GENERAL KINETICS INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For Quarter Ended November 30, 2003

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

Incorporation or Organization)

(I.R.S. Employer Identification No.)

10688-D Crestwood Drive, Manassas, VA		20109
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, including Area Code 703-331-8033

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 ¨

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The number of shares of Registrant’s Common Stock outstanding as of January 9, 2003 7,118,925 Shares

INDEX

		Page No.
Cautionary Statement		3

Part I - Financial Information

Item 1 - Financial Statements

	Balance Sheets - November 30, 2003 and May 31, 2003	5

	Statements of Operations - Six Months and Three Months Ended November 30, 2003 and November 30, 2002	6

	Statements of Cash Flows - Six Months Ended November 30, 2003 and November 30, 2002	7

	Notes to Condensed 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		16

Item 4 - Controls and Procedures		16

Part II - Other Information

	Item 6 - Exhibits and Reports on Form 8-K	18

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements”. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or the negatives thereof, variations thereon or similar terminology. The forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management’s reasonable estimates of future results or trends. Although the Company believes that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved. Actual results may differ from projected results due, but not limited, to unforeseen developments, including developments relating to the following:

•

the risk that the Company may not be able to obtain and complete sufficient new orders to maintain positive cash flow;

•

the risk that the Company may not maintain its present financing facility or obtain additional financing, if necessary, including the risk that it will not be able to repay or refinance in full the approximately $8.8 million principal amount of its outstanding convertible debentures currently scheduled to mature in August 2004;

•

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 Over The Counter Bulletin Board.

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from what the Company expects. All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on the Company’s behalf are expressly qualified in their entirety by the foregoing factors. These forward-looking statements

speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.

PART I FINANCIAL INFORMATION

Item 1 - Financial Statements

The unaudited 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 the Company to make estimates and assumptions in preparing the interim financial statements. The Company has made its 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 financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of results for the periods presented. These financial statements should be read in conjunction with the audited financial statements for the fiscal years ended May 31, 2003 and 2002 set forth in the Company’s annual report on Form 10-K, as amended, for the fiscal year ended May 31, 2003.

General Kinetics Incorporated

Balance Sheets

November 30, 2003 and

May 31, 2003

	Nov 30, 2003			May 31, 2003
	(Unaudited)			(Audited)
Assets
Current Assets:
Cash and cash equivalents	$	330,100		$	114,000
Marketable securities		42,400			36,400
Accounts receivable, net of allowance of $22,900		538,500			521,600
Inventories, net		664,000			728,900
Prepaid expenses and other		64,200			41,200

Total Current Assets		1,639,200			1,442,100

Property, plant and equipment		2,963,900			2,960,400
Less: Accumulated depreciation		(2,310,500	)		(2,257,700	)

		653,400			702,700
Other Assets		29,900			11,100

Total Assets	$	2,322,500		$	2,155,900

Liabilities and Stockholders’ Deficit
Current Liabilities:
Advances from Factor	$	99,400		$	—
Current maturities of long-term debt		8,888,800			96,300
Current maturities of capital lease		21,300			20,600
Accounts payable, trade		436,300			366,300
Accrued expenses and other payables		473,600			403,400

Total Current Liabilities		9,919,400			886,600

Long-Term Liabilities:
Long-term debt - less current maturities		213,800			9,023,600
Capital lease - less current maturities		50,000			60,800
Other long-term liabilities		248,700			249,900

Total Long-Term Liabilities		512,500			9,334,300

Total Liabilities		10,431,900			10,220,900

Stockholders’ Deficit:
Common Stock, $0.25 par value, 50,000,000 shares authorized, 7,645,557 shares issued, 7,118,925 shares outstanding		1,911,500			1,911,500
Additional contributed capital		7,337,300			7,337,300
Accumulated deficit		(16,908,000	)		(16,863,600	)

		(7,659,200	)		(7,614,800	)
Less: Treasury Stock, at cost (526,632 shares)		(450,200	)		(450,200	)

Total Stockholders’ Deficit		(8,109,400	)		(8,065,000	)

Total Liabilities and Stockholders’ Deficit	$	2,322,500		$	2,155,900

The accompanying notes are an integral part of the financial statements.

Page 5

General Kinetics Incorporated

Statements of Operations

(Unaudited)

	Six Months Ended						Three Months Ended
	November 30, 2003			November 30, 2002			November 30, 2003			November 30, 2002
Net Sales	$	3,093,800		$	4,253,100		$	1,471,100		$	1,981,400
Cost of Sales		2,445,000			3,168,500			1,147,100			1,482,600

Gross Profit		648,800			1,084,600			324,000			498,800

Selling, General & Administrative		596,100			723,200			287,500			347,100
Product Research, Development & Improvement		—			3,500			—			1,800

Total Operating Expenses		596,100			726,700			287,500			348,900

Operating Income		52,700			357,900			36,500			149,900
Interest Expense		(97,100	)		(103,700	)		(47,300	)		(52,200	)

Net Income		(44,400	)		254,200			(10,800	)		97,700

Basic Earnings per Share:
Basic Earnings per Share		($0.006)		$	0.038			($0.002)		$	0.015
Weighted Average Number of Common Shares Outstanding		7,118,925			6,718,925			7,118,925			6,718,925
Diluted Earnings per Share:
Diluted Earnings per Share		($0.006)		$	0.012			($0.002)		$	0.005
Weighted Average Number of Common Shares and Dilutive Equivalents Outstanding		7,118,925			24,708,925			7,118,925			24,708,925

The accompanying notes are an integral part of the above statements.

Page 6

General Kinetics Incorporated

Statements of Cash Flows

(Unaudited)

	Six Months Ended
	November 30, 2003			November 30, 2002
Cash Flows From Operating Activities:
Net Income (loss)	$	(44,400	)	$	254,200
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Unrealized (gain) loss on marketable securities		(6,000	)		4,700
Depreciation and amortization		52,800			63,200
Amortization of bond discount		33,100			31,000
(Increase) Decrease in Assets:
Accounts receivable		(16,900	)		(50,100	)
Inventories		64,900			314,000
Prepaid expenses		(23,000	)		23,300
Other assets		(18,800	)		22,700
Increase (Decrease) in Liabilities:
Accounts payable - Trade		70,000			(439,100	)
Accrued expenses		70,200			(106,600	)
Other long term liabilities		(1,200	)		(1,300	)

Net cash provided by Operating Activities		180,700			116,000

Cash Flows from Investing Activities:
Acquisition of property, plant and equipment		(3,500	)		(19,800	)

Net cash used in Investing Activities		(3,500	)		(19,800	)

Cash Flows from Financing Activities:
Advances from Factor		537,300			553,000
Repayments of advances from Factor		(437,900	)		(553,000	)
Principal payments under capital lease		(10,100	)		(9,300	)
Repayments on long term debt		(50,400	)		(44,200	)

Net cash provided by (used in) Financing Activities		38,900			(53,500	)

Net increase (decrease) in cash and cash equivalents		216,100			42,700
Cash and Cash Equivalents: Beginning of Period		114,000			185,100

Cash and Cash Equivalents: End of Period	$	330,100		$	227,800

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:			</