SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended February 28, 2001 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
Incorporation or Organization) Identification No.)
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 April 2, 2001 6,718,925 Shares
INDEX
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 Balance Sheets -
February 28, 2001 and May 31, 2000...................... 5
Condensed Statements of Operations -
Three Months and Nine Months Ended February 28, 2001
and February 29, 2000, respectively..................... 6
Condensed Statements of Cash Flows -
Nine Months Ended February 28, 2001 and
February 29, 2000, respectively......................... 7
Notes to Condensed Consolidated Financial Statements.... 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk.............................................. 14
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K......................... 14
2
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements contained in this Quarterly Report on Form 10-Q, including
without limitation, as set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as oral
statements that may be made by the Company or by officers, directors or
employees of the Company acting on the Company's behalf, that are not historical
fact may contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements involve
risks and uncertainties. They are not historical facts or guarantees of future
performance or events. They are based on current expectations, estimates,
beliefs, assumptions, goals and objectives, and are subject to uncertainties
that are difficult to predict. In particular, certain risks and uncertainties
may include, but are 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. Forward looking
statements included in this quarterly report are based on information known to
GKI as of the date of this quarterly report and GKI accepts no obligation (and
expressly disclaims any obligations) to update these forward looking statements
and does not intend to do so. Certain of these risks and uncertainties 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 - Financial Statements
The unaudited condensed 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
for interim reporting. Certain financial information and footnote disclosures
normally included in the annual financial statements prepared in accordance with
generally accepted accounting principles (GAAP) have been condensed or omitted
pursuant to those rules and regulations. Revenues, expenses, assets and
liabilities vary during the year and GAAP
3
requires GKI to make estimates and assumptions in preparing the interim
financial statements. GKI has made their best effort in establishing good faith
estimates and assumptions, however, actual results may differ.
In the opinion of management of the Company, the information furnished
reflects all adjustments (consisting of normal recurring adjustments) that are
necessary for a fair presentation of results of the interim periods. The
financial statements should be read in conjunction with the audited financial
statements and notes thereto filed with Form 10-K, as amended, for the fiscal
year ended May 31, 2000.
4
General Kinetics Incorporated
Balance Sheets
February 28, May 31,
2001 2000
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(Unaudited) (Audited)
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Assets
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Current Assets:
Cash and cash equivalents $ 865,200 $ 958,100
Accounts receivable, net of allowance of $75,000 993,700 1,130,600
Inventories 1,327,100 982,800
Prepaid expenses and other 53,000 36,200
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Total Current Assets 3,239,000 3,107,700
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Property, Plant and Equipment 2,775,200 2,751,900
Less: Accumulated Depreciation (1,945,500) (1,827,000)
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829,700 924,900
Other Assets 76,400 97,700
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Total Assets $ 4,145,100 $ 4,130,300
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Liablilities and Stockholders' Deficit
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Current Liabilities:
Advances from Factor $ - $ 44,100
Current maturities of long-term debt 69,600 69,600
Accounts payable, trade 1,156,100 873,700
Accrued expenses and other payables 503,900 739,300
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Total Current Liabilities 1,729,600 1,726,700
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Long-Term Debt - less current maturities (including
$8,716,600 and $8,654,700 of convertible debentures) 9,290,100 9,300,900
Other long-term liabilities 240,200 269,000
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Total Long-Term Liabilities 9,530,300 9,569,900
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Total Liabilities 11,259,900 11,296,600
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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 (15,715,500) (15,767,000)
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(6,664,600) (6,716,100)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
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Total Stockholders' Deficit (7,114,800) (7,166,300)
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Total Liabilities and Stockholders' Deficit $ 4,145,100 $ 4,130,300
============ ============
The accompanying notes are an integral part of the above statements.
