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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, 1999 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 $ 408,496*
of the Registrant as of August 24, 1999
(* 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 31, 1999, 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 1999 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 succesor 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, 1999, 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. Both SCD and FTC experienced
operating losses during fiscal 1997. Both SCD and FTC are reflected as
discontinued operations to the extent included in the accompanying financial
statements.
(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
3
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 electronic systems from shock and
vibration sensitive electronic communication and detection equipment. The EED's
principal customer for these products is the U.S. Navy which, directly or
indirectly through its prime contractors, accounted for 92%, 91% and 98% of the
Division's revenues in fiscal 1999, 1998 and 1997, 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 new 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 2000.
4
The Company plans to finance its strategy for Fiscal 2000 through cash on hand
as of May 31, 1999, careful management of operating expenses, factoring accounts
receivable to alleviate short-term cash requirements, and cash flow generated
through operations. The Company is also looking 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 and 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 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
5
the broadcast and security industries. During fiscal 1999, shipments of
enclosures to commercial customers totaled $54,000.
CUSTOMERS
During fiscal years 1999, 1998 and 1997 the EED has sold 92%, 91% and 98%,
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 2000 the EED expects to expand its sales effort,
principally 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, 1999 and May 31, 1998 was approximately
$4.2 million and $1.9 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 government requirements of government
or commercial customers. During the second half of fiscal 1999, the EED
experienced significant delays in shipping certain products, including both
6
production delays and delays in acceptance by customers, as well as delays
occasioned by customer changes and modifications.
COMPETITION
The EED operates in a mature, highly fragmented market with intense competition.
The principal elements of competition are price, the ability to deliver product
in accordance with major U.S. Government and prime contractor production
schedules, technical expertise, quality, and 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 expensed approximately $59,200 during fiscal 1997, in connection
with research and development with respect to the feasibility of potential new
products or services, outside of the Company's present operating divisions,
principally the new products and services being pursued by Link2It, LLC, in
which the Company has an ownership interest. The Company has no further
commitment for research and development expenditures related to these products
in fiscal 2000. (See Note 16 to the Consolidated Financial Statements)
The Company does not expect the EED to engage in any significant research and
development activities during fiscal 2000.
7
THE U.S. GOVERNMENT PROCUREMENT PROCESS
The majority of the Company's fiscal 1999 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
92% of the Company's total revenue in fiscal 1999. 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 1999 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 1997, 1998, or 1999. 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
8
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, 1999, the Company had 144 employees, all located in the United
States. Of the 144 employees, 18 were salaried and 126 were paid by the hour. At
that date, on a Company-wide basis, there were 3 employees in engineering, 1
employee in sales and marketing, 119 employees in manufacturing and assembly
operations, and 21 employees in an executive capacity or in finance and
administration. 96 of the Company's employees were represented by the
International Brotherhood of Electrical Workers Union in Johnstown,
Pennsylvania. The Company and the Union recently completed negotiating 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
As of December 5, 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
9
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
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. Cryptek's pending action against the Company and
the Company's counterclaims against Cryptek have been discontinued and mutual
releases exchanged by the parties. The accompanying financial statements at May
31, 1999 and 1998 include a valuation reserve of $150,000 and $441,600,
respectively, with respect to the note and related accrued interest.
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 which had not experienced any significant growth in recent years.
(d) FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
10
The EED does not have any 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.
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.
During fiscal 1997, the Company sold a 19,000 square foot facility which it
owned in Johnstown, Pennsylvania. The building was sold under a lease purchase
option to an unrelated third party which had been leasing the building, for
approximately $7,500 after credit for lease payments received by the Company.
The Company believes that its present facilities are adequate to meet its
current production requirements.
11
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, 1999 .22 .08
February 28, 1999 .23 .05
November 30, 1998 .10 .04
August 31, 1998 .16 .03
May 31, 1998 .22 .05
February 28, 1998 .22 .03
November 30, 1997 .44 .13
August 31, 1997 .31 .06
The approximate number of holders of record of the Company's Common Stock, $.25
par value, as of August 31, 1999, was 1,030.
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.
12
ITEM 6 - SELECTED FINANCIAL DATA
The following sets forth certain selected consolidated financial data for the
five years in the period ended May 31, 1999. The consolidated statement of
operations data for the fiscal years ended May 31, 1999, 1998, 1997 and the
consolidated balance sheet data at May 31, 1999 and 1998 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, 1996 and 1995 and the
consolidated balance sheet data at May 31, 1997, 1996, and 1995 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.
