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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, 2000 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.)
14130-A Sullyfield Circle, Chantilly, VA 20151
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (703) 802-4848
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 with par value of 25 cents 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 [ ].
Aggregate market value of the voting stock held by non-affiliates $ 816,992*
of the Registrant as of August 23, 2000
(* Executive officers, directors, and Registrant's ESOP were considered
affiliates, solely for purposes of this item.)
The number of shares outstanding of Registrant's Common Stock,
$.25 par value, as of August 23, 2000, was 6,718,925
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 2000 fiscal year are incorporated into Part III hereof.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this Annual Report on Form 10-K under the caption "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including, but not limited to, the
risk that the Company may not be able to obtain additional financing if
necessary; the risk that the Company may not be able to continue the necessary
development of its operations, including maintaining or increasing sales and
production levels, on a profitable basis; the risk the Company may in the future
have to comply with more stringent environmental laws or regulations, or more
vigorous enforcement policies of regulatory agencies, and that such compliance
could require substantial expenditures by the Company; the risk that U.S.
defense spending may be substantially reduced; and the risk that the Company's
Common Stock will not continue to be quoted on the NASD OTC Bulletin Board
services. In addition, the Company's business, operations and financial
condition are subject to substantial risks which are described in the Company's
reports and statements filed from time to time with the Securities and Exchange
Commission, including this Report.
PART I
ITEM 1 - BUSINESS
(a) General Development of Business
General Kinetics Incorporated (the "Company" or "GKI"), through its Electronic
Enclosure Division (the "EED"), designs and manufactures high-quality precision
enclosures for electronic systems, principally for sale to the U.S. Department
of Defense and the U.S. Navy.
Over the years, the Company has operated a number of diversified businesses.
The Company was founded in 1954 and its Common Stock became publicly traded in
November 1961.
Beginning in December 1992, the Company's operations were financed to a
significant extent by debt and equity investments made by clients of Gutzwiller
& Partner, A.G.("Gutzwiller") or its successor, most recently in 1994. The
Company understands that shares of its Common Stock and convertible debentures,
which
in past years have been reported as beneficially owned by Gutzwiller or its
successor, are held by Gutzwiller or its successor as nominee only for various
underlying owners, none of which is a beneficial owner of five percent or more
of the Company's Common Stock. As of May 31, 2000, clients of Gutzwiller or its
successor had invested approximately $3 million in equity, and approximately
$9.0 million in convertible debentures of the Company.
As of December 5, 1996, GKI completed the sale of its Secure Communications
Division ("SCD") to Cryptek Secure Communications, LLC ("Cryptek"), a Delaware
limited liability company, the majority of whose equity interests are owned by
affiliates of Angelo Gordon & Co., L.P. As of May 30, 1997, the Company sold the
stock in its wholly owned Food Technology Corporation ("FTC") subsidiary to the
former vice president and general manager of FTC.
(b) Financial Information About Industry Segments
Due to the sale of SCD and FTC during fiscal 1997, the Company is currently
operating in a single industry segment.
(c) Narrative Description of Business
Electronic Enclosure Business
General
The Electronic Enclosure Division designs and manufactures high-quality
precision enclosures for sophisticated electronic systems. The EED is a
manufacturing and engineering services group which produces build-to-print as
well as custom engineered products. The EED has manufactured electronics-ready
enclosures and mounting systems for over 30 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 EED's principal customer
for these products is the U.S. Navy which, directly or indirectly through its
prime contractors, accounted for 83%, 92% and 91% of the Division's revenues in
fiscal 2000, 1999 and 1998, respectively. The EED sells these products as a
prime contractor and also as a subcontractor to major prime contractors such as
Northrop Grumman, Palomar Products, Lockheed Martin and DRS Laurel Technologies.
Strategy
The Company's long-term goals for the EED are to increase market penetration
with 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. In addition, the Company has begun efforts to
enter the commercial enclosure marketplace by developing a catalog of commercial
products and a network of sales representatives. The commercial catalog became
available during the second quarter of fiscal 1999.
Management intends to use its current sales force and build on its reputation
for quality to seek to expand sales to the U.S. Navy and other agencies within
the government. The Company is also developing outside sales representatives to
help expand its current customer base. Also, the Company is exploring
opportunities, using the current sales force and new outside representatives, in
the non-government marketplace which has requirements for high end precision
enclosures as well as related metal fabrication products. The Company does not
expect the non-government marketplace to provide a significant portion of the
Company's sales during fiscal 2001.
The Company plans to finance its strategy for Fiscal 2001 through cash on hand
as of May 31, 2000, careful management of operating expenses, factoring accounts
receivable to alleviate short-term cash requirements, and cash flow generated
through operations. The Company may also look for additional sources of
financing to provide a cushion to handle variances in cash requirements if sales
and shipment levels fluctuate throughout the fiscal year.
Products
The EED'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 EED has developed a series of
consoles and enclosures to offer as a commercial-off-the-shelf ("COTS") product
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 EED'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 datums within ten
thousandths of an inch (.0001) of their true fabricated position, and the
machining of parts to a size of plus or minus one thousandth of an inch (.001)
of their specified dimension. Furthermore, the EED has in-plant facilities to
test for radio frequency interference (R.F. testing) as it is required to
certify certain products. The EED 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 EED's products have high visibility in such programs as AEGIS and other
major U.S. Government programs.
As discussed above, the Company introduced a new catalog of commercial
enclosures during fiscal 1999. The Company is attempting to market these
products through a network of sales representatives targeting markets such as
the broadcast and
security industries. During fiscal 2000 and 1999, shipments of enclosures to
commercial customers totaled $176,695 and $54,000, respectively.
Customers
During fiscal years 2000, 1999 and 1998 the EED has sold 83%, 92%, and 91%,
respectively, of its products to the U.S. Government, principally to the U.S.
Navy, either as a prime contractor or a subcontractor to major prime
contractors. Therefore, a material decline in spending by the Department of
Defense, in particular spending by the U.S. Navy, could have a material adverse
effect on the operations of the EED, unless offset by greater market penetration
or new sales to other government and commercial customers. The Company considers
its relationships with the U.S. Navy and its major prime contractor customers to
be good.
Marketing and Sales
The EED currently markets its products through a direct sales force and through
outside agencies. In fiscal 2001 the EED expects to expand its sales effort,
both through in house sales people and through outside agencies contracted as
additional sales representatives. The EED also participates in industry trade
shows as a means of contacting new and existing customers and introducing new
products.
Backlog
The EED's contract backlog as of May 31, 2000 and May 31, 1999 was approximately
$3.01 million and $4.2 million, respectively. The Company does not believe that
seasonal fluctuations play a significant role in the backlog for the enclosure
business.
The EED 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.
Competition
The EED 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 the EED competes with approximately 25 other manufacturers of
electronic enclosures, including, in some instances, major prime contractors,
which are also customers of the Company. Many of the EED's competitors have
significantly greater financial, marketing and technological resources than the
Company.
Research and Development
The Company expects research and development activities to total less than
$50,000 during fiscal 2001.
The U.S. Government Procurement Process
The majority of the Company's fiscal 2000 revenue from continuing operations 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. Navy. Revenue from these sales represented approximately
83% of the Company's total revenue in fiscal 2000. 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. The
Company estimates that substantially all of the EED's fiscal 2000 revenue was
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 thereon or adjustment for loss if
completion of performance would have resulted in a loss. There
were no terminations for convenience in fiscal 1998, 1999, or 2000. 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 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 as a consequence 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 competitions for contracts, and reductions in levels of
military and other agencies' spending.
Employees and Labor Agreements
As of May 31, 2000, the Company had 103 employees, all located in the United
States. Of the 103 employees, 31 were salaried and 82 were paid by the hour. At
that date, on a Company-wide basis, there were 2 employees in engineering, 1
employee in sales and marketing, 89 employees in manufacturing and assembly
operations, and 11 employees in an executive capacity or in finance and
administration. 64 of the Company's employees were represented by the
International Brotherhood of Electrical Workers Union in Johnstown,
Pennsylvania. The Company and the Union are working under a five-year collective
bargaining agreement that will expire on May 31, 2004. The Company considers its
employee relations to be good.
Environmental Matters
The EED 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.
Secure Communications Division
In December 1996, GKI completed the sale of SCD to Cryptek, the majority of
whose equity interests are owned by affiliates of Angelo Gordon & Co., L.P. The
SCD division had been in the business of manufacturing and selling secure
facsimile machines and secure local area network products for customers handling
classified information. The division incurred significant operating losses
during fiscal 1997 and in each of the prior three fiscal years. Management
believed that the resources likely to be involved in returning the division to
profitability could more effectively be generated and utilized in connection
with the development of the EED and other activities. In addition, the $1.75
million in cash proceeds received from the sale of the division at closing
provided the Company with operating capital for its continuing business.
