SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended February 28, 2002 Commission File Number 0-1738
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GENERAL KINETICS INCORPORATED
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(Exact Name of Registrant as Specified in its Charter)
Virginia 54-0594435
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10688- D Crestwood Drive Manassas, VA 20109
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 703-331-8033
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Indicate by checkmark whether the Registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.
Yes X No_
-
The number of shares of Registrant's Common
Stock outstanding as of April 5, 2002 6,718,925 Shares
INDEX
Page No.
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Cautionary Statement Under the Private Securities Litigation Reform Act of 1996 .............................3
Part I - Financial Information
Item 1 - Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
February 28, 2002 and May 31, 2001 .......................................................................5
Condensed Consolidated Statements of Operations -
Three Months and Nine months Ended February 28, 2002 and February 28, 2001,
respectively ..............................................................................................6
Condensed Consolidated Statements of Cash Flows -
Nine months Ended February 28, 2002 and
February 28, 2001, respectively ..........................................................................7
Notes to Condensed Consolidated Financial Statements ......................................................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 ..............................................................................18
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K ............................................................................18
2
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements contained in this Quarterly Report on Form 10-Q, including without
limitation, as set forth under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations", as well as oral statements
that may be made by the Company or by officers, directors or employees of the
Company acting on the Company's behalf, that are not historical fact may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve risks and
uncertainties. They are not historical facts or guarantees of future performance
or events. They are based on current expectations, estimates, beliefs,
assumptions, goals and objectives, and are subject to uncertainties that are
difficult to predict. In particular, certain risks and uncertainties may
include, but are not limited to, the risk that the Company may not be able to
obtain additional financing if necessary; the risk that the Company may not be
able to continue the necessary development of its operations, including
maintaining or increasing sales and production levels, on a profitable basis;
the risk the Company may in the future have to comply with more stringent
environmental laws or regulations or more vigorous enforcement policies of
regulatory agencies, and that such compliance could require substantial
expenditures by the Company; the risk that U.S. defense spending may be
substantially reduced; and the risk that the Company's Common Stock will not
continue to be quoted on the NASD OTC Bulletin Board services. Forward looking
statements included in this quarterly report are based on information known to
GKI as of the date of this quarterly report and GKI accepts no obligation (and
expressly disclaims any obligations) to update these forward looking statements
and does not intend to do so. Certain of these risks and uncertainties are
described in the Company's reports and statements filed from time to time with
the Securities and Exchange Commission, including this Report.
PART I FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
The unaudited consolidated financial statements of General Kinetics
Incorporated ("GKI" or the "Company") set forth below have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. Revenues, expenses, assets and liabilities vary during the year and
generally accepted accounting principles require the Company to make estimates
and assumptions in preparing the interim
3
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 consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments and the recognition of manufacturing startup costs of
$265,000 during the period ended February 28, 2002) that are necessary for a
fair presentation of results for the periods presented. It is suggested that
these consolidated financial statements be read in conjunction with the audited
financial statements for the fiscal years ended May 31, 2001 and 2000 set forth
in the Company's annual report on Form 10-K, as amended, for the fiscal year
ended May 31, 2001.
4
General Kinetics Incorporated
Balance Sheets
Febrary 28, 2002 and
May 31, 2001
28-Feb May 31,
2002 2001
---- ----
(Unaudited) (Audited)
----------- ---------
Assets
------
Current Assets:
Cash and cash equivalents $ 418,000 $ 388,300
Accounts receivable, net of allowance of $57,900 and $72,700 1,031,800 1,251,600
Inventories 1,087,200 1,452,300
Prepaid expenses and other 25,900 13,100
------------ -----------
Total Current Assets 2,562,900 3,105,300
------------ -----------
Property, Plant and Equipment 2,933,800 2,786,100
Less: Accumulated Depreciation (2,099,500) (1,984,400)
------------ -----------
834,300 801,700
Other Assets 127,200 102,400
------------ -----------
Total Assets $ 3,524,400 $ 4,009,400
============ ===========
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Advances from Factor $ 174,300 $ -
Current maturities of long-term debt 93,600 75,100
Accounts payable, trade 912,200 1,104,100
Accrued expenses and other payables 627,100 575,000
------------ -----------
Total Current Liabilities 1,807,200 1,754,200
------------ -----------
Long-Term Debt - less current maturities (including
$8,840,400 and $8,793,900 of convertible debentures) 9,364,500 9,288,300
Other long-term liabilities 234,200 263,000
------------ -----------
Total Long-Term Liabilities 9,598,700 9,551,300
------------ -----------
Total Liabilities 11,405,900 11,305,500
------------ -----------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 1,811,500 1,811,500
shares authorized, 7,245,557 shares issued, 6,718,925
shares outstanding
Additional Contributed Capital 7,239,400 7,239,400
Accumulated Deficit (16,482,200) (15,896,800)
------------ -----------
(7,431,300) (6,845,900)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ---------
Total Stockholders' Deficit (7,881,500) (7,296,100)
------------ -----------
Total Liabilities and Stockholders' Deficit $ 3,524,400 $ 4,009,400
============ ===========
The accompanying notes are an integral part of the above statements.
