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 November 30, 2000 Commission File Number 0-1738
------
GENERAL KINETICS INCORPORATED
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
--------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14130-A Sullyfield Circle, Chantilly, VA 20151
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-802-4848
-------------------------
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
---
The number of shares of Registrant's Common Stock outstanding as of January
5, 2001 6,718,925 Shares
INDEX
Page No.
--------
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 -
November 30, 2000 and May 31, 2000.................................................................. 4
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended November 30, 2000 and November 30, 1999,
respectively........................................................................................ 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended November 30, 2000 and
November 30, 1999, 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....................................................................... 13
2
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, 2000 and 1999 set forth in the Company's Annual
Report on Form 10-K, as amended, for the fiscal year ended May 31, 2000.
3
General Kinetics Incorporated
Balance Sheets
November 30, 2000 and
May 31, 2000
November 30, May 31,
2000 2000
---- ----
(Unaudited) (Audited)
----------- ---------
Assets
------
Current Assets:
Cash and cash equivalents $ 358,700 $ 958,100
Accounts receivable, net of allowance of $75,000 and $75,000 1,734,200 1,130,600
Inventories 773,300 982,800
Prepaid expenses and other 33,100 36,200
------------ ------------
Total Current Assets 2,899,300 3,107,700
============ ============
Property, Plant and Equipment 2,760,000 2,751,900
Less: Accumulated Depreciation (1,906,800) (1,827,000)
------------ ------------
853,200 924,900
Other Assets 44,900 97,700
------------ ------------
Total Assets $ 3,797,400 $ 4,130,300
============ ============
Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities:
Advances from Factor $ - $ 44,100
Current maturities of long-term debt 69,600 69,600
Accounts payable, trade 893,100 873,700
Accrued expenses and other payables 497,800 739,300
------------ ------------
Total Current Liabilities 1,460,500 1,726,700
============ ============
Long-Term Debt - less current maturities (including
$8,716,600 and $8,654,700 of convertible debentures) 9,298,000 9,300,900
Other long-term liabilities 249,800 269,000
------------ ------------
Total Long-Term Liabilities 9,547,800 9,569,900
============ ============
Total Liabilities 11,008,300 11,296,600
============ ============
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 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 (15,811,600) (15,767,000)
------------- ------------
(6,760,700) (6,716,100)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (7,210,900) (7,166,300)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 3,797,400 $ 4,130,300
============ ============
The accompanying notes are an integral part of the above statements.
Page 4
General Kinetics Incorporated
Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
---- ---- ---- ----
Net Sales $ 4,713,900 $ 5,051,500 $ 2,447,300 $ 2,602,600
Cost of Sales 3,765,900 4,303,400 1,846,100 2,079,900
----------- ----------- ----------- -----------
Gross Profit 948,000 748,100 601,200 522,700
=========== =========== =========== ===========
Selling, General & Administrative 844,700 838,600 415,700 412,500
Product Research, Development & Improvement 37,700 - 37,700 -
----------- ----------- ----------- -----------
Total Operating Expenses 882,400 838,600 453,400 412,500
=========== =========== =========== ===========
Operating Income (loss) 65,600 (90,500) 147,800 110,200
Interest Expense (110,200) (176,100) (60,400) (80,400)
----------- ----------- ----------- -----------
Net Income (loss) (44,600) (266,600) 87,400 29,800
=========== =========== =========== ===========
Basic Earnings per Share:
Basic Earnings (loss) per Share ($0.01) ($0.04) $ 0.01 $ 0.004
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925 6,718,925 6,718,925
Diluted Earnings per Share:
Diluted Earnings (loss) per share ($0.01) ($0.04) $ 0.004 $ 0.001
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 6,718,925 24,708,925 24,708,925
The accompanying notes are an integral part of the above statements.