In December 1998, the Company entered into a settlement agreement with Cryptek,
resolving differences arising out of it's purchase of GKI's former secure
communications business. Pursuant to such settlement, Cryptek made an immediate
principal payment of $25,000 on its outstanding promissory note to the Company
and agreed to forego sublease rent owed by the Company through November 1998.
The remaining principal amount of the Cryptek promissory note was reduced to
$550,000 and the payment schedule for such note was revised and extended through
2002. In addition, the face value of the preferred membership interest in
Cryptek held by the Company was reset at $900,000, and the requirement for
redemption of such interest by Cryptek was extended through December 2002.
In October 1999, the Company entered into an agreement that amended the
settlement agreement the Company had reached with Cryptek in December 1998. The
October 1999 Agreement reduced the face amount of the promissory note payable to
the Company by Cryptek from $550,000 to $400,000 in exchange for accelerating
the payment schedule. The Company received $200,000 upon execution of the new
Agreement. In addition, the October 1999 Agreement gave Cryptek the option to
pay the remainder of the promissory note and redeem the preferred interest in
Cryptek held by the Company (with a face amount of $900,000 and a requirement
for mandatory redemption in December 2002) for an additional $488,750, if that
option were exercised within six months after the execution of the October 1999
Agreement.
At November 30, 1999 the $150,000 reduction in the face amount of the note was
offset against an existing valuation reserve related to the Cryptek promissory
note. In December 1999, Cryptek exercised its option and paid the Company
$478,800, representing a discount of $10,000 in consideration of a closing in
December 1999 rather than at the end of the six-month option period in April
2000. The $478,800 was first applied to settle the note receivable with a
carrying value of $200,000, and the excess of $278,800 is recorded in the
accompanying financial statements as a non-recurring gain in non-operating
income. This gain was recognized because GKI did not attribute any value to the
preferred interest in Cryptek for financial reporting purposes due to
uncertainty over valuation at the time of the original sale transaction.
Food Technology Corporation
As of May 30, 1997, the Company sold the stock in its wholly owned FTC
subsidiary to the former vice president and general manager of FTC. FTC is a
manufacturer of high-quality texture testing instrumentation for the food
industry and optical inspection equipment for the plastics and related
industries. The Company decided to exit the Food Technology business primarily
because it was a small operation which was not related to the Company's primary
business, and had not experienced any significant growth in recent years.
(d) Foreign and Domestic Operations and Export Sales
The EED has not had significant foreign operations or export sales.
ITEM 2 - PROPERTIES
The Company maintains its executive offices, in an approximately 7,700 square
foot subleased facility in northern Virginia. As part of the sale of the
Company's SCD, the Company assigned a lease for approximately 36,800 square feet
of space in the building in Chantilly, Virginia which previously housed SCD. The
lease for the Chantilly facility requires the Company to pay for its pro rata
share of the taxes, insurance, and maintenance. The Company has subleased
approximately 7,700 square feet of space from Cryptek on substantially the same
terms and conditions as the master lease for its executive offices and the FTC
operation. With the sale of FTC, the Company has sub-subleased approximately
2,300 square feet of this space to FTC on substantially the same terms and
conditions as the sublease with Cryptek. The sublease expires in March 2001, and
the Company plans to either negotiate a new agreement for the space currently
occupied, or to find new office space of similar size.
Manufacturing facilities for the Company's EED are presently located in a
building owned by the Company, a 56,000 square foot industrial manufacturing
plant in Johnstown, Pennsylvania. A small portion of the Johnstown facility is
leased to unrelated third parties. The Johnstown facility is subject to a
mortgage held by a local banking institution.
During the fourth quarter of fiscal 1998 the Company sold its 38,500 square foot
industrial manufacturing plant in Orlando, Florida to an unrelated third party
for $625,000. The Company realized a pretax gain of approximately $191,500 on
the disposition of the Orlando 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 are no material pending legal proceeding to which
the Company is a party or of which any of their property is the subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
PART II
ITEM 5 - MARKET FOR GKI COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock, $.25 par value per share, is quoted in the Over the
Counter ("OTC") Bulletin Board service, 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:
Quarter Ended High Low
- ------------- ---- ---
May 31, 2000 .49 .10
February 28, 2000 .34 .03
November 30, 1999 .10 .04
August 31, 1999 .15 .06
May 31, 1999 .22 .08
February 28, 1999 .23 .05
November 30, 1998 .10 .04
August 31, 1998 .16 .03
The approximate number of holders of record of the Company's Common Stock, $.25
par value, as of August 31, 2000, was 1,015.
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 consolidated financial data for each
of the years in the five-year period ended May 31, 2000. The consolidated
statement of operations data for the fiscal years ended May 31, 2000, 1999, 1998
and the consolidated balance sheet data at May 31, 2000 and 1999 are derived
from and are qualified by reference to the
consolidated financial statements of the Company audited by BDO Seidman, LLP,
the Company's independent certified public accountants, included elsewhere,
herein. The consolidated statement of operations data for the fiscal years ended
May 31, 1997 and 1996 and the consolidated balance sheet data at May 31, 1998,
1997 and 1996 are derived from consolidated 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 consolidated financial statements and
related notes and other financial information and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere
herein.
Years ended May 31
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Income Statement Data:
- --------------------------------------------------------------------------------
Net Sales $7,585 $7,700 $6,739 $7,490 $8,833
Cost of sales 5,654 5,542 5,013 6,429 7,828
------ ------ ------ ------ ------
Gross profit 1,931 2,158 1,726 1,061 1,005
Selling, general,
and administrative
expenses 1,668 1,470 1,153 1,724 1,514
Product R&D, and
improvement 94 59 0 0 0
Provision for Note
Receivable 0 0 442 13 0
------ ------ ------ ------ ------
Operating income (loss) 169 629 131 (675) (509)
Gain on sale of building 0 0 192 0 0
Gain on Note Settlement 0 0 0 0 279
Interest expense, net 335 336 250 241 299
------ ------ ------ ------ ------
Income (loss) from con-
tinuing operations (166) 293 73 (916) (529)
Income (loss) from dis-
continued operations (587) (217) 0 0 0
------ ------ ------ ------ ------
Income (loss) before
extraordinary item (753) 76 73 (916) (529)
Extraordianr gain from
debt extinguishment 0 0 187 67 0
------ ------ ------ ------ ------
Income (loss)
before income taxes (753) 76 260 (849) (529)
Provision for
income taxes 0 0 6 0 0
------ ------ ------ ------ ------
Net Income/(Loss) (753) $ 76 $ 254 $ (849) $ (529)
====== ====== ====== ====== ======
Basic Earnings Per Share:
Income (loss) from
continuing operations (.025) .04 .01 (.136) (.079)
Loss from discontinued
operations (.090) (.03) .00 .000 .000
Income from extraor-
dinary item .000 .00 .03 .010 .000
Basic Earnings(loss)
Per share (.116) .01 .04 (.126) (.079)
Weighted average common
shares outstanding 6,509 6,659 6,719 6,719 6,719
Diluted Earnings Per Share:
Income (loss) from
continuing operations (.004) .014 .005 (.136) (.079)
Loss from discontinued
Operations (.023) (.008) .000 .000 .000
Income from extraor-
dinary item .000 .000 .008 .010 .000
Diluted Earnings(loss)
Per share (.027) .005 .013 (.126) (.079)
Weighted average common
shares and dilutive equi-
valents outstanding 25,509 25,509 24,909 6,719 6,719
Cash dividends
per common share 0 0 0 0 0
Balance Sheet and Other Data:
- --------------------------------------------------------------------------------
May 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Working capital $ 2,063 $ 2,070 $ 2,492 $ 1,570 $ 1,381
Cash 364 1,482 1,923 307 958
Total assets 7,026 5,334 4,770 4,685 4,130
Net property, plant
& equipment 1,482 1,249 1,015 1,016 925
Capital expenditures 188 157 288 174 93
Long-term liabilities 10,092 9,964 9,646 9,580 9,570
Total Stockholders'
Deficit (6,224) (6,073) (5,788) (6,638) (7,166)
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 consolidated statements
of operations from continuing operations for fiscal years 1998, 1999 and 2000
(each ended May 31), as a percentage of revenue.
Percent of Revenue
------------------
1998 1999 2000
---- ---- ----
Net sales 100.0% 100.0% 100.0%
----- ----- -----
Gross profit 25.6% 14.2% 11.4%
Operating expenses (23.7%) (23.2%) (17.1%)
----- ----- -----
Operating income (loss) 1.9% (9.0%) (5.7%)
Interest expense (3.7%) (3.2%) (3.4%)
Gain on sale of Orlando Building 2.8% 0.0% 0.0%
Gain on settlement of Cryptek Note 0.0% 0.0% 3.2%
Extraordinary item- debt extinguishment 2.8% 0.9% 0.0%
Loss from discontinued operations 0.0% 0.0% 0.0%
----- ----- -----
Net income (loss) 3.8% (11.3%) (5.9%)
===== ===== =====
Fiscal Year 2000 Compared to Fiscal Year 1999
Net sales for fiscal 2000 were approximately $8.8 million as compared with $7.5
million for fiscal 1999, representing an increase of 17.3%. The increase in
volume was primarily attributable to increased customer demand and increased
sales and marketing efforts by the Company.
