##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For Quarter Ended August 31, 2003



Commission File Number 0-1738



GENERAL KINETICS INCORPORATED

(Exact
Name of Registrant as Specified in its Charter)



|Virginia                                                       |  | 54-0594435                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|10688-D Crestwood Drive, Manassas, VA    |  | 20109     
|---------------------------------------- |  | ----------
|(Address of Principal Executive Offices) |  | (Zip Code)



Registrants
Telephone Number, including Area Code 703-331-8033



Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No ̈



Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ̈No  x



The number of shares of Registrants Common Stock outstanding as of October 10, 2003    7,118,925 Shares



---



1



---

##### Table of Contents

INDEX



|                                                                                               |  | Page No.                                                                         
|---------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------
|Cautionary Statement                                                                           |  | 3                                                                                
|                                                                                               | 
|Part IFinancial Information                                                                   |  |                                                                                  
|                                                                                               | 
|Item 1  Financial Statements                                                                  |  |                                                                                  
|                                                                                               |  |                                                                                  
|                                                                                               |  | Balance Sheets  August 31, 2003 and May 31, 2003                                
|                                                                                               |  |                                                                                  
|                                                                                               |  | Statements of Operations  Three Months Ended August 31, 2003 and August 31, 2002
|                                                                                               |  |                                                                                  
|                                                                                               |  | Statements of Cash Flows  Three Months Ended August 31, 2003 and August 31, 2002
|                                                                                               |  |                                                                                  
|                                                                                               |  | Notes to Condensed Financial Statements                                          
|                                                                                               | 
|Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10                                                                               
|                                                                                               | 
|Item 3  Quantitative and Qualitative Disclosures About Market Risk                            |  | 15                                                                               
|                                                                                               | 
|Item 4  Controls and Procedures                                                               |  | 15                                                                               
|                                                                                               | 
|Part IIOther Information                                                                      |  |                                                                                  
|                                                                                               | 
|Item 6  Exhibits and Reports on Form 8-K                                                      |  | 17                                                                               



2



---

##### Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS



Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as
may, will, estimate, intend, continue, believe, expect or anticipate or the negatives thereof, variations thereon or similar terminology. The
forward-looking statements contained in this Quarterly Report are generally located in the material set forth under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations, but may be found
in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon managements reasonable estimates of future results or trends. Although the Company believes that the
plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved. Actual results may differ from projected results due, but not limited, to unforeseen developments,
including developments relating to the following:



| |  | the risk that the Company may not be able to obtain and complete sufficient new orders to maintain positive cash flow;
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | the risk that the Company may not maintain its present financing facility or obtain additional financing, if necessary, including the risk that it will not be able to repay or
refinance in full the approximately $8.8 million principal amount of its outstanding convertible debentures currently scheduled to mature in August 2004;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the risk that the Company may not be able to continue the necessary development of its operations, including maintaining or increasing sales and production levels, on a profitable
basis;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the risk the Company may in the future have to comply with more stringent environmental laws or regulations or more vigorous enforcement policies of regulatory agencies, and that
such compliance could require substantial expenditures by the Company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the risk that U.S. defense spending may be substantially reduced; and
| | - | ---------------------------------------------------------------------



| |  | the risk that the Companys Common Stock will not continue to be quoted on the NASD Over The Counter Bulletin Board.
| | - | --------------------------------------------------------------------------------------------------------------------



You should read this Quarterly Report completely and with the understanding that actual
future results may be materially different from what the Company expects. All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on the Companys behalf are expressly qualified in their
entirety by the foregoing factors. These forward-looking statements



3



---

##### Table of Contents

speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to
any forward-looking statement to reflect any change in the Companys expectations or any change in events, conditions or circumstances in which the forward-looking statement is based.



PART I FINANCIAL INFORMATION



Item 1  Financial Statements



The unaudited financial statements of General Kinetics Incorporated (GKI or the
Company) set forth below have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. Revenues, expenses, assets and liabilities vary during the year and generally accepted accounting principles require the
Company to make estimates and assumptions in preparing the interim financial statements. The Company has made its best effort in establishing good faith estimates and assumptions. However, actual results may differ. The Company believes that the
disclosures made are adequate to make the information presented not misleading.



In the opinion of management of the Company, the accompanying financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of results for the periods presented.
These financial statements should be read in conjunction with the audited financial statements for the fiscal years ended May 31, 2003 and 2002 set forth in the Companys annual report on Form 10-K, as amended, for the fiscal year ended May 31,
2003.



