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 February 29, 2004
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 the Registrant’s Common Stock outstanding as of April 4, 2003 7,118,925 Shares
| Page No. | ||
| 3 | ||
| Part I - Financial Information |
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| Item 1 - Financial Statements |
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| Condensed Balance Sheets - February 29, 2004 and May 31, 2003 |
5 | |
| 6 | ||
| Condensed Statements of Cash Flows - Nine months Ended February 29, 2004 and February 28, 2003 |
7 | |
| 8 | ||
| Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | |
| Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
17 | |
| Item 4 - Controls and Procedures |
17 | |
| Part II - Other Information |
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| Item 6 - Exhibits and Reports on Form 8-K |
19 | |
2
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. |
| • | The risk that the Company will not successfully renegotiate a new contract with the labor union when the current contract expires on May 31, 2004. |
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
3
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.
4
General Kinetics Incorporated
February 29, 2004 and
May 31, 2003
| February 29, 2004 |
May 31, 2003 |
|||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 74,200 | $ | 114,000 | ||||
| Marketable securities |
50,300 | 36,400 | ||||||
| Accounts receivable, net of allowance of $22,500 and $22,900 |
568,500 | 521,600 | ||||||
| Inventories, net |
851,500 | 728,900 | ||||||
| Prepaid expenses and other |
40,600 | 41,200 | ||||||
| Total Current Assets |
1,585,100 | 1,442,100 | ||||||
| Property, plant and equipment |
2,968,400 | 2,960,400 | ||||||
| Less: Accumulated depreciation |
(2,335,700 | ) | (2,257,700 | ) | ||||
| 632,700 | 702,700 | |||||||
| Other Assets |
10,200 | 11,100 | ||||||
| Total Assets |
$ | 2,228,000 | $ | 2,155,900 | ||||
| Liablilities and Stockholders’ Deficit | ||||||||
| Current Liabilities: |
||||||||
| Advances from Factor |
$ | 170,700 | $ | — | ||||
| Current maturities of long-term debt |
8,905,200 | 96,300 | ||||||
| Current maturities of capital lease |
21,800 | 20,600 | ||||||
| Accounts payable, trade |
546,500 | 366,300 | ||||||
| Accrued expenses and other payables |
527,700 | 403,400 | ||||||
| Total Current Liabilities |
10,171,900 | 886,600 | ||||||
| Long-Term Liablities: |
||||||||
| Long-term debt - less current maturities |
188,300 | 9,023,600 | ||||||
| Capital lease - less current maturities |
44,400 | 60,800 | ||||||
| Other long-term liabilities |
248,100 | 249,900 | ||||||
| Total Long-Term Liabilities |
480,800 | 9,334,300 | ||||||
| Total Liabilities |
10,652,700 | 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 |
(17,223,300 | ) | (16,863,600 | ) | ||||
| (7,974,500 | ) | (7,614,800 | ) | |||||
| Less: Treasury Stock, at cost (526,632 shares) |
(450,200 | ) | (450,200 | ) | ||||
| Total Stockholders’ Deficit |
(8,424,700 | ) | (8,065,000 | ) | ||||
| Total Liabilities and Stockholders’ Deficit |
$ | 2,228,000 | $ | 2,155,900 | ||||
The accompanying notes are an integral part of the financial statements.
Page 5
General Kinetics Incorporated
(unaudited)
| Nine Months Ended |
Three Months Ended |
|||||||||||||||
| February 29, 2004 |
February 28, 2003 |
February 29, 2004 |
February 28, 2003 |
|||||||||||||
| Net Sales |
$ | 4,341,200 | $ | 5,488,800 | $ | 1,247,400 | $ | 1,235,700 | ||||||||
| Cost of Sales |
3,695,800 | 4,345,100 | 1,250,800 | 1,176,700 | ||||||||||||
| Gross Profit |
645,400 | 1,143,700 | (3,400 | ) | 59,000 | |||||||||||
| Selling, General & Administrative |
857,900 | 955,600 | 261,800 | 232,300 | ||||||||||||
| Product Research, Development & Improvement |
700 | 3,500 | 700 | — | ||||||||||||
| Total Operating Expenses |
858,600 | 959,100 | 262,500 | 232,300 | ||||||||||||
| Operating Income (Loss) |
(213,200 | ) | 184,600 | (265,900 | ) | (173,300 | ) | |||||||||
| Interest Expense |
(146,500 | ) | (149,100 | ) | (49,400 | ) | (45,400 | ) | ||||||||
| Net Income (Loss) |
(359,700 | ) | 35,500 | (315,300 | ) | (218,700 | ) | |||||||||
| Basic Earnings per Share: |
||||||||||||||||
| Basic Earnings per Share |
($0.051 | ) | $ | 0.005 | ($0.044 | ) | ($0.031 | ) | ||||||||
| Weighted Average Number of Common Shares Outstanding |
7,118,925 | 7,118,925 | 7,118,925 | 7,118,925 | ||||||||||||
| Diluted Earnings per Share: |
||||||||||||||||
| Diluted Earnings per Share |
($0.051 | ) | $ | 0.004 | ($0.044 | ) | ($0.031 | ) | ||||||||
| Weighted Average Number of Common Shares and Dilutive Equivalents Outstanding |
7,118,925 | 24,708,925 | 7,118,925 | 7,118,925 | ||||||||||||
The accompanying notes are an integral part of the financial statements.
