UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2005 Commission File No. 0-1738
GENERAL KINETICS INCORPORATED
(Exact Name of Registrant as specified in its Charter)
Virginia 54-0594435
(State of Incorporation) (IRS Employer Identification No.)
110 Sunray Dr, Johnstown, PA 15905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (814) 255-6891
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, $0.25 par value per share
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
YES NO X
---
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
YES NO X
---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on November 30,
2004, the last business day of the registrant's most recently completed second
fiscal quarter, as reported on the NASD OTC Bulletin Board, was approximately
$196,766. Shares of Common Stock held by the executive officers, directors and
under the Registrant's ESOP have been excluded in that such persons may be
deemed affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of Registrant's Common Stock, $0.25 par value,
as of August 16, 2005, was 7,118,925.
Documents Incorporated by Reference
-----------------------------------
Certain portions of the Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Registrant's 2005 fiscal year are incorporated into Part III hereof.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K 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 Annual 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 may not be able to obtain and complete sufficient
new orders to maintain 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 or refinance in full the
approximately $7,315,000 principal amount of its outstanding convertible
debentures which matured on August 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; and
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 Annual 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
ITEM 1 - BUSINESS
(a) General Development of Business
3
General Kinetics Incorporated (the "Company" or "GKI") designs and manufactures
high-quality precision enclosures for sophisticated electronic systems,
principally for sale to the U.S. Department of Defense.
The Company was founded as a Virginia corporation in 1954 and its common stock
became publicly traded in November 1961.
At May 31, 2005, convertible debentures initially issued to clients of
Gutzwiller & Partner, AG, now known as Rabo Investment Management Ltd. (the
"Manager"), were outstanding in an aggregate principal amount of approximately
$7,315,000. Such 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. Shares issuable upon conversion
were also subject to certain rights to registration under the Securities Act of
1933, as amended. In a filing with the Securities and Exchange Commission dated
November 29, 2004, the Manager indicated that it terminated its business
activities on December 31, 2002 and, as part of that process, distributed to its
clients GKI debentures, in the aggregate principal amount of $7,300,000, which
the Manager held on behalf of such clients.
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
principal amount of the Company's 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 in the accompanying financial statements.
The Company's cash flow, capital resources, and overall financial condition will
not be sufficient to repay or refinance in full the approximately $7,315,000
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 consider
its potential alternatives. There can be no assurance, however, that the Company
will be able to come to an agreement with the other debenture holders with
respect to repayment or refinancing of the debentures.
4
(b) Financial Information about Industry Segments
The Company is currently operating in a single industry segment.
(c) Narrative Description of Business
The Business
General
The Company designs and manufactures high-quality precision enclosures for
sophisticated electronic systems. The Company is a manufacturing and engineering
services company which produces build-to-print as well as custom engineered
products. The Company has manufactured electronics-ready enclosures and mounting
systems for over 40 years. Products include both standard and made-to-order
racks, cabinets and kits. These products are precision-manufactured to enclose
and protect sensitive electronic communication and detection equipment from
shock and vibration. The principal customer for these products is the U.S.
Department of Defense which, directly or indirectly through its prime
contractors, accounted for 99%, 99%, and 93% of the Company's revenues in the
fiscal years 2005, 2004 and 2003, respectively. The Company sells these products
as a prime contractor and as a subcontractor to major prime contractors such as
Lockheed Martin, Raytheon, SAIC, Northrop Grumman, and DRS Laurel Technologies.
Strategy
The Company's long-term goals are to increase market penetration within the
Department of Defense, and to expand into the non-government marketplace by
targeting build-to-print or engineering design opportunities for enclosures and
related products. The Company entered the commercial enclosure marketplace in
fiscal 2000. The current strategy for these products is to concentrate on
selling high-end precision enclosures through a small network of U.S. sales
representatives. The Company does not expect the non-government marketplace to
provide a significant portion of the Company's sales during fiscal 2006.
Management intends to use its current sales force and build on its reputation
for quality to expand sales to the U.S. Department of Defense and other agencies
within the government.
The Company plans to finance its strategy for fiscal 2006 through cash on hand
as of May 31, 2005, careful management of operating expenses, factoring accounts
receivable to alleviate short-term cash requirements, and cash flow generated
through operations. The Company may also seek additional sources of debt or
equity financing to allow it to meet cash commitments if sales and shipment
levels fluctuate throughout the fiscal year.
5
Products
The Company's principal products are enclosures, such as racks, cabinets,
consoles, and mounting platforms for sophisticated electronic systems generally
made in accordance with specific client requirements. The Company has developed
a series of consoles and enclosures to offer as commercial-off-the-shelf
products to be sold to prime contractors for contracts in the defense community
that require this type of enclosure. These consoles and enclosures provide an
environment that makes it possible to use commercial electronics while meeting
the need for combat ready systems.
The Company's production processes cover a wide range of operations, including
high volume production using tight tolerance, military-specified engineering
requirements. Military specifications for metal fabrication and machinery
require geometric dimensioning to and from fabricated areas to datum within
ten-thousandths (.0001) of an inch of their true fabricated position, and the
machining of parts to a size of plus or minus one thousandth (.001) of an inch
of their specified dimension. Furthermore, the Company has in-plant facilities
to test for radio frequency interference (R.F. testing) as it is required to
certify certain products. The Company fabricates metal cabinets and other
products from sheet aluminum and steel and other metal components, all of which
are readily available from numerous domestic suppliers. The manufactured
products must satisfy the close-tolerance specifications of its customers and
are subjected to in-house sound testing to ensure that the levels of noise
emanating from the enclosures at various frequencies are within customer
specifications. The Company's products have high visibility in such programs as
the US Navy's AEGIS destroyer program and other major U.S. Government programs.
Customers
During fiscal years 2005, 2004, and 2003, the Company sold 99%, 99%, and 93%,
respectively, of its products to the U.S. Government, principally to the U.S.
Department of Defense, as either a prime contractor or a subcontractor to major
prime contractors. Therefore, a material decline in spending by the Department
of Defense, could have a material adverse effect on the operations of the
Company, unless offset by greater market penetration or new sales to other
government and commercial customers. In addition, the Company's U.S. Government
contracts and, in general, its subcontracts with the U.S. Government's prime
contractors provide that such contracts may be terminated by the U.S. Government
or prime contractor for convenience at any time. The Company considers its
relationships with the U.S. Department of Defense and its major prime contractor
customers to be good.
Marketing and Sales
The Company currently markets its products through a direct sales force and
through outside agencies. The Company also participates in industry trade shows
as a means of contacting new and existing customers and introducing new
products.
6
Backlog
The Company sells its products pursuant to both long and short-term contracts
with scheduled backlog and delivery orders. Amounts are not carried in backlog
until the related contracts receive government funding (in the case of
government contracts) and, in any event, delivery orders are released to the
Company. Once an order is received, production and delivery can be scheduled,
but in some instances, dates can be delayed by changing requirements of
government or commercial customers.
The Company's contract backlog as of May 31, 2005 and May 31, 2004 was
approximately $3.5 million and $2.5 million, respectively. The entire $3.5
million backlog as of May 31, 2005 is expected to be shipped during fiscal 2006.
The Company does not believe that seasonal fluctuations play a significant role
in the backlog for its business.
Competition
The Company operates in a mature, highly fragmented market with intense
competition. The principal elements of competition are price, the ability to
deliver products in accordance with major U.S. Government and prime contractor
production schedules, technical expertise, quality, service and support. The
Company believes that it competes with approximately 25 other manufacturers of
electronic enclosures, including, in some instances, major prime contractors,
which are also customers of the Company. Certain competitors of the Company have
significantly greater financial, marketing and technological resources.
Research and Development
The Company expects research and development activities to total less than
$25,000 during fiscal 2006. No material research and development expenses were
incurred in fiscal 2005, 2004 or 2003.
The U.S. Government Procurement Process
The majority of the Company's fiscal 2005 revenue was generated from sales
directly to departments and agencies of the U.S. Government, and to prime
contractors reselling to the U.S. Government market, principally to the U.S.
Department of Defense. Revenue from these sales represented approximately 99% of
the Company's total revenue in fiscal 2005. The Company sells to the U.S.
Government through a wide variety of contract procurement mechanisms that
include formal solicitations and requests for quotes. The Company's sales to
U.S. Government prime contractors are typically made through contracts secured
by formal competitive bidding.
The Company's U.S. Government contracts and, in general, its subcontracts with
the U.S. Government's prime contractors, provide that such contracts may be
terminated by the U.S. Government or prime contractor for convenience at any
time. Substantially all of the Company's fiscal 2006 revenue will be derived
from contracts that are subject to termination for convenience. In the event of
such a termination, the Company is normally entitled to receive the purchase
price for delivered items, reimbursement for allowable costs for work in
process, and an allowance for profit
7
thereon or adjustment for loss if completion of performance would have resulted
in a loss. There were no terminations for convenience in fiscal 2005, 2004, or
2003. Upon termination of a U.S. Government contract for contractor default, the
U.S. Government may seek to recover from the defaulting contractor the increased
costs of procuring the specified goods and services from a different contractor.
The U.S. Government to date has not terminated for default of any contract
awarded to the Company.
