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, 1996 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-C Sullyfield Circle, Chantilly, VA 20151
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (703)-802-9300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on which Registered
- ------------------- ------------------------------------
Common Stock with par value of
25 cents per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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
----- -----
* (Further amendment required to previously filed Form 8-K to add audit report
regarding acquisition financial statements)
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 $1,410,680*
of the Registrant as of August 19, 1996
(* Executive officers, directors, ESOP and Gutzwiller and Partner, A.G. 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 19, 1996, was 6,508,925
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 1996 fiscal year are incorporated into Part III hereof.
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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 the Company may not be
able to maintain its listing on the American Stock Exchange; and the risk that
the Company may not be able to continue the necessary development of its
operations on a profitable basis. 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 ("EED"), designs and manufactures high-quality precision
enclosures for electronic systems, principally for sale to the U.S. Department
of Defense and U.S. Navy.
GKI, through its Secure Communications Division ("SCD"), is also a designer,
producer and marketer of secure digital facsimile equipment, principally to the
U.S. and foreign governments. Secure facsimile equipment utilizes special US and
NATO protocols to allow for the transmission of sensitive communications via
government secure lines. The division also produces local area network security
products for US and NATO governments.
The Company also manufactures and distributes food testing equipment and machine
vision equipment, such as plastic sorting equipment, through its wholly-owned
subsidiary, Food Technology Corporation ("FTC").
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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 have been financed to a
significant extent by debt and equity investments made by the Company's majority
shareholder, Gutzwiller & Partner, A.G. ("Gutzwiller"), a Swiss investment bank.
As of May, 1996, Gutzwiller has invested approximately $3 million in equity, and
approximately $9.5 million in convertible debentures.
In July 1996, the Company reached a preliminary understanding in principle to
sell its Secure Communications Division to an undisclosed third party. The
proposed transaction remains subject to conclusion and execution of a definitive
agreement, receipt of any required approvals, and other contingencies. A
previous preliminary understanding reached on December 12, 1995 to sell the
division to another third party had not progressed to a definitive agreement.
The Company is not actively attempting to sell the division, but has considered
certain offers as presented to it.
(b) Financial Information About Industry Segments
For information regarding the sales, income and identifiable assets attributable
to each industry segment, see Note 17 to the Consolidated Financial Statements
in Item 8.
(c) Narrative Description of Business
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Electronic Enclosure Division
General
The Electronic Enclosure Division designs and manufactures high-quality
precision enclosures for sophisticated electronic systems. The Enclosure
Division 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 from
shock and vibration sensitive electronic communication and detection equipment.
EED's principal customer for these products is the U.S. Navy which, directly or
through its prime contractors, accounted for 99% of the Division's revenues in
fiscal year 1996. EED sells these products as a prime contractor and also as a
subcontractor to major prime contractors such as Westinghouse, Raytheon, Hughes
Aircraft, Martin Marietta, General Electric and Lockheed.
Strategy
The Company's long-term goals for EED are to increase market penetration with
the Department of Defense, to expand into other departments within the U.S.
Government, and to expand into the non-government marketplace by targeting build
to print opportunities for enclosures and related items.
Management intends to use its established customer base and reputation for
quality to expand into other departments and agencies within the government. The
emphasis in the non-government marketplace is expected be on those companies
with requirements for high end precision enclosures and related items.
It is anticipated that the Enclosure Division will achieve moderate overall
growth along with improved margins in its operations.
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Products
The Enclosure Division's principal products are enclosures, such as racks and
cabinets, consoles, and "COTS" mounting platforms for sophisticated electronic
systems generally made in accordance with specific client requirements. In 1994,
EED developed a series of consoles and enclosures to offer as a catalog product
to be sold to prime contractors for contracts in the defense community that
require this type of enclosure. These new consoles and enclosures provide an
environment that makes it possible to use commercial electronics while meeting
the need for combat ready systems.
The Enclosure Division'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, EED has in-plant facilities to
test for radio frequency interference (R.F. testing) as is required to certify
certain products. EED fabricates high volumes of 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 Enclosure Division's products have high visibility in such
programs as AEGIS and other major U.S. Government programs.
Customers
During fiscal year 1996,1995, and 1994 EED has sold 99%,96%, and 93%,
respectively, of its products to the U.S. Navy, either as a prime contractor or
a subcontractor to major prime contractors. Therefore, a material decline in
Department of Defense spending, in particular spending by the U.S. Navy, could
have a material adverse effect on the operations of the Enclosure Division,
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.
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Marketing and Sales
The Enclosure Division currently markets its products through a direct sales
force. In fiscal 1997 EED expects to expand its direct sales force and to
contract with outside agencies for additional sales representatives. EED also
participates in industry trade shows as a means of contacting new and existing
customers and introducing new products.
Backlog
The Enclosure Division's contract backlog as of May 31, 1996 and May 31, 1995
was approximately $2.4 million and $3.7 million, respectively.
The Enclosure Division 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.
Competition
The Enclosure Division 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 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 EED's
competitors have significantly greater financial, marketing and technological
resources that the Company.
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Secure Communications Division
General
In July 1996, the Company reached a preliminary understanding in principle to
sell its Secure Communications Division to an undisclosed third party. The
proposed transaction remains subject to conclusion and execution of a definitive
agreement, receipt of any required approvals, and other contingencies. A
previous preliminary understanding reached on December 12, 1995 to sell the
division to another third party had not progressed to a definitive agreement.
The Company is not actively attempting to sell the division, but has considered
certain offers as presented to it.
The Secure Communications Division is in the business of manufacturing, selling
and supporting Secure Facsimile machines and Secure Local Area Networks for
customers handling classified information. GKI's products transmit images and
information over fax and enable users to share information on digital networks
under secure conditions. The products are certified to handle classified data
and to use secure communication lines, which is required for certain uses by the
Federal government. Even though they are evaluated and certified by the
Department of Defense, all products are Commercial Off-The-Shelf ("COTS") and
are sold to a product specification to government users and system integrators
alike.
During fiscal 1996 the Company reviewed the government and commercial market for
VSLAN and VSIP secure network products and determined that at this point in time
the Company would not be able to make material new sales in this marketplace
without significant additional investment in product development, sales, and
marketing. Accordingly, during the fourth quarter of fiscal 1996, the Company
wrote off capitalized software costs of $142,900 and certain related inventory
totaling $84,800 in connection with the VSLAN products.
Strategy
Beginning in 1994, SCD developed a strategy which emphasizes the government
markets where its facsimile products and marketing channels have historically
proven most successful. This plan discontinued prior efforts to re-apply the
facsimile products and channels to commercial markets, where the value added of
very high levels of security is less established, and the products and
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channels do not fit without substantial change and investment. SCD has further
clarified this strategy, resulting in a focus on Tactical Secure Facsimile
systems for U.S. and International markets.
Products and Services
FAX products: The secure facsimile products perform three basic functions that
are unique to users handling classified information.
First, they interface to a variety of encryption devices, such as the secure
telephone units ("STU"), which are used by authorized users to transmit
classified information over telephone and satellite links. This allows the safe
transmission of "encrypted" or scrambled information from point to point.
Ordinary fax machines cannot connect to such devices. Special designs and
government approvals are required. GKI's products are designed and approved to
be compatible with all versions of the STU that the Company understands to be in
use by the United States Government.
Second, electronic emanations can be detected from any electric or electronic
equipment, and read by unauthorized persons. Special enclosures or special
circuit design inhibits such emanations from occurring, in accordance with
certain Government ("Tempest") standards. Certain facsimile machines in GKI's
product line are approved and certified to these standards.