The principal customer for the Enclosure Division's products is the U.S.
Government, principally the U.S. Navy, which, directly or through its prime
contractors, accounted for 83% of the EED's revenues in fiscal year 2000. The
Company's sales to the United States government and its prime contractors
represented approximately 83% and 92% of total net sales during the Company's
fiscal years ended May 31, 2000 and May 31, 1999, respectively,
and are expected to continue to account for a substantial portion of the
Company's revenues for the foreseeable future. The Company's contracts with the
United States government are subject to the availability of funds through annual
appropriations, may be terminated by the government for its convenience at any
time and generally do not require the purchase of a fixed quantity of products.
Reductions in United States government defense spending could adversely affect
the Company's operating results. While the Company is not aware of present or
anticipated reductions in United States 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 United States government defense spending in general will not have
an adverse effect on sales of the Company's products in the future.
Gross profit for fiscal 2000 was approximately $1.0 million compared with
approximately $1.1 million for fiscal 1999. Gross profit as a percentage of
sales decreased from 14.2% in fiscal 1999 to 11.4% in fiscal 2000. The primary
reasons for the decrease in gross profits were production issues resulting from
facing a large increase in orders in the second half of fiscal 1999 and the
first quarter of fiscal 2000. This was followed by a decrease in order level
during the second half of fiscal 2000.
Operating expenses for fiscal 2000 were approximately $1.5 million compared with
$1.7 million for fiscal 1999. Operating expenses as a percentage of net sales
were approximately 17.1% in fiscal 2000 compared to approximately 23.2% in
fiscal 1999. The decrease in Selling, General & Administrative expenses was
principally because in fiscal 1999 there were sales, marketing, and development
costs of approximately $225,000 related to the introduction of a new commercial
product line.
As discussed above, during fiscal 2000 the Company recorded a non-recurring gain
of $278,000 on the settlement of the Cryptek note and preferred interest.
Interest Expense
Interest expense increased from approximately $241,300 in fiscal 1999 to
approximately $298,900 in fiscal 2000. This increase occurred principally
because interest expense from factoring accounts receivable was $70,800 in
fiscal 2000 as compared to $22,500 in fiscal 1999.
Extraordinary Item
In fiscal 1999, the Company repurchased $100,000 of convertible debentures for
$33,000 in cash. The gain from the extinguishment of debt was recorded as an
extraordinary item in the accompanying statement of operations for the year
ended May 31, 1999.
The net loss was $528,800 for fiscal 2000 as compared to a net loss after
extraordinary item of $849,100 in fiscal 1999.
Income Taxes
The Company had no income tax provision in fiscal 2000 due to the net loss. Due
to the available net operating loss carryforwards, there was no material income
tax expense for fiscal 1999, nor were any additional income tax benefits
available from the carryback for income taxes of net operating losses. Under
Statement of Accounting Standards No. 109 (FAS 109) 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
asset due to uncertainties of its ultimate realization in fiscal 2000 and 1999.
If the Company achieves profitable operations, it will be subject to alternative
minimum taxes, which has a lower effective tax rate than the statutory rate of
34%.
Fiscal Year 1999 Compared to Fiscal Year 1998
Net sales for fiscal 1999 were approximately $7.5 million as compared with $6.7
million for fiscal 1998, representing an increase of 11.9%. The increase in
volume was primarily attributable to increased customer demand and increased
sales and marketing efforts by the Company.
The principal customer for the Enclosure Division's products is the U.S.
Government, principally the U.S. Navy, which, directly or through its prime
contractors, accounted for 92% of the EED's revenues in fiscal year 1999. The
Company's sales to the United States government and its prime contractors
represented
approximately 92% and 91% of total net sales during the Company's fiscal years
ended May 31, 1999 and May 31, 1998, respectively.
Gross profit for fiscal 1999 was approximately $1.1 million compared with
approximately $1.7 million for fiscal 1998, representing a decrease of
approximately 35.3%. Gross profit as a percentage of sales decreased from 25.6%
in fiscal 1998 to 14.2% in fiscal 1999. The primary reasons for the decrease in
gross profits were additional manufacturing costs associated with a large
increase in monthly production requirements during the second half of fiscal
1999. Net sales for the second half of fiscal 1999 were approximately $5.1
million as compared to approximately $2.4 million during the first half of the
fiscal year. The Company significantly increased payroll, overtime, and overhead
costs in order to scale up to the higher production volume. There were
significant manufacturing inefficiencies created as the Company increased
production. In addition, as compared to fiscal 1998, the mix of contracts in
fiscal 1999 included more commercial accounts and piece parts, which have lower
profit margins than the Company's standard Navy type cabinets.
Operating expenses for fiscal 1999 were approximately $1.7 million compared with
$1.6 million for fiscal 1998. Operating expenses as a percentage of net sales
were approximately 23.2% in fiscal 1999 compared to approximately 23.7% in
fiscal 1998. During fiscal 1998, operating expenses included a bad debt
provision of $441,600, recorded during the fourth quarter, related to the
Cryptek note receivable and related accrued interest. Selling, General &
Administrative expenses increased from approximately $1.2 million in fiscal 1998
to approximately $1.8 million in fiscal 1999. The increase was principally due
to an increase in sales, marketing, and development costs of approximately
$225,000 related to the introduction of a new commercial product line, and an
adjustment in fiscal 1998 in which certain accrued liabilities were reduced by
approximately $336,000.
Other Income
During the fourth quarter of fiscal 1998, the Company sold its Orlando facility,
and recognized a pretax gain on the sale of approximately $191,500. There was no
such item in fiscal 1999.
Interest Expense
Interest expense decreased from approximately $249,500 in fiscal 1998 to
approximately $241,300 in fiscal 1999. This small decrease occurred principally
because the Company did not pay mortgage interest on a building in Orlando,
Florida that was sold during the fourth quarter of fiscal 1998.
Extraordinary Item
In October 1998, the Company repurchased $100,000 of convertible debentures for
$33,000 in cash. The gain from the extinguishment of debt, was recorded as an
extraordinary item in the accompanying statement of operations for the year
ended May 31, 1999.
In May 1998, the Company repurchased $300,000 of convertible debentures for
$100,000 in cash. The gain from the extinguishment of debt was recorded as an
extraordinary gain of $186,900, net of bond discount, in the accompanying
statement of operations for the year ended May 31, 1998.
The net loss after extraordinary items was $849,100 for fiscal 1999 as compared
to net income of $254,400 in fiscal 1998.
Income Taxes
The Company had no income tax provision in fiscal 1999 due to the net loss. Due
to the available net operating loss carryforwards, there was no material income
tax expense for fiscal 1998, nor were any additional income tax benefits
available from the carryback for income taxes of net operating losses. The
Company recorded a provision of $6,000 in 1998 related to alternative minimum
tax. Under Statement of Accounting Standards No. 109 (FAS 109) 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 asset due to uncertainties of its ultimate realization in fiscal
1999 and 1998.
Liquidity and Capital Resources
The Company has relied upon internally generated funds and accounts receivable
financing, plus cash from sales of two of its operating companies, to finance
its operations. During fiscal 2000, operating losses totaled $528,800. In order
to generate the working capital required for operations, the Company must
continue to generate orders, stabilize its level of shipments, and operate
profitably during fiscal 2001.
The Company must continue to market electronic enclosure products to government
and commercial markets, enter into contracts which the Company can complete with
favorable profit margins, ship the orders in a timely manner, and control its
costs in order to recover from its liquidity problems and seek to operate
profitably in fiscal 2001.
As of May 31, 2000, the Company had cash of $958,100. As discussed in Note 3 to
the financial statements, during the second quarter of fiscal 2000 the Company
renegotiated the terms of its promissory note due from, and preferred membership
interest in, Cryptek. This resulted in cash to the Company totaling $200,000 in
October 1999 and $478,750 in December 1999.
The Company has faced production issues which have contributed to the losses
from operations since facing a large increase in orders in the second half of
fiscal 1999 and the first quarter of fiscal 2000. This was followed by a
decrease in order level during the second half of fiscal 2000. The Company has
taken and is continuing to take steps to address these production issues through
changes and additions to plant supervision and by adding new scheduling and
planning procedures. The Company is trying to stabilize the level of shipments
at a profitable level through these changes and an increased sales effort. The
backlog at May 31, 2000 was 3.01 million, and the first quarter's backlog is in
line with the projected stabilized level of shipments.
