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 |
||
| Item 1 - Financial Statements |
||
| 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 |
||
| 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 | 0.004 | |||||
| Dilutive earnings per share |
$ | 101,462 | 24,708,925 | $ | 0.004 | |||
8
Note 3 - Notes Payable
At February 29, 2004 and May 31, 2003, convertible debentures initially issued to clients of Gutzwiller & Partner, AG, now known as Rabo Investment Management Ltd., are outstanding in an aggregate principal amount of approximately $8.8 million. Such debentures mature in August 2004, are convertible into common stock at a conversion price of $0.50 per share, and bear interest at 1% per annum, which is payable annually. Shares issuable upon conversion are also subject to certain registration rights under the Securities Act of 1933, as amended.
On March 12, 2003, Manassas Partners LLC, a Delaware limited liability company of which Larry Heimendinger, acting President and Chairman of the Board of Directors of the Company, is the managing member, purchased from third parties, at a significant discount, a portion of the Company’s $8.8 million outstanding convertible debentures in an aggregate principal amount of $5.8 million.
Pending confirmation of ownership status of the Company’s convertible debentures, the Company has not effected payment of interest on the convertible debentures in the amount of $88,800 scheduled on August 14, 2003. This amount, together with interest accrued for the nine months ended February 29, 2004 is included in accrued expenses and other payables on the balance sheets.
Note 4 - Income Taxes
The Company’s estimated effective tax rate for fiscal 2004 is 0%. This estimated effective tax rate is lower than the statutory rate due to the existence of net operating loss carryforwards.
9
Note 5 - Inventories
Inventories consist of the following:
| February 29, 2004 |
May 31, 2003 |
|||||||
| Work in process |
$ | 754,400 | $ | 561,800 | ||||
| Finished Goods |
17,100 | 15,400 | ||||||
| Raw materials |
378,700 | 450,300 | ||||||
| Valuation reserve |
(298,700 | ) | (298,600 | ) | ||||
| Total |
$ | 851,500 | $ | 728,900 | ||||
Work in process inventory represents actual production costs, including manufacturing overhead incurred to date, reduced by amounts identified with revenue recognized on units delivered. The costs attributable to units delivered are based on the estimated average costs of all units expected to be produced under multi-unit orders. Estimated costs to complete are based on historical experience and knowledge of building similar products. On an on-going basis, the Company evaluates the estimates of total costs to complete a multi-unit order. Work in process is reduced by charging any amounts in excess of estimated net realizable value to cost of sales as soon as they become known. Interim inventories are determined by application of estimated gross profit margins to sales.
10
GENERAL KINETICS INCORPORATED
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended February 29, 2004 Compared to Three Months Ended February 28, 2003
Net sales for the three months ended February 29, 2004 were approximately $1.25 million compared to net sales of approximately $1.24 million for the quarter ended February 28, 2003. The low sales figure and corresponding negligible increase were due primarily to a decrease in orders under a large blanket contract with a prime contractor to the U.S. Navy, in addition to an overall slowdown of orders from customers involved in projects related to the U.S. Navy.
The gross margin percentage decreased to -0.3% for the quarter ended February 29, 2004 from 4.8% for the quarter ended February 28, 2003. The negative gross margin during the third quarter of fiscal 2004 occurred because the low sales level was not enough to support overhead expenses incurred during the quarter. The primary reason for the decrease in gross profit margins was changes in the mix of jobs produced in the quarter ended February 29, 2004 as compared to the job mix in the quarter ended February 28, 2003.
Selling, general & administrative costs were approximately $261,800 in the third quarter of fiscal 2004 as compared to approximately $232,300 in the corresponding quarter of the prior fiscal year. The increase was principally due to cost reduction measures during the third quarter of the prior fiscal year, including salary decreases, put into place by management in response to the reduced backlog and shipping levels. Certain of the cost cutting measures, including salary decreases, were discontinued by the third quarter of fiscal 2004 because of the increased backlog as the Company entered the fourth quarter of the fiscal year.
For the three months ended February 29, 2004, the Company had an operating loss of $265,900 compared to an operating loss of $173,300 for the comparable quarter of the prior fiscal year. The increase was due primarily to the decrease in gross profit margins and increases in selling, general, and administrative costs described above.
Interest expense was $49,400 in the third quarter of fiscal 2004 compared to $45,400 in the third quarter of fiscal 2003. The increase was due to an increase in the factoring of accounts receivable in the quarter ended February 29, 2004 as compared to the quarter ended February 28, 2003.
11
The Company’s estimated effective tax rate for fiscal 2004 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 29, 2004 Compared to Nine Months Ended February 28, 2003
Net sales for the nine months ended February 29, 2004 were approximately $4.3 million, as compared to net sales of approximately $5.5 million for the nine months ended February 28, 2003. The decrease in sales was due primarily to a decrease in orders under a large blanket contract with a prime contractor to the U.S. Navy, in addition to an overall slowdown of orders from customers involved in projects related to the U.S. Navy.
