SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended August 31, 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 Identification No.)
Incorporation or Organization)
10688-D Crestwood Drive, Manassas, VA 20109
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-331-8033
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Indicate by checkmark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
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The number of shares of Registrant's Common
Stock outstanding as of October 12, 2001 6,718,925 Shares
INDEX
Page No.
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Cautionary Statement Under the Private Securities Litigation Reform Act of 1995 .... 3
Part I - Financial Information
Item I - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 2001 and May 31, 2001 .................................................. 5
Condensed Consolidated Statements of Operations -
Three Months Ended August 31, 2001 and August 31, 2000,
respectively ....................................................................... 6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended August 31, 2001 and
August 31, 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
Part 2 - Other Information
Item 6 - Exhibits and Reports on Form 8-K .................................................... 13
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 - 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. Revenues, expenses, assets and liabilities vary during the year and
generally accepted accounting principles require
3
the Company to make estimates and assumptions in preparing the interim
financial statements. The Company has made their best effort in establishing
good faith estimates and assumptions. However, actual results may differ. 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, 2001 and 2000 set forth in the Company's annual
report on Form 10-K, as amended, for the fiscal year ended May 31, 2001.
4
General Kinetics Incorporated
Balance Shests
August 31, 2001 and
May 31, 2001
August 31, May 31,
2001 2001
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(Unaudited) (Audited)
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Assets
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Current Assets:
Cash and cash equivalents $ 180,400 $ 388,300
Accounts receivable, net of allowance of $60,000 and $72,700 1,521,100 1,251,600
Inventories 1,777,000 1,452,300
Prepaid expenses and other 9,300 13,100
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Total Current Assets 3,487,800 3,105,300
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Property, Plant and Equipment 2,788,300 2,786,100
Less: Accumulated Depreciation 2,020,000) (1,984,400)
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768,300 801,700
Patent 38,800 38,000
Other Assets 76,800 64,400
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Total Assets $ 4,371,700 $ 4,009,400
============ ===========
Liablilities and Stockholders' Deficit
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Current Liabilities:
Advances from Factor $ 157,400 $ -
Current maturities of long-term debt 75,100 75,100
Accounts payable, trade 1,317,600 1,104,100
Accrued expenses and other payables 565,000 575,000
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Total Current Liabilities 2,115,100 1,754,200
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Long-Term Debt - less current maturities (including
$8,809,400 and $8,793,900 of convertible debentures) 9,285,900 9,288,300
Other long-term liabilities 253,400 263,000
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Total Long-Term Liabilities 9,539,300 9,551,300
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Total Liabilities 11,654,400 11,305,500
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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 (15,883,400) (15,896,800)
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(6,832,500) (6,845,900)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
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Total Stockholders' Deficit (7,282,700) (7,296,100)
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Total Liabilities and Stockholders' Deficit $ 4,371,700 $ 4,009,400
============ ===========
The accompanying notes are an integral part of the above statements.
Page 5
General Kinetics Incorporated
Statements of Operations
(Unaudited)
Three Months Ended
August 31, August 31,
2001 2000
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Net Sales $ 2,068,500 $ 2,266,600
Cost of Sales 1,604,300 1,919,800
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Gross Profit 464,200 346,800
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Selling, General & Administrative 395,200 429,000
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Total Operating Expenses 395,200 429,000
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Operating Income (loss) 69,000 (82,200)
Interest Expense (55,600) (49,800)
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Net Income (loss) 13,400 (132,000)
=========== ===========
Basic Earnings per Share:
Basic Earnings (loss) per Share $ 0.002 ($0.02)
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925
Diluted Earnings per Share:
Diluted Earnings (loss) per share $ 0.002 ($0.02)
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 24,708,925 6,718,925
The accompanying notes are an integral part of the above statements.