In connection with its efforts to compete for U.S. Government business, the
Company has enjoyed certain statutory advantages because of its size, location
and the American-made character of its products. Such advantages may not be
available to the Company in the future. Although the Company believes that it
will continue to qualify under these statutory provisions for the foreseeable
future, the Company does not believe that the loss of such status would be
likely to have a material adverse effect upon the Company.
The Company's sales to the U.S. Government are subject to numerous other factors
beyond the Company's control that generally apply to other U.S. Government
contractors, including fluctuations and delays resulting from the appropriations
process, the outcome of competition for contracts, and reductions in levels of
military and other agencies' spending.
Employees and Labor Agreements
As of May 31, 2005, the Company had 86 employees, all located in the United
States. At that date, on a Company-wide basis, there were 26 employees in an
executive, finance, engineering, sales, marketing and administration capacity,
and 60 employees in manufacturing, assembly and operations. Sixty of the
Company's employees are represented by the International Brotherhood of
Electrical Workers Union (the "Union") in Johnstown, Pennsylvania. The Company
and the Union are working under a three-year collective bargaining agreement
that will expire on May 31, 2007. The Company considers its employee relations
to be good.
Environmental Matters
The Company uses limited amounts of hazardous materials in its production
process, primarily in the treatment of metal components. All such materials are
disposed of by independent certified carriers. The Company believes it operates
its facilities in compliance, in all material respects, with all existing
federal, state and local environmental regulations.
Pursuant to the requirements of applicable federal, state, and local statutes
and regulations, the Company believes it has received all of the environmental
permits and approvals necessary for the operations of its facilities.
(d) Financial Information about Geographic Areas
The Company has not had significant foreign operations or export sales.
(e)
1) The Company is required to file its annual and quarterly reports as well as
other reports as required on an as needed basis to comply with securities
regulations with the SEC.
2) The public may read and copy any materials the company files with the SEC
at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC.
The address of that site is www.sec.gov.
3) The Company's internet address is www.gki.com.
8
ITEM 2 - PROPERTIES
The Company has closed its Manassas, Virginia offices and consolidated into its
Johnstown facility in order to decrease operating expenses and provide greater
fiscal oversight of operations. The decision to close this office was made in
June of 2005, and executed in August of 2005. The lease term on the Manassas
office extends through the year 2007, and efforts are being made by the Company
to sublease the space. The landlord is also taking steps to lease the available
space. This office closure is not expected to adversely impact the Company, but
conversely allow management better oversight, and decrease overhead costs
significantly.
The Company leases its executive offices and manufacturing facilities at an
industrial manufacturing plant presently located in Johnstown, Pennsylvania. The
property consists of approximately 56,000 square feet of manufacturing
facilities and office space.
The Company's lease for the facility commenced on June 1, 2004 and will end on
May 31, 2009. The current annual base rent payable under the lease is
approximately $180,000. The Company has the right, at its option, to extend the
initial term of its lease for two additional five-year periods at a base rent to
be negotiated, but not more than 10% over the base rent charged during the
previous term. The property owner is responsible for the maintenance and repair
of the roof, plumbing, electrical, heating and air conditioning, exterior walls,
doors, windows, corridors and other common areas of the manufacturing facility.
The Company believes that its present facilities are adequate to meet its
current production requirements.
ITEM 3 - LEGAL PROCEEDINGS
As of the date hereof, there is a threatened legal action relating to a former
employee alleging wrongful dismissal, which the Company expects will be settled
for an amount based on the employee's salary at the time of termination.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
9
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $0.25 par value per share, is quoted on the Over the
Counter ("OTC") Bulletin Board, under the symbol "GKIN". The table below
presents the high and low sales prices as reported for the fiscal quarters
within the two most recent fiscal years:
--------------------------------------------------------------------------------
High Low
---- ---
--------------------------------------------------------------------------------
Fiscal Year Ended May 31, 2005
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fourth Quarter .10 .03
--------------------------------------------------------------------------------
Third Quarter .06 .02
--------------------------------------------------------------------------------
Second Quarter .05 .01
--------------------------------------------------------------------------------
First Quarter .03 .01
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fiscal Year Ended May 31, 2004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fourth Quarter .05 .02
--------------------------------------------------------------------------------
Third Quarter .06 .02
--------------------------------------------------------------------------------
Second Quarter .06 .02
--------------------------------------------------------------------------------
First Quarter .03 .01
--------------------------------------------------------------------------------
The number of holders of record of the Company's Common Stock, $0.25 par value,
as of August 25, 2005, was 982.
The Company has not paid any dividends during the last five fiscal years and has
no present plans to pay dividends in the foreseeable future.
ITEM 6 - SELECTED FINANCIAL DATA
The following sets forth certain selected financial data for each of the years
in the five-year period ended May 31, 2005. The statement of operations data for
the fiscal years ended May 31, 2005, 2004, 2003 and the balance sheet data at
May 31, 2005 and 2004 are derived from the financial statements of the Company
audited by BDO Seidman, LLP, the Company's independent registered public
accounting firm, included elsewhere, herein. The statement of operations data
for the fiscal years ended May 31, 2002 and 2001 and the balance sheet data at
May 31, 2003, 2002 and 2001 are derived from financial statements of the Company
also audited by BDO Seidman, LLP, but not included herein. The financial data
should be read in conjunction with, the financial statements and related notes
and other financial information, the going concern opinion provided by the
Company's auditors, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein.
10
Years ended May 31,
2005 2004 2003 2002 2001
(in thousands, except per share data)
Statement of Operation Data:
Net Sales $ 8,511 $ 6,358 $ 6,377 $ 8,870 $ 8,258
Cost of Sales 7,140 5,521 5,107 7,692 6,736
------------------------------------------------------------------------------------
Gross Profit 1,371 837 1,270 1,178 1,522
------------------------------------------------------------------------------------
Selling, General & Administrative 1,419 1,150 1,202 1,558 1,565
Product Research, Development -- 1 4 -- 42
Manufacturing Start-Up Costs -- -- -- 265 --
------------------------------------------------------------------------------------
Total Operating Expenses 1,419 1,151 1,206 1,823 1,607
------------------------------------------------------------------------------------
Operating Income / (Loss) (48) (314) 64 (645) (85)
------------------------------------------------------------------------------------
Other Income (Expense)
Interest Expense (148) (213) (195) (227) (219)
Gain on Settlement of Debt 1,505 -- -- -- --
Miscellaneous income -- -- -- 37 175
------------------------------------------------------------------------------------
Total Other Income (Expense) 1,357 (213) (195) (190) (44)
------------------------------------------------------------------------------------
Net Income / (Loss) $ 1,309 $ (527) $ (131) $ (835) $ (129)
====================================================================================
Earnings per common share:
Basic Net Income (Loss)per share $ 0.18 ($ 0.07) ($ 0.02) ($ 0.12) ($ 0.02)
Dilluted Net Income (Loss)per share $ 0.18 ($ 0.07) ($ 0.02) ($ 0.12) ($ 0.02)
Weighted Average Number of Common
Shares
Outstanding
Basic 7,118,925 7,118,925 6,898,651 6,718,925 6,718,925
Diluted 7,203,925 7,118,925 6,898,651 6,718,925 6,718,925
Cash Dividend Per Common Share $ - $ - $ - $ - $ -
Balance Sheet and Other Data:
Working capital $ (7,012) $ (8,110) $ 556 $ 606 $ 1,351
Cash $ 302 $ 670 $ 114 $ 185 $ 388
Total Assets $ 2,424 $ 2,405 $ 2,156 $ 2,918 $ 4,009
Net property, plant & equipment $ 296 $ 162 $ 703 $ 800 $ 802
Capital Expenditures $ 219 $ 18 $ 50 $ 46 $ 34
Long-term Liabilities $ 668 $ 696 $ 9,334 $ 9,597 $ 9,551
Total Stockholders Deficit $ (7,284) $ (8,592) $ (8,065) $ (8,132) $ (7,296)
11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth items from the Company's statements of operations
for fiscal years 2005, 2004 and 2003 (each ended May 31), as a percentage of
revenue.
Percent of Revenue
------------------
2005 2004 2003
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
------ ------ ------
Gross Profit 16.1% 13.2% 19.9%
Operating Expenses (16.6%) (18.1%) (18.9%)
------- ------- -------
Operating Income (loss) (0.5%) (4.9%) 1.0%
Other Income and Expense 15.9% (3.4%) (3.1%)
Net Income (Loss) 15.4% (8.3%) (2.1%)
====== ======= ======
Fiscal Year 2005 Compared to Fiscal Year 2004
Revenue
Net sales for fiscal 2005 were approximately $8.5 million as compared with $6.4
million for fiscal 2004, representing an increase of 32.8%. The increase in
sales was due primarily to an increase in orders under a large blanket contract
with a prime contractor to the U.S. Department of Defense, in addition to an
overall increase of orders from customers involved in projects related to the
U.S. Department of Defense. The primary market driver behind these increases is
the current geopolitical environment, requiring an increased number of the
products produced by the Company, in order to meet the ongoing demands for new
and replacement parts by the U.S. Department of Defense. The Company's contracts
with the U.S. Government are subject to the availability of funds through annual
appropriations, may be terminated by the U.S. government at any time and
generally do not require the purchase of a fixed quantity of products.
