarily from the
close out of a contract with the National Aeronautics and Space
Administration ("NASA"). The Company also recognized revenue of $39,000 and
$47,000 for management consulting services for the three- and nine-month
periods ending September 30, 1995, respectively.
The Company recorded adjustments of $24,000 and $105,000 for the
three- and nine-month periods ending September 30, 1996, respectively, to
recognize the reversal of excess receivable reserves. During the first
three quarters of 1995, the Company reserved as an allowance against gross
revenue and unbilled receivables the difference between actual costs
incurred by the Company and the amounts received from NASA. For further
discussion regarding the receivable allowances, see "Note A - Receivables"
to the Unaudited Consolidated Financial Statements included in this report.
Cost of revenue decreased from $25,000 and $32,000 during the three-
and nine-month periods ending September 30, 1995, respectively, to zero
during the same periods in 1996. Cost of revenue during the three- and
nine-month periods ending September 30, 1995 was primarily the result of
outside consulting work performed by the Company's management.
<PAGE>
Selling, general, and administrative expenses decreased by
approximately $15,000 (9%) during the three-month period ending September
30, 1996 and increased by approximately $13,000 (2%) during the nine-month
period ending September 30, 1996 compared with the same periods in 1995.
The overall increase in selling, general and administrative expenses is due
primarily to the cost of litigating the Company's breach of contract claim
against the DOE during the first quarter of 1996. The increase in legal and
related expenses was partially offset by a 29% decrease in salaries and
fringe benefit costs during the first three quarters of 1996 compared with
the same period in 1995.
Interest income remained at $1,000 for the three-month periods
ending September 30, 1995 and 1996. Interest income decreased from $5,000
during the nine-month period ending September 30, 1995 to $2,000 during the
same period in 1996 due to lower cash balances and the inability to convert
receivables into cash.
Other income decreased from $22,000 and $109,000 during the three-
and nine-month periods ending September 30, 1995 to zero and $54,000,
respectively, during the same periods in 1996. Other income during 1995
included approximately $77,000 of royalties to be received from the
purchaser of the Company's former rugged computer product line. Other
income during 1996 included $50,000 which KMST earned from licensing one of
its technologies. In addition, dividend income decreased from approximately
$19,000 during the first three quarters of 1995 to approximately $4,000
during the same period in 1996.
A net loss of $131,000 and $500,000 resulted from the above factors
for the three- and nine-month periods ending September 30, 1996,
respectively, compared with net losses of $134,000 and $519,000 during the
respective 1995 periods. This generated a net loss of $0.04 and $0.19 per
share during the three- and nine-month periods ending September 30, 1996,
respectively, compared to net losses of $0.05 and $0.21 per share for the
same periods in 1995.
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
The Company's cash and cash equivalents at September 30, 1996 of
approximately $34,000 consisted of immediately accessible deposits. The
Company has no line of credit. Management has generated approximately
$280,000 of cash since December 31, 1995 through the following actions: 1)
the sale of 500,000 shares of common stock to officers of the Company, 2)
the collection of NASA and other Government contract receivables, 3) the
collection of management consulting and royalty receivables, and 4) the
collection of fees from licensing KMST technologies. The Company's ongoing
obligations, including those under its employment agreements with its
Chairman and Chief Executive Officer and its President, require cash
expenditures in excess of its cash and cash equivalents at September 30,
1996. If the Company is unable to continue to meet its obligations under
its employment agreements with its Chairman and Chief Executive Officer and
its President, such individuals may be entitled to severance payments which
could have a material adverse effect on the Company's financial condition.
The Company failed to meet its salary obligations to its Chairman and Chief
Executive Officer and to its President during the month of October 1996.
The two officers have not yet made a decision whether or not to demand
severance payments from the Company in accordance with their respective
employment agreements. In light of these obligations, and because
Management cannot be assured of receiving any significant amounts of
additional cash in the future, the Company may not be able to continue
operations through 1996. See the discussion under the caption "Future
Prospects."
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See "Note C - Contingencies" to the Unaudited Consolidated Financial
Statements
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KMS INDUSTRIES, INC.
-------------------------------
(Registrant)
Date: November 13, 1996 /s/ Patrick B. Long
-------------------------------
Patrick B. Long
Chairman of the Board and Chief
Executive Officer
(principal executive officer)
Date: November 13, 1996 /s/ Rocko W. Mazzaro
-------------------------------
Rocko W. Mazzaro
Vice President and Chief Financial
Officer (principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 34,000
<SECURITIES> 0
<RECEIVABLES> 9,467,000
<ALLOWANCES> (9,467,000)
<INVENTORY> 0
<CURRENT-ASSETS> 39,000
<PP&E> 274,000
<DEPRECIATION> (242,000)
<TOTAL-ASSETS> 135,000
<CURRENT-LIABILITIES> 338,000
<BONDS> 0
0
0
<COMMON> 239,000
<OTHER-SE> (442,000)
<TOTAL-LIABILITY-AND-EQUITY> 135,000
<SALES> 0
<TOTAL-REVENUES> 105,000
<CGS> 0
<TOTAL-COSTS> 661,000
<OTHER-EXPENSES> (56,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (500,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (500,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (500,000)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
