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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, 1998 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 $ 261,437*
of the Registrant as of August 24, 1998
(*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 1, 1998, 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 1998 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 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; the risk that the Company may not be able to continue
the necessary development of its operations on a profitable basis; the risk that
the Company's Common Stock will not continue to be quoted on the NASD OTC
Bulletin Board services, and the risk of a negative outcome in the pending
litigation between the Company and Cryptek. 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
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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 of more
of the Company's Common Stock. As of May 31, 1998, clients of Gutzwiller or its
successor had invested approximately $3 million in equity, and approximately
$9.4 million in convertible debentures.
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 subsidiary 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
through its prime contractors, accounted for 91% of the Division's revenues in
fiscal year 1998. 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 is
expected to become available during 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 attempting to develop a network of new outside
sales representatives to help expand its current customer base and is planning
to introduce a new commercial catalog for electronic enclosures. 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 its sales during fiscal 1999.
4
The Company plans to finance their strategy through cash on hand as of May 31,
1998 and cash flow generated through operations during fiscal 1999.
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
thousands of an inch (.010) 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 is planning to introduce a new catalog of
commercial enclosures during fiscal 1999. The Company will attempt to market
these products through a network of sales representatives targeting markets such
as the broadcast and security industries.
5
CUSTOMERS
During fiscal year 1998, 1997, and 1996 the EED has sold 91%, 98%, and 99%,
respectively, of its products to the U.S. Government, principally 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 as well as
through outside agencies. In fiscal 1999 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, 1998 and May 31, 1997 was approximately
$1.9 million and $1.3 million, respectively.
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 and 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.
6
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 1999. (See Note 2 to the Consolidated Financial Statements)
The Company does not expect the EED to engage in any significant research and
development activities during fiscal 1999.
THE U.S. GOVERNMENT PROCUREMENT PROCESS
The majority of the Company's fiscal 1998 revenues from continuing operations
were 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. Revenues from these sales represented
approximately 91% of the Company's total revenues in fiscal 1998. 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,
7
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 1998 revenues were derived from contracts that are subject to
termination for convenience. In the event of such a termination, the Company is
normally entitled to receive the purchase price for delivered items,
reimbursement for allowable costs for work in process, and an allowance for
profit thereon or adjustment for loss if completion of performance would have
resulted in a loss. There were no terminations for convenience in fiscal 1998.
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, which 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 apply to other U.S. Government contractors
generally, 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.
8
EMPLOYEES AND LABOR AGREEMENTS
As of May 31, 1998, the Company had 94 employees, all located in the United
States. Of the 94 employees, 10 were salaried and 84 were paid hourly. At that
date on a Company-wide basis, there were 3 employees in engineering, 2 employees
in sales and marketing, 75 employees in manufacturing and assembly operations,
and 14 employees in an executive capacity or in finance and administration. 50
of the Company's employees were represented by the International Brotherhood of
Electrical Workers union in Johnstown, Pennsylvania, under a five year
collective bargaining agreement which will expire on May 31, 1999. The Company
considers its employee relations to be good.
The Company has a noncontributory, qualified employee stock option plan ("ESOP")
plan covering its nonunion, full-time employees, who are at least 21 years of
age. The Company funded its ESOP in April 1991. The shares held by the ESOP were
earned as compensation by eligible employees over a five-year period which ended
May 31, 1996. The ESOP holds 171,500 shares, or approximately 2.6% of the
outstanding Common Stock of the Company.
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.
In connection with the renegotiation of the mortgage on the Orlando facility
during fiscal 1996 an environmental study was undertaken which preliminarily
indicated that the ground water might contain contaminants approaching or
exceeding regulatory standards, which might be attributable to another company's
neighboring facility. That company was notified, conducted a site assessment,
and then agreed to bear responsibility for any costs associated with
remediation. The neighboring company has indicated that it has completed its
monitoring and remediation procedures and contaminant levels are now below the
regulatory standards, and that it has reached an agreement with the Florida
Department of Environmental Protection. The Company does not believe that it
will incur any future costs in this regard. Accordingly, the Company has not
recorded any provision for loss
9
with respect to this matter. During fiscal 1998, the Company sold the Orlando
facility to an unrelated third party.
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 division had been in the business of manufacturing and selling secure
facsimile machines and secure local area network products for customers handling
classified information. The Division incurred significant operating losses
during fiscal 1997 and in each of the prior three fiscal years. Management
believed that the resources likely to be involved in returning the division to
profitable operations 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.
The Company did not receive as scheduled in December 1997 the $200,000 first
installment of the principal due from Cryptek on the $750,000 secured promissory
note (the "Note") which formed a portion of the consideration received from
Cryptek in the disposition of the secure communications business.
Representatives of the Company and Cryptek were discussing certain issues
relating to that disposition, but the Company did not believe that there was any
basis for non-payment. Nevertheless, on April 21, 1998 Cryptek filed a lawsuit
making certain claims in connection with the disposition. The Company filed an
answer responding to those claims and asserting counterclaims against Cryptek on
June 22, 1998. See Item 3 - "Legal Proceedings." Due to the current legal matter
and Cryptek's financial situation, the accompanying financial statements at May
31, 1998 include a valuation reserve of $441,600 with respect to the Note and
the related accrued interest.
10
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
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 minor portion of the Johnstown facility is
leased to an unrelated third party. 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.
11
During fiscal 1998 and 1997, only 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 and
has adequate excess capacity to provide for the Company's expected short term
growth.
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.
ITEM 3 - LEGAL PROCEEDINGS
On April 21, 1998 Cryptek filed in state court in New York County a Summons and
Complaint alleging that the Company made certain false statements to Cryptek in
connection with the sale of the Company's secure communications business, and
seeking unspecified compensatory damages and $50 million in punitive damages on
purported claims of fraud, negligent misrepresentation, breach of contract,
indemnification, and breach of the implied covenant of good faith and fair
dealing.