Many users of secure information are interested in images as well as text.
Photographs and other images are particularly important and very difficult to
transmit over normal facsimile equipment. It is often critical to maintain very
high resolution integrity of photographs in order for the resulting fax image to
be useful. The Company believes that GKI's proprietary technology provides
leading image resolution within the industry. Achieved by a combination of
thermal paper and 16 shades of gray, this capability provides the transmission
of complex images with very high integrity, and has been a product
differentiator for the Company's products for several years.
Three models are currently in production:
TS10A and TS 14 are the original heavy duty, communication center units
with full photographic resolution capability for Tempest and
non-Tempest needs respectively.
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TS21 is a ruggedized lightweight product designed for use in field
tactical situations or use in severe environments. The Company believes
that this product has significant advantages over the competition in
the tactical market, and believes that this facsimile machine will be
the primary source of sales in the Secure Communications Division
beginning in fiscal 1997.
Prices for products currently in production range from approximately $6,000 to
$15,000.
The major competition for SCD facsimile products comes from Ricoh, a major
Japanese-owned supplier of facsimile machines, copiers and other office
products. Other competitors are ILEX, TSP subsidiary of GTE, and Motorola. All
three major competitors have greater financial, marketing, and technological
resources than the Company and price their products very aggressively. The
Company believes that the high resolution imaging capacity of its products
distinguishes its products from those of its competitors.
Network products: Local Area Networks ("LANs") couple computers ("PCs") together
so they may share equipment and information. Printers, communication devices,
shared data files, etc. can all be accessed by anyone on a LAN. There are many
LAN users in government sites and in industry sites doing work for the
government. In order to prevent unauthorized or inadvertent access to classified
information, the federal government currently allows only two approaches. First,
a LAN that has any PC using classified information must be "system high"-
meaning that it must have all users and equipment cleared for that particular
level and category of classified information. This severely restricts the use of
a shared LAN and its resources between users, or causes duplicate LANs (one for
each cleared level) to be built. Alternatively, the NSA's National Computer
Security Center ("NCSC") has developed a process for achieving and evaluating
Multi-Level Secure ("MLS") networks, whereby, users of different security levels
may share the same LAN. GKI's VSLAN network product is evaluated by NCSC at the
B2 level of assurance which is necessary to allow classified and unclassified
data to share the same network. The Company believes that VSLAN is one of only
two LAN products on NSA's "evaluated products list" ("EPL") at or above the B2
level of assurance.
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The Network systems include the VSLAN and the VSIP which have the following
characteristics:
VSLAN: the basic B2 network product allows PCs, Unix Workstations and
many other large computers to connect together using both classified
and unclassified information.
VSIP: a Router, a device to connect LANs together, such as two secure
LANs or a secure LAN and non-secure LAN
Prices for VSLAN range from $1,000 to $3,500 per connection (number of computers
that are connected together on a LAN), and from $12,000 to $20,000 for VSIP.
During fiscal 1996 the Company reviewed the government and commercial market for
VSLAN and VSIP secure network products and determined that at this point in time
the Company would not be able to make material new sales in this marketplace
without significant additional investment in product development, sales, and
marketing. Accordingly, during the fourth quarter of fiscal 1996, the Company
wrote off capitalized software costs of $142,900 and certain related inventory
totaling $84,800 in connection with the VSLAN products.
Served Markets
Primary markets: The Secure Communications Division's primary markets are
government users and industrial organizations engaged in government contracts
who handle classified information or use classified transmission lines. The
users are primarily the U.S. Federal Government, military, and contractors, and
International military and Federal Governments, law enforcement agencies and
contracts, particularly in NATO countries, Pacific Rim and third world
countries.
Significant customers profiles:
White House Communications Agency ("WHCA") uses TS10As to meet a
requirement to send high resolution photographs via secure phones from
communication centers worldwide to the White House and trip teams
supporting the President. GKI is the only supplier to this account. During
military operations such as Just Cause and Dessert Storm, TS10As have been
used for months on a 24 hour basis to and from the WHCA.
U.S. Air Force selected SCD faxes to be on board aircraft including Air
Force One, Speckled Trout, C-20 Gulfstreams, AC-
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130 Spectre Gunships, EC-135 Special Duty Aircraft, E-3B/C Sentry
(AWACS), E-4B National Emergency Airborne Command Post, and the E-8 Joint
STARS aircraft.
Defense Information Systems Agency selected SCD Faxes as a standard
DoD/Federal Agency supplier for DoD support of drug interdiction efforts;
Department of Justice DEA, FBI, INS and US Marshal offices; Coast Guard and
Treasury (including ATF, Customs Service, IRS and Secret Service).
Manufacturing
The general approach taken by SCD is to contract out the manufacture of, or to
purchase sub-assemblies and provide final assembly and test in the Company's own
plant.
Both product lines make extensive use of small printed circuit boards ("PCBs")
for the electronics portion of LANs and FAXes. The Company designs, tests, and
documents initial PCBs and contracts to outside sources to build and test
production units to its specification. Other assemblies such as chassis, printer
and scanner units are purchased from outside suppliers.
The Division maintains modest finished goods inventory and arranges for
suppliers to maintain "kits" of parts and components in order to be able to
rapidly build subassemblies to order. Further implementation of this Just In
Time ("JIT") approach is dependent on the Company's ability to convince
suppliers to share some of the financial risk. The result would be quicker
product delivery and responsiveness to customers.
Backlog
The Company's Secure Communications Division backlog at May 31, 1996 was
approximately $1.9 million which are expected to ship during the following year,
per customer requirements. The backlog for this division at May 31, 1995, was
approximately $5.0 million.
In August of 1991, the Company entered into a contract with ANT Nachrichtechnil
GmbH ("ANT"), a German subsidiary of Robert Bosch GmbH, to act as a supplier of
certain TS10A like machines under a contract with the Federal Republic of
Germany. As a result of developing modifications to the TS10A and submitting
prototypes
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for test by the German Government, a production contract for over $4.0
million was awarded to GKI and shipments began in March 1995. During the 1996
fiscal year, the Company shipped facsimile equipment with a purchase price of
approximately $3.2 million to ANT and shipments were completed on this
contract in April, 1996.
Food Technology Corporation
GKI's wholly-owned subsidiary, Food Technology Corporation, is a manufacturer of
high-quality texture testing instrumentation for the food industry and optical
inspection equipment for the plastics and related industries. Total revenues for
the fiscal year ended May 31, 1996, represented approximately 3.5 percent of the
Company's total sales.
The majority of FTC's revenues were generated by the food texture measurement
product line. These systems allow the food industry to objectively measure the
"texture" of raw and processed foods. The quality conscious food industry has
recognized the importance of consistent texture, as well as taste, color and
aroma as a major factor in consumer acceptance. System configurations range from
sophisticated computer based laboratory designs to simple in plant units.
FTC's optical inspection systems are widely used to inspect streams of plastic
pellets for contamination. Employed as production equipment, large systems
detect and remove contamination as small as a few thousandths of an inch from
purity critical applications such as the insulation surrounding high voltage
cable. Used in the QC lab, smaller systems are used to evaluate production
samples for the presence of contamination generated in the polymer manufacturing
process.
FTC currently markets these products through the direct efforts of one
professional employee and a limited network of manufacturer's representatives.
The current marketplaces are mildly competitive due to the relatively small
size.
FTC's backlog was approximately $24,100 at May 31, 1996.