Management believes that cash on hand, borrowings from the factoring of accounts
receivable, and careful management of operating costs and cash disbursements can
enable the Company to meet its cash requirements through May 31, 2001. The
Company may also seek additional funding sources to provide a cushion to handle
variances in cash requirements if sales and shipment levels fluctuate throughout
the fiscal year. However, there is no assurance the Company will be successful
in pursuing its plans or in obtaining additional financing to meet those cash
requirements. The Company must continue to maintain its level of sales,
consistently make timely shipments and produce its products at adequate profit
margins, or the Company will continue
to face liquidity problems, and may be left without sufficient cash to meet its
ongoing requirements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As explained above, the Company has
sustained significant operating losses in fiscal 1999 and 2000. In addition, the
Company has significant short-term cash commitments, the funding of which is
limited to cash flow from operations and the factoring of certain accounts
receivable. These factors raise significant doubt about the Company's ability to
continue as a going concern. The financial statements do not contain any
adjustment that might result from the outcome of these uncertainties.
The Company is party to a factoring agreement with Reservoir Capital Corporation
("Reservoir") in which Reservoir agreed to purchase eligible accounts receivable
from the Company at an assignment price equal to 80% of the outstanding amount
of such accounts receivable. At May 31, 2000 advances due to Reservoir totaled
$44,100. The Company expects to draw on this facility through fiscal 2001 as
necessary to alleviate cash requirements, although, as discussed above, the
Company will also need to reduce and control expenses, maintain the sales
backlog at appropriate levels, and keep shipment levels in line with booked
orders in order to meet these requirements.
The Company had significant amounts payable to trade creditors at May 31, 2000.
In addition, commitments under operating leases, net of sublessee income, amount
to $90,500 in fiscal 2001. Current maturities of long-term debt amount to
$69,600 in fiscal 2001.
The Company has outstanding debentures originally issued to clients of
Gutzwiller totaling approximately $9.0 million. The debentures mature in August
2004, are convertible into common stock at a conversion price of 50 cents per
share, and bear interest at 1% per annum payable annually.
Analysis of Cash Flows
Operating activities provided $290,700 in cash in fiscal 2000. This reflects a
net loss of $528,800 offset by $573,600 in cash to fund changes in working
capital items plus $245,900 in non-cash expenses. The cash provided from working
capital items was principally due to a decrease in accounts receivable of
$372,200, and a decrease in inventories of $262,800, offset by a decrease in
accounts payable of $85,000 during the fiscal year ended May 31, 2000. The
decrease in accounts receivable was principally due to a large client paying for
May shipments during the last month of fiscal 2000, and the decrease in
inventories was due to the decrease in backlog at May 31, 2000 as compared to
May 31, 1999. Accounts payable decreased because of the decrease in inventory in
the fourth quarter.
Investing activities provided $457,000 in fiscal 2000. These activities
consisted principally of acquired property, plant and equipment totaling
$93,000, offset by the accelerated collection of the Cryptek note receivable
totaling $550,000.
Financing activities used $97,000 in fiscal 2000. Net factored accounts
receivable advances were approximately $34,900, and $62,100 was used to repay
long-term real estate debt.
Management believes that inflation did not have a material effect on the
operations of the Company during fiscal 2000.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of the Company may be exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the cost of financing, investing, and operating transactions. Because the
Company has only fixed rate long-term convertible debentures and no foreign
currency transactions, there is no material impact on earnings from fluctuations
in interest and currency exchange rates.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of income
when the transaction affects earnings. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. Presently, the Company does not use derivative instruments either in
hedging activities or as investments. Accordingly, the Company believes that
adoption of FASB 133 will have no impact on its financial position or results of
operations.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors And Stockholders
General Kinetics Incorporated
Chantilly, Virginia
We have audited the accompanying balance sheets of General Kinetics Incorporated
as of May 31, 2000 and 1999, and the related statements of operations,
stockholders' deficit, and cash flows for each of the three years in the period
ended May 31, 2000. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of General Kinetics Incorporated
as of May 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended May 31, 2000 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has sustained significant
operating losses in fiscal 2000 and 1999. In addition, the Company has
significant short-term cash commitments and additional short-term borrowing to
fund these commitments is limited to accounts receivable. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are described in Note 1. The
financial statements do not contain any adjustments that might result from the
outcome of these uncertainties.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Washington, DC
August 18, 2000
General Kinetics Incorporated
Balance Sheets
May 31, May 31,
2000 1999
---- ----
Assets
------
Current Assets:
Cash and cash equivalents $ 958,100 $ 307,400
Accounts receivable, net of allowance of $75,000 and $208,000 1,130,600 1,502,800
Inventories 982,800 1,285,600
Prepaid expenses and other 36,200 59,300
Note receivable, current - 70,000
Note receivable, affiliate, net of allowance of $175,000 and $87,500 - 87,500
----------- ----------
Total Current Assets 3,107,700 3,312,600
----------- ----------
Property, Plant and Equipment 2,751,900 2,942,800
Less: Accumulated Depreciation (1,827,000) (1,926,800)
----------- -----------
924,900 1,016,000
Note receivable, less current portion, net of
allowance of $0 and $150,000 - 330,000
Other Assets 97,700 26,600
----------- -----------
Total Assets $ 4,130,300 $ 4,685,200
=========== ===========
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Advances from factor $ 44,100 $ 79,000
Current maturities of long-term debt 69,600 66,200
Accounts payable, trade 873,700 958,800
Accrued expenses and other payables 739,300 638,900
----------- -----------
Total Current Liabilities 1,726,700 1,742,900
----------- -----------
Long-Term debt - less current maturities (including
$8,732,000 and $8,670,100 of convertible debentures) 9,300,900 9,304,400
Other long-term liabilities 269,000 275,400
----------- -----------
Total Long-Term Liabilities 9,569,900 9,579,800
----------- -----------
Total Liabilities 11,296,600 11,322,700
----------- -----------
Commitments and Contingencies
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 shares authorized 1,811,500 1,811,500
7,245,557 shares issued, 6,718,925 shares outstanding
Additional Contributed Capital 7,239,400 7,239,400
Accumulated Deficit (15,767,000) (15,238,200)
----------- -----------
(6,716,100) (6,187,300)
Less:
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
----------- -----------
Total Stockholders' Deficit (7,166,300) (6,637,500)
----------- ----------
Total Liabilities and Stockholders' Deficit $ 4,130,300 $ 4,685,200
=========== ===========
The accompanying notes are an integral part of the financial statements.
General Kinetics Incorporated
Statements of Operations
For the Years Ended May 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Net Sales $ 8,833,000 $ 7,490,200 $ 6,739,300
Cost of Sales 7,827,500 6,428,900 5,013,600
--------------- -------------- -------------
Gross Profit 1,005,500 1,061,300 1,725,700
--------------- -------------- -------------
Selling, General & Administrative 1,514,200 1,723,600 1,152,600
Provision for Note Receivable - 12,500 441,600
--------------- -------------- -------------
Total Operating Expenses 1,514,200 1,736,100 1,594,200
--------------- -------------- -------------
Operating Income (Loss) (508,700) (674,800) 131,500
Gain on sale of Orlando building - - 191,500
Gain on settlement of Cryptek note 278,800
Interest Expense (298,900) (241,300) (249,500)
--------------- -------------- -------------
Income(loss) before extraordinary item (528,800) (916,100) 73,500
Extraordinary item-gain from debt extinguishment - 67,000 186,900
--------------- -------------- -------------
Income (loss) before income taxes (528,800) (849,100) 260,400
Provision for income taxes - - 6,000
--------------- -------------- -------------
Net Income (loss) $ (528,800) $ (849,100) $ 254,400
=============== ============== =============
Basic Earnings per Share:
Earnings (loss) before extraordinary item ($0.079) ($0.136) $0.011
Earnings from extraordinary item - 0.010 0.028
--------------- -------------- -------------
Basic Earnings (loss) per share ($0.079) ($0.126) $0.039
====== ====== ======
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925 6,718,925
Diluted Earnings per Share:
Earnings (loss) before extraordinary item ($0.079) ($0.136) $0.005
Earnings from extraordinary item - 0.010 0.008
--------------- -------------- -------------
Diluted Earnings (loss) per share ($0.079) ($0.126) $0.013
====== ====== ======
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 6,718,925 24,908,925
The accompanying notes are an integral part of the financial statements.
General Kinetics Incorporated
Statements of Stockholders' Deficit
For the Years Ended May 31, 2000, 1999, and 1998
Additional Total
Common Stock Contributed Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------ ------ ------- ------- ----- ------
Balance 5/31/97 7,185,557 $ 1,796,500 $ 7,224,400 $ (14,643,500) $ (450,200) $ (6,072,800)
Net Income 254,400 254,400
Issuance of 60,000 shares 60,000 15,000 15,000 30,000
of common stock
------------ ------------ ------------ ------------- ------------ -------------
Balance 5/31/98 7,245,557 1,811,500 7,239,400 (14,389,100) (450,200) (5,788,400)
Net Loss (849,100) (849,100)
------------ ------------ ------------ ------------- ------------ -------------
Balance 5/31/99 7,245,557 1,811,500 7,239,400 (15,238,200) (450,200) (6,637,500)
Net Loss ($528,800) (528,800)
------------ ------------ ------------ ------------- ------------ -------------
Balance 5/31/00 7,245,557 $ 1,811,500 $ 7,239,400 $ (15,767,000) $ (450,200) $ (7,166,300)
============ ============ ============ ============= ============ =============
The accompanying notes are an integral part of the financial statements.