13
Years ended May 31
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
- -------------------------------------------------------------------------------------
Income Statement Data:
- -------------------------------------------------------------------------------------
Net Sales $ 6,420 $ 7,585 $ 7,700 $ 6,739 $ 7,490
Cost of sales 5,438 5,654 5,542 5,013 6,429
-------- -------- -------- -------- --------
Gross profit 982 1,931 2,158 1,726 1,061
Selling, general,
and administrative
expenses 1,663 1,668 1,470 1,153 1,724
Product R&D, and
improvement 0 94 59 0 0
Provision for Note
Receivable 0 0 0 442 13
-------- -------- -------- -------- --------
Operating income
(loss) (681) 169 629 131 (675)
Gain on sale of
building 0 0 0 192 0
Interest expense, net 463 335 336 250 241
-------- -------- -------- -------- --------
Income (loss) from con-
tinuing operations (1,144) (166) 293 73 (916)
Income (loss) from dis-
continued operations (419) (587) (217) 0 0
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item (1,563) (753) 76 73 (916)
Extraordianr gain from
debt extinguishment 0 0 0 187 67
-------- -------- -------- -------- --------
Income (loss)
before income taxes (1,563) (753) 76 260 (849)
Provision for
income taxes 0 0 0 6 0
-------- -------- -------- -------- --------
Net Income/(Loss) $ (1,563) $ (753) $ 76 $ 254 $ (849)
======== ======== ======== ======== ========
Basic Earnings Per Share:
Income (loss) from
continuing operations (.18) (.025) .04 .01 (.136)
Loss from discontinued
operations (.06) (.090) (.03) .00 .000
Income from extraor-
dinary item .00 .000 .00 .03 .010
Basic Earnings(loss)
Per share (.24) (.116) .01 .04 (.126)
Weighted average common
shares outstanding 6,509 6,509 6,659 6,719 6,719
14
Diluted Earnings Per Share:
Income (loss) from
continuing operations (.045) (.004) .014 .005 (.136)
Loss from discontinued
Operations (.016) (.023) (.008) .000 .000
Income from extraor-
dinary item .00 .000 .000 .008 .010
Diluted Earnings(loss)
Per share (.061) (.027) .005 .013 (.126)
Weighted average common
shares and dilutive equi-
valents outstanding 25,509 25,509 25,509 24,909 6,719
Cash dividends
per common share 0 0 0 0 0
15
Balance Sheet and Other Data:
- --------------------------------------------------------------------------------
May 31,
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Working capital $ 2,405 $ 2,063 $ 2,070 $ 2,492 $ 1,530
Cash 212 364 1,482 1,923 307
Total assets 8,694 7,026 5,334 4,770 4,685
Net property, plant
& equipment 1,747 1,482 1,249 1,015 1,016
Capital
expenditures 155 188 157 288 174
Long-term
liabilities 10,063 10,092 9,964 9,646 9,580
Total Stockholders'
Deficit (5,492) (6,224) (6,073) (5,788) (6,638)
16
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from the Company's consolidated statements
of operations from continuing operations for fiscal years 1997, 1998 and 1999
(each ended May 31), as a percentage of revenue.
Percent of Revenue
------------------
1997 1998 1999
------ ------ ------
Net sales 100.0% 100.0% 100.0%
------ ------ ------
Gross profit 28.0% 25.6% 14.2%
Operating expenses (19.8%) (23.7%) (23.2%)
------ ------ ------
Operating income (loss) 8.2% 1.9% (9.0%)
Interest expense (4.4%) (3.7%) (3.2%)
Gain on sale of Orlando Building 0.0% 2.8% 0.0%
Extraordinary item- debt extinguishment 0.0% 2.8% 0.9%
Loss from discontinued operations (2.8%) 0.0% 0.0%
------ ------ ------
Net income (loss) 1.0% 3.8% (11.3%)
====== ====== ======
RESULTS OF OPERATIONS
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Continuing Operations
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, 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
17
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 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.
18
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
19
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. 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 1998 COMPARED TO FISCAL YEAR 1997
Continuing Operations
Net sales for fiscal 1998 were approximately $6.7 million as compared with $7.7
million for fiscal 1997, representing a decrease of 13.0%. The decrease in
volume was primarily attributable to reduced customer demand and increased
competition for available Navy programs.
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 91% of the EED's revenues in fiscal year 1998. The
Company's sales to the United States government and its prime contractors
represented approximately 91% and 98% of total net sales during the Company's
fiscal years ended May 31, 1998 and May 31, 1997, respectively, and are expected
to continue to account for a substantial portion of the Company's revenues for
the foreseeable future.
Gross profit for fiscal 1998 was approximately $1.7 million compared with
approximately $2.2 million for fiscal 1997, representing a decrease of
approximately 22.7%. Gross profit as a percentage of sales decreased from 28.0%
in fiscal 1997 to 25.6% in fiscal 1998. Gross profit decreased primarily because
the fixed manufacturing overhead had to be distributed over a smaller sales
volume.
Operating expenses for fiscal 1998 were approximately $1.6 million compared with
$1.5 million for fiscal 1997. 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. This non-recurring
expense caused operating expenses as a percentage of net sales to increase from
19.9% in fiscal 1997 to 23.7% in fiscal 1998. Selling, General & Administrative
expenses decreased from approximately $1.5 million in fiscal 1997 to
approximately
20
$1.2 million in fiscal 1998, principally due to a write off in fiscal 1998 of
certain accrued liabilities totaling $336,300.
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.
Interest Expense
Interest expense decreased from approximately $336,200 in fiscal 1997 to
approximately $249,500 in fiscal 1998. The Company has financed its working
capital needs with cash flow from operations plus available cash. The decrease
was due to reduced borrowings. During fiscal 1998 the Company made no use of its
accounts receivable financing facility.
Extraordinary Item
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.
Net income after discontinued operations and extraordinary items was $154,400
for fiscal 1998 as compared to $76,100 in fiscal 1997.
Income Taxes
Due to the available net operating loss carryforwards, there was no material
income tax expense for fiscal 1998 and 1997, nor were any additional income tax
benefits available from the carryback 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. 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%.
21
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. The Company's capital requirements primarily result from working
capital needed to support increases in inventory and accounts receivable. During
the second half of fiscal 1999, the Company's expenditures for material and
equipment, as well as payroll and related costs, rose substantially as the level
of booked and anticipated orders increased. In order to generate the additional
working capital required for these purposes, the Company must continue to
generate orders and increase its level of shipments, which have not kept pace
with the increased level of orders and expenditures in recent months. As a
result, the Company faces severe liquidity problems.
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
increased costs in order to recover from its liquidity problems and seek to
operate profitably in fiscal 2000.
As of May 31, 1999, the Company had cash of approximately $300,000. The
Company's liquidity was substantially diminished after year-end following two
months in which the level of shipments was significantly lower than anticipated,
while expenditures for payroll and materials remained high. The Company is
taking steps to address these production issues through changes and additions to
plant supervision and by adding new scheduling and planning procedures. August
shipments were back in line with anticipated levels.