On June 22, 1998 the Company served its answer in that action, interposed
numerous affirmative defenses, and asserted its own counterclaims against
Cryptek for breach of contract, seeking all amounts due from Cryptek on the Note
in the amount of $750,000 delivered in connection with the Transaction, and
actual, incidental and consequential damages sustained by the Company as a
result of Cryptek's breaches.
Management believes that Cryptek's claims are without merit and intends to
aggressively pursue its counterclaims. The matter is currently in pretrial
discovery.
At the time of Cryptek's failure to pay the first installment of principal due
on the Note and thereafter, representatives of the companies discussed certain
issues relating to the transaction. In management's view, no specific or
persuasive instances of alleged misrepresentation have been identified and no
amounts by which Cryptek might claim to have been damaged have been
12
presented. Management notes that no issues in this regard were raised by Cryptek
until the Company sought assurances from Cryptek that it would comply with its
contractual obligations with respect to the Transaction and until immediately
before Cryptek was required to make its first of three mandated principal
payments on the Note.
Due to Cryptek's financial situation, its unilateral decision to default on the
Note, and the pending litigation, the accompanying financial statements at May
31, 1998 include a valuation reserve of $441,600, with respect to the Note and
related accrued interest.
PART II
ITEM 5 - MARKET FOR GKI COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Effective June 1997, the Company's Common Stock, $.25 par value per share, began
to be quoted in the Over the Counter ("OTC") Bulletin Board service, under the
symbol "GKIN". Prior to that time, the Company's Common Stock traded on the
American Stock Exchange ("AMEX") under the symbol "GKI".
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
- ------------- ---- ---
OTC BULLETIN BOARD:
May 31, 1998 .22 .05
February 28, 1998 .22 .03
November 30, 1997 .44 .13
August 31, 1998 .31 .06
AMEX:
May 31, 1997 5/16 1/16
February 28, 1997 7/16 3/16
November 30, 1996 9/16 3/16
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August 31, 1996 5/8 3/8
The approximate number of holders of record of the Registrant's Common Stock,
$.25 par value, as of August 15, 1998, was 1,018.
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.
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ITEM 6 - SELECTED FINANCIAL DATA
Years ended May 31
- -------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
- -------------------------------------------------------------------
Income Statement Data:
Net Sales $ 7,803 $ 6,420 $7,585 $7,700 $6,739
Cost of sales 7,519 5,438 5,654 5,542 5,013
------- ------- ------ ------ ------
Gross profit 284 982 1,931 2,158 1,726
Selling, general,
and administrative
expenses 2,693 1,663 1,668 1,470 1,153
Product R&D, and
improvement 0 0 94 59 0
Provision for Note
Receivable 0 0 0 0 442
Write off of acquired
R & D costs 416 0 0 0 0
Write off of goodwill 862 0 0 0 0
------- ------- ------ ------ ------
Operating income
(loss) (3,687) (681) 169 629 131
Gain on sale of
building (553) 0 0 0 192
Interest expense, net 710 463 335 336 250
------- ------- ------ ------ ------
Income (loss) from con-
tinuing operations (3,844) (1,144) (166) 293 73
Income (loss) from dis-
continued operations (892) (419) (587) (217) 0
------- ------- ------ ------ ------
Income (loss) before
extraordinary item (4,736) (1,563) (753) 76 73
Gain from debt
extinguishment 0 0 0 0 187
------- ------- ------ ------ ------
Income (loss)
before income taxes (4,736) (1,563) (753) 76 260
Provision for
Income taxes 0 0 0 0 6
------- ------- ------ ------ ------
Net Income/(Loss) $(4,736) $(1,563) $ (753) $ 76 $ 254
======= ======= ====== ====== ======
Basic Earnings Per Share:
Income (loss) from
continuing operations (.69) (.18) (.025) .04 .01
Loss from discontinued
operations (.16) (.06) (.090) (.03) .000
15
Income from extraor-
dinary item .000 .00 .03
Basic Earnings(loss)
Per share (.85) (.24) (.116) .01 .04
Weighted average common
shares outstanding 5,543 6,509 6,509 6,659 6,719
Diluted Earnings Per Share:
Income (loss) from
continuing operations (.69) (.045) (.004) .014 .005
Loss from discontinued
Operations (.16) (.016) (.023) (.008) .000
Income from extraor-
dinary item .00 .00 .000 .000 .008
Diluted Earnings(loss)
Per share (.85) (.061) (.027) .005 .013
Weighted average common
shares and dilutive equi-
valents outstanding 5,543 25,509 25,509 25,509 24,909
Cash dividends
per common share 0 0 0 0 0
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Balance Sheet and Other Data:
- ----------------------------------------------------------------------
May 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Working capital $ 2,084 $ 2,405 $ 2,063 $ 2,070 $ 2,492
Cash 765 212 364 1,482 1,923
Total assets 7,812 8,694 7,026 5,334 4,770
Net property, plant
& equipment 2,121 1,747 1,482 1,249 1,015
Capital
expenditures 317 155 188 157 288
Long-term
liabilities 8,248 10,063 10,092 9,964 9,646
Total Stockholders'
Deficit (3,950) (5,492) (6,224) (6,073) (5,788)
Depreciation and
amortization 671 527 500 207 167
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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 income from continuing operations for fiscal years 1996, 1997 and 1998 (each
ended May 31), and select items as a percentage of revenue.