The gross margin percentage decreased from 20.8% for the nine months ended February 28, 2003 to 14.9% for the nine months ended February 29, 2004. The primary reasons for the decrease in the gross profit percentage were the mix of jobs for the current fiscal year as compared to the same nine months of 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 $857,900 in the first nine months of fiscal 2004 as compared to approximately $955,600 in the first nine months of the prior fiscal year. The reduction was principally due to cost reduction measures during the first two quarters of fiscal 2004, including salary decreases, put into place by management in response to reduced backlog and shipping levels.
For the nine months ended February 29, 2004, the Company had an operating loss of $213,200 compared to an operating income of $184,600 for the comparable nine months of the prior fiscal year. The decrease was due primarily to the decrease in sales and in gross profit margins described above.
Interest expense was $146,500 in the first nine months of fiscal 2004 compared to $149,100 in the first nine months of fiscal 2003.
12
Liquidity and Capital Resources
The Company relies upon internally generated funds and accounts receivable factoring to finance its operations. In addition to a net loss of $359,700 for the first nine months of fiscal 2004, during fiscal years 2003 and 2002 the Company incurred net losses of approximately $131,400 and $835,400, respectively. In order to generate the working capital required for operations, the Company must continue to generate orders, increase its gross margins, and effectively manage operating expenses during fiscal 2004.
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 operating costs in order to recover from the Company’s liquidity problems and seek to operate profitably for the remainder of fiscal 2004.
The decrease in sales in the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003 is primarily due to an overall slowdown of orders from customers involved in projects related to the U.S. Navy.
However, the Company has received significant new orders during the last several months, and the shippable backlog at February 29, 2004 is $2.8 million as compared to $497,000 at February 28, 2003. The Company must produce and ship this backlog of orders on schedule and on budget to generate positive cash flow and operate profitably for the remainder of fiscal 2004. The Company must also maintain or increase the current level of backlog to provide positive cash flow over the next twelve month period. However, there is no assurance the Company will be successful in its efforts to obtain an adequate level of new contracts to maintain positive cash flow or profitable operations.
As of February 29, 2004, the Company had cash and marketable securities totaling $124,500. The Company has faced production issues that have contributed to losses from operations in the prior three fiscal years. The Company has taken and is continuing to take steps to address these production issues through changes and additions to plant supervision, regularly updating scheduling and planning procedures, and adding new production machinery. The Company is trying to stabilize the level of shipments at a profitable level through these changes. During the first half of fiscal 2004, management implemented cost reductions, including salary reductions, in response to reduced sales and order backlog. The salary reductions ended during the quarter ended February 29, 2004 in response to the increase in backlog and production requirements.
13
Management believes that the Company can meet its cash requirements through the current fiscal year with cash on hand and borrowings from the factoring of accounts receivable if they can ship the scheduled backlog on time and within budget. Meeting the Company’s cash requirements through the next twelve months will also require maintaining or increasing the current order backlog, as well as profitable production and shipment of those orders. 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 maintain or increase its current 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 has sustained operating losses in the first nine months of the current fiscal year and in fiscal years 2003, 2002 and 2001, 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, if available. These losses and commitments, in addition to an overall slowdown of orders from customers involved in projects related to the U.S. Navy, 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 was formerly party to a factoring agreement with Reservoir Capital Corporation (“Reservoir”) that provided 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 of whom are directors of the Company, entered into a factoring agreement with the Company on terms substantially similar 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. An amended factoring agreement with Link2It Corporation, on similar terms, was entered into in April 2002. During the quarter ended August 31, 2003, the Company entered into a new factoring agreement with Key Capital Factoring (“Key”) that also provides for advances of up to 85% of specified accounts receivable. The Company expects to draw on the Key facility during fiscal 2004 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 February 29, 2004, there was $170,700 of outstanding advances due to Key.
The Company had significant amounts payable to trade creditors at February 29, 2004.
14
The Company has outstanding debentures originally issued to clients of Gutzwiller & Partner, AG, now known as Rabo Investment Management Ltd. (the “Manager”), totaling approximately $8.8 million. The debentures mature in August 2004, are convertible into common stock at a conversion price of $0.50 per share, and bear interest at 1% per annum payable annually. In a filing with the SEC dated November 9, 2001, the Manager indicated that it may be deemed to be the beneficial owner of debentures having an aggregate principal amount of $7,885,000, including debentures in the principal amount of $585,000 which were purchased by the Manager as to which the Manager was the economic beneficial owner and held sole voting and dispositive power, and debentures in a principal amount of $7,300,000 held in client accounts managed by the Manager on behalf of various clients who held beneficial economic ownership thereof for which the Manager held voting and dispositive power. On March 12, 2003, Manassas Partners LLC, a Delaware limited liability company of which Larry Heimendinger, Chairman of the Board of Directors of the Company is the managing member, purchased from third parties, at a significant discount, a portion of the Company’s $8.8 million outstanding convertible debentures in an aggregate principal amount of $5.8 million.