4



---

##### Table of Contents

General Kinetics Incorporated

Balance Sheets

August 31, 2003 and

May 31, 2003



|                                                                                                                   |  | August 31,2003 |             |   | May 31,2003 |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----------- | - | ----------- | -
|                                                                                                                   |  | (Unaudited)    |             |   | (Audited)   |  
|Assets                                                                                                             |  |                |             |   |             |  
|                                                                                                                   |  |               
|Current Assets:                                                                                                    |  |                |             |   |             |  
|Cash and cash equivalents                                                                                          |  | $              | 413,100     |   |             | $
|Marketable securities                                                                                              |  |                | 39,500      |   |             |  
|Accounts receivable, net of allowance of $22,900                                                                   |  |                | 571,400     |   |             |  
|Inventories, net                                                                                                   |  |                | 511,900     |   |             |  
|Prepaid expenses and other                                                                                         |  |                | 22,600      |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|Total Current Assets                                                                                               |  |                | 1,558,500   |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|Property, plant and equipment                                                                                      |  |                | 2,960,400   |   |             |  
|Less: Accumulated depreciation                                                                                     |  |                | (2,285,900  | ) |             |  
|                                                                                                                   |  |                |             |   |             |  
|                                                                                                                   |  |                | 674,500     |   |             |  
|Other Assets                                                                                                       |  |                | 20,600      |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|Total Assets                                                                                                       |  | $              | 2,253,600   |   |             | $
|                                                                                                                   |  |                |             |   |             |  
|                                                                                                                   |  |               
|Liablilities and Stockholders Deficit                                                                             |  |                |             |   |             |  
|                                                                                                                   |  |               
|Current Liabilities:                                                                                               |  |                |             |   |             |  
|Advances from Factor                                                                                               |  | $              | 52,300      |   |             | $
|Current maturities of long-term debt                                                                               |  |                | 8,872,100   |   |             |  
|Current maturities of capital lease                                                                                |  |                | 21,000      |   |             |  
|Accounts payable, trade                                                                                            |  |                | 426,000     |   |             |  
|Accrued expenses and other payables                                                                                |  |                | 445,600     |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|Total Current Liabilities                                                                                          |  |                | 9,817,000   |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|Long-Term Liablities:                                                                                              |  |                |             |   |             |  
|Long-term debtless current maturities                                                                             |  |                | 239,300     |   |             |  
|Capital leaseless current maturities                                                                              |  |                | 55,500      |   |             |  
|Other long-term liabilities                                                                                        |  |                | 240,300     |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|Total Long-Term Liabilities                                                                                        |  |                | 535,100     |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|Total Liabilities                                                                                                  |  |                | 10,352,100  |   |             |  
|                                                                                                                   |  |                |             |   |             |  
|                                                                                                                   |  |               
|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   |   |             |  
|Additional contributed capital                                                                                     |  |                | 7,337,300   |   |             |  
|Accumulated deficit                                                                                                |  |                | (16,897,100 | ) |             |  
|                                                                                                                   |  |                |             |   |             |  
|                                                                                                                   |  |                | (7,648,300  | ) |             |  
|Less: Treasury Stock, at cost (526,632 shares)                                                                     |  |                | (450,200    | ) |             |  
|                                                                                                                   |  |                |             |   |             |  
|Total Stockholders Deficit                                                                                        |  |                | (8,098,500  | ) |             |  
|                                                                                                                   |  |                |             |   |             |  
|Total Liabilities and Stockholders Deficit                                                                        |  | $              | 2,253,600   |   |             | $
|                                                                                                                   |  |                |             |   |             |  



The accompanying notes
are an integral part of the financial statements.



Page 5



---

##### Table of Contents

General Kinetics Incorporated

Statements of Operations

(Unaudited)