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Research and Development Program
The Company's research agenda has been formulated to pursue certain technologies
that will impact products in the secure facsimile line over the next 3 to 5
years. The Company intends to seek to maintain its technical edge to compliment
its regulatory approvals.
In the last three fiscal years, the Company has expensed $852,400, $1,260,600,
and $1,119,900, respectively, on Company-sponsored research and development
activities relating to SCD. During the fiscal year ended May 31, 1996, the
Company capitalized $101,100 in internally developed software costs relating to
the secure local area network product new release (VSLAN 5.0) and certain
software being developed for the TS-21 ruggedized facsimile machine. However, a
review of the expected sales of the current VSLAN product resulted in a write
down of $142,900, included in the above expense, of the capitalized software
asset for this product during the fourth quarter of fiscal 1996. Amortization of
other capitalized costs is computed on a product-by-product basis over the
estimated economic lives of the products, commencing with the introduction of
the software in the market.
The Company expensed approximately $93,500 during fiscal 1996 in connection with
additional research and development with respect to the feasibility of potential
new products or services, through joint ventures or otherwise, outside of the
Company's present operating divisions. The Company will continue to review and
evaluate the status of this research and development activity. (See Note 16 to
the Consolidated Financial Statements)
Fiscal 1997 research and development activities are expected to be financed
through any combination of cash funds generated from operating activities, and
other sources of financing that the Company may be able to obtain should further
cash needs arise, including proceeds under a line of credit collateralized by
accounts receivable, or placement of additional debt or equity arrangements.
However, no assurances can be given that such additional funding will be
obtained. Accordingly, the degree to which the Company is able to invest in
research and development activities is necessarily limited by the available cash
resources to fund such investment.
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The U.S. Government Procurement Process
Most of the Company's 1996 revenues were derived from sales directly to
departments and agencies of the U.S. Government and to prime contractors
reselling to the U.S. Government market. Revenues from these sales represented
approximately 64% of the Company's total revenues in fiscal 1996. The Company
sells to the U.S. Government through a wide variety of contract procurement
mechanisms that include formal solicitations and requests for quotes. The
Company's sales to U.S. Government prime contractors are typically made through
contracts secured by formal competitive bidding.
The Company's U.S. Government contracts and, in general, its subcontracts with
the U.S. Government's prime contractors, provide that such contracts may be
terminated by the U.S. Government or prime contractor for convenience. The
Company estimates that substantially all of the Enclosure Division's fiscal 1996
revenues were derived from contracts that are subject to termination for
convenience. The Secure Communications Division's government contracts are for
off the shelf products and therefore have not historically been terminated 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 termination for convenience in fiscal 1996. 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 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.
In connection with aspects of its Secure Communications Division products,
certain of the Company's facilities and employees have been granted security
clearances from the Defense Investigative
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Service ("DIS"), which may be required as a condition to bidding for some
United States government contracts. In addition, sales to foreign
customers of the Secure Communications Division products (particularly
products with TEMPEST protection) are restricted to certain countries by
United States export control regulations. In light of the foreign nationality
of Gutzwiller, the Company's principal stockholder, in order to maintain its
security clearances, the Company had pursued certain procedures prescribed by
the DIS to limit Gutzwiller's access to Company facilities and/or its voting
power with respect to certain operations of the Company. Certain proposed
changes in those arrangements intended to more particularly address the
Company's circumstances have been discussed with the DIS. In this connection,
the Company has formed a subsidiary, Cryptek Secure Communications,
Incorporated, to manage and execute all business relating to or requiring
security clearances. It is anticipated that this subsidiary will have three
board members, including two present employees of the Company and one
non-employee, none, or only one, of whom will be directors of GKI itself, and
all of whom are U.S. Citizens. The DIS has reviewed relevant documentation and a
"Special Security Agreement" contemplating the transfer of all facility and
personnel security clearances into the new subsidiary, as to which the foreign
ownership or influence issues that arise at the Company level should not exist,
and is currently reviewing certain proposed procedures for implementing the
arrangement, including certain reconfiguration of the layout of the Chantilly
facility. The Company does not anticipate any adverse impact on Company
operations from the implementation of such arrangements or appropriate
alternative arrangements, if any, that might be pursued with the DIS.
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.
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Employees and Labor Agreements
As of May 31, 1996, the Company had 120 employees, all located in the United
States. Of the 120 employees, 51 were salaried and 69 were paid by the hour. At
that date on a Company-wide basis, there were 4 employees in engineering and
research and development, 8 employees in sales and marketing, 91 employees in
manufacturing and assembly operations, and 17 employees in an executive capacity
or in finance and administration. 47 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 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.
Environmental Matters
The Enclosure Division 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. The Company is currently awaiting notification from the
Florida Department of Environmental Protection that it has been released from
further responsibility associated with this matter and does not believe that
they will incur any future costs in this regard. Accordingly, the Company has
not recorded any provision for loss with respect to this matter.
Pursuant to the requirements of applicable federal, state, and local statutes
and regulations, the Company believes it has
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received all of the environmental permits and approvals necessary for the
operations of its facilities.
(d) Foreign and Domestic Operations and Export Sales
For information regarding export sales, see Note 13 to the Consolidated
Financial Statements in Item 8.
ITEM 2 - PROPERTIES
The Company maintains executive offices, the Secure Communications Division, and
Food Technology Corporation at an approximately 36,800 sq. ft. subleased
facility in northern Virginia. This facility, which is located in Chantilly,
Virginia, is subleased through April 2001 from an unrelated third party. The
total future rent commitments for the Chantilly facility is approximately
$1,040,900. Manufacturing facilities for the Company's Enclosure Division are
located in buildings owned by the Company in two locations: a 56,000 square foot
industrial manufacturing plant in Johnstown, Pennsylvania; and a 38,500 square
foot industrial manufacturing plant in Orlando, Florida. A minor portion of the
Johnstown facility is leased to an unrelated third party.
During fiscal 1996 the Company entered into a Forbearance Agreement with the
holder of the real estate mortgage on the Company's Orlando facility. Pursuant
to the Forbearance Agreement, a redemption notice with respect to the bonds
originally issued to finance the facility, previously delivered by the mortgage
holder, was withdrawn and the Company has agreed to make accelerated payments of
$10,000 per month in principal ($168,540 at May 31, 1996) and interest until the
remaining principal is paid in full.
The Johnstown facility is also subject to a mortgage held by a local banking
institution.
In addition, GKI owns a 19,000 square foot facility in Johnstown, Pennsylvania.
The building is currently being leased by an unrelated third party for
approximately $550 per month. The lease term covers three years, expiring in
1997 with an option to purchase.
The Company believes that its present facilities are adequate to meet its
current production requirements.
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ITEM 3 - LEGAL PROCEEDINGS
As of the date hereof, there are no material pending legal proceedings to which
GKI or any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the last
quarter of fiscal year 1996.
PART II
ITEM 5 - MARKET FOR GKI COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Effective November 21, 1991, the Company's Common Stock, $.25 par value per
share, began trading on the American Stock Exchange ("AMEX") under the symbol
"GKI." Prior to trading on the AMEX, the Company's Common Stock was traded on
the NASDAQ National Market System from June 18, 1991 through November 20, 1991
under the symbol "GKIE" and prior to that was traded in the NASDAQ
over-the-counter market. The table below presents the high and low sales prices
as reported on the AMEX for the fiscal quarters within the two most recent
fiscal years:
Quarter Ended High Low
May 31, 1996 7/8 7/16
February 28, 1996 7/8 7/16
November 30, 1995 15/16 1/16
August 31, 1995 1/2 1/16
May 31, 1995 9/16 1/8
February 28, 1995 3/4 7/16
November 30, 1994 15/16 9/16
August 31, 1994 1 3/8 1/2
The approximate number of holders of record of the Registrant's Common Stock,
$.25 par value, as of August 19, 1996, was 1,060.