Reductions in U.S. Government defense spending could adversely affect the
Company's operating results. While the Company is not aware of present or
anticipated reductions in U.S. Government spending on specific programs or
contracts pursuant to which the Company has sold material quantities of its
products, there can be no assurance that such reductions will not occur or that
decreases in U.S. Government defense spending in general will not have an
adverse effect on sales of the Company's products in the future.
Gross Profit
Gross profit for fiscal 2005 was approximately $1.4 million compared with
approximately $0.8 million for fiscal 2004. Gross profit as a percentage of
sales increased from 13.2% in fiscal 2004 to 16.1% in fiscal 2005. The primary
reasons for the increase in the gross profit percentage were the
12
mix of jobs (Fabricating intensive vs. Machining intensive) for the current
fiscal year as compared to the prior fiscal year, along with improved scheduling
and planning procedures implemented during the fiscal year. The Company operates
as a job shop, making a mix of build-to-print cabinets and parts, standard
cabinets, 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 periods. The Company continues to
address production planning 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.
Operating Expense
Operating expenses for fiscal 2005 were approximately $1.4 million compared with
$1.2 million for fiscal 2004. The increase was principally due to the increased
volume of net sales.
Interest Expense
Interest expense decreased to $148,000 in fiscal 2005 compared to $213,500 in
fiscal 2004. This was primarily due to the absence of mortgage interest and a
decrease in factoring activity.
Net Income / Loss
The overall net income was $1,308,700 for fiscal 2005 as compared to a net loss
of $527,300 in fiscal 2004. Improved results were primarily due to the increases
in sales and gross profits and the recognition of a $1,504,800 gain on
settlement of debt.
Income Taxes
The Company had no income tax provision in fiscal 2004 or fiscal 2005 due to the
net operating loss and net operating loss carry forward respectively. Under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company has provided a full
valuation allowance against its net deferred tax asset due to uncertainties of
its ultimate realization. If the Company achieves profitable operations, it may
be subject to alternative minimum taxes, which have a lower effective tax rate
than the federal statutory rate of 34%. Under IRC Section 108(a)(1) Gross income
does not include any amount which (but for this subsection) would be includable
in gross income by reason for the discharge (in whole or in part) of
indebtedness of the taxpayer if the discharge occurs when the taxpayer is
insolvent. The Company qualifies under this rule due to the retirement of the
debentures during the fiscal year. This allowed the Company to exclude from
taxable income the $1,505,000 gain from the retirement of debt resulting in a
net loss for the purpose of calculating tax.
Fiscal Year 2004 Compared to Fiscal Year 2003
Revenue
13
Net sales for fiscal 2004 were $6.36 million and substantially unchanged from
$6.38 million for fiscal 2003.
The principal customer for the Company's products is the U.S. Government,
principally the U.S. Navy, which, directly or through its prime contractors,
accounted for 99% of the Company's revenues in fiscal year 2004. The Company's
sales to the U.S. Government and its prime contractors represented approximately
93% and 94% of total net sales during the Company's fiscal years ended May 31,
2003 and May 31, 2002, respectively, and are expected to continue to account for
a substantial portion of the Company's revenues for the foreseeable future.
Gross Profit
Gross profit for fiscal 2004 was approximately $0.8 million compared with
approximately $1.3 million for fiscal 2003. Gross profit as a percentage of
sales decreased from 19.9% in fiscal 2003 to 13.2% in fiscal 2004. The primary
reason for the decrease in gross profit margins was changes in the mix of jobs
produced in the fiscal year ended May 31, 2004 as compared to the job mix in the
fiscal year ended May 31, 2003.
Operating Expenses
Operating expenses for fiscal 2004 were approximately $1.15 million compared
with $1.21 million for fiscal 2003. The small decrease from fiscal 2003 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 then reduced backlog and shipping levels.
Interest Expense
Interest expense increased to $213,500 in fiscal 2004 as compared to $195,200 in
fiscal 2003. This increase occurred principally because interest expense from
factoring accounts receivable was $40,000 in fiscal 2004 as compared to $12,000
in fiscal 2003.
Net Loss
The overall net loss was $527,300 for fiscal 2004 as compared to a net loss of
$131,400 in fiscal 2003. The increase in the loss was primarily due to the
decrease in gross profits discussed above.
Income Taxes
The Company had no income tax provision in fiscal 2004 or fiscal 2003 due to the
net losses. Under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The Company has
provided a full valuation allowance against its net deferred tax asset due to
uncertainties of its ultimate realization. If the Company achieves profitable
operations, it will be subject to
14
alternative minimum taxes, which have a lower effective tax rate than the
statutory rate of 34%.
Liquidity and Capital Resources
The Company relies upon internally generated funds and accounts receivable
factoring to finance its operations. During fiscal year 2005 the Company had net
income of $1,308,700, and for fiscal 2004, the Company incurred a net loss of
approximately $527,300. 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 2006.
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 fiscal 2006.
The Company has received significant new orders during the last several months
of fiscal 2005, and the shippable backlog at May 31, 2005 is $3.5 million as
compared to $2.5 million at May 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 May 31, 2005, the Company had cash and marketable securities totaling
$370,200. 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 the Company 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 flow 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 significant
losses in years prior to 2005, 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. These losses and commitments raise
significant doubt about the
15
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 had $669,500 in trade accounts payable to creditors at May 31, 2005,
which amount included $149,400 of outstanding advances due to Key Capital
Factoring.
At May 31, 2005, convertible debentures, initially issued to clients of
Gutzwiller & Partner, AG, now known as Rabo Investment Management Ltd. (the
"Manager"), were outstanding in an aggregate principal amount of approximately
$7,315,000. The outstanding debentures matured on August 14, 2004, and were
stated to be convertible into common stock at a conversion price of $0.50 per
share, bearing interest at 1% per annum, payable annually. Shares issuable upon
conversion were also subject to certain rights to registration under the
Securities Act of 1933, as amended. In a filing with the Securities and Exchange
Commission dated November 29, 2004, the Manager indicated that it terminated its
business activities on December 31, 2002 and, as part of that process,
distributed to its clients GKI debentures in the aggregate principal amount of
$7,300,000, which the Manager held on behalf of such clients.
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
principal amount of the Company's 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 in the accompanying financial statements.
The Company's cash flow, capital resources, and overall financial condition will
not be sufficient to repay or refinance in full the approximately $7,315,000
principal amount of outstanding debentures which matured on August 14, 2004. At
present, the Company is in discussions 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 consider
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.
16
Analysis of Cash Flows
Operating activities used $140,300 in cash in fiscal 2005. This reflects a net
income of $1,308,700, cash generated from working capital items of $79,200 and
offset by $1,504,800 in net non-cash income and expenses. The cash generated
from changes in working capital items includes a decrease in accounts receivable
of $235,800, an increase in accounts payable of $ 97,100, an increase in accrued
expenses and other payables of $216,200. Cash used in working capital items
include an increase in inventories of $398,300 and an increase in other assets
of $50,100.
Investing activities used $219,400 in fiscal 2005. These activities consisted of
acquiring property and equipment totaling $219,400 of which $160,900 was
equipment acquired under a capital lease.
Financing activities used $8,800 in fiscal 2005. These activities consisted
principally of the factoring of accounts receivable, which used $64,800, and
borrowings under capital leases, which provided $101,600.
Contractual Obligations and Commercial Commitments
The Company's commitments through May 31, 2009 and thereafter are comprised of
the following at May 31, 2005 (in thousands):
-------------------------------------------------------------------------------
Through May 31,
-------------------------------------------------------------------------------
2006 2007 2008 2009+ Total
-------------------------------------------------------------------------------
Convertible debentures $7,315 $0 $0 $0 $7,315
-------------------------------------------------------------------------------
Interest on debentures 234 0 0 0 234
-------------------------------------------------------------------------------
Other notes payable 40 0 0 0 40
-------------------------------------------------------------------------------
Capital leases 60 45 34 24 163
-------------------------------------------------------------------------------
Operating leases 210 206 181 181 778
-------------------------------------------------------------------------------
Total $7,859 $251 $215 $205 $8,530
-------------------------------------------------------------------------------
Amounts shown as convertible debentures as of 2006 include principal and accrued
interest due, as of May 31, 2005.
The Company has closed its Manassas, Virginia offices and consolidated into its
Johnstown facility in order to decrease operating expenses and provide greater
fiscal oversight of operations. The decision to close this office was made in
June of 2005, and executed in August of 2005. The lease term on the Manassas
office extends through the year 2007, and efforts are being made by the Company
to sublease the space. The landlord is also taking steps to lease the available
space. This office closure is not expected to adversely affect the Company, but
conversely allow management better oversight, and decrease overhead costs
significantly. Obligations under this lease are included in the table above.
Inflation
The Company believes the effects of inflation currently do not have a material
impact on its operations, financial position, or cash flows.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in the
notes to the financial statements. The preparation of financial statements in
conformity with generally accepted accounting principles in
17
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.