Page 5
General Kinetics Incorporated
Statements of Operations
(Unaudited)
Nine Months Ended Three Months Ended
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 6,740,900 $ 6,240,900 $ 2,051,700 $ 1,526,900
Cost of Sales 5,764,400 5,004,600 1,999,000 1,238,700
------------ ------------ ------------ ------------
Gross Profit 976,500 1,236,300 52,700 288,200
------------ ------------ ------------ ------------
Selling, General & Administrative 1,120,100 1,151,600 340,200 306,900
Manufacturing Start-Up Costs 265,100 -- 265,100 --
Product Research, Development & Improvement -- 42,800 -- 5,000
------------ ------------ ------------ ------------
Total Operating Expenses 1,385,200 1,194,400 605,300 311,900
------------ ------------ ------------ ------------
Operating Income (Loss) (408,700) 41,900 (552,600) (23,700)
Other Income -- 175,000 -- 175,000
Interest Expense (176,700) (165,400) (60,000) (55,200)
------------ ------------ ------------ ------------
Net Income (Loss) (585,400) 51,500 (612,600) 96,100
============ ============ ============ ============
Basic Earnings per Share:
Basic Earnings (Loss) per Share ($0.087) $0.008 ($0.091) $0.014
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925 6,718,925 6,718,925
Diluted Earnings per Share:
Diluted Earnings (Loss) per Share ($0.087) $0.005 ($0.091) $0.005
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 24,708,925 6,718,925 24,708,925
The accompanying notes are an integral part of the above statements.
Page 6
General Kinetics Incorporated
Statements of Cash Flows
(Unaudited)
Nine Months Ended
February 28, February 28,
2002 2001
---- ----
Cash Flows From Operating Activities:
Net Income/(Loss) $ (585,400) $ 51,500
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 115,100 118,500
Amortization of bond discount 46,500 46,500
Bad debt provision (14,800) (175,000)
(Increase) Decrease in Assets:
Accounts Receivable 234,700 136,900
Inventories 365,100 (344,300)
Prepaid Expenses (12,700) (16,800)
Other assets (24,800) 21,300
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (191,900) 282,400
Accrued Expenses 51,800 (235,500)
Other Long Term Liabilities (28,800) (28,800)
------------ -----------
Net cash provided by/(used in) Operating Activites (45,200) (143,300)
------------ -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (39,600) (23,300)
Collection of Notes Receivable - 175,000
------------ -----------
Net cash provided by/(used in) Investing Activities (39,600) 151,700
------------ -----------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 1,148,500 132,700
Repayments of advances from Factor/
Demand Notes Payable (974,200) (176,800)
Repayments on Long Term Debt (59,800) (57,200)
------------ -----------
Net cash provided by/(used in) Financing Activities 114,500 (101,300)
------------ -----------
Net (decrease) increase in cash and cash equivalents 29,700 (92,900)
Cash and Cash Equivalents: Beginning of Period 388,300 958,100
------------ -----------
Cash and Cash Equivalents: End of Period $ 418,000 $ 865,200
============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 147,800 $ 134,200
Income Taxes 800 800
The accompanying notes are an integral part of the above statements.
Page 7
GENERAL KINETICS INCORPORATED
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The unaudited condensed financial statements at February 28, 2002, and for
the three months and nine months ended February 28, 2002 and February 28, 2001,
respectively, include the accounts of General Kinetics Incorporated ("GKI").