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.
18
<PAGE>
The Company continues to be out of compliance with certain listing requirements
of the American Stock Exchange by virtue of recent trading prices of its common
stock as well as stockholders' equity and working capital deficits, recent
losses and other factors. The Company is actively taking steps to address the
Exchange's guidelines, and has recently met with representatives of the Exchange
to discuss its situation and the basis of which a termination of listing might
continue to be deferred, but there can be no assurance that a return to
compliance will be accomplished or that the listing will be continued.
The Company anticipates that implementation of the 1-for-3 reverse stock split
recommended by the American Stock Exchange and approved by shareholders at the
1995 Annual Meeting would be delayed until after the closing of the proposed
transaction to sell the Secure Communications Division.
19
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION
Years ended May 31
1992 1993 1994 1995 1996
(in thousands, except per share data)
<S> <C>
Income Statement Data:
Net Sales $17,299 $13,473 $12,596 $13,415 $15,368
Cost of sales 15,972 10,929 11,116 10,061 11,668
------ ------ ------ ------ ------
Gross profit 1,327 2,544 1,480 3,354 3,700
Selling, general,
and administra-
tive expenses 5,726 4,416 3,586 3,177 3,170
Product research,
development, and
improvement
expenses 1,873 556 1,123 1,276 946
Write off of Research
and Development
Costs Acquired 0 0 416 0 0
Write off of Goodwill 0 0 862 0 0
------ ------ ------ ------ ------
Operating income
(loss) (6,272) (2,428) (4,507) (1,099) (416)
Gain on Sale of
Rockville Building 0 0 (553) 0 0
Interest expense,
net 429 655 782 464 337
Income (loss)
before income
taxes (6,701) (3,083) (4,736) (1,563) (753)
Income tax
(expense)
benefit 479 0 0 0 0
Net income (loss) (6,222) (3,083) (4,736) (1,563) (753)
======= ======= ======= ======= =====
Earnings (loss)
per common
share (2.94) (.88) (.85) (.24) (.12)
Cash dividends
per common share 0 0 0 0 0
Weighted average
shares and dilu-
tive equivalents
outstanding 2,119 3,498 5,543 6,509 6,509
</TABLE>
20
<PAGE>
Balance Sheet and Other Data:
<TABLE>
<CAPTION>
May 31
1992 1993 1994 1995 1996
<S> <C>
Working capital $(5,192) $ (509) $ 2,084 $ 2,405 $ 2,063
Cash 60 67 765 212 364
Total assets 10,518 9,918 7,812 8,694 7,026
Net property, plant
& equipment 3,085 2,554 2,121 1,747 1,482
Capital
expenditures 1,294 68 317 155 188
Long-term
liabilities 977 4,771 8,248 10,063 10,092
Shareholders'
equity (deficit) (1,939) (1,722) (3,950) (5,492) (6,224)
Depreciation and
amortization 682 703 671 527 500
</TABLE>
21
<PAGE>
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 for fiscal years 1994, 1995 and 1996 (each ended May 31), and select
items as a percent of revenue.
Segment Information
(in thousands)
Net Sales:
1994 1995 1996
Electronic Enclosure Division 7,802 6,420 7,585
Secure Communications Division 4,194 $ 6,550 $ 7,253
Food Technology Corporation 600 445 530
------- ------- -------
Total $12,596 $13,415 $15,368
======= ======= =======
Operating Income (Loss):
1994 1995 1996
Electronic Enclosure Division (660) 486 1,488
Secure Communications Division (1,055) $ (468) (585)
Food Technology Corporation 237 51 0
Corporate expenses (3,029) (1,168) (1,319)
-------- -------- --------
Total $(4,507) $(1,099) $ (416)
======== ======== ========
Percent of Revenue
1994 1995 1996
Net sales 100.0% 100.0% 100.0%
------ ------ ------
Gross profit 11.8% 25.0% 24.1%
Operating expenses (47.6%) (33.2%) (26.9%)
------- ------- -------
Operating income (loss) (35.8%) (8.2%) (2.7%)
Interest expense (6.2%) (3.5%) (2.2%)
Gain on sale of Rockville Building 4.4% 0.0% 0.0%
Income tax (provision) benefit 0.0% 0.0% 0.0%
------- ------- ------
Net income (loss) (37.6%) (11.7%) (4.9%)
Results of Operations ======= ======= ======
22
<PAGE>
Fiscal Year 1996 Compared to Fiscal Year 1995
Net sales for fiscal 1996 were $15.4 million as compared with $13.4 million for
fiscal 1995, representing an increase of 14.6%. The Electronic Enclosure
Division's net sales in fiscal 1996 totaled $7.6 million compared with $6.4
million in fiscal 1995. The increase was attributable to an increase in volume
as a result of an increased sales effort and an increase in customer demand.
Management believes this growth trend may continue into fiscal 1997.
There was also an increase in sales in the Secure Communications Division, which
had net sales of $7.3 million in fiscal 1996 compared to $6.5 million in fiscal
year 1995. This increase was due principally to deliveries to ANT (a supplier of
fax machines to the German Government) of $3.2 million in fiscal 1996 as
compared to $1.8 million in fiscal 1995. The final shipments to complete the ANT
contract were made in April, 1996. The increase was offset by a lower average
sales price on its TS-10 products sold through international resellers. The
secure network products acquired from Verdix resulted in net sales of $242,000
in fiscal 1996, as compared to net sales of $329,300 in fiscal 1995. Based on
future sales projections, the Company has decided to de-emphasize its secure
network products in fiscal 1997. The Company's other operations are expected to
continue to represent a minor portion of the Company's business in the near
future.
The Company's sales to the United States government and its prime contractors
represented approximately 64% and 62% of total net sales during the Company's
fiscal years ended May 31, 1996 and May 31, 1995, respectively, and are expected
to continue to account for a substantial portion of the Company's revenues for
the foreseeable future. The Company's contracts with the United States
government are subject to the availability of funds through annual
appropriations, may be terminated by the government for its convenience at any
time and generally do not require the purchase of a fixed quantity of products.
Reductions in United States government defense spending could adversely affect
the Company's operating results. In particular, the principal customer for the
Enclosure Division's products is the United States Navy which, directly or
through its prime contractors, accounted for 99% of the Enclosure Division's
revenues in fiscal year 1996. 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
23
<PAGE>
will not have an adverse effect on sales of the Company's products in the
future.
Gross profit for fiscal 1996 was approximately $3.7 million compared with
approximately $3.4 million for fiscal 1995, representing an increase of
approximately 10.6%. The gross profit for the Enclosure Division was
approximately $2.0 million for the fiscal year ended May 31, 1996 compared to a
gross profit of approximately $1.0 million for the prior fiscal year. The gross
profit for the Secure Communications Division was approximately $1.7 million in
fiscal 1996 compared to a gross profit of approximately $2.2 million in fiscal
1995.
The gross profit increase for the Electronic Enclosure Division 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. These procedures
were implemented during fiscal 1995, but the full effect was not felt until
1996. The Company expects the trend to continue in fiscal 1997. The gross profit
decrease for the Secure Communications Division was caused primarily by the
write down in the fourth quarter of approximately $84,800 related to the VSLAN
inventory, and a lower average sales price on the TS-10 product due to
discounted prices for fax machines shipped to resellers for foreign governments.