|                                                                              |  | Three Months Ended |          
|----------------------------------------------------------------------------- |  | ------------------ | ---------
|                                                                              |  | August 31,2003     |          
|Net Sales                                                                     |  | $                  | 1,622,700
|Cost of Sales                                                                 |  |                    | 1,297,900
|                                                                              |  |                    |          
|Gross Profit                                                                  |  |                    | 324,800  
|                                                                              |  |                    |          
|Selling, General & Administrative                                             |  |                    | 308,600  
|Product Research, Development & Improvement                                   |  |                    |         
|                                                                              |  |                    |          
|Total Operating Expenses                                                      |  |                    | 308,600  
|                                                                              |  |                    |          
|Operating Income                                                              |  |                    | 16,200   
|Interest Expense                                                              |  |                    | (49,700  
|                                                                              |  |                    |          
|Net Income (Loss)                                                             |  |                    | (33,500  
|                                                                              |  |                    |          
|Basic Earnings per Share:                                                     |  |                    |          
|Basic Earnings per Share                                                      |  | $                  | (0.005   
|Weighted Average Number of Common Shares Outstanding                          |  |                    | 7,118,925
|Diluted Earnings per Share:                                                   |  |                    |          
|Diluted Earnings per share                                                    |  | $                  | (0.005   
|Weighted Average Number of Common Shares and Dilutive Equivalents Outstanding |  |                    | 7,118,925





The accompanying notes are an integral part of the financial statements.



Page 6



---

##### Table of Contents

General Kinetics Incorporated

Statements of Cash Flows

(Unaudited)



|                                                                                                   |  | Three Months Ended |         
|-------------------------------------------------------------------------------------------------- |  | ------------------ | --------
|                                                                                                   |  | August 31,2003     |         
|Cash Flows From Operating Activities:                                                              |  |                    |         
|Net Income (loss)                                                                                  |  | $                  | (33,500 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                    |         
|Unrealized (gain) loss on marketable securities                                                    |  |                    | (3,100  
|Depreciation and amortization                                                                      |  |                    | 28,200  
|Amortization of bond discount                                                                      |  |                    | 15,100  
|(Increase) Decrease in Assets:                                                                     |  |                    |         
|Accounts receivable                                                                                |  |                    | (49,800 
|Inventories                                                                                        |  |                    | 217,000 
|Prepaid expenses                                                                                   |  |                    | 18,600  
|Other assets                                                                                       |  |                    | (9,500  
|Increase (Decrease) in Liabilities:                                                                |  |                    |         
|Accounts payableTrade                                                                             |  |                    | 59,700  
|Accrued expenses                                                                                   |  |                    | 42,200  
|Other long term liabilities                                                                        |  |                    | (9,600  
|                                                                                                   |  |                    |         
|Net cash provided by (used in) Operating Activites                                                 |  |                    | 275,300 
|                                                                                                   |  |                    |         
|Cash Flows from Investing Activities:                                                              |  |                    |         
|Acquisition of property, plant and equipment                                                       |  |                    |        
|                                                                                                   |  |                    |         
|Net cash used in Investing Activities                                                              |  |                    |        
|                                                                                                   |  |                    |         
|Cash Flows from Financing Activities:                                                              |  |                    |         
|Advances from Factor                                                                               |  |                    | 338,600 
|Repayments of advances from Factor                                                                 |  |                    | (286,300
|Principal payments under capital lease                                                             |  |                    | (4,900  
|Repayments on long term debt                                                                       |  |                    | (23,600 
|                                                                                                   |  |                    |         
|Net cash provided by Financing Activities                                                          |  |                    | 23,800  
|                                                                                                   |  |                    |         
|Net increase (decrease) in cash and cash equivalents                                               |  |                    | 299,100 
|Cash and Cash Equivalents: Beginning of Period                                                     |  |                    | 114,000 
|                                                                                                   |  |                    |         
|Cash and Cash Equivalents: End of Period                                                           |  | $                  | 413,100 
|                                                                                                   |  |                    |         
|Supplemental Disclosures of Cash Flow Information:                                                 |  |                    |         
|Cash paid during the period for:                                                                   |  |                    |         
|Interest                                                                                           |  | $                  | 42,100  



The accompanying notes
are an integral part of the financial statements.



Page 7



---

##### Table of Contents

GENERAL KINETICS INCORPORATED AND SUBSIDIARIES

Notes to Condensed Financial Statements

(Unaudited)



Note 1  Basis of Presentation



The unaudited condensed financial statements at August 31, 2003, and for the three months
ended August 31, 2003 and August 31, 2002, respectively, include the accounts of General Kinetics Incorporated (GKI).



The financial information included herein is unaudited. In addition, the financial information does not include all disclosures required under generally accepted
accounting principles in that certain note information included in the Companys Annual Report has been omitted; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary to a fair presentation of the results of the interim periods.



The results of operations for the three-month period ended August 31, 2003 are not necessarily indicative of the results to be expected for the full year.