Page 5
General Kinetics Incorporated
Statements of Cash Flows
(Unaudited)
Six Months Ended
November 30, November 30,
2000 1999
---- ----
Cash Flows From Operating Activities:
Net Income/(Loss) $ (44,600) $ (266,600)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 79,800 98,400
Amortization of bond discount 31,000 31,000
(Increase) Decrease in Assets:
Accounts Receivable (603,600) (422,900)
Inventories 209,500 344,900
Prepaid Expenses 3,100 18,600
Other assets 52,800 (136,200)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 19,400 (26,000)
Accrued Expenses (241,500) (76,800)
Other Long Term Liabilities (19,200) (19,200)
------------ ------------
Net cash provided by/(used in) Operating Activites (513,300) (454,800)
============ ============
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (8,100) (53,900)
Payment received on Notes Receivable - 200,000
------------ ------------
Net cash provided by/(used in) Investing Activities (8,100) 146,100
============ ============
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 70,500 1,522,600
Repayments of advances from Factor/
Demand Notes Payable (114,600) (1,429,200)
Notes Payable 88,400
Repayments on Long Term Debt (33,900) (41,000)
------------ ------------
Net cash provided by/(used in) Financing Activities (78,000) 140,800
============ ============
Net (decrease) increase in cash and cash equivalents (599,400) (167,900)
Cash and Cash Equivalents: Beginning of Period 958,100 307,400
------------ ------------
Cash and Cash Equivalents: End of Period $ 358,700 $ 139,500
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 116,900 $ 177,400
Income Taxes 800 800
The accompanying notes are an integral part of the above statements.
Page 6
GENERAL KINETICS INCORPORATED
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The condensed financial statements at November 30, 2000 and May 31, 2000, and
for the three months and six months ended November 30, 2000, and November 30,
1999, 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 and six month periods ended
November 30, 2000, 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 November 30, 2000 and May 31, 2000, convertible debentures initially issued
to clients of Gutzwiller & Partner, A.G. ("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.
7
Shares issuable upon conversion are also subject to certain rights to
registration under the Securities Act of 1933, as amended.
Note 4 - Income Taxes
The Company's estimated effective tax rate for fiscal 2001 is 0%. This
estimated effective tax rate is lower than the statutory rate due to the
existence of net operating loss carryforwards.
8
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended November 30, 2000 Compared to Three Months Ended November 30,
-------------------------------------------------------------------------------
1999
----
Net sales for the three months ended November 30, 2000 were approximately
$2.45 million compared to net sales of approximately $2.60 million for the
quarter ended November 30, 1999. The small decrease in sales was due primarily
to what are believed to be normal fluctuations in demand for the Company's
products and services.
The gross margin percentage increased from 20.1% for the quarter ended
November 30, 1999 to 24.6% for the quarter ended November 30, 2000. The primary
reasons for the increase in gross profit margins were the steps taken to address
production issues identified during fiscal 2000 as the Company faced large
increases and decreases in shipping volume.
Sales, General & Administrative costs were essentially unchanged at
approximately $415,700 in the second quarter of fiscal 2001 as compared to
approximately $412,500 in the corresponding quarter of the prior fiscal year.
During the quarter ended November 30, 2000, the Company incurred $37,700 in
Product Research, Development & Improvement costs related to the initial
development work on a new enclosure product.
For the three months ended November 30, 2000, the Company had operating
income of $147,800 compared to operating income of $110,200 for the comparable
quarter of the prior fiscal year. The increase was due primarily to the increase
in gross profit margins described above.
Interest expense decreased from $80,400 in the second quarter of fiscal 2000
to $60,400 in the second quarter of fiscal 2001. This decrease occurred
principally because in fiscal 2001 the Company used less accounts receivable
financing to alleviate short-term cash requirements than in the prior fiscal
year.
The Company's estimated effective tax rate for fiscal 2001 is 0%. This
estimated effective tax rate is lower than the statutory rate due to the
existence of net operating loss carryforwards.
9
Six Months Ended November 30, 2000, Compared to Six Months Ended November 30,
----------------------------------------------------------------------------
1999
----
Net sales for the six months ended November 30, 2000 were approximately $4.7
million compared to net sales of approximately $5.1 million for the six months
ended November 30, 1999. The decrease in sales was due primarily to what are
believed to be normal fluctuations in demand for the Company's products and
services. However, the decrease in demand reflected in the first half of fiscal
2000 is not necessarily indicative of the results to be expected for the full
year. The Company's contract backlog was approximately $3.7 million at November
30, 2000 as compared to approximately $2.9 million at November 30, 1999.