Operating expenses for fiscal 1996 were approximately $4.1 million compared with
$4.5 million for fiscal 1995, representing a decrease of 7.3%. Operating
expenses as a percentage of net sales decreased from 33.2% in fiscal 1995 to
26.9% in fiscal 1996. The reduction in operating expenses occurred because of
factors affecting Product Research, Development and Improvement Costs described
below.
Product Research, Development and Improvement costs were approximately $.9
million in the year ended May 31, 1996, including a write off of VSLAN software
of approximately $142,900 in the fourth quarter, compared to approximately $1.3
million in the year ended May 31, 1995. These costs are primarily related to SCD
and consist primarily of hardware and software engineering, personnel costs and
subcontracting costs. The markets for the Company's secure communications
products are characterized by continuous technological change. Management
believes that expenditures for product development will continue to be required
for SCD. The decrease on fiscal 1996 expenses resulted primarily from the
completion of certain VSLAN 5.0 and TS-21 facsimile machine development during
fiscal 1996. Selling, General, and Administrative costs were approximately $3.2
million in the fiscal year ended May 31, 1996 compared to approximately $3.2
24
<PAGE>
million in the prior fiscal year. The Company recorded a $100,000 increase in
its allowance for doubtful accounts in the fourth quarter of 1996 as a specific
reserve for a customer who has experienced financial difficulties.
Interest expense decreased from approximately $464,600 in fiscal 1995 to
approximately $337,000 in fiscal 1996. This decrease occurred because the
Company made less use of the accounts receivable factor during fiscal 1996 as
compared to fiscal 1995.
Due to the net losses for fiscal 1996 and 1995, there was no material income tax
expense for these years, nor were any additional income tax benefits available
from the carryback of net operating losses. Under Statement of Accounting
Standards No. 109 (FAS 109) deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company has provided a
full valuation allowance against its net deferred tax asset due to uncertainties
of their realization. If the Company achieves profitable operations, they will
be subject to alternative minimum taxes.
Fiscal Year 1995 Compared to Fiscal Year 1994
Net sales for fiscal 1995 were $13.4 million as compared with $12.6 million for
fiscal 1994, representing an increase of 6.3%. There was a significant increase
in sales in the Secure Communications Division, which had net sales of $6.5 in
fiscal 1995 compared to $4.2 million in fiscal year 1994. This increase was due
principally to deliveries of $1.77 million to ANT (a supplier of fax machines to
the German Government) and to an increase in customer demand during the current
fiscal year as compared to the prior fiscal year. In addition, the acquisition
of the Secure Products Division of Verdix in 1994 resulted in net sales of
$329,300 in fiscal 1995, as compared to net sales of $84,000 in fiscal 1994.
The increase in net sales in the Secure Communications Division in fiscal 1995
was offset by a decrease in the Electronic Enclosure Division net sales. The
Enclosure Division's net sales in fiscal 1995 totaled $6.4 million compared with
$7.8 million in fiscal 1994. The decrease was attributable to a decrease in
demand and management's decision to target new contracts with higher profit
margins for the fiscal year ended May 31, 1995 compared to the fiscal year ended
May 31, 1994.
25
<PAGE>
The Company's sales to the United States government and its prime contractors
represented approximately 62% and 69% of total net sales during the Company's
fiscal years ended May 31, 1995 and May 31, 1994, respectively. The principal
customer for the Enclosure Division's products is the United States Navy which,
directly or through its prime contractors, accounted for 96% of the Enclosure
Division's revenues in fiscal year 1995.
Gross profit for fiscal 1995 was approximately $3.4 million compared with
approximately $1.5 million for fiscal 1994, representing an increase of
approximately 127%. The gross profit for the Secure Communications Division was
approximately $2.2 million in fiscal 1995 compared to a gross profit of
approximately $1.3 million in fiscal 1994, and the gross profit for the
Enclosure Division was approximately $1.0 million for the fiscal year ended May
31, 1995 compared to a gross loss of approximately $19,000 for the prior fiscal
year.
The gross profit increase for the Electronic Enclosure Division was caused
primarily by management's decision to target new contracts with higher profit
margins, improvements in manufacturing operations implemented during fiscal
1995, and a write off of approximately $165,000 in obsolete raw materials
inventory during fiscal 1994. The gross profit increase for the Secure
Communications Division was caused primarily by the volume increase in net sales
discussed above.
Operating expenses for fiscal 1995 were approximately $4.5 million compared with
$6.0 million for fiscal 1994, representing a decrease of 25%. Operating expenses
as a percentage of net sales decreased from 47.6% in fiscal 1994 to 33.2% in
fiscal 1995. The reduction in operating expenses occurred primarily because
there had been two significant one time adjustments in fiscal 1994 totaling
approximately $1.3 million, in addition to various factors affecting Selling,
General and Administrative costs and Product Research, Development and
Improvement Costs.
In fiscal 1994, management determined that cost in excess of net assets acquired
(goodwill) related to the acquisition of Cryptek, Inc. was permanently impaired
based on projected undiscounted future earnings of the Secure Communications
Division related to the Cryptek products. Based on this decision a charge of
$861,700 was made to the 1994 fiscal year operating expenses. Additionally,
operating expenses for fiscal 1994 included a charge in the amount of
approximately $416,200 for research and development projects in process acquired
as part of the acquisition of the Secure Products division of Verdix. No similar
one time write offs occurred in fiscal 1995.
26
<PAGE>
Selling, General, and Administrative costs were approximately $3.2 million in
the fiscal year ended May 31, 1995 compared to approximately $3.6 million in the
prior fiscal year, a reduction of approximately $.4 million. The reduced
expenses were primarily due to downsizing and other cost control efforts
implemented by management, which are expected to continue.
Product Research, Development and Improvement costs were $1.3 million in the
year ended May 31, 1995 compared to $1.1 million in the year ended May 31, 1994.
During fiscal 1995, the Company capitalized $301,900 in software development
costs relating to the secure local area network product new release (VSLAN 5.0)
and certain software being developed for the TS-21 ruggedized facsimile machine.
The capitalized software development costs offset increased expenses in the GKI
Secure Communications due to a full year of VSLAN development costs, an
increased effort to complete the development of the TS-21 facsimile machine as
well as the ANTFAX facsimile machine.
In fiscal 1994, the Company recorded a one time gain of approximately $553,100
from the sale of the Company's Rockville, Maryland facility.
Interest expense decreased from approximately $782,600 in fiscal 1994 to
approximately $464,600 in fiscal 1995. This decrease occurred because the
Company did not finance accounts receivable during the first six months of
fiscal 1995, and reduced the interest rate on the debt to the Company's
principal investor in August 1994.
Due to the net losses for fiscal 1995 and 1994, there was no material income tax
expense for these years, nor were any additional income tax benefits available
from the carryback of net operating losses.
27
<PAGE>
Liquidity and Capital Resources
The Company has suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about the Company's ability to continue
as a going concern. However, the operating loss for fiscal 1996 showed
significant improvement over the prior three fiscal years. Management has taken
action to reduce expenses, and to increase revenues and gross profit margins. To
achieve profitability for fiscal 1997, the Company must continue to increase
revenues and gross profit margins. In the Electronic Enclosure Division,
productivity improvements along with efforts to target new contracts with higher
profit margins for the Company resulted in a significant improvement in gross
profits for the 1996 fiscal year as compared to the prior three fiscal years.
The division 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 to continue to operate profitably in fiscal 1997.
