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 the quarter ended August 31, 2005
Commission File No. 0-1738
GENERAL KINETICS INCORPORATED
(Exact Name of Registrant as specified in its Charter)
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Virginia 54-0594435
(State of Incorporation) (IRS Employer Identification No)
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110 Sunray Dr, Johnstown, PA 15905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (814) 255-6891
Indicate by check mark 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 check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES NO X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act ):
YES NO X
--- ---
The number of shares outstanding of Registrant's Common Stock, $0.25 par value,
as of October 21, 2005 was 7,118,925.
INDEX
Page No.
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Cautionary Statement 3
Part I: Financial Information Page 3
Item 1. Financial Statements
Balance Sheets - August 31, 2005 and
May 31, 2005 4
Statements of Operations - Three months ended
August 31, 2005 and August 31, 2004 5
Statement of Stockholders' Deficit
- Three months ended August 31, 2005 6
Statements of Cash Flows - Three months ended
August 31, 2005 and August 31, 2004 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Item 4. Controls and Procedures 11
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits 12
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 headings "Business" and
"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:
o the risk that the Company will not be able to manufacture and complete the
order backlog as scheduled and on budget in order to maintain a positive
cash flow;
o the risk that the Company may not be able to obtain sufficient new orders
to achieve positive cash flow;
o the risk that the Company may not maintain its present financing facility
or obtain additional financing, if necessary;
o the risk that it will not be able to repay, restructure or refinance in
full the approximately $7.32 million principal amount of its outstanding
convertible debentures which matured on August 14, 2004;
o 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;
o 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;
o the risk that U.S. defense spending may be substantially reduced; and
o 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 (GAAP) have been
condensed or omitted pursuant to those rules and regulations. Revenues,
expenses, assets and liabilities vary during the year and GAAP requires 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. The information as of May 31, 2005 is derived from
audited financial statements.
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, 2005 and
2004 set forth in the Company's annual report on Form 10-K, as amended, for the
fiscal year ended May 31, 2005.
General Kinetics Incorporated
Balance Sheets
Unaudited
Aug 31, May 31,
2005 2005
ASSETS ------------ ------------
Current Assets:
Cash and cash equivalents $ 24,100 $ 301,500
Marketable securities - trading 69,800 68,700
Accounts receivable, net of allowance of $20,000 996,100 531,900
Inventories, net 1,222,200 1,072,800
Prepaid expenses and other 55,400 53,100
------------ ------------
Total Current Assets 2,367,600 2,028,000
------------ ------------
Property, Plant and Equipment 2,231,700 2,285,400
Less: Accumulated Depreciation and Amortization (1,953,600) (1,989,700)
------------ ------------
278,100 295,700
------------ ------------
Other Assets 22,400 100,600
------------ ------------
Total Assets $ 2,668,100 $ 2,424,300
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Advances from Factor $ 411,000 $ 149,400
Current maturities of long-term debt 7,315,000 7,315,000
Current maturities of capital lease 32,000 60,000
Accounts payable, trade 721,500 669,500
Accrued expenses and other payables 799,800 741,600
Deferred gain on sale of building 104,100 104,100
------------ ------------
Total Current Liabilities 9,383,400 9,039,600
------------ ------------
Long-Term Liabilities:
Capital lease - less current maturities 114,100 102,500
Other long-term liabilities 243,800 253,600
Deferred gain on sale of building 286,200 312,200
------------ ------------
Total Long-Term Liabilities 644,100 668,300
------------ ------------
Total Liabilities 10,027,500 9,707,900
------------ ------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 shares
authorized, 7,645,557 shares issued 7,118,925
shares outstanding 1,911,400 1,911,400
Additional Contributed Capital 7,337,300 7,337,300
Accumulated Deficit (16,157,900) (16,082,100)
------------ ------------