Note 2  Earnings Per Share



Earnings per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. Basic earnings per share includes
no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could
share in the earnings. Due to the net loss in the quarter ended August 31, 2003, diluted earnings per share is the same as basic earnings per share for that period. The following table presents a reconciliation between the weighted average shares
outstanding for basic and diluted earnings per share for the three months ended August 31, 2002:



|                                                                   |  | Income |         | Shares |            | Per ShareAmount
|------------------------------------------------------------------ |  | ------ | ------- | ------ | ---------- | ---------------
|Basic earnings per share                                           |  |        |         |        |            |                
|Net Income available to common shareholders                        |  | $      | 156,500 |        | 6,718,925  |                
|Effect of assumed conversion of convertible debentures, net of tax |  |        | 23,684  |        | 17,990,000 |                
|                                                                   |  |        |         |        |            |                
|Dilutive earnings per share                                        |  | $      | 180,184 |        | 24,708,925 |                



8



---

##### Table of Contents

Note 3  Notes Payable



At August 31, 2003 and May 31, 2003, convertible debentures initially issued to clients of Gutzwiller & Partner, AG, now known as Rabo
Investment Management Ltd., are outstanding in an aggregate principal amount of approximately $8.8 million. Such debentures mature in August 2004, are convertible into common stock at a conversion price of $0.50 per share, and bear interest at 1%
per annum, which is payable annually. Shares issuable upon conversion are also subject to certain registration rights under the Securities Act of 1933, as amended.



On March 12, 2003, Manassas Partners LLC, a Delaware limited liability company of which Larry Heimendinger, Chairman of the Board of
Directors of the Company, is the managing member, purchased from third parties, at a significant discount, a portion of the Companys $8.8 million outstanding convertible debentures in an aggregate principal amount of $5.8 million.



Note 4  Income Taxes



The Companys estimated effective tax rate for fiscal 2003 is 0%. This estimated
effective tax rate is lower than the statutory rate due to the existence of net operating loss carryforwards.



Note 5  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 $8.8 million outstanding convertible debentures in an aggregate principal amount of $5.8 million.



9



---

##### Table of Contents

Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations



Three Months Ended August 31, 2003, Compared to Three Months Ended August 31, 2002



Net sales for the quarter ended August 31, 2003 were approximately $1.6 million compared to net sales of approximately $2.3 million for the
quarter ended August 31, 2002. The decrease in sales was due primarily to a decrease in orders under a large blanket contract with a prime contractor to the U.S. Navy, in addition to an overall slowdown of orders from customers involved in projects
related to the U.S. Navy.



The gross margin percentage decreased from 25.8% for
the quarter ended August 31, 2002 to 20.0% for the quarter ended August 31, 2003. The primary reasons for the decrease in the gross profit percentage were the mix of jobs for the quarter ended August 31, 2003 as compared to the corresponding quarter
of the prior fiscal year, along with the decrease in sales during the quarter as compared to the corresponding fiscal quarter of the prior year. The Company continues to address production issues through plant supervision and regular updating of
scheduling and planning procedures. The Company is trying to stabilize the level of shipments at a profitable level through these changes and a focused sales effort.



Selling, general and administrative costs were approximately $308,600 for the quarter ended August 31, 2003 as compared to approximately
$376,200 for the quarter ended August 31, 2002. The reduction was principally due to cost reduction measures during the first quarter of fiscal 2004, including salary decreases that were put into place by management in response to the reduced
backlog and shipping levels.



For the quarter ended August 31, 2003, the
Company had operating income of $16,200 compared to operating income of $208,000 for the corresponding quarter of the prior year. The decrease in operating income was due principally to the decrease in net sales and gross margins discussed above.



Interest expense decreased from $51,500 in the first quarter of fiscal 2003 to
$49,700 in the first quarter of fiscal 2004.



The Companys estimated
effective tax rate for fiscal 2003 is 0%. This estimated effective tax rate is lower than the statutory rate due to the existence of net operating loss carryforwards.



10



---

##### Table of Contents

Liquidity and Capital Resources



The Company relies upon internally generated funds and accounts receivable factoring to finance its operations. In addition to a net loss of
$33,500 for the first quarter of fiscal 2004, during fiscal years 2003 and 2002 the Company incurred net losses of approximately $131,400 and $835,400, respectively. In order to generate the working capital required for operations, the Company must
continue to generate orders, increase its gross margins, and effectively manage operating expenses during fiscal 2004.



The Company must continue to market electronic enclosure products to government and commercial markets, enter into contracts which the Company can complete with favorable
profit margins, ship the orders in a timely manner, and control its operating costs in order to recover from its liquidity problems and seek to operate profitably for fiscal 2004.