In the Secure Communications Division, successful operations will depend, to a
large extent, on the success of the new TS-21 and the division's ability to
market the secured communications products overseas and to domestic markets. The
division must also be able to continue to update its secure product line in
order to meet current market demands and develop an adequate sales level for
profitable operations. Management believes that it has taken appropriate steps
to return the Company to profitability, however, there can be no assurance that
revenues will increase or that the Company will be able to generate revenues or
margins sufficient to achieve profitability in fiscal 1997.
On July 29, 1996, the Company reached a preliminary understanding in principle
to sell its Secure Communications Division to an undisclosed third party. The
proposed transaction remains subject to conclusion and execution of a definitive
agreement, receipt of any required approvals, and other contingencies. A
previous preliminary understanding reached on December 12, 1995 to sell the
division to another third party had not progressed to a definitive agreement.
The Company is not actively attempting to sell the division, but has considered
certain offers as presented to it.
Management believes that cash on hand as of May 31, 1996 ($364,100), careful
management of operating costs and cash disbursements, and accounts receivable
financing to alleviate short term cash requirements should enable the Company to
meet its cash requirements through May 31, 1997.
28
<PAGE>
In August 1994 the Company restructured all of its outstanding debentures with
Gutzwiller by issuing new convertible debentures. These debentures mature in 10
years, are convertible into common stock at a conversion price of 50 cents per
share, and bear interest at 1% per annum. Additionally, in September 1994 the
Company received additional financing from Gutzwiller of approximately $1.66
million under the same terms and conditions as the newly restructured
debentures. The conversion feature of the new financing was approved by the
shareholders at an Annual Meeting of Shareholders held on October 28, 1994. 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 limitations exceptions for accounts receivable and other financing), to
secure the obligations in respect of the debentures. Shares issuable upon
conversion of such debentures are also subject to certain rights to registration
under the Securities Act of 1933, as amended.
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 factoring agreement with
Reservoir was renewed in December 1994, and continues on a month-to-month basis.
At May 31, 1996, the balance due Reservoir was $146,500. The Company expects to
continue to draw on this credit facility in the future to alleviate short-term
cash requirements.
The Company has no significant commitments currently for capital expenditures
for fiscal 1997 and does not expect capital expenditures to be significant.
Commitments under operating leases, net of sublessee income, amount to $188,900
in fiscal 1997. Current maturities of long term debt, including obligations
under capitalized leases, amount to $391,300 in fiscal 1997.
29
<PAGE>
Analysis of Cash Flows
Operating activities provided approximately $.7 million in cash flows in fiscal
1996 as compared to using approximately $2.3 million in fiscal 1995. The $3.0
million increase principally reflects an improvement in the net loss of
approximately $.8 million, a decrease of $1.9 million in cash used to fund
changes in working capital items, and an increase of approximately $.3 million
in non-cash expenses. In fiscal 1996 the Company had a decrease in accounts
payable and accrued expenses of approximately $ 585,400 which was related
primarily to the payment of older accounts, including accrued professional fees.
In fiscal 1995 the Company had an increase in accounts payable and accrued
expenses of approximately $408,200 resulting from slower payments of older
payables as well as increased purchases in the last quarter of that year.
Inventories increased by approximately $532,300 in the prior fiscal year as
compared to an increase of approximately $514,700 in fiscal 1996. The fiscal
1996 inventory increase is offset in part by an additional inventory reserve of
approximately $209,800 recorded during 1996. In the prior year accounts
receivable increased by approximately $1.1 million as compared to a decrease of
approximately $1.6 million in the current fiscal year. The decrease in current
year accounts receivable is principally due to an decrease in sales in the last
two months of fiscal 1996 as compared to the same period in fiscal 1995.
Non-cash items increased by $.4 million, from $.7 million in fiscal 1995 to $1.1
million in fiscal 1996. The increase principally reflects the inventory reserve
of approximately $209,800 and the write off of capitalized VSLAN software of
approximately $142,900.
Cash used in investing activities was $148,800 in fiscal 1995 compared to
approximately $183,100 in fiscal 1996. The Company's primary investing
activities in both 1996 and 1995 consisted of the purchase of property, plant
and equipment.
Cash provided by financing activities amounted to approximately $1.9 million in
fiscal 1995 as compared to using approximately $.4 million in fiscal 1996. In
fiscal 1996 the Company used the $.4 million to repay advances from the factor
and to repay certain long term mortgage debt. In fiscal 1995 the Company had
received approximately $1.6 million in additional proceeds from the sales of
Debentures to Gutzwiller.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
30
<PAGE>
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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended May 31, 1996. 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 subsidiaries of May 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plan in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 11, in fiscal 1995, the Company changed its method of
accounting for its Employee Stock Ownership Plan.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Washington, DC
August 9, 1996
31
<PAGE>
GENERAL KINETICS INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of May 31, 1996, and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C>
Assets
Current Assets:
Cash and cash equivalents $ 364,100 $ 212,200
Accounts receivable, net of allowance, $249,700 and $181,400 1,325,500 3,045,000
Inventories 3,505,900 3,201,000
Prepaid expenses and other 24,600 69,300
---------- ----------
Total Current Assets 5,220,100 6,527,500
---------- ----------
Property, Plant and Equipment 6,869,300 6,697,700
Less: Accumulated Depreciation (5,387,600) (4,950,300)
---------- ----------
1,481,700 1,747,400
Other Assets, principally capitalized software of $206,100 and $300,600 324,000 419,400
Total Assets $7,025,800 $8,694,300
========== ==========
Liablilities and Stockholders' Deficit
Current Liabilities:
Advances from factor $ 146,500 $ 407,000
Current maturities of long-term debt 244,800 364,500
Accounts payable, trade 1,541,600 2,189,100
Accrued expenses and other payables 1,224,400 1,162,300
---------- ----------
Total Current Liabilities 3,157,300 4,122,900
---------- ----------
Long-Term debt - less current maturities (including
$8,966,700 and $8,885,900 due to controlling shareholder) 9,800,100 9,765,700
Other long-term liabilities 292,300 297,400
---------- ----------
Total Long-Term Liabilities 10,092,400 10,063,100
---------- ----------
Total Liabilities 13,249,700 14,186,000
---------- ----------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 and 10,000,000 1,759,000 1,759,000
shares authorized, 7,035,557 shares issued, 6,508,925
shares outstanding
Additional Contributed Capital 7,186,900 7,466,400
Accumulated Deficit (14,719,600) (13,966,900)
----------- -----------
(5,773,700) (4,741,500)
Less: Unearned ESOP shares - (300,000)
Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
----------- -----------
Total Stockholders' Deficit (6,223,900) (5,491,700)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 7,025,800 $ 8,694,300
=========== ===========
</TABLE>
The accompanying notes are an integral part of the above statements.
32
<PAGE>
GENERAL KINETICS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended May 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C>
Net Sales $ 15,368,400 $ 13,414,500 $ 12,596,300
Cost of Sales 11,668,200 10,061,900 11,115,900
------------ ------------ ------------
Gross Profit 3,700,200 3,352,600 1,480,400
------------ ------------ ------------
Selling, General & Administrative 3,170,000 3,176,600 3,586,200
Product Research, Development & Improvement 945,900 1,275,300 1,122,900
Write off of Research & Development costs acquired - - 416,200
Write off of Goodwill - - 861,700
------------ ------------ ------------
Total Operating Expenses 4,115,900 4,451,900 5,987,000
------------ ------------ ------------
Operating Loss (415,700) (1,099,300) (4,506,600)
Gain on Sale of Rockville Building - - (553,100)
Interest Expense 337,000 464,600 782,600
------------ ------------ ------------
Net Loss $ (752,700) $ (1,563,900) $ (4,736,100)
============ ============ ============
Net Loss per share $ (0.12) $ (0.24) $ (0.85)
============ ============ ============
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 6,508,925 6,508,925 5,543,202
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the above statements.