The financial information included herein is unaudited. In addition, the
financial information does not include all disclosures required under generally
accepted accounting principles in that certain note information included in the
Company's Annual Report has been omitted; however, such information reflects all
adjustments 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 28, 2002, 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 losses in the
quarter and nine months ending February 28, 2002, diluted earnings per share is
the same as basic earnings per share for those periods. The following tables
presents a reconciliation between the weighted average shares outstanding for
basic and diluted earnings per share for the quarter and nine months ended
February 28, 2001:
Per Share
---------
Three months ended Feb 28, 2001: Income Shares Amount
------ ------ ------
Basic earnings per share
Income available to common shareholders $ 96,100 6,718,925 $0.014
Effect of assumed conversion of
convertible debentures, net of tax 23,684 17,990,000 0.001
-------- ---------- ------
Dilutive earnings per share $119,784 24,708,925 $0.005
8
Per Share
---------
Nine months ended Feb 28, 2001: Income Shares Amount
------ ------ ------
Basic earnings per share
Income available to common shareholders $ 51,500 6,718,925 $0.008
Effect of assumed conversion of
convertible debentures, net of tax 71,052 17,990,000 0.004
-------- ---------- ------
Dilutive earnings per share $122,552 24,708,925 $0.005
Note 3 - Notes Payable
At February 28, 2002 and May 31, 2001 convertible debentures initially issued to
clients of Gutzwiller & Partner, AG ("Gutzwiller"), now known as Rabo Investmet
Management Ltd. (the "Manager") are outstanding in an aggregate principal amount
of approximately $9.0 million, mature in August 2004, are convertible into
common stock at a conversion price of 50 cents per share, and bear interest at
1% per annum, which is payable annually. Shares issuable upon conversion are
also subject to certain rights to registration under the Securities Act of 1933,
as amended.
In a filing with the SEC dated October 30, 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 $7,300,000 held in client accounts
managed by the Manager on behalf of various clients who hold beneficial economic
ownership thereof. That SEC filing also indicated that the Manager may be deemed
to be the beneficial owner of an aggregate of 1,715,000 outstanding shares of
the Company's common stock, including 1,472,300 shares held in client accounts.
Note 4 - Related Party Transactions
In August 2001, the Company entered into a factoring agreement with Link2It
Corporation, a company formed by Larry Heimendinger and Richard McConnell, both
members of the Company's Board of Directors. The agreement is intended to
replace the Company's prior agreement with Reservoir Capital Corporation
("Reservoir"). The agreement, which was negotiated at arms length and approved
by unanimous vote of the Company's Board of Directors, is on terms substantially
identical to those of the Reservoir facility, but more favorable to the Company
in certain respects, including provision for advances at a rate of up to 85% of
specified accounts receivable. At February 28, 2002 outstanding advances due to
Link2It Corporation totaled approximately $174,300. Interest expense on these
advances was approximately $24,000 for the nine months ended February 28, 2002.
A new factoring agreement with Link2It Corporation, on similar terms, was
entered into in April 2002.
9
Link2It Notes
At May 31, 2000 the Company had a membership interest in and certain notes
receivable due from Link2It, LLC. The financial statements at May 31, 2000
included a valuation reserve of $175,000, which represented the total due under
the notes receivable. During January 2001, Link2It LLC merged into Link2It
Corporation and completed a round of equity financing. The $175,000 principal
amount of the notes was repaid in full and recognized as "other income" on the
accompanying statement of operations for the three months and nine months ended
February 28, 2001. GKI also retained approximately 5.7% of Link2It Corporation's
currently outstanding common stock, which it accounts for on the cost method.
Note 5 - Income Taxes
The Company's estimated effective tax rate for fiscal 2002 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net
operating loss carryforwards.
Note 6 - Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") approved
Statement on Financial Accounting Standards No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived assets and
for Long-Lived assets to be disposed Of" and the accounting and reporting
provisions of the Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale and resolved significant implementation issues related to SFAS No. 121.
SFAS No. 144 retains the requirements of SFAS No. 121 to recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and measure an impairment loss as the difference
between the carrying amount and fair value of the asset. SFAS No. 144 excludes
goodwill from its scope, describes a probability-weighted cash flow estimation
approach, and establishes a "primary-asset" approach to determine the cash flow
estimation for groups of assets and liabilities. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early adoption encouraged. The Company believes the adoption
of SFAS No. 144 will not have a material impact of its financial position or
results of operations.