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, which would be material to the Company's financial
position or its results of operations. At May 31, 2005, the Company had an
allowance for doubtful accounts of $20,000.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share Based
Payment (revised 2004)," which is a revision of Statement 123. Generally, the
approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all share based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their grant date fair values. Pro forma disclosure is no longer an
alternative. As permitted by SFAS 123, the Company currently accounts for share
based payments to employees using the intrinsic value method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and, as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method may
have a significant impact on the Company's results of operations, as the Company
will be required to recognize the cost of employee services received in exchange
for awards of equity instruments based on the grant date fair value of those
awards. The impact of adoption of SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
In April 2005, the Securities and Exchange Commission delayed the effective date
of SFAS 123(R), which is now
18
effective for public companies for annual, rather than interim, periods that
begin after June 15, 2005. The Company is currently evaluating the impact on its
financial statements upon the adoption of SFAS 123(R).
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) by requiring these items to be
recognized as current period charges. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005, with earlier
application permitted. The Company does not believe the adoption of SFAS No. 151
will have a material impact on its results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," which requires a nonmonetary exchange of assets be accounted for
at fair value, recognizing any gain or loss, if the exchange meets a commercial
substance criterion and fair value is determinable. The commercial substance
criterion is assessed by comparing the entity's expected cash flows immediately
before and after the exchange. This eliminates the "similar productive assets
exception," which accounts for the exchange of assets at book value with no
recognition of gain or loss. SFAS No. 153 will be effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company does not believe the adoption of SFAS No. 153 will have a material
impact on its financial statements.
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 a
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.
19
ITEM 7A - 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 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
20
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
General Kinetics Incorporated
Johnstown, Pennsylvania
We have audited the accompanying balance sheets of General Kinetics Incorporated
as of May 31, 2005 and 2004 and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the three years in
the period ended May 31, 2005. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Kinetics
Incorporated at May 31, 2005 and 2004, and the results of its operations and its
cash flows for each of the three years in the period ended May 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has sustained significant
losses in years prior to 2005, has significant short-term cash commitments and
funding is limited to cash flow from operations and loans collateralized by
certain accounts receivable. Also, the Company has $7.3 million of convertible
debentures that matured in August 2004 that remain outstanding and that the
Company does not have resources to satisfy. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Bethesda, Maryland
July 29, 2005
21
General Kinetics Incorporated
Balance Sheets
At May 31, 2005 and 2004
May 31, May 31,
2005 2004
------------- ------------
Assets
------
Current Assets:
Cash and cash equivalents $ 301,500 $ 670,000
Marketable securities - trading 68,700 48,100
Accounts receivable, net of allowance of $20,000 531,900 764,800
Inventories, net 1,072,800 677,600
Prepaid expenses and other 53,100 31,600
------------ ------------
Total Current Assets 2,028,000 2,192,100
------------ ------------
Property, Plant and Equipment 2,285,400 2,066,000
Less: Accumulated Depreciation and Amortization (1,989,700) (1,903,700)
------------ ------------
295,700 162,300
Other Assets 100,600 50,500
------------ ------------
Total Assets $ 2,424,300 $ 2,404,900
============ ============
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Advances from Factor $ 149,400 $ 214,200
Current maturities of long-term debt 7,315,000 8,819,900
Current maturities of capital lease 60,000 22,200
Accounts payable, trade 669,500 572,400
Accrued expenses and other payables 741,600 568,700
Deferred gain on sale of building 104,100 104,100
------------ ------------
Total Current Liabilities 9,039,600 10,301,500
------------ ------------
Long-Term Liabilities:
Capital lease - less current maturities 102,500 38,700
Other long-term liabilities 253,600 240,700
Deferred gain on sale of building 312,200 416,300
------------ ------------
Total Long-Term Liabilities 668,300 695,700
------------ ------------
Total Liabilities 9,707,900 10,997,200
------------ ------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 shares
authorized, 7,645,557 shares issued, 7,118,925 shares
outstanding 1,911,500 1,911,500
Additional Contributed Capital 7,337,300 7,337,300
Accumulated Deficit (16,082,200) (17,390,900)
------------ ------------
(6,833,400) (8,142,100)
Less:
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (7,283,600) (8,592,300)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 2,424,300 $ 2,404,900
============ ============
The accompanying notes are an integral part of the financial statements.
22
General Kinetics Incorporated
Statements of Operations
For the Years Ended May 31, 2005, 2004 and 2003
2005 2004 2003
----------- ----------- ----------
Net sales $ 8,511,400 $ 6,357,900 $ 6,377,100
Cost of sales (7,140,500) (5,520,800) (5,106,900)
----------- ----------- -----------
Gross Profit 1,370,900 837,100 1,270,200
----------- ----------- -----------
Selling, general & administrative 1,419,000 1,150,200 1,202,900
Product research, development & improvement -- 700 3,500
----------- ----------- -----------
Total operating expenses 1,419,000 1,150,900 1,206,400
----------- ----------- -----------
Operating Income/ (Loss) (48,100) (313,800) 63,800
Other income (expense):
Interest expense (148,000) (213,500) (195,200)
Gain on settlement of debt 1,504,800
----------- ----------- -----------
Total Other Income (Expense) 1,356,800 (213,500) (195,200)
----------- ----------- -----------
Net Income (Loss) $ 1,308,700 $ (527,300) $ (131,400)
=========== =========== ===========
Earnings per common share:
Basic net income (loss )per share $0.18 ($0.07) ($0.02)
Diluted net income (loss )per share $0.18 ($0.07) ($0.02)
Weighted average number of common shares
Outstanding:
Basic 7,118,925 7,118,925 6,898,651
Diluted 7,203,925 7,118,925 6,898,651
The accompanying notes are an integral part of the financial statements.
23
General Kinetics Incorporated
Statements of Cash Flows
For the Years Ended May 31, 2005, 2004 and 2003
2005 2004 2003
----------- ------------ ------------
Cash Flows From Operating Activities:
Net Income (Loss) $ 1,308,700 $ (527,300) $ (131,400)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Gain on sale of building (104,100) (23,400)
Unrealized (gain) loss on marketable equity securities (20,600) (11,700) 1,000
Depreciation and amortization 86,000 101,700 147,600
Amortization of bond discount 15,100 60,500 61,500
Gain from the retirement of debt (1,504,800) -- --
Provision for doubtful accounts (2,900) -- (48,000)
Provision for inventory obsolescence (3,100) -- 155,800
(Increase) Decrease in Assets:
Accounts receivable 235,800 (243,200) 398,500
Inventories (398,300) 51,300 21,600
Prepaid expenses (21,500) 9,600 15,600
Other assets (50,100) (39,400) 48,300
Increase (Decrease) in Liabilities:
Accounts payable - trade 97,100 206,100 (399,600)
Accrued expenses and other payables 203,300 165,300 (174,100)
Other long term liabilities 12,900 (9,200) (8,500)
----------- ----------- -----------
Net cash (used in) provided by Operating Activites (140,300) (259,700) 88,300
----------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (219,400) (17,500) (49,900)
Proceeds from sale of building -- 1,000,000 --
----------- ----------- -----------
Net cash provided by (used in) Investing Activities (219,400) 982,500 (49,900)
----------- ----------- -----------
Cash Flows from Financing Activities:
Advances from factor/borrowings on demand notes payable 3,181,900 1,991,500 553,000
Repayments of advances from factor/demand notes payable (3,246,700) (1,777,300) (553,000)
Principal payments under capital lease (59,300) (20,500) (19,100)
Borrowings under capital lease 160,900 -- --
Repayments on long term debt (45,600) (360,500) (90,400)
----------- ----------- -----------
Net cash used in Financing Activities (8,800) (166,800) (109,500)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (368,500) 556,000 (71,100)
Cash and Cash Equivalents: Beginning of Period 670,000 114,000 185,100
----------- ----------- -----------
Cash and Cash Equivalents: End of Period 301,500 670,000 114,000
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 52,000 $ 10,000 $ 195,200
Income taxes $ 1,230 $ 1,700 $ 800
Non-cash investing and financing activities:
Assets acquired under capital lease $ 160,900 $ -- $ --
Conversion of long-term debt (net of unamoritized discount) $ -- $ -- $ 197,900
The accompanying notes are an integral part of the financial statements.
24
General Kinetics Incorporated
Statements of Stockholders Deficit
For the Years Ended May 31, 2005, 2004 and 2003
Additional
Common Stock Contributed Accumulated
Shares Amount Capital Deficit
------ ------ ----------- -----------
Balance 5/31/02 7,245,557 1,811,500 7,239,400 (16,732,200)
Converted Debentures 400,000 100,000 97,900
Net Loss (131,400)
------------ ------------ ------------ ------------
Balance 5/31/03 7,645,557 $ 1,911,500 $ 7,337,300 $(16,863,600)
============ ============ ============ ============
Net Loss (527,300)
------------ ------------ ------------ ------------
Balance 5/31/04 7,645,557 $ 1,911,500 $ 7,337,300 $(17,390,900)
============ ============ ============ ============
Net Income (Loss) 1,308,700
------------ ------------ ------------ ------------
Balance 5/31/05 7,645,557 $ 1,911,500 $ 7,337,300 $(16,082,200)
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
25
GENERAL KINETICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The Company's significant accounting policies are described below.