(6,909,200) (6,833,400)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (7,359,400) (7,283,600)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 2,668,100 $ 2,424,300
============ ============
The accompanying notes are an integral part of the financial statements
4
General Kinetics Incorporated
Statements of Operations
(Unaudited)
For The Quarter Ended
--------------------------------------------------------------
August 31, August 31,
2005 2004
----------------------------- ----------------------------
Net Sales $ 2,284,500 100.0% $ 1,721,700 100.0%
Cost of Sales 1,967,000 86.1% 1 412,700 82.1%
---------------------------- ----------------------------
Gross Profit 317,500 13.9% 309,000 17.9%
---------------------------- ----------------------------
Selling, General & Administrative 352,900 15.4% 337,500 19.6%
---------------------------- ----------------------------
Total Operating Expenses 352,900 15.4% 337,500 19.6%
---------------------------- ----------------------------
Operating Loss (35,400) -1.5% (28,500) -1.7%
---------------------------- ----------------------------
Other Income (Expense):
Interest Expense (40,400) -1.8% (47,700) -2.8%
---------------------------- ----------------------------
Total Other Expense (40,400) -1.8% (47,700) -2.8%
Net Loss $ (75,800) -3.3% $ (76,200) -4.4%
============================= ============================
Earnings per common share:
Basic Loss per share ($ 0.01) ($ 0.01)
Weighted Average Number of Common Shares
Outstanding:
Basic 7,118,925 7,118,925
The accompanying notes are an integral part of the financial statements.
5
General Kinetics Incorporated
Statements of Stockholders' Deficit
For the Quarter Ended August 31, 2005 and 2004
Unaudited
Common Stock Additional Total
-------------------------- Contributed Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Deficit
--------- ------------ ------------ ------------ ------------ ------------
Balance 5/31/04 7,645,557 $ 1,911,400 $ 7,337,300 $(17,390,800) $ (450,200) $ (8,592,300)
Net Loss (76,200) (76,200)
---------------------------------------------------------------------------------------------
Balance 8/31/04 7,645,557 $ 1,911,400 $ 7,337,300 $(17,467,000) $ (450,200) $ (8,668,500)
=============================================================================================
Balance 5/31/05 7,645,557 $ 1,911,400 $ 7,337,300 $(16,082,100) $ (450,200) $ (7,283,600)
Net Income (Loss) (75,800) (359,400)
---------------------------------------------------------------------------------------------
Balance 8/31/05 7,645,557 $ 1,911,400 $ 7,337,300 $(16,157,900) $ (450,200) $ (7,359,400)
=============================================================================================
The accompanying notes are an integral part of the financial statements.
6
General Kinetics Incorporated
Statements of Cash Flows
(Unaudited)
For The Quarter Ended
------------------------------
August 31, August 31,
2005 2004
---------- -----------
Cash Flows From Operating Activities:
Net Loss $ (75,800) $ (76,200)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Gain on sale of building (26,000) (26,000)
Unrealized (gain) loss on marketable equity securities (1,100) (2,000)
Depreciation and amortization 21,300 21,600
Amortization of bond discount -- 15,100
(Increase) Decrease in Assets:
Accounts receivable (464,200) (148,300)
Inventories (149,400) (190,100)
Prepaid expenses (2,300) (8,600)
Other assets 78,200 28,300
Increase (Decrease) in Liabilities:
Accounts payable - trade 52,000 (56,800)
Accrued expenses and other payables 58,200 96,600
Other long term liabilities (9,800) (9,600)
--------- ---------
Net cash used in Operating Activites (518,900) (356,000)
--------- ---------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (3,700) (22,000)
--------- ---------
Net cash used in Investing Activities (3,700) (22,000)
--------- ---------
Cash Flows from Financing Activities:
Factor/Borrowings on Demand Notes Payable 261,600 (214,200)
Principal payments under capital lease (16,400) (9,800)
--------- ---------
Net cash provided by (used in) Financing Activities 245,200 (224,000)
--------- ---------
Net decrease in cash and cash equivalents $(277,400) $(602,000)
Cash and Cash Equivalents: Beginning of Period 301,500 670,000
--------- ---------
Cash and Cash Equivalents: End of Period $ 24,100 $ 68,000
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the quarter for:
Interest $ 22,200 $ 9,800
Non-cash investing and financing activities:
Assets acquired under capital lease $ -- $ 163,000
The accompanying notes are an integral part of the financial statements.