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, 2000. The
Company will also seek additional financing 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
22
requirements. The Company must maintain its level of sales, consistently make
timely shipments and produce their products at adequate profit margins, or the
Company will continue to face severe 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 and cash flow deficits in fiscal 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
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.
In June 1993, the Company entered into 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. The Company did not draw on this
facility during fiscal 1998, but reinstated the facility during the second
quarter of fiscal 1999. At May 31, 1999, the balance of advances due to
Reservoir was $79,000. The Company expects to draw on this facility through
fiscal 2000 as necessary to alleviate cash requirements, although, as discussed
above, the Company will also need to reduce and control expenses and maintain
increased shipment levels in order to meet these requirements.
The Company expects to spend approximately $50,000 during fiscal 2000 for
software, hardware, and consulting services used to update its manufacturing,
financial, accounting, and management information systems. Commitments under
operating leases, net of sublessee income, amount to $66,000 in fiscal 2000.
Current maturities of long term debt, including obligations under capitalized
leases, amount to $106,200 in fiscal 2000.
The Company has outstanding debentures originally issued to clients of
Gutzwiller & Partner, A.G. 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 used $1,448,900 in cash in fiscal 1999. This reflects a net
loss of $849,100 plus $589,500 in cash to fund
23
changes in working capital items plus $10,300 in non-cash expenses. The cash
used to fund working capital items was principally due to an increase in
accounts receivable of $942,100, and an increase in inventories of $442,400,
offset by an increase in accounts payable of $741,400 during the fiscal year
ended May 31, 1999. The increase in accounts receivable was due to the increase
in shipments during the last quarter of fiscal 1999 compared to the
corresponding period of fiscal 1998, and the increase in inventories was due to
the increase in backlog at May 31, 1999 as compared to May 31, 1998. Accounts
payable increased because of the increase in inventory in the fourth quarter and
the increased backlog at May 31, 1999.
Investing activities used $149,400 in fiscal 1999. These activities consisted
principally of acquired property, plant and equipment totaling $174,400, which
included approximately $100,000 for hardware and software for an upgraded
accounting and MIS system.
Financing activities used $17,600 in fiscal 1999. Net factored accounts
receivable advances were approximately $79,000, which was offset by $96,600 used
to repay certain bonds payable and long-term real estate debt.
Management believes that inflation did not have a material effect on the
operations of the Company during fiscal 1999.
Year 2000
Many existing computer systems and software products, including many used by
the Company, accept only two digit entries in the date code field. Beginning in
the year 2000, and in certain instances prior to the year 2000, these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, the Company's date critical functions may
be adversely affected unless these computer systems and software products are or
become able to accept four digit entries ("year 2000 compliant").
During the first quarter of fiscal 1999, the Company began updating its
accounting software package to a version that contains modifications intended to
make them year 2000 compliant. Management does not believe the Company will
suffer any material loss of customers or other material adverse effects as a
result of these modifications. There was no additional cost to the Company for
the accounting software upgrade to be year 2000 compliant. Most other software
programs used within the Company are considered to be year 2000 compliant. The
Company has developed and has begun to
24
implement a plan to test year 2000 compliance in all of its systems, and to
examine the effect of compliance by major vendors and customers. The Company
will, within the next 90 days, develop a contingency plan to be utilized in the
event that its management information systems fail due to a year 2000 related
issue. This plan will focus on temporary manual procedures to be used while the
system issues are addressed. There can be no assurance, however, that the
Company's systems will be rendered year 2000 compliant in a timely manner, or
that the Company might not incur significant unforeseen additional expenses to
assure such compliance. Failure to successfully complete and implement these
modification projects on a timely basis could have a material adverse effect on
the Company's operations.
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.
25
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors And Stockholders
General Kinetics Incorporated
Chantilly, Virginia
We have audited the accompanying consolidated balance sheets of General Kinetics
Incorporated and subsidiary as of May 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended May 31, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Kinetics
Incorporated and subsidiary as of May 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1999 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 and cash flow deficits in fiscal 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 20, 1999
27
GENERAL KINETICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 1999 AND 1998
May 31, May 31,
1999 1998
------------ ------------
Assets
------
Current Assets:
Cash and cash equivalents $ 307,400 $ 1,923,300
Accounts receivable, net of allowance of $208,000 in 1999 and 1998 1,502,800 560,700
Inventories 1,285,600 740,500
Prepaid expenses and other 59,300 4,900
Note Receivable, current 70,000 --
Note Receivable, affiliate, net of allowance of $87,500 and $0 87,500 175,000
------------ ------------
Total Current Assets 3,312,600 3,404,400
------------ ------------
Property, Plant and Equipment 2,942,800 2,780,800
Less: Accumulated Depreciation (1,926,800) (1,766,100)
------------ ------------
1,016,000 1,014,700
Note Receivable, less current portion, net of
allowance of $150,000 and $441,600 330,000 350,000
Other Assets 26,600 1,200
------------ ------------
Total Assets $ 4,685,200 $ 4,770,300
============ ============
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Advances from factor $ 79,000 $ --
Current maturities of long-term debt 66,200 103,000
Accounts payable, trade 958,800 217,400
Accrued expenses and other payables 638,900 591,900
------------ ------------
Total Current Liabilities 1,742,900 912,300
------------ ------------
Long-Term debt - less current maturities (including
$8,654,700 and $8,708,300 of convertible debentures) 9,304,400 9,369,300
Other long-term liabilities 275,400 277,100
------------ ------------
Total Long-Term Liabilities 9,579,800 9,646,400
------------ ------------
Total Liabilities 11,322,700 10,558,700
------------ ------------
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 (15,238,200) (14,389,100)
------------ ------------
(6,187,300) (5,338,200)
Less:
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (6,637,500) (5,788,400)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 4,685,200 $ 4,770,300
============ ============
The accompanying notes are an integral part of the above statements.