33
<PAGE>
<TABLE>
<CAPTION>
Additional Total
Common Stock Contributed Accumulated Treasury Unearned Stockholders'
Shares Amount Capital Deficit Stock ESOP Shares Deficit
<S> <C>
Balance, May 31, 1993 5,560,557 $ 1,390,200 $5,904,900 $ (7,666,900) $(450,200) $(900,000) $(1,722,000)
Net Loss $ (4,736,100) $(4,736,100)
ESOP Compensation $ 300,000 $ 300,000
Issuance of 1,475,000 shares
of common stock 1,475,000 $ 368,800 $1,839,300 $ - $ - $ - $ 2,208,100
--------- ----------- ---------- ----------- --------- --------- -----------
Balance, May 31, 1994 7,035,557 $ 1,759,000 $7,744,200 $(12,403,000) $(450,200) $(600,000) $(3,950,000)
Net Loss $ (1,563,900) $(1,563,900)
ESOP Compensation - $ - $ (277,800) $ - $ - $ 300,000 $ 22,200
--------- ----------- ---------- ------------ --------- --------- -----------
Balance, May 31, 1995 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, May 31, 1996 7,035,557 $ 1,759,000 $7,186,900 $(14,719,600) $(450,200) $ - $(6,223,900)
========= =========== ========== ============ ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the above statements.
34
<PAGE>
GENERAL KINETICS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C>
Cash Flows From Operating Activities:
Net Loss $(752,700) $(1,563,900) $(4,736,100)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 500,400 527,300 671,400
Write off of VSLAN Software 142,900
Write off of goodwill 861,700
Gain on sale of Rockville Building (553,100)
Write off of Research & Development Costs Acquired 416,200
Loss (Gain) on disposal of equipment 1,100 (3,300) (15,900)
ESOP compensation 20,500 22,200 300,000
Amortization of bond discount 64,600 94,400 215,900
Bad Debt Allowance 119,600 95,000 25,500
Inventory Reserve 209,800 - 349,000
(Increase) Decrease in Assets:
Accounts Receivable 1,599,900 (1,123,200) 745,700
Inventories (514,700) (532,300) 677,200
Prepaid Expenses 44,700 78,000 12,200
Other assets - Software Development Costs (101,100) (301,900)
Other assets 900 (26,200) (55,000)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (647,500) 372,500 (278,700)
Accrued Expenses 62,100 35,700 (945,000)
Other Long Term Liabilities (5,100) 2,200 (162,600)
---------- ---------- ----------
Net cash provided/(used) in Operating Activites 745,400 (2,323,500) (2,471,600)
---------- ---------- ----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (187,500) (154,600) (316,800)
Net proceeds from sale of property, plant and equipment 4,400 5,800 917,000
Acquisitions of Verdix Secure Products Division - - (884,700)
---------- ---------- ----------
Net cash used in Investing Activities (183,100) (148,800) (284,500)
---------- ---------- ----------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 1,639,700 3,255,400 5,352,700
Repayments of Advances from Factor/
Demand Notes Payable (1,900,200) (2,848,400) (5,770,500)
Borrowings on Long Term Debt 90,000 1,713,500 170,000
Repayments on Long Term Debt (239,900) (201,200) (926,200)
Proceeds from sale of subordinated debentures - - 2,420,000
Proceeds from Issuance of Common Stock - - 2,208,100
Stock issued to employees - - -
----------- ---------- ----------
Net cash provided/(used) by Financing Activities (410,400) 1,919,300 3,454,100
----------- ---------- ----------
Net (decrease) increase in cash and cash equivalents 151,900 (553,000) 698,000
Cash and Cash Equivalents: Beginning of Period 212,200 765,200 67,200
----------- ---------- ----------
Cash and Cash Equivalents: End of Period $ 364,100 $ 212,200 $ 765,200
=========== ========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 355,088 $ 442,100 $ 561,000
Income Taxes - 65,500 23,000
Supplemental Disclosures of Non Cash Investing
and Financing Activities:
Reduction in paid in capital based on fair market
value of ESOP shares $ 279,500 $ 277,800 -
Debentures exchanged in Debt Restructuring $7,192,700 -
</TABLE>
The accompanying notes are an integral part of the above statements.
35
<PAGE>
GENERAL KINETICS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 1996 AND 1995
1. FUTURE PROSPECTS AND RECENT OPERATIONS:
The Company has suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about the Company's ability to continue
as a going concern. However, the operating loss for fiscal 1996 showed
significant improvement over the prior three fiscal years. Management has taken
action to reduce expenses, and to increase revenues and gross profit margins. To
achieve profitability for fiscal 1997, the Company must continue to increase
revenues and gross profit margins. In the Electronic Enclosure Division,
productivity improvements along with efforts to target new contracts with higher
profit margins for the Company resulted in a significant improvement in gross
profits for the 1996 fiscal year as compared to the prior three fiscal years.
The division 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 to continue to operate profitably in fiscal 1997.
In the Secure Communications Division, successful operations will depend, to a
large extent, on the success of the new TS-21 and the division's ability to
market the secured communications products overseas and to domestic markets. The
division must also be able to continue to update its secure product line in
order to meet current market demands and develop an adequate sales level for
profitable operations. Management believes that it has taken appropriate steps
to return the Company to profitability, however, there can be no assurance that
revenues will increase or that the Company will be able to generate revenues or
margins sufficient to achieve profitability in fiscal 1997.
In July 1996, the Company reached a preliminary understanding in principle to
sell its Secure Communications Division to an undisclosed third party. The
proposed transaction remains subject to conclusion and execution of a definitive
agreement, receipt of any required approvals, and other contingencies.
Because of the preliminary nature of the understanding among other things the
Company is unable to determine with certainty whether there may be a loss or
gain on any ultimate disposition of the division. A previous preliminary
understanding reached on December 12, 1995 to sell the division to another
third party did not
36
<PAGE>
progress to a definitive agreement. The Company is not actively attempting to
sell the division, but has considered certain offers as presented to it.
During fiscal 1996 the Company reviewed the government and commercial market for
VSLAN and VSIP secure network products and determined that it would not be able
make material new sales in this marketplace without significant additional
investment in product development, sales, and marketing. Accordingly during the
fourth quarter of fiscal 1996, the Company wrote off capitalized software costs
of $142,900 and certain related inventory totaling $84,800 in connection with
the VSLAN products.
At its 1995 Annual Meeting the Company's shareholders approved a 1-for-3 reverse
stock split which had been recommended by the American Stock Exchange in light
of the relatively low price per share which such stock has traded in the recent
past, which among other things is not in compliance with certain listing
requirements of the Exchange. The Company does not anticipate implementing the
reverse stock split until after the closing of the proposed transaction to sell
the Secure Communications Division.
In August 1994 the Company restructured all of the outstanding debentures to
Gutzwiller and Partner, A.G. (Gutzwiller)by issuing new convertible
debentures. The debentures mature in 10 years, are convertible into common stock
at a conversion price of 50 cents per share, and bear interest at 1% per annum
payable annually. The Company also received additional financing of
approximately $1.66 million in September 1994 under the same terms and
conditions as the newly restructured debentures. 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. Subsequent to September 1994, the Company has been able
to finance its operations from borrowings from the factor and current
operations.