Page 6
General Kinetics Incorporated
(Unaudited)
| Nine Months Ended |
||||||||
| February 29, 2004 |
February 28, 2003 |
|||||||
| Cash Flows From Operating Activities: |
||||||||
| Net (Loss) Income |
$ | (359,700 | ) | $ | 35,500 | |||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
||||||||
| Unrealized (gain) loss on marketable securities |
(13,900 | ) | 4,800 | |||||
| Depreciation and amortization |
78,000 | 102,600 | ||||||
| Amortization of bond discount |
45,300 | 46,400 | ||||||
| Bad debt provision |
(400 | ) | (600 | ) | ||||
| (Increase) Decrease in Assets: |
||||||||
| Accounts receivable |
(46,500 | ) | 515,500 | |||||
| Inventories |
(122,600 | ) | 433,700 | |||||
| Prepaid expenses |
600 | 30,300 | ||||||
| Other assets |
900 | 44,400 | ||||||
| Increase (Decrease) in Liabilities: |
||||||||
| Accounts payable - Trade |
180,200 | (543,100 | ) | |||||
| Accrued expenses |
124,300 | (194,500 | ) | |||||
| Deferred Revenue |
— | 81,700 | ||||||
| Other long term liabilities |
(1,800 | ) | (1,800 | ) | ||||
| Net cash (used in) provided by Operating Activites |
(115,600 | ) | 554,900 | |||||
| Cash Flows from Investing Activities: |
||||||||
| Acquisition of property, plant and equipment |
(8,000 | ) | (33,300 | ) | ||||
| Net cash used in Investing Activities |
(8,000 | ) | (33,300 | ) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Advances from Factor |
853,000 | 55,300 | ||||||
| Repayments of advances from Factor |
(682,300 | ) | (55,300 | ) | ||||
| Principal payments under capital lease |
(15,200 | ) | (14,200 | ) | ||||
| Repayments on long term debt |
(71,700 | ) | (67,000 | ) | ||||
| Net cash provided by (used in) Financing Activities |
83,800 | (81,200 | ) | |||||
| Net increase (decrease) in cash and cash equivalents |
(39,800 | ) | 440,400 | |||||
| Cash and Cash Equivalents: Beginning of Period |
114,000 | 185,100 | ||||||
| Cash and Cash Equivalents: End of Period |
$ | 74,200 | $ | 625,500 | ||||
| Supplemental Disclosures of Cash Flow Information: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 30,100 | $ | 149,100 | ||||
The accompanying notes are an integral part of the financial statements.
Page 7
GENERAL KINETICS INCORPORATED
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The unaudited condensed financial statements at February 29, 2004, and for the three months and nine months ended February 29, 2004 and February 28, 2003, include the accounts of General Kinetics Incorporated (“GKI” or the “Company”).
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 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 29, 2004, 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. Due to the net losses in the quarter ended February 28, 2003, and the quarter and nine months ended February 29, 2004, diluted earnings per share is the same as basic earnings per share for those periods. The following table presents a reconciliation between the weighted average shares outstanding for basic and diluted earnings per share for the nine months ended February 28, 2003:
| Nine months ended Feb 28, 2003: | Income |
Shares |
Per Share Amount | |||||
| Basic earnings per share |
||||||||
| Income available to common shareholders |
$ | 35,500 | 7,118,925 | $ | 0.005 | |||
| Effect of assumed conversion of convertible debentures |
65,962 | 17,590,000</ | ||||||