The gross margin percentage increased from 14.8% for the six months ended
November 30, 1999 to 20.1% for the six months ended November 30, 2000. The
primary reasons for the increase in gross profit margins were the steps taken to
address production issues identified during fiscal 2000 as the Company faced
large increases and decreases in shipping volume.
Sales, General & Administrative costs were essentially unchanged at
approximately $844,700 in the first six months of fiscal 2001 as compared to
approximately $838,600 in the first six months of the prior fiscal year. During
the six months ended November 30, 2000, the Company incurred $37,700 in Product
Research, Development & Improvement costs related to the initial development
work on a new enclosure product.
For the six months ended November 30, 2000, the Company had operating income
of $65,600 compared to an operating loss of $90,500 for the comparable six
months of the prior fiscal year. The improvement was due principally to the
increase in gross profit margins described above.
Interest expense decreased from $176,100 in the first six months of fiscal
2000 to $110,200 in the first six months of fiscal 2001. This decrease occurred
principally because in fiscal 2001 the Company used less accounts receivable
financing to alleviate short-term cash requirements than in the prior fiscal
year.
10
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. During the first half of fiscal 2001, operating income totaled
$65,600, after incurring significant operating losses during the prior two
fiscal years. In order to generate the working capital required for operations,
the Company must continue to generate orders, stabilize its level of shipments,
and operate profitably during the remainder of fiscal 2001.
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
costs in order to recover from its liquidity problems and seek to operate
profitably in the second half of fiscal 2001.
As of November 30, 2000, the Company had cash of $358,700. The Company has faced
production issues that have contributed to losses from operations. The Company
has taken and is continuing to take steps to address these production issues
through changes and additions to plant supervision and by adding new scheduling
and planning procedures. The Company is trying to stabilize the level of
shipments at a profitable level through these changes and an increased sales
effort. The backlog at November 30, 2000 was $3.7 million.
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, 2001. The
Company may also seek additional funding sources to provide a cushion to handle
variances in cash requirements if sales, gross profits 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 continue to maintain its level of
sales, consistently make timely shipments and produce its products at adequate
profit margins, or the Company will continue to face 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
sustained significant operating losses in fiscal 2000. In addition, the Company
has significant short-term cash commitments, the funding of which is limited to
cash flow from operations and the factoring of certain 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.
11
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 November 30, 2000 there were no advances due to
Reservoir. The Company expects to draw on this facility through fiscal 2001 as
necessary to alleviate cash requirements, although, as discussed above, the
Company will also need to 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 had significant amounts payable to trade creditors at November 30,
2000. In addition, commitments under operating leases, net of sublessee income,
amount to $90,500 in fiscal 2001. Current maturities of long-term debt amount to
$69,600 in fiscal 2001.
The Company has outstanding debentures originally issued to clients of
Gutzwiller 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.
Analysis of Cash Flows
Operating activities used $513,300 in cash in the first half of fiscal 2000.
This reflects a net loss of $44,600 less $110,800 in non-cash expenses, plus
$579,500 in cash to fund changes in working capital items. The cash to fund
changes in working capital items included an increase in accounts receivable of
$603,600 in the six months ended November 30, 2000. This increase in accounts
receivable occurred principally because billings totaled $1.72 million in the
two months ended November 30, 2000 as compared to $1.52 million for the
comparable period ended May 31, 2000, and because accounts receivable had been
temporarily reduced at May 31, 2000 due to a large client receiving and paying
for May shipments during the last month of fiscal 2000.
Investing activities used $8,100 in the first half of fiscal 2001. These
activities consisted of acquired property, plant and equipment.
Financing activities used $78,000 in the first half of fiscal 2001. These
activities consisted of net repayments of factoring advances and repayments of
long-term debt.
12
Management believes that inflation has not had a material effect on the
operations of the Company during the first half of fiscal 2001.
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.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
None
13
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: January 15, 2001 /s/ Larry M. Heimendinger
------------------------- -----------------------------------
Chairman of the Board
(Principal Executive Officer)
Date: January 15, 2001 /s/ Sandy B. Sewitch
-------------------------- -----------------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14