General Kinetics Incorporated
Statements of Cash Flows
For the years ended May 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Cash Flows From Operating Activities:
Net Income/(Loss) $ (528,800) $ (849,100) $ 254,400
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 184,000 173,100 167,000
Extraordinary gain on debt extinguishment (67,000) (186,900)
Loss (Gain) on disposal of equipment (218,700)
Write off of accounts payable (253,700)
Amortization of bond discount 61,900 61,900 68,700
Provision for doubtful accounts (196,500) 87,500 441,600
Write-off of note receivable 216,600 -
Provision for inventory obsolescence 40,000 60,000 60,000
Write-off of inventory (162,700) (84,200)
Write-off of accrued liabilities (85,100) (82,600)
(Increase) Decrease in Assets:
Accounts Receivable 506,200 (1,233,700) 450,300
Inventories 262,800 (442,400) (66,800)
Prepaid Expenses 23,100 (54,400) 15,100
Other assets (71,000) (25,400) (19,600)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (85,100) 741,400 (164,400)
Accrued Expenses and other payables 100,500 132,100 27,100
Other Long Term Liabilities (6,400) (1,700) (7,900)
---------- ------------ -----------
Net cash provided by/(used) in Operating Activites 290,700 (1,448,900) 399,400
---------- ------------ -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (93,000) (174,400) (287,700)
Net proceeds from sale of property, plant and equipment - - 573,600
Collection of notes recievable 550,000 25,000 -
Issuance of notes receivable - - (25,000)
---------- ------------ -----------
Net cash provided by/(used) in Investing Activities 457,000 (149,400) 260,900
---------- ------------ -----------
Cash Flows from Financing Activities:
Repayment of bonds payable - (33,200) (100,000)
Advances from Factor/Borrowings
on Demand Notes Payable 600,000 687,400 -
Repayments of Advances from Factor/
Demand Notes Payable (634,900) (608,400) -
Repayments on Long Term Debt (62,100) (63,400) (119,300)
---------- ------------ -----------
Net cash used in Financing Activities (97,000) (17,600) (219,300)
---------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 650,700 (1,615,900) 441,000
Cash and Cash Equivalents: Beginning of Period 307,400 1,923,300 1,482,300
---------- ------------ -----------
Cash and Cash Equivalents: End of Period $ 958,100 $ 307,400 $ 1,923,300
========== ============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 200,900 $ 175,100 $ 204,300
Income Taxes $ 800 $ 7,100 $ 800
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Conversion of notes receivable to common stock $ - $ - $ 30,000
The accompanying notes are an integral part of the financial statements.
GENERAL KINETICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. FUTURE PROSPECTS AND RECENT OPERATIONS:
General Kinetics Incorporated (The "Company" or "GKI") has relied upon
internally generated funds and accounts receivable financing, plus cash from
sales of two of its operating companies, to finance its operations. During
fiscal 2000, operating losses totaled $508,700. In order to generate the working
capital required for operations, the Company must continue to generate orders,
stabilize its level of shipments, and operate profitably during fiscal 2001.
The Company must continue to market electronic enclosure products to government
and commercial markets, enter into contracts which the Company can complete with
favorable profit margins, ship the orders in a timely manner, and control its
costs in order to recover from its liquidity problems and seek to operate
profitably in fiscal 2001.
As of May 31, 2000, the Company had cash of $958,100. As discussed in Note 3 to
the financial statements, during the second quarter of fiscal 2000 the Company
renegotiated the terms of its promissory note due from, and preferred membership
interest in, Cryptek. This resulted in cash to the Company totaling $200,000 in
October 1999 and $478,750 in December 1999.
The Company has faced production issues which have contributed to the losses
from operations since facing a large increase in orders in the second half of
fiscal 1999 and the first quarter of fiscal 2000. This was followed by a
decrease in order level during the second half of fiscal 2000. The Company has
taken and is continuing to take steps to address these production issues through
changes and additions to plant supervision and by adding new scheduling and
planning procedures. The Company is trying to stabilize the level of shipments
at a profitable level through these changes and an increased sales effort.
Management believes that cash on hand, borrowings from the factoring of accounts
receivable, and careful management of operating costs and cash disbursements can
enable the Company to meet its cash requirements through May 31, 2001. The
Company may also seek additional funding sources to provide a cushion to handle
variances in cash requirements if sales and shipment levels fluctuate throughout
the fiscal year. However, there is no
assurance the Company will be successful in pursuing its plans or in obtaining
additional financing to meet those cash requirements. The Company must continue
to maintain its level of sales, consistently make timely shipments and produce
its products at adequate profit margins, or the Company will continue to face
liquidity problems, and may be left without sufficient cash to meet its ongoing
requirements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As explained above, the Company has
sustained significant operating losses in fiscal 1999 and 2000. In addition, the
Company has significant short-term cash commitments, the funding of which is
limited to cash flow from operations and the factoring of certain accounts
receivable. These factors raise significant doubt about the Company's ability to
continue as a going concern. The financial statements do not contain any
adjustment that might result from the outcome of these uncertainties.
The Company is party to a factoring agreement with Reservoir Capital Corporation
("Reservoir") in which Reservoir agreed to purchase eligible accounts receivable
from the Company at an assignment price equal to 80% of the outstanding amount
of such accounts receivable. At May 31, 2000 advances due to Reservoir totaled
$44,100. The Company expects to draw on this facility through fiscal 2001 as
necessary to alleviate cash requirements, although, as discussed above, the
Company will also need to reduce and control expenses, maintain the sales
backlog at appropriate levels, and keep shipment levels in line with booked
orders in order to meet these requirements.
2. SIGNIFICANT ACCOUNTING POLICIES:
The Company's significant accounting policies are described below.
NATURE OF BUSINESS:
The Company designs, manufactures and sells specialty metal products such as
precision enclosures and rack mounting systems for the installation of
electronics.
Cash and Cash Equivalents
The Company classifies all temporary investments purchased with a maturity of
less than three months as cash equivalents.
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.
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 an accelerated basis for machinery and
equipment and furniture and fixtures and on a
straight-line basis for all other assets over the following estimated useful
lives.
Buildings and improvements 18 to 45 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Transportation equipment and other 3 years
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 121, 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 the amount of 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
For fiscal 1998, the Company adopted Financial Accounting Standards No. 128,
"Earnings per Share (SFAS 128)". SFAS 128 provides a different method of
calculating earnings per share than was previously used in accordance with APB
Opinion 15. SFAS
128 provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity. Common
stock equivalents consist of convertible debentures (see Note 9) and stock
options (see Note 14). Basic and diluted earnings per share are the same in
fiscal 1999 and 2000 because the impact of dilutive securities is anti-dilutive.
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 than those reported in the financial statements. Management
believes that as of May 31, 2000, the estimates used in the financial statements
are adequate based on the information currently available.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of income
when the transaction affects earnings. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the
period of change. Presently, the Company does not use derivative instruments
either in hedging activities or as investments. Accordingly, the Company
believes that adoption of FASB 133 will have no impact on its financial position
or results of operations.
3. SETTLEMENT OF CRYPTEK NOTE RECEIVABLE
In December 1996, GKI completed the sale of its secure communications division
to Cryptek, the majority of whose equity interests are owned by affiliates of
Angelo Gordon & Co., L.P. The SCD division had been in the business of
manufacturing and selling secure facsimile machines and secure local area
network products for customers handling classified information. The division
incurred significant operating losses during fiscal 1997 and in each of the
prior three fiscal years. Management believed that the resources likely to be
involved in returning the division to profitability could more effectively be
generated and utilized in connection with the development of the electronic
enclosure division and other activities. In addition, the $1.75 million in cash
proceeds received from the sale of the division at closing provided the Company
with operating capital for its continuing business.
In December 1998, the Company entered into a settlement agreement with Cryptek
Secure Communications ("Cryptek"), LLC, resolving differences arising out of
Cryptek's purchase of GKI's former secure communications business. Pursuant to
such settlement, Cryptek made an immediate principal payment of $25,000 on its
outstanding promissory note to the Company and agreed to forego sublease rent
owed by the Company through November 1998. The remaining principal amount of the
Cryptek promissory note was reduced to $550,000 and the payment schedule for
such note was revised and extended through 2002. In addition, the face value of
the preferred membership interest in Cryptek held by the Company was reset at
$900,000, and the requirement for redemption of such interest by Cryptek was
extended through December 2002.