NATURE OF BUSINESS:
General
The Company designs and manufactures high-quality precision enclosures for
sophisticated electronic systems. The Company is a manufacturing and engineering
services company which produces build-to-print as well as custom engineered
products. The Company has manufactured electronics-ready enclosures and mounting
systems for over 40 years. Products include both standard and made-to-order
racks, cabinets and kits. These products are precision-manufactured to enclose
and protect sensitive electronic communication and detection equipment from
shock and vibration. The principal customer for these products is the U.S.
Department of Defense which, directly or indirectly through its prime
contractors, accounted for 99%, 99%, and 93% of the Company's revenues in the
fiscal years 2005, 2004 and 2003, respectively. The Company sells these products
as a prime contractor and as a subcontractor to major prime contractors such as
Lockheed Martin, Raytheon, SAIC, Northrop Grumman, and DRS Laurel Technologies.
Research and Development
The Company expects research and development activities to total less than
$50,000 during fiscal 2006. No material research and development expenses were
incurred in fiscal 2005, 2004 or 2003.
The U.S. Government Procurement Process
The majority of the Company's fiscal 2005 revenue was generated from sales
directly to departments and agencies of the U.S. Government, and to prime
contractors reselling to the U.S. Government market, principally to the U.S.
Department of Defense. Revenue from these sales represented approximately 99% of
the Company's total revenue in fiscal 2005. The Company sells to the U.S.
Government through a wide variety of contract procurement mechanisms that
include formal solicitations and requests for quotes. The Company's sales to
U.S. Government prime contractors are typically made through contracts secured
by formal competitive bidding.
The Company's U.S. Government contracts and, in general, its subcontracts with
the U.S. Government's prime contractors, provide that such contracts may be
terminated by the U.S. Government or prime contractor for convenience at any
time. The Company estimates that substantially all of the Company's fiscal 2006
revenue will be derived from contracts that are subject to termination for
convenience. In the event of such a termination, the Company is normally
entitled to receive the purchase price for delivered items, reimbursement for
allowable costs for work in process,
26
and an allowance for profit thereon or adjustment for loss if completion of
performance would have resulted in a loss. There were no terminations for
convenience in fiscal 2005, 2004, or 2003. Upon termination of a U.S. Government
contract for contractor default, the U.S. Government may seek to recover from
the defaulting contractor the increased costs of procuring the specified goods
and services from a different contractor. The U.S. Government to date has not
terminated for default of any contract awarded to the Company.
In connection with its efforts to compete for U.S. Government business, the
Company has enjoyed certain statutory advantages because of its size, location
and the American-made character of its products. Such advantages may not be
available to the Company in the future. Although the Company believes that it
will continue to qualify under these statutory provisions for the foreseeable
future, the Company does not believe that the loss of such status would be
likely to have a material adverse effect upon the Company.
The Company's sales to the U.S. Government are subject to numerous other factors
beyond the Company's control that generally apply to other U.S. Government
contractors, including fluctuations and delays resulting from the appropriations
process, the outcome of competition for contracts, and reductions in levels of
military and other agencies' spending.
Employees and Labor Agreements
As of May 31, 2005, the Company had 86 employees, all located in the United
States. At that date, on a Company-wide basis, there were 26 employees in an
executive, finance, engineering, sales, marketing and administration capacity,
and 60 employees in manufacturing, assembly and operations. Sixty of the
Company's employees are represented by the International Brotherhood of
Electrical Workers Union (the "Union") in Johnstown, Pennsylvania. The Company
and the Union are working under a three-year collective bargaining agreement
that will expire on May 31, 2007. The Company considers its employee relations
to be good.
Environmental Matters
The Company uses limited amounts of hazardous materials in its production
process, primarily in the treatment of metal components. All such materials are
disposed of by independent certified carriers. The Company believes it operates
its facilities in compliance, in all material respects, with all existing
federal, state and local environmental regulations.
Pursuant to the requirements of applicable federal, state, and local statutes
and regulations, the Company believes it has received all of the environmental
permits and approvals necessary for the operations of its facilities.
Cash and Cash Equivalents
The Company classifies all temporary investments purchased with a maturity of
less than three months as cash equivalents.
27
Revenue Recognition and Profit Determination
Revenues, sales, and cost of sales on fixed-price contracts are generally
recorded when units are delivered based on the profit rate anticipated on the
contracts at completion. The Company's contracts are primarily fixed price.
Sales and cost of sales from cost reimbursable and time-and-materials contracts
are recognized as costs are incurred. Profits expected to be realized on
contracts are based on total sales value and estimated costs at completion.
These estimates are reviewed and revised periodically throughout the lives of
the contracts and adjustments to profits resulting from such revisions are made
cumulative to the date of change. Amounts in excess of the agreed-upon contract
price for customer caused delays, errors, and change orders are recognized in
contract value if it is probable that the claim will result in additional
revenue and the amount can be reasonably estimated. Losses on contracts are
recorded in full as soon as they become known.
Marketable Securities
The Company has classified its marketable equity securities as trading.
Investments in equity securities with readily determinable fair values are
reported at fair value, with gains and losses reported in the statements of
operations.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms. They
consist primarily of amounts due from the sale of products. Senior management
reviews accounts receivable on a monthly basis to determine if any receivables
will be potentially uncollectible. Any accounts receivable balances that are
determined to be uncollectible, along with a general reserve, are included in
the overall allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Management believes the allowance for doubtful accounts as of May 31, 2005 and
2004 is adequate. However, write-offs might exceed the recorded allowance.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market (net realizable value).
Property, Plant, and Equipment
Property, plant and equipment are recorded at cost. The Company provides for
depreciation and amortization on a straight-line basis for machinery, equipment,
furniture, fixtures, and for all other assets over the following estimated
useful lives:
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Transportation equipment and other 3 years
28
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the remaining term of the lease.
Expenditures for maintenance and repairs are charged against income as incurred;
betterments, which increase the value or materially extend the life of the
asset, are capitalized. When assets are sold or retired, the cost and
accumulated depreciation are removed from the accounts, and any gain or loss is
included in income.
In accordance with SFAS 144, the Company periodically evaluates the carrying
value of long-lived assets when events and circumstances warrant such a review.
The carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately identifiable
and is less than the carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Product Research, Development and Improvements
Costs associated with product research, development and improvements are
expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method,
which requires that deferred tax assets and liabilities be, recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The recognition of net deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits that, based
on available evidence, are not expected to be realized. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income tax expense in the period that includes the enactment date.
Basic and Diluted Earnings Per Share
Earnings per share are based on the weighted average number of shares of common
stock and dilutive common stock equivalents outstanding. Basic earnings per
share include no dilution and are computed by dividing net income (loss) 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 of an entity. Common stock equivalents consist of convertible
debentures (see Note 8) and stock options (see Note 12). For 2005, 85,000
options were included in the diluted net income per share calculation; their
impact was insignificant. Basic and diluted earnings per share were the same in
fiscal 2004 and 2003 because the impact of dilutive securities would have been
anti-dilutive or insignificant.
Stock Options
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" and SFAS No. 148, "Accounting for
29
Stock-Based Compensation - Transition and Disclosure", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock plans.
If the Company had elected to recognize compensation expense based on the fair
value at the grant dates consistent with the method prescribed by SFAS 123, net
gain (loss) and gain (loss) per share would have been changed to the pro forma
amounts indicated below:
---------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------------------------------
Net Income (Loss):
---------------------------------------------------------------------------------------------
As reported $1,308,700 $(527,300) $(131,400)
--------------------------------------------------------------------------------------------
Stock based compensation
--------------------------------------------------------------------------------------------
Expense determined under fair value based -0- (600) (1,000)
method
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Pro Forma Net Income (Loss) $1,308,700 $(527,900) $(132,400)
--------------------------------------------------------------------------------------------
Basic and Diluted Income (Loss) per share:
--------------------------------------------------------------------------------------------
As reported $ .18 $ (.07) $ (.02)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Pro forma $ .18 $ (.07) $ (.02)
---------------------------------------------------------------------------------------------
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain estimates used by
management are particularly susceptible to significant changes in the economic
environment. These include estimates of inventory obsolescence, valuation
allowances for trade receivables and deferred tax assets. Each of these
estimates, as well as the related amounts reported in the financial statements,
are sensitive to near term changes in the factors used to determine them. A
significant change in any one of those factors could result in the determination
of amounts different from those reported in the financial statements. Management
believes that, as of May 31, 2005, the estimates used in the financial
statements are adequate based on the information currently available.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share Based
Payment, (revised 2004)," which is a revision of Statement 123. Generally, the
approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all share based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their grant date fair values. Pro forma disclosure is no longer an
alternative. As permitted by SFAS 123, the
30
Company currently accounts for share based payments to employees using the
intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and, as such, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123(R)'s fair value method may have a significant impact on the
Company's results of operations, as the Company will be required to recognize
the cost of employee services received in exchange for awards of equity
instruments based on the grant date fair value of those awards. The impact of
adoption of SFAS 123(R) cannot be predicted at this time because it will depend
on levels of share-based payments granted in the future. In April 2005, the
Securities and Exchange Commission delayed the effective date of SFAS 123(R),
which is now effective for public companies for annual, rather than interim,
periods that begin after June 15, 2005. The Company is currently evaluating the
impact on its financial statements upon the adoption of SFAS 123(R).