7
Notes to Unaudited Condensed Financial Statements
Note 1 - Basis of Presentation
The unaudited financial statements at August 31, 2005, and for the three months
ended August 31, 2005 and August 31, 2004, 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 (GAAP) because 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, 2005 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 net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings.
Note 3 - Notes Payable
At August 31, 2005, convertible debentures were outstanding in an aggregate
principal amount of approximately $7.32 million. The debentures matured on
August 14, 2004, and were stated to be convertible into common stock at a
conversion price of $0.50 per share, and to bear interest at 1% per annum,
payable annually. The Company continues to accrue interest on the debentures.
Shares issuable upon conversion were also subject to certain rights to
registration under the Securities Act of 1933, as amended.
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 outstanding convertible debentures in an aggregate
principal amount of $5,800,000. On July 18, 2005, an additional $290,000 of the
Company's principal outstanding convertible debentures was purchased by Manassas
Partners LLC, from third parties, at 3% of face value.
In October 2004, the Company purchased $1.36 million aggregate principal amount
of debentures from certain debenture holders for a total price (including
accrued interest) equal to 3% of the principal amount. The Company made a final
payment to the debenture holders in January 2005. In a separate transaction, in
January 2005, the Company purchased an additional $160,000 aggregate principal
amount of debentures from certain debenture holders for a total price (including
accrued interest) equal to 3% of the principal amount. As a result of these
transactions, the Company recognized a gain on the settlement of debt of
$1,346,400 during the second quarter of fiscal 2005 and $158,400 during the
third quarter of fiscal 2005.
The Company's cash flow, capital resources, and overall financial condition will
not be sufficient to repay or refinance in full the approximately $7.32 million
principal amount of outstanding debentures which matured on August 14, 2004. At
present, the Company is in discussion with certain other debenture holders, but
has decided on no specific plans with respect to the repayment or refinancing of
the debentures. The Company is continuing to review the situation and
considering its potential alternatives. There can be no assurance, however, that
the Company will be able to come to agreement with the other debenture holders
with respect to repayment or refinancing of the debentures.
Note 4 - Income Taxes
The Company's estimated effective tax rate for fiscal 2006 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carry forwards.
Note 5 - Recent Accounting Pronouncements
In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143 ("FIN 47"),
which requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. FIN 47 is effective for fiscal years ending
after December 15, 2005. The Company does not anticipate that the adoption of
FIN 47 will have a material impact on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 replaces APB No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting changes in Interim Financial Statements," and
establishes retrospective application as the required method for reporting
change in accounting principle. SFAS No. 154 provides guidance for determining
whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. The reporting of a correction of an error by restating previously
issued financial statements is also addressed. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not anticipate that the adoption of
SFAS No. 154 will have a material impact on its financial statements.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended August 31, 2005 Compared to Three Months Ended August 31,
2004
--------------------------------------------------------------------------------
Net sales for the quarter ended August 31, 2005 were approximately $ 2.3 million
compared to net sales of approximately $1.7 million for the quarter ended August
31, 2004. The increase in sales was due primarily to an increase in orders under
large blanket contracts with prime
8
contractors to the U.S. Department of Defense (DOD), in addition to an overall
increase of orders from customers involved in projects related to the U.S. DOD
compared to the prior fiscal year.
The gross margin percentage decreased from 17.9% for the quarter ended August
31, 2004 to 13.9% for the quarter ended August 31, 2005. The decrease in the
gross profit percentage was caused by the mix of jobs for the quarter ended
August 31, 2005 as compared to the corresponding quarter of the prior fiscal
year. The Company operates as a job shop, making a mix of build-to-print
enclosures, assembles and parts, standard enclosures, and special orders, all
with variable quantities depending on the current contracts. Therefore, the mix
of orders and margins associated with those orders can vary significantly
between quarters.