Percent of Revenue
------------------
1996 1997 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
----- ----- -----
Gross profit 25.4% 28.0% 25.6%
Operating expenses (22.0%) (19.9%) (23.7%)
----- ----- -----
Operating income (loss) 2.2% 8.2% 1.9%
Interest expense (4.4%) (4.4%) (3.7%)
Gain on sale of Orlando Building 0.0% 0.0% 2.8%
Extraordinary item- debt extinguishment 0.0% 0.0% 2.8%
----- ----- -----
Net income (loss) (9.9%) 1.0% 3.8%
===== ===== =====
RESULTS OF OPERATIONS
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. The Company's contracts with the United States
government are subject
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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 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. During fiscal 1999, the Company plans to complete the upgrade of its MIS
and accounting systems, which the Company expects will provide more timely and
accurate information about manufacturing operations.
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 $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 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, which it ultimately cancelled as of May
31, 1998.
19
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%.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Continuing Operations
Net sales for fiscal 1997 for the EED were approximately $7.70 million as
compared with $7.58 million for fiscal 1996, representing an increase of 1.5%.
The increase was attributable to an increase in volume as a result of an
increased sales effort and an increase in customer demand.
The U.S. Navy, directly or through its prime contractors, accounted for 98% of
the EED's revenues in fiscal year 1997. The
20
Company's sales to the United States government and its prime contractors
represented approximately 98% and 99% of total net sales during the Company's
fiscal years ended May 31, 1997 and May 31, 1996, respectively.
Gross profit for fiscal 1997 was approximately $2.16 million compared with
approximately $1.93 million for fiscal 1996, representing an increase of
approximately 11.9%. Gross profit as a percentage of sales increased from 25.6%
in fiscal 1996 to 28.0% in fiscal 1997. The gross profit increase for the EED
was caused primarily by internal efficiencies and improvements in the
manufacturing process, improvements in the estimation and bidding process, and
targeting contracts which the Company can most efficiently manufacture. The
Company began implementing these procedures during fiscal 1995, and the effect
of these changes has resulted in improved gross profits over each of the
following two fiscal years. During fiscal 1998, the Company plans to upgrade its
MIS and accounting systems, which the Company expects will provide more timely
and accurate information about manufacturing operations.
Operating expenses for fiscal 1997 were approximately $1.53 million compared
with $1.77 million for fiscal 1996, representing a decrease of 15.7%. Operating
expenses as a percentage of net sales decreased from 23.2% in fiscal 1996 to
19.9% in fiscal 1997. Selling, General, and Administrative costs were
approximately $1.47 million in the fiscal year ended May 31, 1997 compared to
approximately $1.67 million in the prior fiscal year. This decrease was in part
due to the Company recording a $100,000 increase in its allowance for doubtful
accounts in the fourth quarter of fiscal 1996 as a specific reserve for a
customer who had experienced financial difficulties. Product Research,
Development & Improvement expenses decreased from $93,500 in fiscal 1996 to
$59,200 for the fiscal year ended May 31, 1997. These expenses are related to
the Company's investment in Link2It, LLC (see Note 16 to the Consolidated
Financial Statements), and did not continue in fiscal 1998.
Interest expense increased slightly, from approximately $335,300 in fiscal 1996
to approximately $336,200 in fiscal 1997.
Discontinued Operations
The Company recognized a gain on the sale of the SCD business of $117,000 during
fiscal 1997. The Company incurred losses from discontinued operations in both
the SCD and the FTC Subsidiary. These losses from discontinued operations
totaled $333,800 in fiscal 1997 as compared to $587,100 during fiscal 1996.
21
There was a net loss from SCD of approximately $240,700 on net sales of
approximately $1.6 million from June 1, 1996 through November 30, 1996. During
the prior fiscal year, the SCD had a net loss of approximately $585,000 on net
sales of approximately $7.3 million. Net sales and net income for the fiscal
year ended May 31, 1996 included deliveries totaling $3.2 million on a contract
to Bosch Telecom, a supplier of fax machines to the German Government.
Deliveries on the contract with Bosch Telecom were substantially complete by
April 1996. A provision of $40,000 was made at the time of the sale for future
contingencies, including certain legal and administrative expenses, of which
$5,000 remained at May 31, 1997.
There was a net loss from FTC of approximately $93,100 on net sales of
approximately $199,500 for fiscal 1997 compared to a net loss of $400 on net
sales of $530,400 for the year ended May 31, 1996. The reduction in sales and
increase in operating loss was primarily due to the sale of sorting equipment of
approximately $200,000 during fiscal 1996 as compared to no sales of sorting
equipment during fiscal 1997.
Due to the net losses for fiscal 1996 and the availability of net operating loss
carryforwards there was no material income tax provision for fiscal 1996 or
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied upon internally generated funds, 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. In addition, in the fourth quarter of
fiscal 1998, the Company received $625,000 in cash from the sale of the Orlando
facility, which improved the Company's short term liquidity.
The Company must continue to market electronic enclosure products to government
and commercial markets, and enter into contracts which the Company can complete
with favorable profit margins in order to operate profitably in fiscal 1999. The
Company also intends to introduce and market a catalog of commercial enclosures
during fiscal 1999 targeting markets such as the broadcast and security
industries.
22
The Company has outstanding debentures originally issued to clients of
Gutzwiller & Partner, A.G. totaling $9.1 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.
As of May 31, 1998, the Company had cash of approximately $1.9 million.
Management believes that cash on hand and careful management of operating costs
and cash disbursements should enable the Company to meet its cash requirements
through May 31, 1999.
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. Since the Company does not expect to draw on the
facility during fiscal 1999, the facility was cancelled as of May 31, 1998. The
Company believes that similar facilities will be available at lower costs if it
becomes necessary in the future to alleviate short-term cash requirements.
The Company expects to spend approximately $50,000 during fiscal 1999 for
software, hardware, and consulting services used to update its financial,
accounting, and management information systems. There may be further capital
expenditures of up to $100,000 required for the implementation of the commercial
enclosure product line during the second half of fiscal 1999. Commitments under
operating leases, net of sublessee income, amount to $101,600 in fiscal 1999.