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) by requiring these items to be
recognized as current period charges. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005, with earlier
application permitted. The Company does not believe the adoption of SFAS No. 151
will have a material impact on its results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions" , which requires a nonmonetary exchange of assets be accounted for
at fair value, recognizing any gain or loss, if the exchange meets a commercial
substance criterion and fair value is determinable. The commercial substance
criterion is assessed by comparing the entity's expected cash flows immediately
before and after the exchange. This eliminates the "similar productive assets
exception," which accounts for the exchange of assets at book value with no
recognition of gain or loss. SFAS No. 153 will be effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company does not believe the adoption of SFAS No. 153 will have a material
impact on its financial statements.
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 a
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
31
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.
2. FUTURE PROSPECTS AND RECENT OPERATIONS:
General Kinetics Incorporated (the "Company" or "GKI") relies upon internally
generated funds and accounts receivable factoring to finance its operations.
During fiscal years 2005 and 2004, the Company incurred a net gain of
approximately $1,308,700 and a 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 fiscal 2006.
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 fiscal 2006.
The Company has received significant new orders during the last several months
of fiscal 2005, and the shippable backlog at May 31, 2005 is $3.5 million as
compared to $2.5 million at May 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 May 31, 2005, the Company had cash and marketable securities totaling
$370,200. 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 cash requirements 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.
32
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 last three fiscal years, 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. These losses and
commitments, and the maturity of the Company's convertible debentures, which
were due in August 2004 as described below, 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.
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 2006 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 May 31, 2005, there was $149,400 of outstanding advances due to Key.
The Company had $669,500 in trade accounts payable to creditors at May 31,
2005, which amount included the $149,400 of outstanding advances due to Key.
At May 31, 2005, convertible debentures, initially issued to clients of
Gutzwiller & Partner, AG, now known as Rabo Investment Management Ltd., (the
"Manager"), were outstanding in an aggregate principal amount of approximately
$7,315,000. The outstanding debentures matured on August 14, 2004, and were
stated to be convertible into common stock at a conversion price of $0.50 per
share, bearing interest at 1% per annum, payable annually. Shares issuable upon
conversion were also subject to certain rights to registration under the
Securities Act of 1933, as amended. In a filing with the Securities and Exchange
Commission dated November 29, 2004, the Manager indicated that it terminated its
business activities on December 31, 2002 and, as part of that process,
distributed to its clients GKI debentures in the aggregate principal amount of
$7,300,000, which the Manager held on behalf of such clients.
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
33
fiscal 2005 and $158,400 during the third quarter of fiscal 2005 in the
accompanying financial statements.
The Company's cash flow, capital resources, and overall financial condition will
not be sufficient to repay or refinance in full the approximately $7,315,000
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 consider
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.
3. RELATED PARTY TRANSACTIONS
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.
4. CREDIT RISK
For the years ended May 31, 2005, 2004, and 2003, the Company's net sales to the
U.S. government and/or subcontractors accounted for 99%, 99%, and 93%,
respectively, of net sales. Accounts receivable from those customers amounted to
$0.53 million and $0.76 million as of May 31, 2005 and 2004, respectively. A
substantial portion of the Company's sales are to the U.S. government and/or
subcontractors, and consequently a material decline in Department of Defense
spending could have a material adverse effect on the operations of the Company.
Competition in the Company's electronic enclosure business is intense as it
primarily operates in a mature industry. The Company's uncollectible receivables
have historically not been material.
The Company has a cash balance with a bank in excess of the federally insured
limit. The Company minimizes the risk by placing these funds with high-quality
financial institutions.
5. INVENTORIES
Inventories consist of the following:
--------------------------------------------------------------------------------
May 31,
--------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------
Work in process $952,100 $536,600
--------------------------------------------------------------------------------
Finished goods 23,100 21,400
--------------------------------------------------------------------------------
Raw materials 399,300 418,200
--------------------------------------------------------------------------------
Valuation reserve (301,700) (298,600)
--------------------------------------------------------------------------------
Total $1,072,800 $677,600
--------------------------------------------------------------------------------
34
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.
6. PROPERTY, PLANT AND EQUIPMENT:
Major classes of property, plant and equipment consist of the following at May
31:
2005 2004
---- ----
Machinery and equipment $1,342,900 $1,312,300
Equipment under capital lease 288,000 108,100
Buildings and improvements -0- 7,100
Furniture and fixtures 613,900 579,000
Transportation equipment and other 40,600 59,500
--------- ---------
Total 2,285,400 2,066,000
Less-Accumulated depreciation & amortization 1,989,700 1,903,700
--------- ---------
Net property, plant & equipment $295,700 $162,300
--------- ---------
Depreciation and amortization expense for the years ended May 31, 2005, 2004,
and 2003 was $86,000, $101,700, and $147,600 respectively. Included in
depreciation and amortization expense was $18,200 and $18,200 of amortization
expense in the years ended May 31, 2005 and May 31, 2004, respectively, related
to the assets under capital lease.
7. ACCRUED EXPENSES AND OTHER PAYABLES:
Accrued expenses and other payables consist of the following at May 31:
2005 2004
---- ----
Employee vacations $254,200 $248,200
Salaries and wages 140,100 87,500
Other 347,300 233,000
-------- --------
Total $741,600 $568,700
-------- --------
8. DEMAND NOTES PAYABLE AND LONG-TERM DEBT:
Demand notes payable and long-term debt consists of the following on May 31:
35
2005 2004
---- ----
1994 Convertible Subordinated Debentures $7,315,000 $8,835,000
Less:
Current maturities (7,315,000) (8,819,900)
Unamortized discount on debentures -0- (15,100)
Long-term debt -0- -0-
In connection with the restructuring of the debt in 1994, the Company recorded a
discount of approximately $646,000 representing the difference between the cash
proceeds and the face amount of the debt. The amount of discount amortization
was $15,100, $60,500, and $61,500 for the years ending May 31, 2005, 2004, and
2003, respectively.
The convertible debentures matured on August 14, 2004, were convertible into
common stock at a conversion price of $0.50 cents per share, and bore interest
at 1% per annum payable annually in arrears. The conversion feature of the
financing was approved by the Company's shareholders at an Annual Meeting of
Shareholders held in October 1994 through a motion to increase the number of
authorized shares of the Company. The convertible debentures are subject to the
terms of a Pledge and Security Agreement dated as of August 14, 1994 providing
for a security interest in substantially all the assets of the Company, with
certain exceptions (including, without limitation, exceptions for accounts
receivable and other financing), to secure the obligations in respect of the
convertible debentures. Shares issuable upon conversion of such convertible
debentures are also subject to certain rights to registration under the
Securities Act of 1933, as amended.
During fiscal 2003, a bondholder converted $200,000 face amount of convertible
debentures into 400,000 shares of the Company's common stock.
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. In a separate transaction
in January 2005, the Company purchased $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.
In March 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.
Other Real Estate Mortgage Loans
On May 19, 2004 the Company sold its single-story manufacturing facility in
Johnstown, Pennsylvania to James F. Hargreaves and Carl Vulcan, Trustees of Fund
A Under the Last Will and Testament of Paul J. Petrovich, Deceased (the
"Buyer"), in a sale-leaseback transaction. The Buyer has no material
36
relationship to the Company or any of its affiliates, any director or officer of
the Company or any associate of any such director or officer.
The property consists of the building, fixtures and other improvements
constructed thereon, including but not limited to approximately 56,000 square
feet of manufacturing facilities and office space and approximately 10 acres of
land. The total sale price of the property was $1,000,000. After payment of the
mortgage on the property and other expenses incurred in connection with the
sale, the net proceeds to the Company were approximately $692,000. The amount of
consideration paid was determined in arms-length negotiations between the
parties. The Company recognized a deferred gain of $543,800 on the sale of the
property. The deferred gain is being recognized over the term of the leaseback,
$23,400 was recognized during fiscal 2004 and $104,082 was recognized during
fiscal 2005.
The Company's lease for the manufacturing facility commenced on June 1, 2004 and
will end on May 31, 2009. The current annual base rent payable under the lease
is approximately $180,000. The Company has the right, at its option, to extend
the initial term of its lease for two additional five-year periods at a base
rent to be negotiated, but not more than 10% over the base rent charged during
the previous term. The Buyer, as property owner, is responsible for the
maintenance and repair of the roof, plumbing, electrical, heating and air
conditioning, exterior walls, doors, windows, corridors and other common areas
of the manufacturing facility.
9. INCOME TAXES:
Due to the net losses in fiscal 2004 and 2003 and the available net operating
loss carry forwards, there was no income tax expense for fiscal 2005, 2004, or
2003, nor were any additional income tax benefits available from the carry back
of net operating losses. Under Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The Company has
provided a full valuation allowance against its net deferred tax assets due to
uncertainties of its ultimate realization. If the Company achieves profitable
operations, it may be subject to alternative minimum taxes, which has a lower
effective tax rate than the statutory rate of 34%. As of May 31, 2005, there are
no additional income tax benefits available from the carry back of net operating
losses.
The primary difference between income (loss) for financial reporting purposes
and income tax purposes is the recognition of allowances for uncollectible
accounts receivable and obsolete inventory, accrued professional fees, deferred
compensation, vacation accruals, and research and development expenses, which
are currently non-deductible for income tax purposes.