Page 5
General Kinetics Incorporated
Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
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Net Sales $ 6,240,900 $6,883,700 $ 1,526,900 $1,832,200
Cost of Sales 5,004,600 6,102,900 1,238,700 1,799,500
----------- ---------- ----------- ----------
Gross Profit 1,236,300 780,800 288,200 32,700
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Selling, General & Administrative 1,151,600 1,169,800 306,900 331,200
Product Research, Development & Improvement 42,800 - 5,000 -
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Total Operating Expenses 1,194,400 1,169,800 311,900 331,200
----------- ---------- ----------- ----------
Operating Income (loss) 41,900 (389,000) (23,700) (298,500)
Other Income 175,000 - 175,000 -
Interest Expense (165,400) (234,100) (55,200) (58,000)
----------- ---------- ----------- ----------
Income (loss) before extraordinary item 51,500 (623,100) 96,100 (356,500)
----------- ---------- ----------- ----------
Extraordinary item - gain from debt extinguishment - 278,800 - 278,800
----------- ---------- ----------- ----------
Net income (loss) $ 51,500 $ (344,300) $ 96,100 $ (77,700)
----------- ---------- ----------- ----------
Basic Earnings per Share:
Earnings (loss) before extraordinary item $ 0.01 ($0.09) $ 0.014 ($0.05)
Earnings from extraordinary item $ 0.00 $ 0.04 $ 0.000 $ 0.04
Basic Earnings (loss) per Share $ 0.01 ($0.05) $ 0.014 ($0.01)
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925 6,718,925 6,718,925
Diluted Earnings per Share:
Earnings (loss) before extraordinary item $ 0.002 ($0.09) $ 0.004 ($0.05)
Earnings from extraordinary item $ 0.000 $ 0.04 $ 0.000 $ 0.04
Diluted Earnings (loss) per share $ 0.002 ($0.05) $ 0.004 ($0.01)
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 24,708,925 6,718,925 24,708,925 6,718,925
The accompanying notes are an integral part of the above statements.
Page 6
General Kinetics Incorporated
Statements of Cash Flows
(Unaudited)
Nine Months Ended
February 28, February 29,
2001 2000
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Cash Flows From Operating Activities:
Net Income/(Loss) $ 51,500 $ (344,300)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 118,500 137,700
Amortization of bond discount 46,500 46,500
Gain on sale of Cryptek (278,800)
Bad debt recovery (175,000)
(Increase) Decrease in Assets:
Accounts Receivable 136,900 85,800
Inventories (344,300) 483,300
Prepaid Expenses (16,800) 25,100
Other assets 21,300 (12,400)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 282,400 (279,500)
Accrued Expenses (235,500) (3,500)
Other Long Term Liabilities (28,800) (28,800)
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Net cash provided by/(used in) Operating Activites (143,300) (168,900)
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Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (23,300) (66,300)
Collection of notes receivable 175,000 400,000
Net proceeds from sale of Cryptek - 278,800
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Net cash provided by/(used in) Investing Activities 151,700 612,500
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Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 132,700 1,574,400
Repayments of advances from Factor/
Demand Notes Payable (176,800) (1,653,400)
Issusance of note payable 88,400
Repayments of note payable (52,800)
Repayments on Long Term Debt (57,200) (57,000)
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Net cash provided by/(used in) Financing Activities (101,300) (100,400)
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Net (decrease) increase in cash and cash equivalents (92,900) 343,200
Cash and Cash Equivalents: Beginning of Period 958,100 307,400
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Cash and Cash Equivalents: End of Period $ 865,200 $ 650,600
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 134,200 $ 198,900
Income Taxes 800 800
The accompanying notes are an integral part of the above statements.
Page 7
GENERAL KINETICS INCORPORATED
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The unaudited condensed financial statements at February 28, 2001 and May 31,
2000, and for the three months and nine months ended February 28, 2001, and
February 29, 2000, 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 information and footnotes
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
presentation of the results of the interim periods.
The results of operations for the three month and nine month periods ended
February 28, 2001, are not necessarily indicative of the results to be expected
for the full year.
Note 2 - Net Income/(Loss)Per Share
The Company calculated earnings per share following the guidelines in
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". 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 effects
would have been anti-dilutive.
Note 3 - Notes Payable
At February 28, 2001 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
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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
issuable upon conversion are also subject to certain rights to registration
under the Securities Act of 1933, as amended.
Note 4 - Link2It Notes
At May 31, 2000 the Company had a membership interest in and certain notes
receivable due from Link2It, LLC, a company formed by Larry M. Heimendinger and
Richard McConnell, both GKI board members. The financial statements at May 31,
2000 included a valuation reserve of $175,000, which represented the total due
under the notes receivable.
During January 2001, Link2It LLC merged into Link2It Corporation and completed
a round of equity financing. The $175,00 principal amount of the notes was
repaid in full and recognized as "other income" on the accompanying statement of
operations. GKI also retained approximately 5.7% of Link2It Corporation's
currently outstanding common stock, which it accounts for in the cost method.