The Company does not expect that its cash flow, capital resources, and overall financial condition will be sufficient to repay or refinance in full the approximately $8.8 million principal amount of outstanding convertible debentures currently scheduled to mature in August 2004. At present, the Company has decided on no specific plans with respect to the repayment or refinancing of the debentures, but it expects to continue to review the situation and consider its potential alternatives.
Analysis of Cash Flows
Operating activities used $115,600 in cash in the first nine months of fiscal 2004. This reflects the net loss of $359,700 offset by $108,900 in non-cash expenses and unrealized gain on marketable securities and by $135,200 in cash generated from changes in working capital items. The cash generated from changes in working capital items in the first nine months of fiscal 2004 includes a increase in inventories of $122,600 offset by an increase in accounts payable of $180,200.
The Company used $8,000 to acquire property, plant and equipment during the first three quarters of fiscal 2004.
Financing activities provided $83,800 in the first three quarters of fiscal 2004. These activities consisted primarily of factoring accounts receivable netting to $170,700, offset by the repayment of certain long-term debt.
15
Inflation
Management believes that inflation did not have a material effect on the operations, financial position or cash flows of the Company during the first nine months of fiscal 2004.
Contractual Obligations and Commercial Commitments
The Company’s commitments through February 28, 2009 are comprised of the following at February 29, 2004 (in thousands):
| Through February, | ||||||||||||||||||
| 2005 |
2006 |
2007 |
2008 |
2009 |
Total | |||||||||||||
| Convertible debentures |
$ | 8,795 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 8,795 | ||||||
| Other notes payable |
40 | 0 | 0 | 0 | 0 | 40 | ||||||||||||
| Real estate mortgage |
100 | 106 | 82 | 0 | 0 | 288 | ||||||||||||
| Capital leases |
22 | 23 | 21 | 0 | 0 | 66 | ||||||||||||
| Operating leases |
27 | 5 | 3 | 2 | 1 | 38 | ||||||||||||
| Total |
$ | 8,984 | $ | 134 | $ | 106 | $ | 2 | $ | 1 | $ | 9,227 | ||||||
Critical Accounting Policies
The Company’s significant accounting policies are more fully described in Note 2 to the financial statements in our 2003 Annual Report on Form 10-K, as amended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, the Company has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below; however, application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Work in process inventory represents actual production costs, including manufacturing overhead incurred to date, reduced by amounts identified with revenue recognized on units delivered as well as reserves for amounts in excess of estimated net realizable value. The costs attributable to units delivered are based on the estimated average costs of all units expected to
16
be produced under multi-unit orders. Estimated costs to complete are based on historical experience and knowledge of building similar products. On an on-going basis, the Company evaluates the estimates of total costs to complete a multi-unit order. Work in process is reduced by charging any amounts in excess of estimated net realizable value to cost of sales as soon as they become known. Interim inventories are determined by application of estimated gross profit margins to sales.
The Company provides an allowance for uncollectible receivables based on experience with customers and individual review of any past due accounts. Although it is reasonably possible that management’s estimate could change in the near future, management is not aware of any events that would result in a change to its estimate which would be material to the Company’s financial position or its results of operations. At February 29, 2004, the Company had an allowance for doubtful accounts of $22,500.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market Risk – The Company is exposed to market risk from adverse changes in interest rates.
Interest Rate Risks – The Company is exposed to risk from changes in interest rates as a result of its borrowing activities. At February 29, 2004, the Company had total debt of $9.16 million, of which $0.29 million represents borrowing for its real estate mortgage, which is at a variable interest rate. Interest on that portion of the Company’s debt is directly affected by changes in the prime interest rate, and therefore fluctuations may have an impact on the Company’s financial results.
Item 4 - Controls and Procedures
The Company maintains “disclosure controls and procedures,” as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
17
As of the end of the period covered by this quarterly report, the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as required by Rule 13a-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There has been no change in the Company’s internal control over financial reporting that has occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
18
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
| 31.1 | Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
(b) Reports on Form 8-K
None.
19
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 14, 2004 |
/s/ Larry M. Heimendinger | |||||||
| Chairman of the Board (Principal Executive Officer) | ||||||||
| Date: April 14, 2004 |
/s/ Sandy B. Sewitch | |||||||
| Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) | ||||||||
20