In October 1999, the Company entered into an agreement that amended the
settlement agreement the Company had reached with Cryptek in December 1998. The
October 1999 Agreement reduced the face amount of the promissory note payable to
the Company by Cryptek from $550,000 to $400,000 in exchange for accelerating
the payment schedule. The Company received $200,000 upon execution of the new
agreement. In addition, the October 1999 agreement gave Cryptek the option to
pay the remainder of the promissory note and redeem the preferred interest in
Cryptek held
by the Company (with a face amount of $900,000 and a requirement for mandatory
redemption in December 2002) for an additional $488,750, if that option were
exercised within six months after the execution of the October 1999 Agreement.
At November 30, 1999, the $150,000 reduction in the face amount of the note was
offset against an existing valuation reserve related to the Cryptek promissory
note. In December 1999, Cryptek exercised its option and paid the Company
$478,800, representing a discount of $10,000 in consideration of a closing in
December 1999 rather than at the end of the six-month option period in April
2000. The $478,800 was first applied to settle the note receivable with a
carrying value of $200,000, and the excess of $278,800 is recorded in the
accompanying financial statements as a non-recurring gain in non-operating
income. This gain was recognized because GKI did not attribute any value to the
preferred interest in Cryptek for financial reporting purposes due to
uncertainty over valuation at the time of the original sale transaction.
4. CREDIT RISK
For the years ended May 31, 2000, 1999, and 1998, the Company's net sales to the
U.S. government and/or subcontractors accounted for 83%, 92%, and 91%,
respectively, of consolidated net sales. Accounts receivable from those
customers amounted to $1.05 million and $1.40 million as of May 31, 2000 and
1999, 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,
----------------
2000 1999
---- ----
Work in process $ 813,000 $1,092,200
Raw materials 368,900 352,600
Valuation reserve (199,200) (159,200)
--------- ----------
Total $ 982,800 $1,285,600
========= ==========
Work in process represents actual production costs, including manufacturing
overhead incurred to date, reduced by amounts identified with revenue recognized
on units delivered. The costs attributed to units delivered are based on the
estimated average cost of all units expected to be produced under multiunit
orders. Work in process is reduced by charging any amounts in excess of
estimated net realizable value to cost of sales as soon as they become known.
6. PROPERTY, PLANT AND EQUIPMENT:
Major classes of property, plant and equipment consist of the following on May
31:
2000 1999
---------- ----------
Machinery and equipment $1,250,500 $1,271,600
Buildings and improvements 908,700 908,700
Furniture and fixtures 503,900 673,700
Transportation equipment and other 88,800 88,800
---------- ----------
2,751,900 2,942,800
Less- Accumulated
depreciation and
Amortization 1,827,000 1,926,800
---------- ----------
Net property, plant and
equipment $ 924,900 $1,016,000
========== ==========
Depreciation expense for the years ended May 31, 2000, 1999, and 1998 was
$184,000, $173,100, and $167,000, respectively.
7. DISPOSTION OF ORLANDO FACILITY
During the fourth quarter of fiscal 1998 the Company sold its 38,500 square foot
industrial manufacturing plant in Orlando, Florida to an unrelated third party
for $625,000. The Company realized a pretax gain of approximately $191,500 on
the disposition of the Orlando facility.
During fiscal 1998 and 1997, approximately 2% of the Company's sales were
manufactured in the Orlando facility, and the Company believes that the
Johnstown facility is adequate to meet its current production requirements.
8. ACCRUED EXPENSES AND OTHER PAYABLES:
Accrued expenses and other payables consists of the following on May 31:
2000 1999
---- ----
Employee vacations $257,700 $231,000
Salaries and wages 78,700 109,800
Other 402,900 298,100
-------- --------
$739,300 $638,900
======== ========
9. DEMAND NOTES PAYABLE AND LONG-TERM DEBT:
Demand notes payable and long-term debt consists of the following on May 31:
2000 1999
---- ----
Subordinated Debt Originally Issued for
- ---------------------------------------
Clients of Gutzwiller and Partner, A.G.
- ---------------------------------------
1994 Convertible Subordinated
Debentures $8,995,000 $8,995,000
Other
-----
Real estate mortgage collateralized by first
deed of trust and security interest
in certain real property. Payable in 180 equal
installments through November 2006, plus
interest at prime plus 1.0% (9.5% at
May 31, 2000). 598,500 657,700
Other notes payable with interest rates at
1% at May 31, 2000, and payable August 2004. 40,000 42,800
---------- ----------
$9,633,500 $9,695,500
Less: Current Maturities (69,600) (66,200)
Unamortized discount on
Debentures (263,000) (324,900)
---------- ----------
Long-term debt $9,300,900 $9,304,400
========== ==========
The amount of unamortized discount on Convertible Debentures originally issued
to clients of Gutzwiller and its successor at May 31, 2000, is as follows:
Face Unamortized Carrying
Amount Due Discount Amount
---------- ----------- --------
Convertible Debentures $8,995,000 $263,000 $8,732,000
In connection with the restructuring of the debt, the Company recorded a
discount of approximately $646,000 representing the difference between the cash
proceeds and the face amount of the debt. The total amount of discount
amortization for the years ending May 31, 2000 and 1999 was $61,900 and $61,900,
respectively.
In August 1997, $30,000 of convertible debentures were converted to 60,000
shares of Common Stock. In May 1998, the Company repurchased $300,000 of
convertible debentures for $100,000 in cash. The gain from the extinguishment of
debt was recorded as an extraordinary gain of $186,900, net of bond discount, in
the accompanying statement of operations for the year ending May 31, 1998. In
October 1998, the Company repurchased $100,000 of convertible debentures for
$33,000 in cash. The gain from the extinguishment of debt recorded as an
extraordinary gain of $67,000 in the accompanying statement of operations for
the year ended May 31, 1999.
The convertible debentures mature in August 2004, are convertible into common
stock at a conversion price of 50 cents per share, and bear interest at 1% per
annum payable in arrears at maturity. 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.
In November 1999, the Company finalized an agreement for the funding of the
August 1999 scheduled payments of interest on the convertible debentures by
issuing five promissory notes totaling $88,421. The notes bore interest at 10%
per annum, and were repaid
at the rate of one note each month beginning in December 1999, with final
payment on the last note completed in April 2000.
Other Real Estate Mortgage Loans
The Company has a real estate mortgage agreement on the Company's Johnstown
facility that contains certain covenants which include restrictions on capital
expenditures and dividend payments and a requirement that the Company maintain
certain financial ratios (including minimum tangible net worth and total
liabilities to tangible net worth). The Company was in violation of certain loan
covenants as of May 31, 2000; however, the lender has agreed to waive the
violations through May 31, 2001.
Additionally, the above real estate mortgage agreement contains a subjective
covenant which could allow the bank to accelerate the maturity of the debt if
the bank determines that a material adverse change in the financial or business
condition of the Company has occurred.
During fiscal 1998 the Company repaid its real estate mortgage on the Company's
Orlando facility, and subsequently sold the facility to an unrelated third party
(see Note 7).
Future principal maturities of debt are as follows:
Year Ending
May 31,
2001 $ 69,600
2002 76,800
2003 84,500
2004 132,800
2005 9,107,100
Thereafter 162,700
------------
$ 9,633,500
============
10. INCOME TAXES:
Due to the net losses in fiscal 2000 and 1999 and the available net operating
loss carryforwards, there was no material income tax expense for fiscal 2000 or
1999, nor were any additional income tax benefits available from the carryback
of net operating losses. The Company recorded a provision for income taxes of
$6,000 in 1998 related to alternative minimum tax. Under Statement of Accounting
Standards No. 109 (FAS 109) 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 will be subject to alternative minimum taxes, which has a lower
effective tax rate than the statutory rate of 34%. As of May 31, 2000, there are
no additional income tax benefits available from the carryback of net operating
losses.
The difference between the Federal tax rate and the effective tax rate realized
as a percent of pretax earnings for the years ended May 31, 2000, 1998, and
1998, is as follows:
2000 1999 1998
---- ---- ----
Tax provision (benefit) at
statutory rates $(180,000) $(289,000) $ 89,000
Non deductible related party
interest expense 18,000 32,000 32,000
Generation (utilization) of net
operating loss carryforward and
change in valuation allowance 162,000 257,000 (115,000)
--------- --------- ---------
$ - $ - $ 6,000
========= ========= =========
The primary difference between income (loss) for financial reporting purposes
and income tax purposes is the recognition of reserves for uncollectible
accounts receivable and obsolete inventory, accrued professional fees, deposits
on contracts, and research and development expenses, which are currently
deductible for income tax purposes.