The backlog at August 31, 2003 was $1.5 million, as compared to $2.1 million at August 31, 2002. The decrease in backlog is primarily due to
an overall slowdown of orders from customers involved in projects related to the U.S. Navy. The Company must increase its level of sales to maintain a sales level that will provide positive cash flow for the remainder of the fiscal year. 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.



In recent months, the Company and its customers have experienced significant delays in the release of orders under awarded programs, and
there can be no assurance that such delays will not continue or become more severe. In the absence of orders released against these awards or other new business, the Company could experience a material decrease in its level of business, revenues and
cash flows.



As of August 31, 2003, the Company had cash and marketable
securities totaling $452,600. The Company has faced production issues that have contributed to losses from operations in the prior three fiscal years. The Company has taken and is continuing to take steps to address these production issues through
changes and additions to plant supervision, regularly updating scheduling and planning procedures, and adding new production machinery. The Company is trying to stabilize the level of shipments at a profitable level through these changes. However,
during the past fiscal year and current fiscal quarter, management implemented cost reductions, including salary reductions, in response to reduced sales and order backlog.



Management believes that, unless there is an increase in the shippable order backlog, the Company may not be able to meet its cash
requirements through the current fiscal year with cash on hand and borrowings from the factoring of accounts receivable. Meeting the Companys cash requirements



11



---

##### Table of Contents

through the next twelve months will also require an increase in the current order backlog, as well as profitable production and shipment of those orders.
However, there is no assurance the Company will be successful in pursuing its plans or in obtaining additional financing to meet those cash requirements. The Company must increase its current level of sales, consistently make timely shipments and
produce its products at adequate profit margins, or the Company will continue to face liquidity problems and may be left without sufficient cash to meet its ongoing requirements.



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has
sustained operating losses in the current fiscal quarter and in fiscal years 2003, 2002 and 2001, and, in addition, the Company has significant short-term cash commitments, the funding of which is limited to cash flow from operations and the
factoring of certain accounts receivable, if available. These losses and commitments, in addition to an overall slowdown of orders from customers involved in projects related to the U.S. Navy, raise significant doubt about the Companys ability
to continue as a going concern. The financial statements do not contain any adjustment that might result from the outcome of these uncertainties.



The Company was formerly party to a factoring agreement with Reservoir Capital Corporation (Reservoir) that provided for advances (or loans) of up to 80% of
specified accounts receivable. In August 2001, Link2It Corporation, a company formed by Larry Heimendinger and Richard McConnell, both of whom are directors of the Company, entered into a factoring agreement with the Company on terms substantially
similar to those of the Reservoir facility, but more favorable to the Company in certain respects, including provision for advances at a rate of up to 85% of specified accounts receivable. A factoring agreement with Link2It Corporation, on similar
terms, was entered into in April 2002. During the quarter ended August 31, 2003, the Company entered into a new factoring agreement with Key Capital Factoring (Key) that also provides for advances of up to 85% of specified accounts
receivable. The Company expects to draw on the Key facility during fiscal 2004 as necessary to help alleviate liquidity problems, although, as discussed above, the Company will also need to control expenses, maintain the sales backlog at appropriate
levels, and keep shipment levels in line with booked orders in order to meet these requirements. At August 31, 2003, there was $52,300 of outstanding advances due to Key.



The Company had significant amounts payable to trade creditors at August 31, 2003. Current maturities of long-term debt and capital lease
obligations amount to $117,000 in fiscal 2004.



The Company has outstanding
debentures originally issued to clients of Gutzwiller & Partner, AG, now known as Rabo Investment Management Ltd. (the Manager), totaling approximately $8.8 million. The debentures



12



---

##### Table of Contents

mature in August 2004, are convertible into common stock at a conversion price of $0.50 per share, and bear interest at 1% per annum payable annually. In a
filing with the SEC dated November 9, 2001, the Manager indicated that it may be deemed to be the beneficial owner of debentures having an aggregate principal amount of $7,885,000, including debentures in the principal amount of $585,000 which were
purchased by the Manager as to which the Manager was the economic beneficial owner and held sole voting and dispositive power, and debentures in a principal amount of $7,300,000 held in client accounts managed by the Manager on behalf of various
clients who held beneficial economic ownership thereof for which the Manager held voting and dispositive power. On March 12, 2003, Manassas Partners LLC, a Delaware limited liability company of which Larry Heimendinger, Chairman of the Board of
Directors of the Company is the managing member, purchased from third parties, at a significant discount, a portion of the Companys $8.8 million outstanding convertible debentures in an aggregate principal amount of $5.8 million.