Current maturities of long term debt, including obligations under capitalized
leases, amount to $103,000 in fiscal 1999.
While the Company does not believe that it should be found to have any liability
to Cryptek pending litigation between Cryptek and the Company arising out of the
1996 sale of the Company's SCD business, there can be no assurance that the
Company will prevail on all issues. There can be no assurance that the Company's
liquidity and capital resources might not be materially affected by an negative
outcome in such litigation. See Item 3 "Legal Proceedings."
Year 2000
- ---------
Many existing computer systems and software products, including many used by the
Company, accept only two digit entries in the date
23
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").
Subsequent to May 31, 1998, the Company updated 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 expects
to develop and implement a plan during fiscal 1999 to test year 2000 compliance
in all of its systems, and to examine the effect of compliance by major vendors
and customers. 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.
ANALYSIS OF CASH FLOWS
Operating activities provided $399,400 in cash in fiscal 1998. This reflects net
income of $254,400 plus $174,500 in cash to fund changes in working capital
items plus $725,500 in non-cash expenses, offset by $755,000 in nonrecurring,
noncash gains. The cash used to fund working capital items was principally due
to an increase in accounts receivable of $450,300 during the fiscal year ended
May 31, 1998. This increase in accounts receivable was due to the increase in
shipments during the last quarter of fiscal 1998 compared to the corresponding
period of fiscal 1997.
Investing activities provided $260,900 in fiscal 1998. Net proceeds from the
sale of the Company's Orlando property of $573,600 was offset principally by
acquired property, plant and equipment totaling $287,700, which included
approximately $165,100 for hardware and software for an upgraded accounting and
MIS system.
Financing activities used $219,300 in fiscal 1998, which was used to repay
certain bonds payable and long-term real estate debt.
24
Management believes that inflation did not have a material effect on the
operations of the Company during fiscal 1998.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revised employers'
disclosures about pension and other postretirement benefit plans but does not
change measurement or recognition of those plans. Also, SFAS 132 requires
additional information on changes in the benefit obligations and fair values of
plan assets. Presently, the Company does not offer postretirement benefits, and
adoption of SFAS 132 will not therefore have an effect on reported financial and
operating results.
25
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of income
when the transaction affects earnings. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. Presently, the Company does not use derivative instruments either in
hedging activities or as investments. Accordingly, the Company believes that
adoption of FASB 133 will have no impact on its financial position or results of
operations.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
General Kinetics Incorporated
Chantilly, Virginia
We have audited the accompanying consolidated balance sheets of General Kinetics
Incorporated and subsidiary as of May 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended May 31, 1998. We have also audited
the schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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 and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. 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 and schedule. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
____________________
BDO Seidman, LLP
Washington, DC
August 14, 1998
27
General Kinetics Incorporated
Consolidated Balance Sheets
As of May 31, 1998, and 1997
May 31, May 31,
1998 1997
---- ----
Assets
------
Assets
Current Assets:
Cash and cash equivalents $ 1,923,300 $ 1,482,300
Accounts receivable, net of allowance of $208,000 560,700 1,011,000
Inventories 740,500 649,500
Prepaid expenses and other 4,900 20,000
Note Receivable, current - 200,000
Note Receivable, affiliate 175,000 150,000
------------ ------------
Total Current Assets 3,404,400 3,512,800
------------ ------------
Property, Plant and Equipment 2,780,800 4,712,100
Less: Accumulated Depreciation (1,766,100) (3,463,100)
------------ ------------
1,014,700 1,249,000
Note Receivable, less current portion, net of
allowance of $441,600 350,000 550,000
Other Assets 1,200 22,100
------------ ------------
Total Assets $ 4,770,300 $ 5,333,900
============ ============
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Current maturities of long-term debt 103,000 160,300
Accounts payable, trade 217,400 635,500
Accrued expenses and other payables 591,900 646,600
------------ ------------
Total Current Liabilities 912,300 1,442,400
------------ ------------
Long-Term debt - less current maturities (including
$8,708,300 and $8,956,400 of convertible debentures) 9,369,300 9,679,300
Other long-term liabilities 277,100 285,000
------------ ------------
Total Long-Term Liabilities 9,646,400 9,964,300
------------ ------------
Total Liabilities 10,558,700 11,406,700
------------ ------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 shares authorized 1,811,500 1,796,500
7,245,557 shares issued, 6,718,925 shares outstanding
Additional Contributed Capital 7,239,400 7,224,400
Accumulated Deficit (14,389,100) (14,643,500)
------------ ------------
(5,338,200) (5,622,600)
Less:
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (5,788,400) (6,072,800)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 4,770,300 $ 5,333,900
============ ============
The accompanying notes are an integral part of the above statements.
Page 28
General Kinetics Incorporated
Consolidated Statements of Operations
For the Years Ended May 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Net Sales $ 6,739,300 $ 7,700,700 $ 7,584,800
Cost of Sales 5,013,600 5,542,300 5,653,500
----------- ----------- -----------
Gross Profit 1,725,700 2,158,400 1,931,300
----------- ----------- -----------
Selling, General & Administrative 1,152,600 1,470,100 1,668,100
Provision for Note Receivable 441,600 - -
Product Research, Development & Improvement - 59,200 93,500
----------- ----------- -----------
Total Operating Expenses 1,594,200 1,529,300 1,761,600
----------- ----------- -----------
Operating Income 131,500 629,100 169,700
Gain on sale of Orlando building 191,500 - -
Interest Expense (249,500) (336,200) (335,300)
----------- ----------- -----------
Income (loss) from continuing operations 73,500 292,900 (165,600)
Loss from discontinued operations - (216,800) (587,100)
----------- ----------- -----------
Income(loss) before extraordinary item 73,500 76,100 (752,700)
Extraordinary item -gain from debt extinguishment 186,900 - -
----------- ----------- -----------
Income (loss) before income taxes 260,400 76,100 (752,700)
Provision for income taxes 6,000 - -
----------- ----------- -----------
Net Income (loss) $ 254,400 $ 76,100 $ (752,700)
----------- ----------- -----------
Basic Earnings per Share:
Earnings (loss) from continuing operations $0.01 $0.04 ($0.025)
Earnings (loss) from discontinued operations - (0.03) (0.090)
Earnings from extraordinary item 0.03 - -
----------- ----------- -----------
Basic Earnings (loss) per share $0.04 $0.01 ($0.116)
===== ===== =======
Weighted Average Number of Common Shares
Outstanding 6,718,925 6,658,925 6,508,925
Diluted Earnings per Share:
Earnings (loss) from continuing operations $0.005 $0.014 ($0.004)
Earnings (loss) from discontinued operations - (0.008) (0.023)
Earnings from extraordinary item 0.008 - -
----------- ----------- -----------
Diluted Earnings (loss) per share $0.013 $0.005 ($0.027)
====== ====== =======
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 24,908,925 25,508,925 25,508,925
The accompanying notes are an integral part of the above statements.