28
GENERAL KINETICS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1999, 1998, AND 1997
1999 1998 1997
---- ---- ----
Net Sales $ 7,490,200 $ 6,739,300 $ 7,700,700
Cost of Sales 6,428,900 5,013,600 5,542,300
------------ ------------ ------------
Gross Profit 1,061,300 1,725,700 2,158,400
------------ ------------ ------------
Selling, General & Administrative 1,723,600 1,152,600 1,470,100
Provision for Note Receivable 12,500 441,600 --
Product Research, Development & Improvement -- -- 59,200
------------ ------------ ------------
Total Operating Expenses 1,736,100 1,594,200 1,529,300
------------ ------------ ------------
Operating Income (Loss) (674,800) 131,500 629,100
Gain on sale of Orlando building -- 191,500 --
Interest Expense (241,300) (249,500) (336,200)
------------ ------------ ------------
Income (loss) from continuing operations (916,100) 73,500 292,900
Loss from discontinued operations -- -- (216,800)
------------ ------------ ------------
Income(loss) before extraordinary item (916,100) 73,500 76,100
Extraordinary item -gain from debt extinguishment 67,000 186,900 --
------------ ------------ ------------
Income (loss) before income taxes (849,100) 260,400 76,100
Provision for income taxes -- 6,000 --
------------ ------------ ------------
Net Income (loss) $ (849,100) $ 254,400 $ 76,100
============ ============ ============
Basic Earnings per Share:
Earnings (loss) from continuing operations ($0.136) $ 0.011 $ 0.04
Earnings (loss) from discontinued operations -- -- (0.03)
Earnings from extraordinary item 0.010 0.028 --
------------ ------------ ------------
Basic Earnings (loss) per share ($0.126) $ 0.039 $ 0.01
============ ============ ============
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,718,925 6,508,925
Diluted Earnings per Share:
Earnings (loss) from continuing operations ($0.136) $ 0.005 $ 0.014
Earnings (loss) from discontinued operations -- -- (0.008)
Earnings from extraordinary item 0.010 0.008 --
------------ ------------ ------------
Diluted Earnings (loss) per share ($0.126) $ 0.013 $ 0.005
============ ============ ============
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,718,925 24,908,925 25,508,925
The accompanying notes are an integral part of these consolidated statements.
29
GENERAL KINETICS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1999, 1998, AND 1997
Additional Total
Common Stock Contributed Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------ ------ ------- ------- ----- ------
Balance 5/31/96 7,035,557 1,759,000 7,186,900 (14,719,600) (450,200) (6,223,900)
Net Income 76,100 76,100
Issuance of 150,00 shares 150,000 37,500 37,500 75,000
of common stock
--------- --------- --------- ----------- -------- ----------
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)
--------- --------- --------- ----------- -------- ----------
The accompanying notes are an integral part of these consolidated statements.
30
GENERAL KINETICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1999, 1998, AND 1997
1999 1998 1997
----------- ----------- -----------
Cash Flows From Operating Activities:
Net Income/(Loss) $ (849,100) $ 254,400 $ 76,100
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 173,100 167,000 207,000
Extraordinary gain on debt extinguishment (67,000) (186,900) --
Gain on disposition of discontinued operations -- (117,000)
Loss (Gain) on disposal of equipment (218,700) --
Write off of accounts payable (253,700) --
Amortization of bond discount 61,900 68,700 64,600
Provision for doubtful accounts 87,500 441,600 40,000
Write-off of note receivable 216,600 -- --
Provision for inventory obsolescence 60,000 60,000 60,000
Write-off of inventory (162,700) (84,200) (388,700)
Write off of accrued liabilities (85,100) (82,600) --
(Increase) Decrease in Assets:
Accounts Receivable (1,233,700) 450,300 (104,900)
Inventories (442,400) (66,800) 640,800
Prepaid Expenses (54,400) 15,100 4,900
Other assets (25,400) (19,600) 100,600
Increase (Decrease) in Liabilities:
Accounts Payable - Trade 741,400 (164,400) (305,200)
Accrued Expenses 132,100 27,100 (176,800)
Other Long Term Liabilities (1,700) (7,900) (7,300)
----------- ----------- -----------
Net cash provided by/(used) in Operating Activites (1,448,900) 399,400 94,100
----------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (174,400) (287,700) (157,000)
Net proceeds from sale of property, plant and equipment 573,600 --
Collection of Notes Recievable 25,000
Issuance of notes receivable (25,000) (150,000)
Net proceeds from disposition of discontinued operations -- -- 1,672,500
----------- ----------- -----------
Net cash provided by/(used) in Investing Activities (149,400) 260,900 1,365,500
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of bonds payable (33,200) (100,000) --
Advances from Factor/Borrowings
on Demand Notes Payable 687,400 -- 1,543,900
Repayments of Advances from Factor/
Demand Notes Payable (608,400) -- (1,690,400)
Borrowings on Long Term Debt -- -- 13,100
Repayments on Long Term Debt (63,400) (119,300) (208,000)
----------- ----------- -----------
Net cash used in Financing Activities (17,600) (219,300) (341,400)
----------- ----------- -----------
Net change in cash and cash equivalents (1,615,900) 441,000 1,118,200
Cash and Cash Equivalents: Beginning of Period 1,923,300 1,482,300 364,100
----------- ----------- -----------
Cash and Cash Equivalents: End of Period $ 307,400 $ 1,923,300 $ 1,482,300
----------- ----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 175,100 $ 204,300 $ 355,088
Income Taxes $ 7,100 $ 800 $ --
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $ -- $ -- $ 279,500
Conversion of notes receivable to common stock $ -- $ 30,000 $ --
The accompanying notes are an integral part of the above statements.