10
GENERAL KINETICS INCORPORATED
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended February 28, 2002 Compared to Three Months Ended
-------------------------------------------------------------------
February 28, 2001
-----------------
Net sales for the three months ended February 28, 2002 were approximately
$2.05 million compared to net sales of approximately $1.53 million for the
quarter ended February 28, 2001. The increase in sales was due primarily to what
are believed to be normal fluctuations in demand for the Company's products and
services.
The gross margin percentage decreased from 18.9% for the quarter ended
February 28, 2001 to 2.6% for the quarter ended February 28, 2002. The primary
reason for the decrease in gross profit margins was changes in the mix of jobs
produced in the quarter ended February 28, 2002 as compared to the job mix in
the quarter ended February 28, 2001. The mix of jobs produced in the quarter
ended February 28, 2002 required more machine shop hours than were used in the
prior year, and a larger amount of the machine shop work was outsourced to
subcontractors during the current period. In order to increase machine shop
capacity and reduce the amount of outsourcing for machined parts, the Company
has entered into a lease purchase agreement for a new vertical machining center
that was put into service in December 2001.
Sales, General & Administrative costs were approximately $340,200 in the
third quarter of fiscal 2002 as compared to approximately $306,900 in the
corresponding quarter of the prior fiscal year. The change was principally due
to interest income of approximately $46,000 related to the Link2It notes
recorded in the third quarter of the prior fiscal year.
The Company recognized $265,100 in manufacturing start-up costs related to
a large blanket contract with a U.S. Navy prime contractor in the accompanying
financial statements. The contract is an "IDIQ" (indefinite delivery, indefinite
quantity) contract with an estimated total value of $6.8 million. The enclosures
being delivered under this contract were designed by the customer, and required
the Company to implement a significantly different production process than is
used for its traditional line of enclosures. Specifically, most of the
components must be machined on CNC machining centers, and there is less use of
extrusions, welding, and fabricated parts. The Company incurred significant
costs in planning and implementing this new production process. In accordance
with generally accepted accounting principles, the Company has expensed these
startup costs rather than amortizing them over the life of the contract.
11
During the quarter ended February 28, 2001, the Company incurred $5,000 in
Product Research, Development & Improvement costs related to the initial
development work on a new enclosure product; there were no comparable costs in
the quarter ended February 28, 2002.
For the three months ended February 28, 2002, the Company had an operating
loss of $552,600 compared to an operating loss of $23,700 for the comparable
quarter of the prior fiscal year. The decrease was due primarily to the
manufacturing start-up costs and the decrease in gross profit margins described
above.
During the quarter ended February 28, 2001, the Company recorded $175,000
in "other income" related to the payment of Notes receivable due from Link2It
that had been fully reserved in the prior fiscal year (see Note 4 above).
Interest expense was $60,000 in the third quarter of fiscal 2002 compared
to $55,200 in the third quarter of fiscal 2001. The increase was due to
increased factoring of accounts receivable in the quarter ended February 28,
2002 as compared to the quarter ended February 28, 2001.
The Company's estimated effective tax rate for fiscal 2002 is 0%. This
estimated effective tax rate is lower than the statutory rate due to the
existence of net operating loss carryforwards.
Nine months Ended February 28, 2002, Compared to Nine months Ended February 28,
------------------------------------------------------------------------------
2001
----
Net sales for the nine months ended February 28, 2002 were approximately
$6.7 million, as compared to net sales of approximately $6.2 million for the
nine months ended February 28, 2001.
The gross margin percentage decreased from 19.8% for the nine months ended
February 28, 2001 to 14.5% for the nine months ended February 28, 2002. The
primary reasons for the decrease in gross profit margins was changes in the mix
of jobs produced in the nine-months ended February 28, 2002 as compared to the
job mix in the nine-months ended February 28, 2001. The mix of jobs produced in
the nine-months ended February 28, 2002 required more machine shop hours than
were used in the same period of the prior year, and a larger amount of the
machine shop work was outsourced to subcontractors during the current period. In
order to increase machine shop capacity and reduce the amount of outsourcing for
machined parts, the Company has entered into a lease purchase agreement for a
new vertical machining center that was put into service in December 2001.
12
Sales, General & Administrative costs were approximately $1,120,100 in the
first nine months of fiscal 2002 as compared to approximately $1,151,600 in the
first nine months of the prior fiscal year. The change was principally due to a
reduction in corporate facility costs due to the Company moving its corporate
headquarters to Manassas, Virginia in March 2001. During the nine months ended
February 28, 2001, the Company incurred $42,800 in Product Research, Development
& Improvement costs related to the initial development work on a new enclosure
product; there were no comparable costs in the nine months ended February 28,
2002.