Page 29
General Kinetics Incorporated
Consolidated Statements of Stockholder's Equity
For the Years Ended May 31, 1998, 1997, and 1996
Additional Total
Common Stock Contributed Accumulated Treasury Unearned Stockholders'
Shares Amount Capital Deficit Stock ESOP Share Equity
Balance 5/31/95 7,035,557 $1,759,000 $7,466,400 ($13,966,900) ($450,200) ($300,000) ($5,491,700)
Net Loss (752,700) (752,700)
ESOP Compensation (279,500) 300,000 20,500
--------- ---------- ---------- ------------ --------- --------- -----------
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) $0 ($5,788,400)
--------- ---------- ---------- ------------ --------- --------- -----------
The accompanying notes are an integral part of these consolidated statements.
Page 30
General Kinetics Incorporated
Consolidated Statements of Cash Flows
For the Years Ended May 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Cash Flows From Operating Activities:
Net Income/(Loss) $ 254,400 $ 76,100 $ (752,700)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 167,000 207,000 500,400
Write off of VSLAN Software - - 142,900
Extraordinary gain on debt extinguishment (186,900) - -
Gain on disposition of discontinued operations - (117,000) -
Loss (Gain) on disposal of equipment (218,700) - 1,100
ESOP compensation - - 20,500
Write off of accounts payable (253,700) - -
Amortization of bond discount 68,700 64,600 64,600
Bad debt provision 441,600 (36,000) 119,600
Inventory obsolescence (recovery) provision 35,100 (419,100) 209,800
Write off of accrued liabilities (82,600) - -
(Increase) Decrease in Assets:
Accounts Receivable 450,300 (28,900) 1,599,900
Inventories (126,100) 731,200 (514,700)
Prepaid Expenses 15,100 4,900 44,700
Other assets - Software Development Costs - - (101,100)
Other assets (19,600) 100,600 900
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (164,400) (305,200) (647,500)
Accrued Expenses 27,100 (176,800) 62,100
Other Long Term Liabilities (7,900) (7,300) (5,100)
---------- ----------- -----------
Net cash provided by Operating Activites 399,400 94,100 745,400
---------- ----------- -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (287,700) (157,000) (187,500)
Net proceeds from sale of property, plant and equipment 573,600 - 4,400
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 260,900 1,365,500 (183,100)
---------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of bonds payable (100,000) - -
Advances from Factor/Borrowings
on Demand Notes Payable - 1,543,900 1,639,700
Repayments of Advances from Factor/
Demand Notes Payable - (1,690,400) (1,900,200)
Borrowings on Long Term Debt - 13,100 90,000
Repayments on Long Term Debt (119,300) (208,000) (239,900)
---------- ----------- -----------
Net cash used in Financing Activities (219,300) (341,400) (410,400)
---------- ----------- -----------
Net increase in cash and cash equivalents 441,000 1,118,200 151,900
Cash and Cash Equivalents: Beginning of Period 1,482,300 364,100 212,200
---------- ----------- -----------
Cash and Cash Equivalents: End of Period $1,923,300 $ 1,482,300 $ 364,100
---------- ----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 204,300 $ 259,000 $ 355,088
Income Taxes $ 800 $ 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 $ - $ -
Note received upon disposition of discontinued operations $ - $ 750,000 $ -
The accompanying notes are an integral part of the above statements.
Page 31
GENERAL KINETICS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 1998 AND 1997
1. FUTURE PROSPECTS AND RECENT OPERATIONS:
As of December 5, 1996, GKI completed the sale of the business 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. (see Note 4). 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 (see Note 4). Both SCD and FTC had experienced operating losses during
fiscal 1997.
The Company has relied upon internally generated funds, plus cash from sales of
two of its operation companies to finance its operations. The Company's capital
requirements primarily result from working capital needed to support increases
in inventory and accounts receivable. In addition, in the fourth quarter of
fiscal 1998, Company received $625,000 in cash from the sale of the Orlando
facility, which improved the Company's short term liquidity.
The Company must continue to market electronic enclosure products to government
and commercial markets, and enter into contracts which the Company can complete
with favorable profit margins in order to operate profitably in fiscal 1999. The
Company also intends to produce and market a catalog of commercial enclosures
during fiscal 1999 targeting new markets such as the broadcast and security
industries.
The Company has outstanding debentures issued to clients of Gutzwiller &
Partner, A.G. ("Gutzwiller"), or its successor totaling $9.1 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.
As of May 31, 1998, the Company had a balance of approximately $1.9 million in
cash and cash equivalents. Management believes that cash on hand and careful
management of operating costs and cash disbursements should enable the Company
to meet its cash requirements through May 31, 1999.