Selling, general and administrative (SG&A) costs were approximately $352,900 for
the quarter ended August 31, 2005 as compared to approximately $337,500 for the
quarter ended August 31, 2004. The increase was principally due to higher
professional fees related to our annual report filed on form 10-K.
For the quarter ended August 31, 2005, the Company had an operating loss of
$35,400 compared to an operating loss of $28,500 for the corresponding quarter
of the prior year. The increase in operating loss was due principally to an
increase in overhead costs due to an increased number of employees in both
production and administration.
Interest expense decreased from $47,700 in the first quarter of fiscal 2005 to
$40,400 in the first quarter of fiscal 2006. The decrease was due to more
efficient use of cash in the current fiscal year.
The Company's estimated effective tax rate for fiscal 2006 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carry forwards.
Liquidity and Capital Resources
The Company relies upon internally generated funds and accounts receivable
factoring to finance its operations. During the three months ended August 31,
2005, the Company had an operating loss of $35,400. For the fiscal years ended
May 31, 2005 and 2004, the Company had net income of approximately $1,308,700,
which included a gain on settlement of debt of $1,504,800 and net loss of
approximately $527,300, 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 the
remainder of fiscal 2006.
The Company must continue to market electronic enclosure products to government
and commercial markets, enter into contracts that 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 2006.
The Company had $721,500 payable to trade creditors at August 31, 2005, as
compared to $669,500 at May 31, 2005.
The Company has received significant new orders during the first quarter of
fiscal 2006, and the shippable backlog at August 31, 2005 is $3.8 million as
compared to $3.6 million at August 31, 2004. The Company must produce and ship
this backlog of orders on schedule and on budget to generate positive cash flow
and operate profitably in fiscal 2006. 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 August 31, 2005, the Company had cash and marketable securities totaling
$93,900. During the quarter ended August 31, 2005 the company had limited cash
flow, and had difficulty meeting operating cash flow requirements. The Company
was only able to meet cash requirements through the aggressive factoring of
accounts receivable. This cash shortage was caused by the Company utilizing
funds to make necessary changes in operations.
The Company has taken, and is continuing to take, steps to address production
planning 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.
Management believes that the Company can meet its operating cash requirements,
excluding the repayment of the debentures referred to below, through the current
fiscal year with cash on hand and borrowings from the factoring of accounts
receivable if they can maintain or increase the current level of backlog, and
ship the scheduled backlog on time and within budget. 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 two of the last three fiscal years, and the Company has significant
short-term cash commitments, the funding of which are limited to cash flow from
operations and the factoring of certain accounts receivable, if available. The
Company is also attempting to restructure or repurchase at a discount the
remaining convertible debentures (discussed below) which matured on August 14,
2004. The
9
losses and commitments raise significant doubt about the Company's ability to
continue as a going concern. The financial statements do not contain any
adjustments that might result from the outcome of these uncertainties. The
Company's auditors have given a going concern opinion for the last three years.
During the quarter ended February 28, 2003, the Company entered into a factoring
agreement with Key Capital Factoring ("Key") that provides for advances of up to
85% of specified accounts receivable. The Company has drawn on the Key facility
during fiscal 2005 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. The Company factored accounts
receivable during the quarter ended August 31, 2005. There were outstanding
advances due to Key at August 31, 2005 of $411,000. Key may cancel the agreement
at any time with 20 days prior notice to the Company.
At August 31, 2005, convertible debentures were outstanding in an aggregate
principal amount of approximately $7.32 million. The debentures matured on
August 14, 2004, and were stated to be convertible into common stock at a
conversion price of $0.50 per share, and to bear interest at 1% per annum,
payable annually. The Company continues to accrue interest on these debentures.
Shares issuable upon conversion were also subject to certain rights to
registration under the Securities Act of 1933, as amended.
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 outstanding convertible debentures in an aggregate
principal amount of $5,800,000. On July 18, 2005, an additional $290,000 of the
Company's principal outstanding convertible debentures was purchased by Manassas
Partners LLC, from third parties, at a significant discount.