31
GENERAL KINETICS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 1999 AND 1998
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. The
Company's capital requirements primarily result from working capital needed to
support increases in inventory and accounts receivable. During the second half
of fiscal 1999, the Company's expenditures for material and equipment, as well
as payroll and related costs, rose substantially as the level of booked and
anticipated orders increased. In order to generate the additional working
capital required for these purposes, the Company must continue to generate
orders and increase its level of shipments, which have not kept pace with the
increased level of orders and expenditures in recent months. As a result, the
Company faces severe liquidity problems.
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
increased costs in order to recover from its liquidity problems and seek to
operate profitably in fiscal 2000.
As of May 31, 1999, the Company had cash of approximately $300,000. The
Company's liquidity was substantially diminished after year-end following two
months in which the level of shipments was significantly lower than anticipated,
while expenditures for payroll and materials remained high. The Company is
taking steps to address these production issues through changes and additions to
plant supervision and by adding new scheduling and planning procedures. August
shipments were back in line with anticipated levels.
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, 2000. The
Company will also seek additional financing 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
32
in obtaining additional financing to meet those cash requirements. The Company
must maintain its level of sales, consistently make timely shipments and produce
their products at adequate profit margins, or the Company will continue to face
severe 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 and cash flow deficits in
fiscal 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 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.
In June 1993, the Company entered into 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. The Company did not draw on this
facility during fiscal 1998, but reinstated the facility during the second
quarter of fiscal 1999. At May 31, 1999, the balance of advances due to
Reservoir was $79,000. The Company expects to draw on this facility through
fiscal 2000 as necessary to alleviate cash requirements, although, as discussed
above, the Company will also need to reduce and control expenses and maintain
increased shipment levels in order to meet these requirements.
The Company expects to spend approximately $50,000 during fiscal 2000 for
software, hardware, and consulting services used to update its manufacturing,
financial, accounting, and management information systems. Commitments under
operating leases, net of sublessee income, amount to $66,000 in fiscal 2000.
Current maturities of long term debt, including obligations under capitalized
leases, amount to $106,200 in fiscal 2000.
The Company has outstanding debentures originally issued to clients of
Gutzwiller & Partner, A.G. 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.
33
2. SIGNIFICANT ACCOUNTING POLICIES:
The Company's significant accounting policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
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
In the Electronic Enclosure Division (the "EED"), contract 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
34
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
35
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.
Comprehensive Income
On May 1, 1998, the Company adopted Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income". Comprehensive income as defined includes all
changes to equity except those resulting from investments and distributions to
owners. The Company has no items of comprehensive income to report.
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 14)
and stock options (see Note 15). Basic and diluted earnings per share are the
same in 1999 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
36
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, 1999, 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. NATURE OF BUSINESS:
After the sale of the Secure Communications Division ("SCD") and Food Technology
Corporation ("FTC") during fiscal 1997, the Company has consolidated its
operations into a single primary line of business: Electronic enclosures and
precision equipment. The EED designs, manufactures, and sells specialty metal
products such as precision enclosures and rack mounting systems for the
installation of electronics.
4. DISCONTINUED OPERATIONS
During fiscal 1997, the Company disposed of its SCD and its FTC subsidiary.
37
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 provided
the Company with operating capital for its continuing business. The Company
decided to exit the FTC business primarily because it was a small operation
which was not related to the Company's primary business, and it had not
experienced any significant growth in recent years.
The following table summarizes the revenues and earnings (loss) from these
operations, including the gain on the sale of SCD.
(in thousands)
1997
Net sales:
SCD $ 1,626
FTC 200
Income/(loss) from discontinued
operations:
SCD (241)
FTC (93)
Gain on sale of SCD 117
Net income/(loss) from discontinued
Operations (217)
Loss per share from discontinued operations
($.01)
SALE OF THE SECURE COMMUNICATIONS BUSINESS
As of December 5, 1996, GKI completed the sale of its secure
communications business to Cryptek, the majority of whose equity interests are
owned by affiliates of Angelo Gordon & Co., L.P.
In the transaction, GKI received $1.75 million in cash, a $750,000
secured promissory note (the "Note") payable over three years (bearing interest
at 1% over the prime rate) and $1.5 million face amount of 6% convertible
preferred equity of the
38
Purchaser which must be redeemed by Cryptek within five years (unless previously
converted). Such preferred equity interest is convertible, at GKI's option, into
4.2% of the regular membership interests in the Purchaser on a diluted basis.
Cryptek also assumed certain liabilities related to the secure communications
business, subject to the terms and conditions of the agreement of sale. The cash
proceeds from the sale were offset by estimated disposal costs and a provision
for operating losses during the phase out period of approximately $214,200. The
foregoing summary is not a complete description of the terms and conditions of
the reported transaction; reference is made to the copy of the agreement between
Cryptek and GKI attached as Exhibit 2.1 to GKI's Form 8-K dated December 20,
1996. Such summary is qualified in all respects by such reference.
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. Cryptek's pending action against the
Company and the Company's counterclaims against Cryptek have been discontinued
and mutual releases exchanged by the parties. The accompanying financial
statements at May 31, 1999 and 1998 include a valuation reserve of $150,000 and
$441,600, respectively, with respect to the note and related accrued interest.
The consideration received by GKI for its secure communications
business was determined in arms-length negotiations with Cryptek. GKI is not
aware of any material relationship between it or any of its directors and
officers, or between any affiliate or the directors or officers of any affiliate
and Cryptek, that existed at the date of the disposition.
Operating results of SCD for the year ended May 31, 1997 are shown
separately as part of discontinued operations in the accompanying statements of
operations. Net sales of SCD for the
39
period ended December 5, 1996 were approximately $1.6 million. The net loss in
the division for the period ended December 5, 1996 was approximately $240,700.
These amounts are included as a discontinued operation in the accompanying
statement of operations.