32
2. SIGNIFICANT ACCOUNTING POLICIES:
The Company's significant accounting policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of General Kinetics
Incorporated, and its wholly owned subsidiary.
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 straight-line basis for all other
assets over the following estimated useful lives.
33
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.
Product Research, Development and Improvements
Costs associated with product research, development and improvements are
expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method which
requires that deferred tax assets and liabilities be recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The recognition of net deferred tax assets is
reduced, if necessary, by a valuation allowance for the amount of any tax
benefits that, based on available evidence, are not expected to be realized.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date.
Basic and Diluted Earnings Per Share
For fiscal 1998, the Company adopted Financial Accounting Standards No. 128,
"Earnings per Share (SFAS 128)". SFAS 128
34
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).
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain estimates used by
management are particularly susceptible to significant changes in the economic
environment. These include estimates of inventory obsolescence, valuation
allowances for trade receivables and deferred tax assets. Each of these
estimates, as well as the related amounts reported in the financial statements,
are sensitive to near term changes in the factors used to determine them. A
significant change in any one of those factors could result in the determination
of amounts different than those reported in the financial statements. Management
believes that as of May 31, 1998, the estimates used in the financial statements
are adequate based on the information currently available.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards:
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and
35
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revised employers'
disclosures about pension and other postretirement benefit plans but does not
change measurement or recognition of those plans. Also, SFAS 132 requires
additional information on changes in the benefit obligations and fair values of
plan assets. Presently, the Company does not offer postretirement benefits, and
adoption of SFAS 132 will not therefore have an effect on reported financial and
operating results.
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 122 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
36
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 SCD and 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 the 1997 fiscal year, the Company disposed of its SCD and its FTC
subsidiary.
Management believed that the resources likely to be involved in returning the
division to profitable operations 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)
1996 1997
---- ----
Net sales:
SCD $7,253 $1,626
FTC 530 200
37
Income/(loss) from discontinued operations:
SCD (587) (241)
FTC (0) (93)
Gain on sale of SCD 117
Net income/(loss) from discontinued
Operations (587) (217)
Loss per share from discontinued operations
($.09) ($.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 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.
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 andCryptek, that existed at the date of the disposition.
38
Operating results of SCD for the fiscal year ended May 31, 1997 and
1996 are shown separately as part of discontinued operations in the accompanying
statements of operations. Net sales of SCD for the period ended December 5, 1996
and the fiscal year ended May 31, 1996 were approximately $1.6 million and $7.3
million, respectively. The net losses for the division for the period ended
December 5, 1996 and the fiscal year ended May 31, 1996 were approximately
$240,700 and $586,700, respectively. 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 and May 31, 1996:
December 5, 1996 May 31, 1996
---------------- ------------
Accounts receivable $ 365,532 $ 429,839
Inventories 2,391,214 2,490,382
Prepaid expenses 1,547 6,910
Property, plant and Equip. 180,981 198,567
Other assets 201,269 304,429
---------- ----------
Total assets 3,140,543 3,429,667
---------- ----------
Accounts payable 582,023 692,798
Accrued expenses 387,936 419,163
---------- ----------
Net assets sold $2,170,584 $2,317,716
========== ==========
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.
The Company did not receive as scheduled in December 1997 the first
installment of $200,000 due from Cryptek on the $750,000 Note which formed a
portion of the consideration received from Cryptek in the disposition of the
secure communications business. Representatives of the Company and Cryptek were
discussing certain issues relating to that disposition, but the Company did not
believe that there was any basis for non-payment. Nevertheless, on April 21,
1998 Cryptek filed a lawsuit making certain claims in connection with the
disposition. The Company filed an answer responding to those claims and
asserting counterclaims against Cryptek on June 22, 1998 (See Note 12). Because
of Cryptek's financial situation, its unilateral decision to default on the
Note, and the pending
39
litigation, the accompanying financial statements at May 31, 1998 include a
valuation reserve of $441,600, with respect to the Note and related accrued
interest.
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 fiscal years ended May 31, 1997
and 1996 are shown separately as part of discontinued operations in the
accompanying statement of operations. Net sales of FTC for the fiscal years
ended May 31, 1997 and 1996 were approximately $.2 million and $.5 million,
respectively. The losses for the division for the fiscal years ended May 31,
1997 and 1996 were approximately $93,100 and $400, respectively. 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.
40
5. CREDIT RISK
For the years ended May 31, 1998, 1997, and 1996, the Company's net sales to the
U.S. government and/or subcontractors accounted for 91%, 98%, and 99%,
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:
May 31,
-------------------------------
1998 1997
---- ----
Work in process $ 675,000 $ 539,300
Raw materials 327,400 396,300
Inventory reserve (261,900) (286,100)
--------- ---------
Total 740,500 649,500
========= =========
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.
41
7. PROPERTY, PLANT AND EQUIPMENT:
Major classes of property, plant and equipment consist of the following on May
31:
1998 1997
---- ----
Machinery and equipment $1,172,600 $2,060,700
Buildings and improvements 908,700 1,747,900
Furniture and fixtures 613,000 715,100
Transportation equipment and other 86,500 88,400
Land 0 100,000
---------- ----------
2,780,800 4,712,100
Less- Accumulated depreciation and
amortization 1,766,100 3,463,100
---------- ----------
Net property, plant and equipment $1,014,700 $1,249,000
========== ==========
Depreciation expense for the years ended May 31, 1998, 1997, and 1996 was
$167,000, 447,700, and $526,000, 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
42
current production requirements and has adequate excess capacity to provide for
the Company's expected short term growth.