Principal items comprising deferred income tax assets and liabilitities, at May
31, are as follows:
2000 1999
---- ----
Net operating loss carryforward $ 4,105,000 $ 3,926,000
R & D and other credit carryforwards 380,000 380,000
Purchased R & D costs 91,000 102,000
Inventory reserves 63,000 48,000
Allowance for doubtful accounts 29,000 78,000
Excess financial statement depreciation (17,000) (11,000)
Accrued Vacations 98,000 88,000
Other accrued liabilities 93,000 40,000
Accrued professional fees 6,000 9,000
Allowance for Note Receivable 67,000 90,000
Deferred compensation 102,000 105,000
--------- ---------
Total deferred tax assets 5,017,000 4,855,000
Valuation allowance (5,017,000) (4,855,000)
----------- -----------
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, 2000, the Company has net operating loss carryforwards for Federal
and state income tax reporting purposes of approximately $10,802,000, which
expire at various dates
through 2011. The Company has research and development, and other credit
carryforwards for Federal income tax reporting purposes of approximately
$380,000.
11. COMMITMENTS:
Leases:
As part of the sale of the secure communications business, the Company assigned
a lease for approximately 36,800 square feet of space in the building in
Chantilly, Virginia which previously housed this division. The lease for the
Chantilly facility requires the Company to pay for its pro rata share of the
taxes, insurance, and maintenance. The Company has subleased approximately 7,700
square feet of space from Cryptek on substantially the same terms and conditions
as the master lease for its executive offices and the food technology operation.
With the sale of the food technology subsidiary, the Company has sub-subleased
approximately 2,300
square feet of this space to the new owner of the food technology subsidiary on
substantially the same terms and conditions as the sublease with Cryptek. The
sublease expires in March 2001, and the Company plans to either negotiate a new
agreement for the space currently occupied, or to find new office space of
similar size.
The Company also leases certain equipment under noncancelable operating leases
which expire at various dates through 2001.
At May 31, 2000, approximate future minimum rental commitments for all
noncancelable operating leases are as follows:
Year Ending
May 31,
2001 $74,400
2002 10,900
2003 300
-------
85,600
Less- sublease
income(through
May 31, 2001) 19,600
--------
$ 66,000
========
Amounts charged to operations for rent expense amounted to $90,500, $49,300, and
$53,300, for the years ended May 31, 2000, 1999 and 1998, respectively. These
amounts were offset by annual sublease income of approximately $21,200, $19,600,
and $31,700, respectively.
12. RETIREMENT PLANS:
The Company has the following retirement plans at May 31, 2000:
Defined Contribution Plans
In 1999, the Company adopted a 401(k) plan covering its union employees. The
Company makes matching contributions of up to 5% of the individual union
employee's pretax salary deferral. This plan replaced a defined contribution
plan in effect prior to August 1999. Total related pension expense was
approximately $71,900, $77,300, and $66,900, in fiscal 2000, 1999 and 1998,
respectively.
In addition, the Company has a 401(k) plan covering its nonunion employees.
Participants can make pretax salary deferrals up to certain limitations. Company
contributions are discretionary. Total related expenses were approximately
$25,200, $11,900, and $9,100 for fiscal years 2000, 1998 and 1998, respectively.
Employee Stock Ownership Plan ("ESOP") and Trust Agreement
The Company has a noncontributory, qualified ESOP plan covering its nonunion,
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 in the
amount of $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 entitled to receive one-half of that
amount for such spouse's lifetime. The Company provides, on an annual basis, for
anticipated payments under this plan, using an average discount rate of 10
percent and the most recent life expectancy of each individual covered.
Compensation related to this plan totaled approximately $32,100, $36,700, and
$30,400, in fiscal 2000, 1999 and 1998, respectively. As of May 31, 2000, 1999
and 1998, deferred compensation recorded in the consolidated balance sheets was
approximately $269,000,
$275,400, and $277,100, respectively, and was all attributable to retirees
currently receiving benefits.
13. EARNINGS PER SHARE:
In fiscal 1998, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". SFAS 128 replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share and requires a reconciliation of the numerator and
denominator of basic earnings per share to diluted earnings per share.
FOR THE YEAR ENDED May 31, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Net Income $254,400 6,718,925 $0.04
Effect of Dilutive
Securities:
Convertible debentures 58,900 18,190,000
Diluted EPS
Income available to
Common Stockholders
plus assumed conversions $313,300 24,908,925 $0.01
Options to purchase 752,777 shares of common stock were outstanding during the
year but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of common
shares.
Basic EPS and Diluted EPS were the same in both fiscal 1999 and 2000 due to
operating losses in those two years.
14. STOCK OPTIONS:
The Company has six incentive stock option plans under which stock options may
be granted. The Company has reserved 1,950,000 common shares for issuance under
these plans. All six plans have a ten year life and options are granted at the
fair value market value at 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 1989 Stock Option Plan was approved by the stockholders on November 30,
1989. All options under the 1989 stock option plan expired during fiscal 2000.
The 1990 Stock Option Plan was approved by the stockholders on November 13,
1990. Under the 1990 plan, 100,000 options are available for grant. There are no
options outstanding under this plan, as of May 31, 2000.
The 1991 Stock Option Plan was approved by the stockholders on November 19,
1991. Under the 1991 plan, 375,000 options are available for grant through
November 18, 2001, with no more than 125,000 options granted in any one fiscal
year.
The Company adopted the 1991 Nonemployee and Directors Stock Option Plan on
November 19, 1991. This plan provides for grants to nonemployees (consultants
and advisors) and to nonemployee directors of options to purchase up to 100,000
shares of the Company's common stock. There were no options outstanding under
this plan during fiscal 2000.
The 1994 Stock Option Plan was approved by stockholders on October 28, 1994.
Under the 1994 plan, 525,000 options are available for grant through October 28,
2004, with no more than 225,000 options granted in any one fiscal year.
The 1994 Nonemployee and Directors Stock Option Plan was adopted by the Company
on October 28, 1994. This plan provides for grants to nonemployees (consultants
and advisors) and to nonemployee 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.
The summary of the option plans for the years ended May 31, is as follows:
2000 1999 1998
---- ---- ----
Options outstanding June 1, 752,777 714,527 645,277
Granted 42,500 42,500 72,500
Exercised 0 0 0
Canceled (20,750) (9,250) (3,250)
---------- ---------- ----------
Options outstanding at end of
period 774,527 752,777 714,527
---------- ---------- ----------
Price range of
options granted $ 0.25 $ 0.15 $ .09-.19
========== ========== ==========
Price range of options Exercised - - -
========== ========== ==========
Exercise price range of
Outstanding options $.06-$2.50 $.06-$7.00 $.06-$7.00
========== ========== ==========
The summary of stock options outstanding and exercisable as of May 31, 2000 is
as follows:
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------------
1991 Stock Option Plan
$0.56 - $2.50 31,250 1 $0.87 31,250 $0.87
1994 Stock Option Plan
$0.38 - $0.56 38,277 6 0.51 38,277 0.51
1994 Non-employees and Directors Stock Option Plan
$0.06 -$0.09 57,500 6 0.07 57,500 0.07
$0.15 -$0.19 85,000 6 0.17 85,000 0.17
$0.25 -$0.38 75,000 6 0.30 53,750 0.33
$0.69 487,500 6 0.69 162,500 0.69
- -------------------------------------------------------------------------------------------------------------
$0.06 -$2.50 774,527 5.8 $0.55 428,277 $0.46
=============================================================================================================
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
plans. For SFAS 123
purposes, 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 5.96%, 5.53%,
and 5.77% and expected volatility of 50% for the years ended May 31, 2000, 1999
and 1998, 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 $.16,$.04, and$.05 for fiscal
2000, 1999 and 1998, respectively. There were no adjustments made in calculating
the fair value to account for vesting provisions or for non-transferability or
risk of forfeiture.
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
income (loss) and earnings (loss) per share would have been changed to the pro
forma amounts indicated below.
2000 1999 1998
--------------------------------
Net Income(Loss):
As reported $(528,800) $(849,100) $254,400
Pro forma (532,200) (851,200) 251,900
Basic Earnings(Loss) per share:
As reported $ (0.08) $ (0.13) $ .04
Pro forma (0.08) (0.13) .04
Diluted Earnings(Loss) per share:
As reported $ (0.08) $ (0.13) $ .01
Pro forma (0.08) (0.13) .01
15. RELATED PARTY TRANSACTIONS
During fiscal 1996 and 1997, Square Systems, Corp., whose president, Richard J.
McConnell, is a director of the Company, provided consulting services to the
Company in connection with its work with respect to certain research and
development activities. Total charges to the Company for these consulting
services were approximately $123,500 through May 31, 1997. Of that amount,
$30,000 was attributable to software development
work in connection with a facsimile product of the Company's secure
communications division, and the balance was attributable to work in connection
with a contemplated joint venture with Link2It, LLC ("Link2It"), a company
formed by Larry M. Heimendinger and Mr. McConnell. An additional $59,200 was
charged to the Company by Square Systems during fiscal 1997, between June 1 and
December 31, 1996, which was attributable to work in connection with Link2It.
Additional funds advanced by the Company in that connection include payments of
$14,300 to third parties and certain Company expenses allocated to the new
venture totaling approximately $38,500.