Assets and liabilities of SCD consisted of the following at December 5,
1996:
December 5, 1996
----------------
Accounts receivable $ 365,532
Inventories 2,391,214
Prepaid expenses 1,547
Property, plant and Equip 180,981
Other assets 201,269
----------
Total assets 3,140,543
----------
Accounts payable 582,023
Accrued expenses 387,936
----------
Net assets sold $2,170,584
==========
The Company realized a gain of approximately $117,000 on the sale of
the secure communications business, net of estimated disposal costs and a
provision for operating losses during the phase-out period.
SALE OF FOOD TECHNOLOGY CORPORATION
As of May 30, 1997, GKI completed the sale of all of its shares of
stock in its FTC subsidiary to the former Vice President and general manager of
FTC.
In the transaction, GKI received approximately $139,000 in cash. In
addition, the Company may receive royalties for a period of ten years based on
total annual revenues from FTC in excess of $300,000. The purchaser also agreed
to pay up to $10,000 of the Company's legal expenses for the transaction.
The consideration received by GKI for FTC was determined in arms-length
negotiations with the purchaser.
Operating results of the FTC for the year ended May 31, 1997 are shown
separately as part of discontinued operations in the accompanying statement of
operations. Net sales of FTC for the year ended May 31, 1997 were approximately
$.2 million. The losses for the division for the
40
year ended May 31, 1997 were approximately $93,100. These amounts are included
in discontinued operations in the accompanying statement of operations.
Assets and liabilities of FTC consisted of the following at May 31,
1997:
May 31, 1997
------------
Accounts receivable $ 13,726
Inventories 153,693
Property, plant and Equip 1,634
--------
Total assets 169,053
--------
Accounts payable 18,854
Accrued expenses 13,057
Net assets sold $137,142
========
The Company did not realize any gain or loss on the sale of FTC.
5. CREDIT RISK
For the years ended May 31, 1999, 1998, and 1997, the Company's net sales to the
U.S. government and/or subcontractors accounted for 92%, 91%, and 98%,
respectively, of consolidated net sales. 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 EED
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 institutions.
6. INVENTORIES
Inventories consist of the following:
41
May 31,
---------------
1999 1998
---- ----
Work in process $ 1,092,200 $ 675,000
Raw materials 352,600 327,400
Valuation reserve (159,200) (261,900)
----------- -----------
Total 1,285,600 740,500
=========== ===========
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.
7. PROPERTY, PLANT AND EQUIPMENT:
Major classes of property, plant and equipment consist of the following on May
31:
1999 1998
-------- ------
Machinery and equipment $ 1,271.600 $ 1,172,600
Buildings and improvements 908,700 908,700
Furniture and fixtures 673,700 613,000
Transportation equipment and other
88,800 86,500
---------- ---------
2,942,800 2,780,800
Less- Accumulated
depreciation and
Amortization 1,926,800 1,766,100
---------- ---------
42
Net property, plant and
equipment $ 1,016,000 $ 1,014,700
========== =========
Depreciation expense for the years ended May 31, 1999, 1998, and 1997 was
$173,100, $167,000, and 447,700, respectively.
8. 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.
9. ACCRUED EXPENSES AND OTHER PAYABLES:
Accrued expenses and other payables consists of the following on May 31:
1999 1998
--------- ------
Employee vacations 231,000 184,500
Salaries and wages 109,800 56,100
Other 298,100 351,300
---------- ----------
$ 638,900 $ 591,900
========== ==========
10. DEMAND NOTES PAYABLE AND LONG-TERM DEBT:
Demand notes payable and long-term debt consists of the following on May 31:
43
1999 1998
-------- ------
Subordinated Debt Originally Issued for
Clients of Gutzwiller and Partner, A.G.
1994 Convertible Subordinated
Debentures 8,995,000 9,095,000
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% (9.25%
at May 31, 1999). 657,700 717,000
Other notes payable and capitalized
leases with interest rates between 7% and
15.7% at May 31, 1999, and approximate
monthly aggregate payments of $8,800. 42,800 47,000
--------- ----------
$ 9,695,500 $ 9,859,000
Less: Current Maturities ( 66,200) (103,000)
Unamortized discount on
Debentures (324,900) (386,700)
---------- ----------
Long-term debt $ 9,304,400 $ 9,369,300
========== ==========
The amount of unamortized discount on Convertible Debentures originally issued
to clients of Gutzwiller and its successor at May 31, 1999, is as follows:
44
Face Unamortized Carrying
Amount Due Discount Amount
---------- -------- ------
Convertible Debentures $8,995,000 $324,900 $8,670,100
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, 1999 and 1998 was $61,800 and $81,800,
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 10 years (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.
Other Real Estate Mortgage Loans
45
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, 1999; however, the lender has agreed to waive the
violations through May 31, 2000.
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.
Future principal maturities of debt are as follows:
Year Ending
May 31,
2000 66,200
2001 69,900
2002 76,700
2003 84,100
2004 92,200
Thereafter 9,306,400
----------
$ 9,695,500
==========
11. INCOME TAXES:
Due to the net loss in fiscal 1999 and the available net operating loss
carryforwards, there was no material income tax expense for fiscal 1999 and
1998, 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
46
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, 1999, 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, 1999, 1998, and
1997, is as follows:
1999 1998 1997
---- ---- ----
Tax provision (benefit) at
statutory rates $(289,000) $89,000 $ 26,000
Non deductible related party
interest expense 32,000 32,000 32,000
Generation (utilization) of net
operating loss carryforward and
change in valuation allowance 257,000 (115,000) ( 58,000)
--------- --------- --------
$ - $ 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:
1999 1998
---- ----
Net operating loss carryforward $ 3,926,000 $ 3,481,000
R & D and other credit carryforwards 145,000 148,000
Purchased R & D costs (56,000) (46,000)
Inventory reserves 48,000 105,000
Allowance for doubtful accounts 78,000 79,000
Excess financial statement depreciation (11,000) (1,000)
Accrued Vacations 88,000 70,000
Other accrued liabilities 40,000 8,000
47
Accrued professional fees 9.000 79,000
Allowance for Note Receivable 90,000 190,000
Deferred compensation 105,000 105,000
----------- -----------
Total deferred tax assets 4,462,000 4,218,000
Valuation allowance (4,462,000) (4,218,000)
----------- -----------
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, 1999, the Company has net operating loss carryforwards for Federal
and state income tax reporting purposes of approximately $10,332,000, which
expire at various dates through 2010. The Company has research and development,
and other credit carryforwards for Federal income tax reporting purposes of
approximately $380,000.