The Company does not expect that its cash flow, capital resources, and overall financial
condition will be sufficient to repay or refinance in full the approximately $8.8 million principal amount of outstanding convertible debentures currently scheduled to mature in August 2004. At present, the Company has decided on no specific plans
with respect to the repayment or refinancing of the debentures, but it expects to continue to review the situation and consider its potential alternatives during the coming fiscal year.



Analysis of Cash Flows



Operating activities provided $275,300 in cash in the first quarter of fiscal 2004. This reflects the net loss of $33,500 offset by $40,200 in non-cash expenses and by
$268,600 in cash generated from changes in working capital items. The cash generated from changes in working capital items in the first quarter of fiscal 2004 includes a decrease in inventories of $217,000 and an increase in accounts payable of
$59,700.



The Company did not engage in any investing activities in the first
quarter of fiscal 2004.



Financing activities provided $23,800 in the first
quarter of fiscal 2004. These activities consisted primarily of factoring accounts receivable netting to $52,300, offset by the repayment of certain long-term debt.



Inflation



Management believes that inflation did not have a material effect on the operations, financial position or cash flows of the Company during the first quarter of fiscal
2004.



13



---

##### Table of Contents

Contractual Obligations and Commercial Commitments



The Companys commitments through August 31, 2008 are comprised of the following at August 31, 2003 (in thousands):



|                       |  | Through August 31,
|---------------------- |  | ------------------
|                       |  | 2004              
|Convertible debentures |  | $                 
|Other notes payable    |  |                   
|Real estate mortgage   |  |                   
|Capital leases         |  |                   
|Operating leases       |  |                   
|                       |  |                   
|Total                  |  | $                 
|                       |  |                   



Critical Accounting Policies



The Companys significant accounting policies are more fully
described in Note 2 to the financial statements in our 2003 Annual Report on Form 10-K, as amended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, the Company has made its best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below;
however, application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.



Work in process inventory represents actual production costs, including manufacturing
overhead incurred to date, reduced by amounts identified with revenue recognized on units delivered as well as reserves for amounts in excess of estimated net realizable value. The costs attributable to units delivered are based on the estimated
average costs of all units expected to be produced under multi-unit orders. Estimated costs to complete are based on historical experience and knowledge of building



14



---

##### Table of Contents

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 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 August 31, 2003, the Company had an allowance for doubtful accounts of $22,900.



Item 3  Quantitative and Qualitative Disclosures About Market Risk



Market Risk  The Company is exposed to market risk from adverse changes in interest rates.



Interest Rate Risks  The Company is exposed to risk from changes in interest rates as a result of its borrowing activities. At August
31, 2003, the Company had total debt of $9.42 million, of which $0.34 million represents borrowing for its real estate mortgage, which is at a variable interest rate. Interest on that portion of the Companys debt is directly affected by
changes in the prime interest rate, and therefore fluctuations may have an impact on the Companys financial results.



Item 4  Controls and Procedures



The Company maintains disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to
ensure that information required to be disclosed in the Companys reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.



15



---

##### Table of Contents

As of the end of the Companys first quarter of fiscal 2004, the Company conducted an evaluation of the
effectiveness of the design and operation of the Companys disclosure controls and procedures, as required by Rule 13a-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective. There has been no change in the Companys internal control over financial reporting that has occurred during the Companys first quarter of fiscal 2004 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.



16



---

##### Table of Contents

PART II OTHER INFORMATION



Item 6  Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 
|     | 
|32.2 | 



| | (b) | Reports on Form 8-K
| | --- | -------------------



None.



17



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



GENERAL KINETICS
INCORPORATED



|                       |  |  |  |                                                    
|---------------------- |  |  |  | ---------------------------------------------------
|                       |  | 
|Date: October 15, 2003 |  |  |  | /s/    LARRY M. HEIMENDINGER                       
|                       |  |  | 
|                       |  |  |  | Chairman of the Board (Principal Executive Officer)



|                       |  |  |  |                                                                                       
|---------------------- |  |  |  | --------------------------------------------------------------------------------------
|                       |  | 
|Date: October 15, 2003 |  |  |  | /s/    SANDY B. SEWITCH                                                               
|                       |  |  | 
|                       |  |  |  | Chief Financial Officer (Principal Accounting Officer and Principal Financial
Officer)



18