9. ACCRUED EXPENSES AND OTHER PAYABLES:
Accrued expenses and other payables consists of the following on May 31:
1998 1997
---- ----
Employee vacations 184,500 176,600
Salaries and wages 56,100 57,600
Other 351,300 412,400
-------- --------
$591,900 $646,600
======== ========
10. DEMAND NOTES PAYABLE AND LONG-TERM DEBT:
Demand notes payable and long-term debt consists of the following on May 31:
1998 1997
---- ----
Subordinated Debt Originally Issued for
Clients of Gutzwiller and Partner, A.G.
- ---------------------------------------
1994 Convertible Subordinated
Debentures 9,095,000 9,425,000
Other
-----
43
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, 1998). 717,000 774,700
Bond payable collateralized by
a first deed of trust and
security interest in real and
personal property. Payable in
monthly installments of
$10,000, including principal
and interest at 68% of prime
plus two points (7.78% at May
31, 1998). 0 57,400
Other notes payable and
capitalized leases with
interest rates between 7% and
15.7% at May 31, 1998, and
approximate monthly aggregate
payments of $8,800. 47,000 51,100
---------- -----------
$9,859,000 $10,308,200
Less: Current Maturities (103,000) (160,300)
Unamortized discount on
Debentures (386,700) (468,600)
---------- -----------
Long-term debt $9,369,300 $ 9,679,300
========== ===========
The amount of unamortized discount on Convertible Debentures originally issued
to clients of Gutzwiller and its successor at May 31, 1998, is as follows:
Face Unamortized Carrying
Amount Due Discount Amount
---------- -------- ------
Convertible Debentures $9,095,000 $386,700 $8,708,300
44
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, 1998 and 1997 was $81,800 and $64,700,
respectively.
During fiscal 1998 there were two transactions involving the convertible
debentures. 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.
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 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
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, 1998; however, the lender has agreed to waive the
violations through May 31, 1999.
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
45
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,
1999 103,000
2000 66,200
2001 69,900
2002 76,700
2003 84,000
Thereafter 9,459,200
----------
$9,859,000
==========
11. 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%. As of May 31,
1998, there are no additional income tax benefits available from the carryback
of net operating losses.
46
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, 1998, 1997, and
1996, is as follows:
1998 1997 1996
---- ---- ----
Tax provision (benefit) at
statutory rates $ 89,000 $ 26,000 $(256,000)
Non deductible related party
interest expense 95,000 95,000 95,000
Generation (utilization) of net
operating loss carryforward (178,000) (121,000) 161,000
--------- --------- ---------
$ 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:
1998 1997
---- ----
Net operating loss carryforward $ 3,162,000 $ 3,852,000
R & D and other credit carryforwards 148,000 148,000
Purchased R & D costs (46,000) 123,000
Inventory reserves 105,000 96,000
Allowance for doubtful accounts 79,000 79,000
Excess financial statement depreciation (138,000) 120,000
Accrued Vacations 70,000 67,000
Other accrued liabilities 8,000 17,000
Excess gain on sale of SCD - 69,000
Accrued professional fees 79,000 52,000
Allowance for Note Receivable 190,000 -
Deferred compensation 150,000 108,000
----------- -----------
Total deferred tax assets $ 3,807,000 $ 4,731,000
Valuation allowance (3,807,000) (4,731,000)
----------- -----------
Net deferred tax asset - -
=========== ===========
47
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, 1998, the Company has NOL carryforwards for Federal and state
income tax reporting purposes of approximately $10,501,000, 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
$389,000.
12. COMMITMENTS AND CONTINGENCIES:
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, 1998, approximate future minimum rental commitments for all
noncancelable operating leases are as follows:
Year Ending
May 31,
1999 $ 52,700
2000 54,000
2001 47,300
2002 4,600
--------
158,600
48
Less-sublease
income (through
May 31, 1999) 57,000
--------
$101,600
========
Amounts charged to operations for operating leases amounted to $53,300,
$119,200, and $228,800 for the years ended May 31, 1998, 1997 and 1996,
respectively. These amounts were offset by annual sublease income of
approximately $31,700, $35,100, and $49,000, respectively.
Cryptek Lawsuit
- ---------------
On April 21, 1998 Cryptek filed in state court in New York County a Summons and
Complaint alleging that the Company made certain false statements to Cryptek in
connection with the sale of the Company's secure communications business, and
seeking unspecified compensatory damages and $50 million in punitive damages on
purported claims of fraud, negligent misrepresentation, breach of contract,
indemnification, and breach of the implied covenant of good faith and fair
dealing (See Note 4).
On June 22, 1998 the Company served its Answer in that action, interposed
numerous affirmative defenses, and asserted its own counterclaims against
Cryptek for breach of contract, seeking all amounts due from Cryptek on the
promissory note in the amount of $750,000 ("the Note") made in connection with
the Transaction, and actual, incidental and consequential damages sustained by
the Company as a result of Cryptek's breaches.
Management believes that Cryptek's claims are without merit and intends to
aggressively pursue its counterclaims. The matter is currently in pretrial
discovery.
At the time of Cryptek's failure to pay the first installment of principal due
on the Note and thereafter, representatives of the companies discussed certain
issues relating to the transaction. In management's view, no specific or
persuasive instances of alleged misrepresentation have been identified and no
amounts by which Cryptek might claim to have been damaged have been presented.
Management notes that no issues in this regard were raised by Cryptek until the
Company sought assurances from Cryptek that it would comply with its contractual
obligations with respect to the Transaction and until immediately before
49
Cryptek was required to make its first of three mandated principal payments on
the Note.
Because of Cryptek's financial situation, its unilateral decision to default on
the Note and the pending litigation, the accompanying financial statements at
May 31, 1998 include a valuation reserve of $441,600, with respect to the Note
and related accrued interest.
13. RETIREMENT PLANS:
The Company has the following retirement plans at May 31, 1998.
Defined Contribution Plans
The Company has a defined contribution plan covering its union employees. Total
related pension expense charged to income was approximately $66,900, $58,300,
and $56,500, in fiscal 1998, 1997 and 1996, respectively. The plan, as required
by a union contract, requires the Company to make an annual contribution equal
to 5 percent of the individual union employee's earned wages.