6
General Kinetics Incorporated
Statements of Cash Flows
(Unaudited)
Three Months Ended
August 31, August 31,
2001 2000
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Cash Flows From Operating Activities:
Net Income/(Loss) $ 13,400 $ (132,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 35,600 40,300
Amortization of bond discount 15,500 15,500
(Increase) Decrease in Assets:
Accounts Receivable (269,500) (432,300)
Inventories (324,700) (41,100)
Prepaid Expenses 3,800 3,800
Other assets (13,200) 4,100
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 213,500 103,400
Accrued Expenses (10,000) (234,200)
Other Long Term Liabilities (9,600) (9,600)
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Net cash provided by/(used) in Operating Activites (345,200) (682,100)
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Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (2,200) (1,400)
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Net cash provided by/(used) in Investing Activities (2,200) (1,400)
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Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 219,800 -
Repayments of advances from Factor/
Demand Notes Payable (62,400) (44,100)
Repayments on Long Term Debt (17,900) (11,200)
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Net cash provided by/(used) in Financing Activities 139,500 (55,300)
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Net (decrease) increase in cash and cash equivalents (207,900) (738,800)
Cash and Cash Equivalents: Beginning of Period 388,300 958,100
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Cash and Cash Equivalents: End of Period $ 180,400 $ 219,300
========= ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 16,900 $ 98,200
Income Taxes - -
The accompanying notes are an integral part of the above statements.
Page 7
GENERAL KINETICS INCORPORATED AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The unaudited condensed financial statements at August 31, 2001, and for
the three months ended August 31, 2001 and August 31, 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 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, 2001,
are not necessarily indicative of the results to be expected for the full year.
Note 2 - Earnings Per Share
Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic earnings
per share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity. The following table
presents a reconciliation between the weighted average shares outstanding for
basic and diluted earnings per share for the three months ended August 31, 2001:
Income Shares Per Share Amount
------ ------ ----------------
Basic earnings per share
Income available to common shareholders $13,400 6,718,925 $0.002
Effect of assumed conversion of
convertible debentures, net of tax 23,684 17,990,000 0.000
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Dilutive earnings per share $37,084 24,708,925 $0.002
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Note 3 - Notes Payable
At August 31, 2001 and May 31, 2001 convertible debentures initially issued to
clients of Gutzwiller & Partner, AG ("Gutzwiller") are outstanding in 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 issuable
upon conversion are also subject to certain rights to registration under the
Securities Act of 1933, as amended.
Note 4 - Related Party Transactions
In August 2001, the Company entered into a factoring agreement with Link2It
Corporation, a company formed by Larry Heimendinger and Richard McConnell, both
members of the Company's Board of Directors. The agreement is intended to
replace the Company's prior agreement with Reservoir Capital Corporation
("Reservoir"). The agreement, which was negotiated at arms length and approved
by unanimous vote of the Company's Board of Directors, is on terms substantially
identical to those of the Reservoir facility, but more favorable to the Company
in certain respects, including provision for advances at a rate of up to 85% of
specified accounts receivable. At August 31, 2001 outstanding advances due to
Link2It Corporation totaled approximately $157,000.
Note 5 - Income Taxes
The Company's estimated effective tax rate for fiscal 2002 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 August 31, 2001, Compared to Three Months Ended August 31,
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2000
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Net sales for the quarter ended August 31, 2001 were approximately $2.07 million
compared to net sales of approximately $2.27 million for the quarter ended
August 31, 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 15.3% for the quarter ended August
31, 2000 to 22.4% for the quarter ended August 31, 2001. The primary reasons for
the increase in the gross profit percentage were the improved scheduling and
planning procedures implemented during the prior fiscal year. The Company
continues to address production issues through plant supervision and regular
updating of scheduling and planning procedures. The Company is trying to
stabilize the level of shipments at a profitable level through these changes and
a focused sales effort.