Principal items comprising deferred income tax assets and liabilities, at May
31, 2005 and 2004 are as follows:
37
2005 2004
---- ----
Net operating loss carry forward $ 3,735,000 $ 4,591,000
Deferred gain 115,000 173,000
R & D and other credit carry forwards - 380,000
Purchased R & D costs 29,000 42,000
Inventory reserves 104,000 114,000
Allowance for doubtful accounts 8,000 9,000
Excess financial statement depreciation (60,000) (72,000)
Accrued vacations 89,000 94,000
Uniform Capitalization Adjustment 10,000 3,000
Accrued professional fees - 2,000
Deferred compensation 83,000 91,000
Non-deductible interest on bonds 82,000 -
----------- -----------
Total deferred tax assets 4,195,000 5,427,000
Valuation allowance (4,195,000) (5,427,000)
Net deferred tax asset $ - $ -
============ ===========
A valuation allowance is provided as management has determined that it is more
likely than not that the deferred tax assets will not be realized.
As of May 31, 2005, the Company has net operating loss carry forwards for
Federal and state income tax reporting purposes of approximately $10,643,049,
which expire at various dates through 2025. The Company has research and
development and other credit carry forwards for Federal income tax reporting
purposes of approximately $380,000.
10. COMMITMENTS:
Leases:
The Company maintained its executive offices in a leased facility in Northern
Virginia that was vacated on August 31, 2005. The executive offices were
consolidated into the Johnstown facility.
At May 31, 2005, approximate future minimum rental commitments for all
non-cancelable operating leases including the leaseback of the manufacturing
facility referred to in note 8 are as follows:
--------------------------------------------------------
Year Ending May 31,
--------------------------------------------------------
2006 $210,000
--------------------------------------------------------
2007 205,000
--------------------------------------------------------
2008 181,000
--------------------------------------------------------
2009+ 180,000
--------------------------------------------------------
Total $776,000
--------------------------------------------------------
Amounts charged to operations for rent expense amounted to $102,000 and $26,300
for the years ended May 31, 2005 and 2004, respectively. The 2004 amount was net
of annual sublease income of approximately $57,900.
38
Future minimum payments under the capital equipment lease are as follows at May
31, 2005:
-------------------------------------------------------------------------------
Year Ending May 31,
-------------------------------------------------------------------------------
2006 $60,000
-------------------------------------------------------------------------------
2007 49,000
-------------------------------------------------------------------------------
2008 34,000
-------------------------------------------------------------------------------
2009+ 40,000
-------------------------------------------------------------------------------
Total future minimum lease payments $183,000
-------------------------------------------------------------------------------
Less amount representing interest at 7.5% (20,500)
-------------------------------------------------------------------------------
Present value of future minimum lease payments 162,500
-------------------------------------------------------------------------------
Current portion 60,000
-------------------------------------------------------------------------------
Non-current portion 102,500
-------------------------------------------------------------------------------
11. RETIREMENT PLANS:
The Company has the following retirement plans at May 31, 2005:
Defined Contribution Plans
In 2000, the Company adopted a 401(k) plan covering its union employees. The
Company makes matching contributions of up to 5% of each individual union
employee's pretax salary deferral. The 401(k) replaced a defined contribution
plan in effect prior to August 2000. Total related pension expense was
approximately $74,100 $61,400, and $59,600 in fiscal 2005, 2004 and 2003,
respectively.
In addition, the Company has a 401(k) plan covering its non-union employees.
Participants can make pretax salary deferrals up to certain limitations. Company
contributions are discretionary. Total related expenses were approximately
$12,200, $21,000, and $14,100 for fiscal years 2005, 2004 and 2003,
respectively.
Employee Stock Ownership Plan and Trust Agreement
The Company has a noncontributory, qualified Employee Stock Ownership Plan (the
"ESOP") covering its non-union, full-time employees, who are at least 21 years
of age. On April 19, 1991, the Company funded the ESOP through a borrowing with
its principal bank for $1,500,000. The ESOP used the proceeds of a $1,500,000
loan from the Company to purchase approximately 171,500 newly issued common
shares of the Company. The shares are shown as outstanding in the consolidated
balance sheet. These shares were earned and allocated to eligible employees over
a five-year period. As of May 31, 1997, all of the shares were earned and
allocated.
Deferred Compensation Retirement Plan
The Company has an unfunded deferred compensation plan under which it is
committed to provide two retired officers and one surviving spouse of a retired
officer with joint and survivor's lifetime annuity payments, beginning upon
retirement at age 65. The lifetime annuity provides the retired officer with an
annual stipend of 16 percent of base salary at the time of retirement. Upon the
officer's death, a surviving spouse is
39
entitled to receive one-half such stipend for such spouse's lifetime. The
Company provides, on an annual basis, for anticipated payments under this plan,
using a discount rate of 5 percent and the most recent life expectancy of each
individual covered.
Compensation related to this plan totaled approximately $38,400, $38,400, and
$38,400, in fiscal 2005, 2004 and 2003, respectively. As of May 31, 2005, 2004
and 2003, deferred compensation recorded in the consolidated balance sheets was
$ $253,600, $240,700, and $249,900, respectively, and was all attributable to
retirees currently receiving benefits.
12. STOCK OPTIONS:
The Company has two incentive stock option plans under which stock options may
be granted. The Company has reserved an aggregate of 1,950,000 common shares for
issuance under these plans. Both plans have a ten-year life, and options under
both plans are granted at the fair market value on the date of grant. Options
vest 50% upon grant and 50% after one year, unless otherwise stated. Canceled
options become available for new grants upon cancellation.
The 1994 Stock Option Plan was approved by stockholders on October 28, 1994.
Under the 1994 Stock Option Plan, 525,000 options were available for grant
through October 28, 2004, with no more than 225,000 options granted in any one
fiscal year.
The 1994 Non-employee and Directors Stock Option Plan was adopted by the Company
on October 28, 1994. This plan provides for grants to non-employees (consultants
and advisors) and to non-employee directors of options to purchase up to 850,000
shares of the Company's common stock. During 1995, the Company issued 325,000
incentive stock options to non-employees and directors under this plan. These
incentive options become vested based on the increase of the Company stock price
over the average stock price during the base period from March 8, 1994 through
October 27, 1994. Vesting begins when the stock price reaches 300% of the base
period price and the options become fully vested when the stock price reaches
600% of the base period price. This stock option arrangement is accounted for as
a variable plan and accordingly the measurement date for compensation expense is
delayed until the Company's stock price meets the initial target price. The
Company recorded no compensation expenses from 2003 through 2005, and no options
have yet vested. The option plan has expired and as of May 31 2005, no new
option plan has been adopted. In addition, 525,800 options that had been granted
under the plan have expired with out being exercised.
The summary of the option plans for the years ended May 31, is as follows:
--------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------
Options outstanding at beginning of period 888,277 870,777
--------------------------------------------------------------------------------
Granted -0- 17,500
--------------------------------------------------------------------------------
Exercised -0- -0-
--------------------------------------------------------------------------------
Expired (525,777) -0-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Options outstanding at end of period 362,500 888,277
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Price range of options granted -0- $0.02
--------------------------------------------------------------------------------
40
--------------------------------------------------------------------------------
Price range of options exercised -0- -0-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Exercise price range of outstanding options $0.02-$0.38 $0.02-$0.69
--------------------------------------------------------------------------------
The summary of stock options outstanding and exercisable as of May 31, 2005 is
as follows:
--------------------------------------------------------------------------------
Range of Number Weighted Weighted Weighted Weighted
Exercise Outstanding Average Average Average Average
Price Remaining Exercise Options Options
Life Price Exercisable Exercisable
Price
--------------------------------------------------------------------------------
$0.02-0.09 210,000 5 0.099 210,000 0.099
--------------------------------------------------------------------------------
$0.15-0.19 110,000 3 0.173 110,000 0.173
--------------------------------------------------------------------------------
$0.25-0.38 42,500 5 0.250 42,500 0.250
--------------------------------------------------------------------------------
The weighted average fair value of each option grant has been estimated as of
the date of the grant using the Black-Scholes option pricing model with the
following assumptions; Risk-free interest rate of 3.50%, 4.78%, and 5.02%, and
expected volatility of 114%, 115%, and 114%for the years ended May 31, 2004,
2003 and 2002, respectively, a dividend payment rate of zero for each year and
an expected option life of five years. Using these assumptions, the weighted
average fair value of the stock options granted is $.02, and $.02 for fiscal
2004, and 2003, respectively. There were no adjustments made in calculating the
fair value to account for vesting provisions or for non-transferability or risk
of forfeiture.
13. MARKET VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires all entities to disclose
the fair value of financial instruments; however, this information does not
represent the aggregate net fair value of the Company. Some of the information
used to determine fair value is subjective and judgmental in nature; therefore,
fair value estimates, especially for less marketable securities, may vary. The
amounts actually realized or paid upon settlement or maturity could be
significantly different.
Unless quoted market price indicates otherwise, the fair values of cash and cash
equivalents generally approximate market values because of the short maturity of
these instruments. The Company has estimated the fair value of bonds payable
based on the present value using interest rates of similar debt instruments.