In October 2004, the Company purchased $1.36 million aggregate principal amount
of debentures from certain debenture holders for a total price (including
accrued interest) equal to 3% of the principal amount. The Company made a final
payment to the debenture holders in January 2005. In a separate transaction, in
January 2005, the Company purchased an additional $160,000 aggregate principal
amount of debentures from certain debenture holders for a total price (including
accrued interest) equal to 3% of the principal amount. As a result of these
transactions, the Company recognized a gain on the settlement of debt of
$1,346,400 during the second quarter of fiscal 2005 and $158,400 during the
third quarter of fiscal 2005.
The Company's cash flow, capital resources, and overall financial condition will
not be sufficient to repay or refinance in full the approximately $7.32 million
principal amount of outstanding debentures which matured on August 14, 2004. At
present, the Company is in discussion with certain other debenture holders, but
has decided on no specific plans with respect to the repayment or refinancing of
the debentures. The Company is continuing to review the situation and
considering its potential alternatives. There can be no assurance, however, that
the Company will be able to come to agreement with the other debenture holders
with respect to repayment or refinancing of the debentures. No payment has
otherwise been made in respect of interest on the outstanding debentures.
Analysis of Cash Flows
Operating activities used $518,900 in cash in the first quarter of fiscal 2006.
This reflects net loss of $75,800 and $437,300 in cash utilized by working
capital items, plus a utilization of $5,800 in net non-cash items. The cash used
from changes in working capital items in the first quarter of fiscal 2006
includes an increase in inventories of $ 149,400 and an increase in accounts
receivable of $ 464,200.
Investing activities used $3,700 in the first quarter of fiscal 2006, which
consists primarily of the acquisition of computer equipment. Fully depreciated
fixed assets were disposed of in the amount of $57,400 during the first quarter
of fiscal 2006. This disposition had no affect on cash flows.
Financing activities provided $245,200 in the first quarter of fiscal 2006.
These activities consisted of $261,600 in advances from the factoring of
accounts receivable and $16,400 of cash used for payments under capital leases.
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
quarter of fiscal 2006.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in Note 2
to the financial statements in our 2005 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, management has made its best estimates and judgments of
10
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 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 that would be material to the Company's financial
position or its results of operations. At August 31, 2005, the Company had an
allowance for doubtful accounts of $20,000.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market Risk - The Company is exposed to market risk from changes in the defense
budget, and other government spending changes, which are completely beyond the
control of the Company.
Interest Rate Risks - The Company is exposed to risk from changes in interest
rates as a result of its borrowing activities.
Item 4 -Controls and Procedures
The Company maintains disclosure controls and procedures 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.
The Company conducted an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures that were in place
at the end of the Company's first quarter of fiscal 2006. 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 have concluded that the Company's disclosure controls
and procedures were not effective as of the end of the Company's first quarter
of fiscal 2006 and that material weaknesses exist in the internal control
structure of the Company, due in particular to the lack of appropriate resources
dedicated to external financial reporting. Management of the Company is and has
taken steps to address the weaknesses. Management is adding additional staff to
the external reporting function and reengineering the reporting process to
increase its efficiency and accuracy.
11
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Certain legal proceedings, in which we are involved, are discussed in Part I,
Item 3 of our Annual Report on Form 10-K for the fiscal year ended May 31, 2005.
As of the date hereof, the threatened legal action relating to a former employee
alleging wrongful dismissal, was settled for an amount based on the employee's
salary at the time of termination.
Item 2. Unregistered Sales of Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
Information is incorporated by reference to "Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations" under the heading
"Liquidity and Capital Resources."
Item 4. Submission Of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6 - 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.
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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
By: /s/ Larry M. Heimendinger
--------------------------------------------
Larry M. Heimendinger, Chairman of the Board
(Principal Executive Officer)
Date: October 28, 2005
By: /s/ Franco DeBlasio
-------------------------------------------
Franco DeBlasio, Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer)
Date: October 28, 2005
13