Selling, General & Administrative costs were approximately $395,200 for the
quarter ended August 31, 2001 as compared to approximately $429,000 for the
quarter ended August 31, 2000. The decrease was principally due to a reduction
in facilities and travel expenses for the first quarter of fiscal 2002 as
compared to the first quarter of the prior fiscal year.
In addition, during the quarter ended August 31, 2001, the Company reviewed the
allowance for doubtful accounts and determined that the allowance should be
reduced from $72,700 to $60,000. The reduction in the allowance resulted in a
reduction in Selling, General & Administrative costs and an increase in net
income of approximately $12,700 for the quarter ended August 31, 2001.
For the quarter ended August 31, 2001, the Company had operating income of
$69,000 compared to an operating loss of $82,200 for the comparable quarter of
the prior year. The improved operating results were due principally to the
increase in gross margins and the decrease in Selling, General & Administrative
costs discussed above.
Interest expense increased from $49,800 in the first quarter of fiscal 2001 to
$55,600 in the first quarter of fiscal 2002 principally due to an increased
level of factored receivables.
The Company's estimated effective tax rate for fiscal 2002 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
10
Liquidity and Capital Resources
The Company relies upon internally generated funds and accounts receivable
financing to finance its operations. During the first quarter of fiscal 2002,
the Company showed a net profit of approximately $13,400. During fiscal 2001,
the net loss totaled $129,800. In order to generate the working capital required
for operations, the Company must continue to generate orders, increase its level
of shipments, and continue to operate profitably during the remainder of fiscal
2002.
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 fiscal 2002.
As of August 31, 2001, the Company had cash of $180,400. The Company has faced
production issues that have contributed to losses from operations in the prior
fiscal year. The Company has taken and is continuing to take steps to address
these production issues through changes and additions to plant supervision and
by regularly updating 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.
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 August 31, 2002. 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, or if the Company purchases capital
equipment to increase production capacity due to any possible increased sales
opportunities. 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 or increase 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. The Company sustained operating losses
in fiscal 2001, 2000, and 1999, and 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 has been party to a factoring agreement with Reservoir Capital
Corporation ("Reservoir") that provides for advances (or loans) of up to 80% of
specified accounts receivable. In August 2001, Link2It Corporation, a company
formed by Larry Heimendinger and Richard McConnell, both directors of the
Company, entered into a new factoring agreement with the Company on terms
substantially identical to those of the Reservoir facility, but more favorable
to the Company in certain respects, including provision for advances at a rate
of up to 85% of specified accounts receivable. The Company expects to draw on
this facility, or a similar facility, throughout fiscal 2002 as necessary to
help alleviate liquidity problems, 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. At August 31, 2001 outstanding advances due to Link2It
Corporation totaled approximately $157,000.
The Company had significant amounts payable to trade creditors at August 31,
2001. In addition, commitments under operating leases, net of sublessee income,
amount to $8,300 in fiscal 2002. Current maturities of long-term debt amount to
$75,100 in fiscal 2002.
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 $345,200 in cash in the first quarter of fiscal 2002.
This reflects net income of $13,400 plus $51,100 in non-cash expenses, offset by
$409,700 in cash to fund changes in working capital items. The cash used to fund
changes in working capital items includes an increase in inventories of $324,700
and an increase in accounts receivable in $269,500, offset by an increase in
accounts payable of $213,500.
Investing activities used $2,200 in the first quarter of fiscal 2002. These
activities consisted of acquired property, plant and equipment.
Financing activities provided $139,500 in the first quarter of fiscal 2002.
These activities consisted primarily of factoring accounts receivable netting to
$157,400, offset by the repayment of certain long-term debt.
Management believes that inflation did not have a material effect on the
operations of the Company during the first quarter of fiscal 2002.
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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 of Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL KINETICS INCORPORATED
Date: October 15, 2001 /s/ Larry M. Heimendinger
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Chairman of the Board
(Principal Executive Officer)
Date: October 15, 2001 /s/ Sandy B. Sewitch
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Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
14