The estimated fair values based on, among other things, a recent transaction, of
the Company's financial instruments, none of which are held for trading
purposes, are summarized as follows:
(In thousands)
May 31, 2005 May 31, 2004
------------ ------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Bonds Payable $7,315 $ 219 $ 8,795 $ 264
41
14. QUARTERLY FINANCIAL DATA (Un-audited)
Summarized quarterly financial data for fiscal 2005 and 2004 is as follows:
--------------------------------------------------------------------------------
Quarter
--------------------------------------------------------------------------------
Fiscal Year 2005 First Second Third Fourth
--------------------------------------------------------------------------------
Net Sales $1,721,700 $2,066,300 $2,433,500 $2,289,900
Gross Profit $ 309,100 $ 328,600 $ 383,200 $ 350,000
Net Gain (Loss) $ (76,200) $1,305,200 $ 137,600 $ (57,900)
Basic gain (loss) per
share $ (0.01) $ 0.17 $ 0.02 $ (0.00)
Diluted gain (loss) per
share $ (0.01) $ 0.17 $ 0.02 $ (0.00)
--------------------------------------------------------------------------------
Quarter
--------------------------------------------------------------------------------
Fiscal Year 2004 First Second Third Fourth
--------------------------------------------------------------------------------
Net Sales $1,622,700 $1,471,100 $1,247,400 $2,016,600
Gross Profit $ 324,800 $ 324,000 $ (3,400) $ 191,700
Net (Loss) $ (33,600) $ (10,800) $ (315,300) $ (167,600)
Basic gain (loss) per
share $ (0.00) $ (0.00) $ (0.04) $ (0.02)
Diluted gain (loss) per
share $ (0.00) $ (0.00) $ (0.04) $ (0.02)
In fiscal fourth quarter 2005 the discount rate for deferred compensaton was
changed from 10% to 5% causing an adjustment of $55,400.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
ITEM 9A - 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 fiscal 2005. 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 and the review of the Company's independent auditors,
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 fourth quarter of fiscal 2005 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 taking steps to seek to address such
weaknesses.
42
ITEM 9B - OTHER INFORMATION
None.
PART III
The information required by Part III (Items 10 through 14) is hereby
incorporated by reference from the Company's definitive proxy statement to be
filed with the Commission under Regulation 14A of the Securities Exchange Act of
1934 not later than 120 days after the end of the 2004 fiscal year or shall be
filed by amendment to this Form 10-K not later than such 120 day period.
PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
Included in Part II, Item 8 of this report:
Balance Sheets as of May 31, 2005 and 2004
Statements of Operations for the years ended May 31, 2005, 2004 and
2003
Statements of Stockholders' Deficit for the years ended May 31,
2005, 2004 and 2003
Statements of Cash Flows for the years ended May 31, 2005, 2004 and
2003
Notes to the Financial Statements
2. Financial Statement Schedule Included in Part IV of this report:
Financial Statements and Supplementary Data for the years ended May
31, 2005, 2004, and 2003:
Schedule II - Schedule of Valuation and Qualifying Accounts
3. Exhibits
43
Exhibit Number Description Note No.
-------------- ----------- --------
3.1 Articles of Incorporation (1)
3.2 Articles of Incorporation, as amended (6)
at the Annual Meeting of GKI
shareholders on November 19, 1991
3.3 Articles of Incorporation, as amended (14)
at the Annual Meeting of GKI
shareholders on October 28, 1994
3.4 By-Laws (1)
3.5 By-Laws, as amended at a Board of (6)
Directors meeting on September
24, 1992
3.6 By-Laws, as amended at a Board of (11)
Directors meeting on
March 2, 1994
3.7 By-Laws, as amended at a Board of (14)
Directors meeting on
January 19, 1995
3.8 By-Laws, as amended at a Board of (18)
Directors meeting on
January 24, 2003
4.1 Form of Convertible Subordinated (7)
Debentures Issued to Gutzwiller &
Partner, A.G., on December 14, 1992
with an effective date of October 20,
1992
4.2 Form of 4% Subordinated Debentures, (8)
Series A, due March 30, 1994
4.3 Form of 4% Subordinated Debentures, (8)
Series B, due March 30, 1995
4.4 Form of 4% Subordinated Debentures, (8)
Series C, due August 15, 1994
4.5 Form of Convertible Debentures Issued (12)
to Gutzwiller & Partner, A.G., dated
August 14, 1994.
4.6 Form of Pledge and Security Agreement (17)
dated as of August 14, 1994 with
respect to Convertible Debentures
10.1* 1988 Stock Option Plan (2)
10.2 Agreement and Plan of Merger and
Reorganization dated August 31, 1990 (1)
44
10.3* 1991 Executive Bonus Plan (4)
10.4* 1991 Stock Option Plan (3)
10.5* 1991 Non-employee and Directors Stock (3)
Option Plan
10.6* 401(k) Retirement, Investment & (6)
Savings Plan
10.7* 1989 Stock Option Plan (4)
10.8* 1990 Stock Option Plan (4)
10.9* 1994 Stock Option Plan (13)
10.10* 1994 Non-employee and Directors Stock (13)
Option Plan
10.11 Verdix Asset Purchase Agreement dated (9)
October 1, 1993
10.12 Amendment to Verdix Asset Purchase (10)
Agreement dated January 26, 1994
10.13 Asset Purchase Agreement between (16)
General Kinetics Incorporated and
Cryptek Secure Communications, LLC, a
Delaware limited liability company,
dated as of November 1, 1996
10.14 Agreement between GKI and Link2It, (15)
L.L.C. dated as of January 21, 1997
10.15 Form of Master Factoring Agreement (17)
between General Kinetics Incorporated
and Link2It Corporation, dated August
22, 2002.
10.16 Agreement for the Sale of Commercial (19)
Real Estate between General Kinetics,
Inc. and the Paul J. Petrovich Trust
dated April 13, 2004.
21.1 List of Subsidiaries (14)
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
45
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.
* Management contract, compensatory plan or arrangement
(1) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 1990, and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 1989, and incorporated herein by reference.
(3) Previously filed with Securities and Exchange Commission as an
Exhibit to the Company's Proxy Statement for the 1991 Annual
Shareholders' Meeting, and incorporated herein by reference.
(4) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 1991, and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Amendment No. 2 to the Annual Report on
Form 10-K for the year ended May 31, 1991, and incorporated herein
by reference.
(6) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 1992 and incorporated herein by reference.
(7) Previously filed with the Securities and Exchange
46
Commission as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended November 30, 1992 and incorporated herein
by reference.
(8) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 1993 and incorporated herein by reference.
(9) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1993 and incorporated herein by reference.
(10) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Current Report on Form 8-K dated February
9, 1994 and incorporated herein by reference.
(11) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Current Report on Form 8-K dated March 17,
1994 and incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 1994, and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Proxy Statement for the 1994 Annual
Shareholders' Meeting, and incorporated herein by reference.
(14) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 1995, and incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Current Report on Form 8-K dated December
20, 1996 and incorporated herein by reference (Formerly designated
Exhibit 2.1).
(16) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 1997 and incorporated herein by
reference.
(17) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 2003 and incorporated herein by reference.
(18) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28, 2003 and
incorporated herein by reference.
(19) Previously filed with the Securities and Exchange Commission as an
Exhibit to the Company's Annual Report on Form 10-K for the year
ended May 31, 2004 and incorporated herein by reference.
(d) Schedule
47
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
General Kinetics Incorporated
Johnstown, Pennsylvania
The audits referred to in our report, dated July 29, 2005, which includes an
explanatory paragraph related to substantial doubt about the Company's ability
to continue as a going concern, relating to the financial statements of General
Kinetics Incorporated, which is contained in Item 8 of this Form 10-K included
the audit of the financial statement schedule listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Bethesda, Maryland
July 29, 2005
48
General Kinetics Incorporated Schedule of Valuation and Qualifying Accounts
For the Years Ended May 31, 2005, 2004, and 2003
Balance at Charged to Charged to Balance at
Description beginning of costs and costs and end of
period expenses expenses Deductions Period
FOR THE YEAR ENDED MAY 31, 2005:
Inventory Reserve 298,600 3,100 0 0 301,700
Allowance for doubtful accounts 22,900 (2,900) 0 0 20,000
FOR THE YEAR ENDED MAY 31, 2004:
Inventory Reserve 298,600 0 0 0 298,600
Allowance for doubtful accounts 22,900 0 0 0 22,900
FOR THE YEAR ENDED MAY 31, 2003:
Inventory Reserve 142,800 155,800 0 0 298,600
Allowance for doubtful accounts 70,900 (48,000) 0 0 22,900
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 13, 2005
------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Larry M. Heimendinger 9/13/05 /s/ Franco DeBlasio 9/13/05
--------------------------------- ---------------------------
Larry M. Heimendinger, Date Franco DeBlasio, Date
Chairman of the Board Chief Financial Officer
(Principal Executive Officer) (Principal Accounting Officer and
Principal Financial Officer)
50
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and dates indicated.
/s/ Richard J. McConnell September 13, 2005
------------------------------ -------------------
Richard J. McConnell, Director Date
/s/ Thomas M. Hacala September 13, 2005
-------------------------- -------------------
Thomas M. Hacala, Director Date
/s/ Marc Cotnoir September 13, 2005
------------------------ -------------------
Marc Cotnoir, Director Date
51