In consideration of, among other things, the foregoing amounts advanced by the
Company through January 21, 1997, in the total amount of approximately $205,500,
the Company received a common membership interest in Link2It representing 10% of
the total and a convertible preferred membership interest in Link2It with a face
amount of $112,500 convertible into 9% of the total membership interests
(subject to adjustment under certain circumstances as described below). In
addition, the Company provided Link2It with $150,000 reflected in convertible
promissory notes due one year from the date of issuance and bearing interest at
9 1/4% per annum. An additional $100,000, of which $25,000 was released, was
provided to become available upon the satisfaction of certain agreed upon
conditions. In January 1998, the Company extended the due date of all of the
promissory notes to January 21, 1999 and, among other things, its obligation to
fund additional amounts was terminated. In January 1999 and January 2000, the
Company again extended the repayment period, and such loans are now scheduled to
mature on January 21, 2001 in consideration of a complete release from any
remaining funding obligation and the issuance of warrants to acquire additional
common membership interests in Link2It.
In each case, Link2It's obligation with respect to advances from the Company is
evidenced in a convertible promissory note convertible into additional common
membership interests in Link2It at the rate of 1% of the aggregate interests for
each $12,500 principal amount of the note so converted (subject to adjustment
under certain circumstances described below). In the event of further
investment in Link2It by independent third-party investors the conversion price
at which both the note and the preferred membership interest described above are
convertible into common membership interests in Link2It shall be subject to
adjustment to such lesser percentage as the principal or face amount so
converted could have then purchased at a purchase price proportionate to the
lowest price actually paid for membership interests by such an independent
third-party investor less a
discount of 15%. Prior to such an adjustment, the Company's aggregate common
membership interest in Link2It, assuming advances in the total amount available,
and conversion in full of both the promissory notes evidencing such advances and
its preferred membership interest, would represent 39% of the total.
The Company has agreed to certain further adjustments to the foregoing terms to
the extent required in connection with certain potential third-party financing
and the repayment of the convertible notes. However, due to delays in the
introduction of Link2It's proprietary products into the marketplace and the
extended repayment period of the loans, the accompanying financial statements at
May 31, 2000 include a valuation reserve of $175,000 which represents the total
due under the note receivable.
Link2It is engaged in the development of certain proprietary products and
services in the area of telecommunications and facsimile transmission. Link2It
has announced that it plans to introduce a line of products that will enable
organizations to integrate their standard fax machines into corporate network
environments, intranets, and the Internet.
The terms of the Company's investment in Link2It were approved by Board of
Directors of the Company as a whole.
16. 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 of the Company's financial instruments, none of which
are held for trading purposes, are summarized as follows (brackets denote
liability):
(000's)
May 31, 2000 May 31, 1999
------------- -------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- ------ ----------
Bonds Payable $(8,995) $ (4,184) $ (8,995) $ (3,955)
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
PART III
The information required by Part III (Items 10 through 13) is hereby
incorporated by reference from the Company's definitive proxy statement to be
filed with the Commission under Section 14A of the Securities Exchange Act of
1934 not later than 120 days after the end of the 2000 fiscal year or shall be
filed by amendment to this Form 10-K not later than such 120 day period.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included in Part II, Item 8 of this report:
Consolidated Balance Sheets as of May 31, 2000 and 1999
Consolidated Statements of Operations for the years ended May 31,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Deficit for the years ended
May 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended May 31,
2000, 1999 and 1998
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Included in Part IV of this report:
Financial Statements and Supplementary Data
for the years ended May 31, 2000, 1999, and 1998:
Schedule II - Schedule of Valuation and Qualifying Accounts
Accounts
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal quarter
ended May 31, 2000.
(c) Exhibits
Exhibit Number Description Note No.
- -------------- ----------- --------
2.1 Agreement between GKI and (17)
Link2It, L.L.C. dated as of
January 21, 1997
3.1 Articles of Incorporation (1)
3.2 Articles of Incorporation, as (7)
amended at the Annual
Meeting of GKI shareholders on
November 19, 1991
3.3 Articles of Incorporation, as (16)
amended 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 (7)
of Directors meeting on
September 24, 1992
3.6 By-Laws, as amended at a Board (12)
of Directors meeting on
March 2, 1994
3.7 By-Laws, as amended at a Board
of Directors meeting on
January 19, 1995
4.1 Agreement by and between GKI (7)
and Gutzwiller & Partner, A.G.,
dated October 20, 1992, and a
letter of clarification
regarding such agreement from
Edward J. Stucky to David A.
Shaw, dated October 23, 1992
4.2 Form of Convertible Subordinated
Debentures Issued to Gutzwiller & (8)
Partner, A.G., on December 14,
1992 with an effective date of
October 20, 1992
4.3 Form of 4% Subordinated (9)
Debentures, Series A, due March
30, 1994
4.4 Form of 4% Subordinated
Debentures, Series B, due March (9)
30, 1995
4.5 Form of 4% Subordinated (9)
Debentures, Series C, due August
15, 1994
4.6 Form of Convertible Debentures (14)
Issued to Gutzwiller & Partner,
A.G., dated August 14, 1994.
10.1* 1988 Stock Option Plan (2)
10.2 Agreement and Plan of Merger (1)
and Reorganization dated
August 31, 1990
10.3* 1991 Executive Bonus Plan (5)
10.4* 1991 Stock Option Plan (4)
10.5* 1991 Nonemployee and Directors
Stock Option Plan (4)
10.6* 401(k) Retirement, Investment & (7)
Savings Plan
10.7* 1989 Stock Option Plan (5)
10.8* 1990 Stock Option Plan (5)
10.9* 1994 Stock Option Plan (15)
10.10* 1994 Nonemployee and Directors (15)
Stock Option Plan
10.11 Verdix Asset Purchase Agreement (10)
dated October 1, 1993
10.12 Amendment to Verdix Asset (11)
Purchase Agreement dated
January 26, 1994
10.13 Asset Purchase Agreement between (18)
General Kinetics Incorporated and
Cryptek Secure Communications, LLC, a
Delaware limited liability company,
dated as of November 1, 19961,
16.0 Letter re Change in Certifying Accountants (3)
16.1 Letter re Change in Certifying Accountants (13)
21.1 List of Subsidiaries (16)
27 Financial Data Schedule
* 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 the Securities and Exchange Commission as
an Exhibit to the Company's Current Report on Form 8-K dated
April 3, 1990, and incorporated herein by reference.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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 November 30, 1992 and incorporated herein by
reference.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's amended Current Report on Form 8-K/A
dated June 16, 1994, 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, 1994, and incorporated herein by reference.
(15) 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.
(16) 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.
(17) 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.
(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, 1997 and incorporated herein by
reference.
(d) Schedule
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
General Kinetics Incorporated
The audits referred to in our report, which includes an explanatory paragraph
related to substantial doubt about the Company's ability to continue as a going
concern, to General Kinetics, Inc. dated August 18, 2000 which is contained in
Item 8 of this Form 10-K, included the audits of the financial statement
schedule listed in the accompanying index for each of the three years in the
period ended May 31, 2000. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
/s/ BDO Seidman, LLP
Washington, DC
August 18, 2000
Schedule II
General Kinetics Incorporated
-----------------------------
Schedule of Valuation and Qualifying Accounts
---------------------------------------------
For the Years Ended May 31, 2000, 1999, and 1998
------------------------------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
----------- ------ -------- -------- ---------- ------
FOR THE YEAR ENDED MAY 31, 2000:
Inventory Reserve 159,200 95,000 (55,000) 0 199,200
Allowance for doubtful accounts 208,000 19,500 (152,500) 0 75,000
Note Receivable Reserve 237,500 87,500 (150,000) 0 175,000
FOR THE YEAR ENDED MAY 31, 1999:
Inventory Reserve 261,900 60,000 (162,700) 0 159,200
Allowance for doubtful accounts 208,000 0 0 0 208,000
Note Receivable Reserve 441,600 87,500 (291,600) 0 237,500
FOR THE YEAR ENDED MAY 31, 1998:
Inventory Reserve 286,100 60,000 (84,200) 0 261,900
Allowance for doubtful accounts 208,000 0 0 0 208,000
Note Receivable Reserve 0 441,600 0 0 441,600
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: August 28, 2000
--------------------------------------------
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 8/28/00 /s/ Sandy B. Sewitch 8/28/00
- --------------------------------- --------------------------------
Larry M. Heimendinger, Date Sandy B. Sewitch, Date
Chairman of the Board Chief Financial Officer
(Principal Executive Officer) (Principal Accounting Officer
and Principal Financial Officer)
62
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/ Marc E. Cotnoir August 28, 2000
- ------------------------------ ---------------
Marc E. Cotnoir, Director Date
/s/ Richard J. McConnell August 28, 2000
- ------------------------------ ---------------
Richard J. McConnell, Director Date
/s/ Thomas M. Hacala August 28, 2000
- ------------------------------ ---------------
Thomas M. Hacala, Director Date
63