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. Total related expenses charged to income were
approximately $9,100, $17,400, and $25,400, for fiscal years 1998, 1997 and
1996, 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 have been earned and allocated.
The related receivable from the ESOP was reflected as a reduction of
stockholders equity in the accompanying financial statements as the receivable
was reduced by company contributions to the ESOP.
50
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 $30,400, $38,400, and
$38,400, in fiscal 1998, 1997 and 1996, respectively. As of May 31, 1998, 1997
and 1996, deferred compensation recorded in the consolidated balance sheets was
approximately $277,100, $285,400, and $292,300, respectively, and was all
attributable to retirees currently receiving benefits.
14. EARNINGS PER SHARE:
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", at May 31, 1998 SFAS 128 replaces the presentation of
primary and fully diluted earnings per share with basic and diluted earnings per
share and requires a reconciliation of the numerator and denominator of basic
earnings per share to diluted earnings per share. 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.
51
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
+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
+assumed conversions $135,000 25,508,925 $0.005
Options to purchase 645,277 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 that 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
52
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 grant 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, net
of cancellations, 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 7,250 outstanding options under this plan as of May 31, 1998.
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, 1998. 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 47,250 options outstanding, net of cancellations, of which
47,250 are exercisable at May 31, 1998 at an average exercise price of $.7675.
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, 1998, there are no options outstanding.
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. At May
31, 1998 there are 38,277 options, net of cancellations, outstanding, of which
38,277 are currently exercisable at an average price of $.5135.
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 37,500 options granted under this plan
during the fiscal year ended May 31, 1998 at an exercise price of $.06 per
share. There were 170,833 options granted under this plan during fiscal year
1995 at an exercise price of $.67 per share.
53
Additionally, 358,333 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 552,500 options outstanding, of which 145,000
are exercisable at May 31, 1997 at an average exercise price of $.657.
A summary of the option plans is as follows for the years ended May 31 :
1998 1997 1996
---- ---- ----
Options outstanding June 1, 645,277 799,193 756,166
Granted 37,500 32,500 70,777
Exercised 0 0 0
Canceled (3,250) (186,416) (27,750)
------------ ------------ ------------
Options outstanding at end of period 679,527 645,277 799,193
------------ ------------ ------------
Options exercisable at end of period 660,777 237,777 341,333
============ ============ ============
Options available for grant 1,390,473 1,424,723 1,300,807
============ ============ ============
Exercise price range of
options granted $.13 - .29 $ .06 $ .38 - .56
============ ============ ============
Price range of options Exercised - - -
============ ============ ============
Exercise price range of
Outstanding options $.06 - $7.00 $.06 - $7.00 $.38 - $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 weighed average fair value of each option
grant has been estimated as of the date of the grant using the Black-Scholes
54
option pricing model with the following assumptions; Risk-free interest rate of
5.77% and 6.45% and expected volatility of 50% for the years ended May 31, 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 $.05 and $.46 for fiscal 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 expenses 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.
1998 1997
-----------------------
Net Income:
As reported $254,400 $76,100
Pro forma 251,900 61,277
Basic Earnings per share:
As reported $ .04 $ .01
Pro forma $ .04 $ .009
Diluted Earnings per share:
As reported $ .01 $ .003
Pro forma $ .01 $ .002
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
55
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 _% per annum. An additional $100,000 (of which $25,000 has been released to
date) 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 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.
56
The terms of the Company's investment in Link2It were negotiated on an
arm's-length basis between Mr. Heimendinger and Marc E. Cotnoir as an
independent director and approved by Mr. Cotnoir and by the Board 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.
17. SEGMENT INFORMATION:
Due to the sale of SCD and FTC discussed above, as of May 31, 1998, the Company
operates as a single business segment.
18. 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.
57
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, 1998 May 31, 1997
------------ ------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Bonds Payable $(9,095) $(3,414) $(9,425) $(3,123)
18. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter ended May 31, 1998, the Company recorded a valuation
allowance related to a note receivable and the associated accrued interest of
$441,600, and reduced certain accrued liabilities by $336,300, all of which had
the effect of reducing net income by $105,300 or $.02 per share.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
58
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 1998 fiscal year or shall be
filed by amendment to this Form 10-K not later than such 120 day period.
59
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, 1998 and 1997
Consolidated Statements of Operations for the years ended May
31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Deficit for the years
ended May 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended May
31, 1998, 1997 and 1996
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, 1998, 1997, and 1996:
Schedule II - Schedule of Valuation and Qualifying 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, 1998.
(c) Exhibits
Exhibit Number Description Note No.
- -------------- ----------- ---------
2.1 Agreement between GKI and Link2It, L.L.C. dated as of (17)
January 21, 1997
60
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 (7)
September 24, 1992
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, A.G., (7)
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
61
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
62
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.
63
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.
64
(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
65
Schedule II
General Kinetics Incorporated
Schedule of Valuation and Qualifying Accounts
For the Years Ended May 31, 1998, 1997, and 1996
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, 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
FOR THE YEAR ENDED MAY 31, 1996
Inventory Reserve 405,000 209,800 0 0 614,800
Allowance for doubtful accounts 181,400 119,600 (51,300) 0 249,700
Page 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: August 28, 1998
_______________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Larry M. Heimendinger 8/28/98 /s/ Sandy B. Sewitch 8/28/98
_________________________________ ____________________________
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 August 28, 1998
________________________ _______________
Marc E. Cotnoir, Director Date
/s/ Richard J. McConnell August 28, 1998
________________________ _______________
Richard J. McConnell, Director Date
/s/ Thomas M. Hacala August 28, 1998
________________________ _______________
Thomas M. Hacala, Director Date
68