Note 5 - 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.
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GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended February 28, 2001 Compared to Three Months Ended February 29,
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2000
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Net sales for the three months ended February 28, 2001 were approximately
$1.53 million compared to net sales of approximately $1.83 million for the
quarter ended February 28, 2000. The 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 2% for the quarter ended February
29, 2000 to 19% for the quarter ended February 28, 2001. 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 approximately $306,900 in the third
quarter of fiscal 2001 as compared to approximately $331,200 in the
corresponding quarter of the prior fiscal year. During the quarter ended
February 28, 2001, the Company incurred $5,000 in Product Research, Development
& Improvement costs related to the initial development work on a new enclosure
product.
For the three months ended February 28, 2001, the Company had an operating
loss of $23,700 compared to an operating loss of $298,500 for the comparable
quarter of the prior fiscal year. The decrease in the operating loss was due
primarily to the increase in gross profit margins described above.
Interest expense decreased from $58,000 in the third quarter of fiscal 2000 to
$55,200 in the third quarter of fiscal 2001.
During the quarter ended February 28, 2001, the Company recorded $175,000 in
"other income" related to the payment of Notes receivable due from Link2It that
had been fully reserved in the prior fiscal year (see Note 4 above).
10
During the quarter ended February 29, 2000, the Company recorded an
extraordinary gain of $278,800 from the settlement of its interest in Cryptek,
LLC.
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.
Nine Months Ended February 28, 2001, Compared to Nine Months Ended February 29,
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2000
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Net sales for the nine months ended February 28, 2001 were approximately $6.2
million compared to net sales of approximately $6.9 million for the nine months
ended February 29, 2000. The decrease in sales was due primarily to what are
believed to be normal fluctuations in demand for the Company's products and
services. The Company's contract backlog was approximately $4.4 million at
February 28, 2001 as compared to approximately $3.8 million at February 29,
2000.
The gross margin percentage increased to 20% for the nine months ended
February 28, 2001 from 11% for the nine months ended February 29, 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 $1.2 million in the first nine months of fiscal 2001 as compared
to approximately $1.2 million in the first nine months of the prior fiscal year.
During the nine months ended February 28, 2001, the Company incurred $42,800 in
Product Research, Development & Improvement costs related to the initial
development work on a new enclosure product.
For the nine months ended February 28, 2001, the Company had operating income
of $41,900 compared to an operating loss of $389,000 for the comparable nine
months of the prior fiscal year. The improvement was due principally to the
increase in gross profit margins described above.
Interest expense decreased from $234,100 in the first nine months of fiscal
2000 to $165,400 in the first nine 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.
11
During the nine months ended February 28, 2001, the Company recorded $175,000
in "other income" related to the payment of Notes receivable due from Link2It
that had been fully reserved in the prior fiscal year (see Note 4 above).
During the nine months ended February 29, 2000 the Company recorded an
extraordinary gain of $278,800 from the settlement of its interest in Cryptek,
LLC.
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 nine months of fiscal 2001, operating income
totaled $41,900, 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 last quarter of fiscal 2001.
As of February 28, 2001, the Company had cash of $865,200. 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 February 28, 2001 was $4.4 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
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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.
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 February 28, 2001 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 February 28,
2001. 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 $143,300 in cash in the first three quarters of
fiscal 2001. This reflects a net income of $51,500 plus $165,000 in non-cash
expenses, less $359,800 in cash to fund changes in working capital items. The
cash to fund changes in working capital items included an increase in
inventories of $344,300 in the nine months ended February 28, 2001.
13
Investing activities provided $151,700 in the first three quarters of fiscal
2001. These activities consisted the repayment of the Link2It loan offset by
acquired property, plant and equipment.
Financing activities used $101,300 in the first three quarters of fiscal 2001.
These activities consisted of net repayments of factoring advances and
repayments of long-term debt.
Management believes that inflation has not had a material effect on the
operations of the Company during the first three quarters of fiscal 2001.
Item 3 - 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
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL KINETICS INCORPORATED
Date: April 16, 2001 /s/ Larry M. Heimendinger
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Chairman of the Board
(Principal Executive Officer)
Date: April 16, 2001 /s/ Sandy B. Sewitch
---------------------- ----------------------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
15