12. COMMITMENTS:
Leases:
As part of the sale of the business 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 Food Technology Corporation on substantially the same terms and conditions as
the sublease with Cryptek. The Company also leases certain equipment under
noncancelable operating leases which expire at various dates through 2001.
At May 31, 1999, approximate future minimum rental commitments for all
noncancelable operating leases are as follows:
48
Year Ending
May 31,
2000 $ 85,900
2001 74,400
2002 10,900
2003 300
---------
171,500
Less-sublease
income (through
May 31, 2001) 35,900
---------
$135,600
=========
Amounts charged to operations for operating leases amounted to $49,300, $53,300,
and $119,200, for the years ended May 31, 1999, 1998 and 1997, respectively.
These amounts were offset by annual sublease income of approximately $19,600,
$31,700, and $35,100, respectively.
13. RETIREMENT PLANS:
The Company has the following retirement plans at May 31, 1999:
Defined Contribution Plans
The Company has a defined contribution plan covering its union employees. Total
related pension expense charged to income was approximately $77,300, $66,900,
and $58,300, in fiscal 1999, 1998 and 1997, respectively. The plan, as required
by a union contract, required the Company to make an annual contribution equal
to 5 percent of the individual union employee's earned wages. As negotiated in
the new collective bargaining agreement, the Company has agreed to replace the
defined contribution plan with a 401(k) plan covering its union employees
effective August 1, 1999. The Company has agreed to make matching contributions
of up to 5% of the individual union employee's pretax salary deferral.
In 1992, the Company adopted a 401(k) plan covering its nonunion employees.
Participants can make pretax salary deferrals up to certain limitations. Company
contributions are discretionary.
49
Total related expenses charged to income were approximately $11,900, $9,100, and
$17,400, for fiscal years 1999, 1998 and 1997, 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 $36,700, $30,400, and
$38,400, in fiscal 1999, 1998 and 1997, respectively. As of May 31, 1999, 1998
and 1997, deferred compensation recorded in the consolidated balance sheets was
approximately $275,400, $277,100, and $285,400, respectively, and was all
attributable to retirees currently receiving benefits.
14. 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
50
reconciliation of the numerator and denominator of basic earnings per share to
diluted earnings per share. The 1997 earnings per share amount has been restated
in accordance with SFAS No. 128. Earnings per share have been computed using the
weighted average number of common shares outstanding.
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
FOR THE YEAR ENDED May 31, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ----------- ------
BASIC EPS
Net Income $ 76,100 6,658,925 $ 0.01
Effect of Dilutive
Securities:
Convertible debentures 58,900 18,850,000
DILUTED EPS
Income available to
Common Stockholders
plus assumed conversions $ 135,000 25,508,925 $ 0.005
51
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.
15. STOCK OPTIONS:
The Company has six incentive stock option plans under which stock options may
be granted. The Company has reserved 2,100,000 common shares for issuance under
these plans. Under all six plans, options are granted for periods up to ten
years and at the fair market value at the date of grant. Canceled options become
available for new grants upon cancellation.
The 1989 Stock Option Plan was approved by the stockholders on November 30,
1989. Under the 1989 plan, of the 150,000 options available, 7,250 options have
been granted at an average exercise price of $7.00. No options were exercised
under this plan during the past three fiscal years. There are 5,500 outstanding
options under this plan as of May 31, 1999.
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, 1999. No options were
exercised under this plan during the prior three fiscal years.
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. There are 36,500 options outstanding and exercisable at May 31, 1999 at an
average exercise price of $.83.
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. Options may be granted through November
18, 2001. As of May 31, 1999, there are no options outstanding.
52
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. During
fiscal 1999, 5,000 shares were issued at an exercise price or $.15. At May 31,
1999 there are 48,277 options, net of cancellations, outstanding, of which
45,777 are currently exercisable at an average price of $.45.
The 1994 Nonemployee and Directors Stock Option Plan was approved by
stockholders 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. Options may be granted
through October 28, 2004. There were 42,500 options granted under this plan
during the fiscal year ended May 31, 1999 at an exercise price of $.15 per
share. There were 162,500 options granted under this plan during fiscal year
1995 at an exercise price of $.6875 per share. Additionally, 325,000 incentive
stock options were granted to nonemployee directors during 1995 at an exercise
price of $.6875. 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. There are a total of
662,500 options outstanding, of which 316,250 are exercisable at May 31, 1999 at
an average exercise price of $.44.
A summary of the option plans is as follows for the years ended May 31 :
1999 1998 1997
-------- -------- ------
Options outstanding June 1, 714,527 645,277 799,193
Granted 42,500 62,500 32,500
Exercised 0 0 0
Canceled (9,250) (3,250) (186,416)
---------- ---------- ----------
Options outstanding
at end of period 752,777 714,527 645,277
---------- ---------- ----------
Options exercisable
at end of period 404,027 335,777 237,777
========== ========== ==========
Options available
for grant 1,382,223 1,355,473 1,424,723
========== ========== ==========
53
Exercise price range of
options granted .15 $.09-.29 $ .06
========== ========== ==========
Price range of options
Exercised -- -- --
========== ========== ==========
Exercise price range of
Outstanding
options $.06-$7.00 $.06-$7.00 $.06-$7.00
========== ========== ==========
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
5.53%, 5.77% and 6.45% and expected volatility of 50% for the years ended May
31, 1999, 1998 and 1997, 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 $.04, $.05 and $.46
for fiscal 1999, 1998 and 1997, 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.