The Company recognized $265,100 in manufacturing start-up costs related to
a large blanket contract with a U.S. Navy prime contractor in the accompanying
financial statements. The contract is an "IDIQ" (indefinite delivery, indefinite
quantity) contract with an estimated total value of $6.8 million. The enclosures
being delivered under this contract were designed by the customer, and required
the Company to implement a significantly different production process than is
used for its traditional line of enclosures. Specifically, most of the
components must be machined on CNC machining centers, and there is less use of
extrusions, welding, and fabricated parts. The Company incurred significant
costs in planning and implementing this new production process. In accordance
with generally accepted accounting principles, the Company has expensed these
startup costs rather than amortizing them over the life of the contract.
During the nine months ended February 28, 2001, the Company incurred
$42,800 in Product Research, Development & Improvement costs related to the
initial development work on a new enclosure product; there were no comparable
costs in the nine months ended February 28, 2002.
For the nine months ended February 28, 2002, the Company had an operating
loss of $408,700 compared to operating income of $41,900 for the comparable nine
months of the prior fiscal year. The decrease was due primarily to the
manufacturing start-up costs and the decrease in gross profit margins described
above.
During the nine months ended February 28, 2001, the Company recorded
$175,000 in "other income" related to the payment of Notes receivable due from
Link2It that had been fully reserved in the prior fiscal year (see Note 4
above).
Interest expense was $176,700 in the first nine months of fiscal 2002
compared to $165,400 in the first nine months of fiscal 2001. The increase was
due to increased factoring of accounts receivable in the nine months ended
February 28, 2002 as compared to the nine months ended February 28, 2001.
13
Liquidity and Capital Resources
The Company relies upon internally generated funds and accounts receivable
financing to finance its operations. During the first nine months of fiscal
2002, the Company showed a net loss of approximately $585,400. During fiscal
2001, the net loss totaled $129,800. In order to generate the working capital
required for operations, the Company must continue to generate orders, increase
its level of shipments, and begin to operate profitably during the remainder of
fiscal 2002.
The Company must continue to market electronic enclosure products to government
and commercial markets, enter into contracts which the Company can complete with
favorable profit margins, ship the orders in a timely manner, and control its
costs in order to recover from its liquidity problems and seek to operate
profitably in fiscal 2003.
As of February 28, 2002, the Company had cash of $418,000. The Company has faced
production issues that have contributed to losses from operations in the prior
fiscal year and in the first three quarters of the current fiscal year. The
Company has taken and is continuing to take steps to address these production
issues through changes and additions to plant supervision and by regularly
updating scheduling and planning procedures, 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 cash on hand, borrowings from the factoring of accounts
receivable, and careful management of operating costs and cash disbursements can
enable the Company to meet its cash requirements through the next twelve months.
The Company may also seek additional funding sources to provide a cushion to
handle variances in cash requirements if sales, gross profits and shipment
levels fluctuate throughout the fiscal year, or if the Company purchases capital
equipment to increase production capacity due to any possible increased sales
opportunities. However, there is no assurance the Company will be successful in
pursuing its plans or in obtaining additional financing to meet those cash
requirements. The Company must continue to maintain or increase its level of
sales, consistently make timely shipments and produce its products at adequate
profit margins, or the Company will continue to face liquidity problems, and may
be left without sufficient cash to meet its ongoing requirements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company sustained operating losses
in the first nine months of fiscal 2002, and in fiscal 2001 and 2000, and in
addition, the Company has significant short-term cash commitments, the funding
of which is limited to cash flow from operations and the factoring of certain
accounts receivable. These factors raise significant doubt about the Company's
ability to continue as a going
14
concern. The financial statements do not contain any adjustment that might
result from the outcome of these uncertainties.
In recent years, the Company had been party to a factoring agreement with
Reservoir Capital Corporation ("Reservoir") that provides for advances (or
loans) of up to 80% of specified accounts receivable. In August 2001, Link2It
Corporation, a company formed by Larry Heimendinger and Richard McConnell, both
directors of the Company, entered into a new factoring agreement with the
Company on terms substantially identical to those of the Reservoir facility, but
more favorable to the Company in certain respects, including provision for
advances at a rate of up to 85% of specified accounts receivable. A new
factoring agreement with Link2It Corporation, on similar terms, was entered into
in April 2002. The Company expects to draw on this facility, or a similar
facility, throughout fiscal 2002 as necessary to help alleviate liquidity
problems, although, as discussed above, the Company will also need to control
expenses, maintain the sales backlog at appropriate levels, and keep shipment
levels in line with booked orders in order to meet these requirements. At
February 28, 2002 outstanding advances due to Link2It Corporation totaled
approximately $174,300.