1999 1998 1997
-----------------------------------------
Net Income(Loss):
As reported $ (849,100) $ 254,400 $ 76,100
Pro forma (851,200) 251,900 61,277
Basic Earnings(Loss) per share:
As reported $ (0.13) $ .04 $ .01
Pro forma $ (0.13) $ .04 $ .009
Diluted Earnings(Loss) per share:
As reported $ (0.13) $ .01 $ .003
Pro forma $ (0.13) $ .01 $ .002
54
16. 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, the Company again
extended the repayment period, and such loans are now scheduled to mature on
January 21, 2000 in consideration of a complete release from any remaining
funding obligation and the issuance of warrants to acquire additional common
membership interest in Link2It. Due to the 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, 1999
include a valuation reserve of $87,500 with respect to the notes.
55
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.
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.
In fiscal 1997, a company of which Mr. Robert K. Gardner, a former director of
the Company, was a principal received payments totaling approximately $57,800
representing fees and expenses in connection with the December 1996 disposition
of the Company's Secure Communications Division. During 1996, the Company made
payments to Mr. Gardner, or a company of which he is a principal, in connection
with consulting services rendered to the Company by Mr. Gardner. Total amounts
paid in respect of such services were $82,000 in fiscal year 1996 during which
time Mr. Gardner also served as Vice Chairman of the Board.
As discussed in Note 3 above, the Company sold all of its stock in its FTC
subsidiary as of May 30, 1997 to the former Vice President and general manager
of FTC.
56
17. 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, 1999 May 31, 1998
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Bonds Payable $(8,995) $(3,955) $(9,095) $(3,414)
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
57
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 1999 fiscal year or shall be
filed by amendment to this Form 10-K not later than such 120 day period.
58
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, 1999 and 1998
Consolidated Statements of Operations for the years ended May
31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Deficit for the years
ended May 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended May
31, 1999, 1998 and 1997
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, 1999, 1998, and 1997:
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, 1999.
(c) Exhibits
Exhibit Number Description Note No.
- -------------- ----------- --------
2.1 Agreement between GKI and Link2It, L.L.C. dated as of (17)
January 21, 1997
59
3.1 Articles of Incorporation (1)
3.2 Articles of Incorporation, as amended at the Annual (7)
Meeting of GKI shareholders on November 19, 1991
3.3 Articles of Incorporation, as amended at the Annual (16)
Meeting of GKI shareholders on October 28, 1994
3.4 By-Laws (1)
3.5 By-Laws, as amended at a Board of Directors meeting on
September 24, 1992 (7)
3.6 By-Laws, as amended at a Board of Directors meeting on (12)
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 and Gutzwiller & Partner, (7)
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 (8)
Gutzwiller & Partner, A.G., on December 14, 1992 with an
effective date of October 20, 1992
4.3 Form of 4% Subordinated Debentures, Series A, due March (9)
30, 1994
4.4 Form of 4% Subordinated Debentures, Series B, due March (9)
30, 1995
60
4.5 Form of 4% Subordinated Debentures, Series C, due August (9)
15, 1994
4.6 Form of Convertible Debentures Issued to Gutzwiller & (14)
Partner, A.G., dated August 14, 1994.
10.1* 1988 Stock Option Plan (2)
10.2 Agreement and Plan of Merger
and Reorganization dated
August 31, 1990 (1)
10.3* 1991 Executive Bonus Plan (5)
10.6* 1991 Stock Option Plan (4)
10.7* 1991 Nonemployee and Directors Stock Option Plan (4)
10.8* 401(k) Retirement, Investment & Savings Plan (7)
10.9* 1989 Stock Option Plan (5)
10.10* 1990 Stock Option Plan (5)
10.11* 1994 Stock Option Plan (15)
10.12* 1994 Nonemployee and Directors Stock Option Plan (15)
10.13 Verdix Asset Purchase Agreement dated October 1, 1993 (10)
10.14 Amendment to Verdix Asset Purchase Agreement dated (11)
January 26, 1994
61
10.15 Asset Purchase Agreement between General Kinetics (18)
Incorporated and Cryptek Secure Communications, LLC, a
Delaware limited liability company, dated as of November
1, 1996
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.
62
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.
63
(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) Schedules
64
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 20, 1999 which is contained in
Item 8 of this Form 10-K, included the audit of the financial statement schedule
listed in the accompanying index for each of the three years in the period ended
May 31, 1999. 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.
BDO Seidman, LLP
Washington, DC
August 20, 1999
65
Schedule II
GENERAL KINETICS INCORPORATED
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MAY 31, 1999, 1998, AND 1997
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, 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
FOR THE YEAR ENDED MAY 31, 1997
Inventory Reserve 614,800 60,000 (388,700) 0 286,100
Allowance for doubtful accounts 249,700 40,000 (81,700) 0 208,000
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENERAL KINETICS INCORPORATED
By: /s/ Larry M. Heimendinger
---------------------------------------------
Larry M. Heimendinger, Chairman of the Board
(Principal Executive Officer)
Date: September 13, 1999
---------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Larry M. Heimendinger 9/13/99 /s/ Sandy B. Sewitch 9/13/99
- --------------------------------- ---------------------------------------
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)
67
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 September 13, 1999
- ------------------------------ ------------------
Marc E. Cotnoir, Director Date
/s/ Richard J. McConnell September 13, 1999
- ------------------------------- ------------------
Richard J. McConnell, Director Date
/s/ Thomas M. Hacala September 13, 1999
- ------------------------------- ------------------
Thomas M. Hacala, Director Date
68