The Company had significant amounts payable to trade creditors at February 28,
2002. Current maturities of long-term debt amount to $93,600 in fiscal 2002.
The Company has outstanding debentures originally issued to clients of
Gutzwiller, now known as Rabo Investment Management Ltd. (the "Manager")
totaling approximately $9.0 million. The debentures mature in August 2004, are
convertible into common stock at a conversion price of 50 cents per share, and
bear interest at 1% per annum payable annually. In a filing with the SEC dated
October 30, 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 $7,300,000 held in client accounts managed by the Manager
on behalf of various clients who hold beneficial economic ownership thereof.
Analysis of Cash Flows
Operating activities used $45,200 in cash in the first nine months of fiscal
2002. This reflects a net loss of $585,400 offset by $146,800 in non-cash
expenses, and $393,400 in cash to fund changes in working capital items. The
cash used to fund changes in working capital items includes a decrease in
inventories of $365,100 and a decrease in accounts receivable of $234,700,
partially offset by an decrease in accounts payable of $191,900. The decrease in
inventories was primarily due to the reevaluation
15
of interim inventory estimates and the resulting charge of $265,100 to
manufacturing start-up costs discussed above.
Investing activities used $39,600 in the first three quarters of fiscal 2002.
These activities consisted of acquired property, plant and equipment.
Financing activities provided $114,500 in the first three quarters of fiscal
2002. These activities consisted of factoring accounts receivable netting to
$174,300, partially offset by the repayment of certain long-term debt.
Management believes that inflation did not have a material effect on the
operations of the Company during the first quarter of fiscal 2002.
Contractual Obligations and Commercial Commitments
The Company's commitments through February 28, 2006 are comprised of the
following at February 28, 2002 (in thousands):
Through February 28,
-------------------------------------
2003 2004 2005 2006 Total
---- ---- ---- ---- -----
Convertible debentures $115 $ 90 $9,125 $ - $9,330
Real estate mortgage 115 115 115 115 460
Capitalized leases 26 26 26 26 104
Operating leases 31 10 8 8 57
Total $287 $241 $9,274 $149 $9,951
==================================================
Critical Accounting Policies
The Company's significant accounting policies are more fully described in the
audited financial statements for the fiscal years ended May 31, 2001 and 2000
set forth in the Company's annual report on Form 10-K, as amended, for the
fiscal year ended May 31, 2001. The preparation of financial statements in
conformity with accounting principles generally accepted within 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 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.
16
Work in process inventory represents actual production costs, including
manufacturing overhead incurred to dated, 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 multiunit orders. 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 and individual review of any past due accounts. Although it is
reasonably possible that 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 the
result of operations. At February 28, 2002, the Company had an allowance for
doubtful accounts of $57,900.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") approved
Statement on Financial Accounting Standards No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived assets and
for Long-Lived assets to be disposed Of" and the accounting and reporting
provisions of the Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale and resolved significant implementation issues related to SFAS No. 121.
SFAS No. 144 retains the requirements of SFAS No. 121 to recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and measure an impairment loss as the difference
between the carrying amount and fair value of the asset. SFAS No. 144 excludes
goodwill from its scope, describes a probability-weighted cash flow estimation
approach, and establishes a "primary-asset" approach to determine the cash flow
estimation for groups of assets and liabilities. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early adoption encouraged. The Company believes the adoption
of SFAS No. 144 will not have a material impact of its financial position or
results of operations.
17
Item 3- Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of the Company may be exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the cost of financing, investing, and operating transactions. Because the
Company has only fixed rate long-term convertible debentures and no foreign
currency transactions, there is no material impact on earnings from fluctuations
in interest and currency exchange rates.
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(b) Reports of Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL KINETICS INCORPORATED
Date: April 15, 2002 /s/ Larry M. Heimendinger
---------------------- -------------------------------
Chairman of the Board
(Principal Executive Officer)
Date: April 15, 2002 /s/ Sandy B. Sewitch
---------------------- --------------------------------
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
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