Management believes that cash on hand as of May 31, 1996 ($364,100), careful
management of operating costs and cash disbursements, and accounts receivable
financing to alleviate short term cash requirements should enable the Company to
meet its cash requirements through May 31, 1997.
2. NATURE OF BUSINESS:
The Company and its subsidiaries operate in three separate lines of business:
electronic enclosure and precision equipment (EED), secure communications
products (SCD), and food testing and optical sorting equipment (FTC). EED
designs, manufactures, and
37
<PAGE>
sells specialty metal products such as environmental enclosures and rack
mounting systems for the installation of electronics. SCD primarily designs,
manufactures, sells, and services various models of secure facsimile machines.
These machines and products are produced in the United States and sold
both domestically and internationally. FTC designs, manufactures, and
sells food testing equipment and optical sorting equipment to in-plant quality
assurance and to research programs.
3. 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, Food Technology Corporation
(collectively, the Company), after elimination of intercompany accounts and
transactions.
Cash and Cash Equivalents
The Company classifies all temporary investments with a maturity of less than
three months as cash equivalents.
Revenue Recognition and Profit Determination
In the Electronic Enclosure Division, 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. The Secure Communications Division recognizes revenue upon
shipment of goods.
38
<PAGE>
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
depreciation and amortization on an accelerated basis for machinery and
equipment and furniture and fixtures and on a straight-line basis for all other
assets over the following estimated useful lives.
Buildings and improvements 18 to 45 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Transportation equipment and other 3 years
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the remaining term of the lease.
Expenditures for maintenance and repairs are charged against income as incurred;
betterments which increase the value or materially extend the life of the asset
are capitalized. When assets are sold or retired, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is included in
income.
Costs in Excess of Net Assets Acquired
The Company periodically evaluated its costs in excess of net assets acquired
for possible impairment. During the 1994 fiscal year, management determined that
the goodwill related to the acquisition of Cryptek was permanently impaired
based on an analysis of projected undiscounted future operations. Accordingly,
the remaining unamortized balance of $861,722 was written off in the fourth
quarter of fiscal 1994.
Warranty Reserve
The Company accrues for anticipated future warranty obligations when revenue on
units sold is recognized.
39
<PAGE>
Product Research, Development and Improvements
Costs associated with product research, development and improvements are
expensed as incurred.
Other Assets
Costs incurred to establish the technological feasibility of a computer software
product are considered research and development costs and are expensed as
incurred. When the technological feasibility of a software product has been
established, development costs subsequent to that date are capitalized.
Capitalization of these costs ceases when the product is considered available
for general release to customers. Amortization of capitalized software
development costs is computed using the straight line method which exceeds the
amortization based on the anticipated revenue stream. The products that are
currently being amortized have estimated lives of three years.
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 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.
Net Income (Loss) Per Share
Net income (loss) per share is computed on the weighted-average number of common
shares and dilutive equivalents outstanding during the year using the treasury
stock method. Common stock equivalents consist of convertible debentures (see
Note 8) and stock options (see Note 12). The net loss per share computations
excludes the common stock equivalents because they are antidilutive.
40
<PAGE>
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, 1996, the estimates used in the financial statements
are adequate based on the information currently available.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to the
current year presentation. These reclassifications have no effect upon
previously reported results of operations.
4. CREDIT RISK
For the years ended May 31, 1996, 1995, and 1994, the Company's net sales to the
U.S. government and/or subcontractors accounted for 64%, 62%, and 69%,
respectively, of consolidated net sales, and the Company's sales to foreign
customers accounted for 32%, 26%, and 18%, respectively, of consolidated net
sales. For the year ended May 31, 1996 and 1995, one foreign customer accounted
for 20% and 13%, respectively, of consolidated net sales and 0% and 22%,
respectively, of consolidated year end accounts receivable, while no foreign
customer accounted for 10% or more of consolidated net sales or receivables for
the year ended May 31, 1994. 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
41
<PAGE>
division is intense as they primarily operate in a mature industry. Competition
for SCD products is less intense, but the division requires ongoing research
and development costs to maintain its competitiveness. The Company's
uncollectible receivables have historically not been material. In the fourth
quarter of 1996, the Company did record an additional $100,000 reserve for
one specific customer. Refer to segment information disclosures at Note 17.
The Company has a cash balance with a bank in excess of the federally insured
limit.
5. SECURE PRODUCTS DIVISION ACQUISITION
In January 1994, the Company acquired the net assets of the Secure Products
Division(SPD or the Division) of Verdix Corporation (Verdix) pursuant to an
asset purchase agreement. SPD developed and marketed security products,
including Secure Local Area Networks, designed to protect information from
unauthorized access. Prior to the transaction SPD was a wholly-owned division of
Verdix. The transaction has been accounted for as a purchase. The purchase price
of $812,500, together with direct acquisition costs, have been allocated to the
assets acquired and the liabilities assumed based upon estimated fair values as
follows:
Research and Development Projects in Process $416,200
Property, Plant, and Equipment 165,200
Prepaid Expenses 133,000
Accounts Receivable 119,400
Inventory 97,000
Liabilities Assumed and Direct Acquisition Costs (118,300)
--------
$812,500
========
Amounts allocated to research and development projects in process were charged
to expense in January 1994.
The unaudited proforma information presented below reflects the acquisition of
SPD as if it occurred on June 1, 1993.
Unaudited
(000's omitted)
-----------------
Year Ended May 31, 1994
Revenue $12,797
=======
42
<PAGE>
Net Loss $(5,856)
Net Loss per Share $ (1.06)
The weighted average shares outstanding used to calculate the proforma net loss
per share gives effect to shares issued in order to fund the acquisition of SPD.
6. INVENTORIES
Inventories consist of the following:
May 31,
---------------
1996 1995
Work in process $1,844,900 $1,848,000
Raw materials 2,275,800 1,758,000
Inventory reserve (614,800) (405,000)
--------- ---------
Total 3,505,900 $3,201,000
========= =========
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 realizable value to cost of sales as soon as they become known.
An analysis was performed by management on the May 31, 1994 raw material
inventory. Accordingly, an additional reserve of $345,000 was established during
the fourth quarter of fiscal 1994 for possible obsolete and defective inventory.
Similar analyses were performed at May 31, 1996 and 1995 and an additional
obsolescence reserve of $125,000 was recorded in the fourth quarter of 1996.
As discussed in Note 1, during the fourth quarter of fiscal 1996 the Company
wrote off approximately $84,800 of inventory associated with the VSLAN products.
This adjustment was included in the cost of sales.
43
<PAGE>
7. PROPERTY, PLANT AND EQUIPMENT:
Major classes of property, plant and equipment consisted of the following on May
31:
1996 1995
Machinery and equipment $3,383,500 $ 3,365,500
Buildings and improvements 1,899,300 1,899,300
Furniture and fixtures 921,000 843,000
Transportation equipment and other 565,500 489,900
Land 100,000 100,000
---------- ----------
6,869,300 6,697,700
Less- Accumulated
depreciation and
amortization 5,387,600 (4,950,300)
--------- ----------
Net property, plant and
equipment $1,481,700 1,747,400
========= ==========
Depreciation expense for the years ended May 31, 1996, 1995, and 1994 was
$447,700, $526,000, and $570,600, respectively.
8. CAPITALIZED SOFTWARE COSTS
During the fiscal year ended May 31, 1995, the Company began capitalizing
internally developed software costs relating to VSLAN products and certain
software being developed for the TS-21 ruggedized facsimile machine. As
discussed in Note 1, during the fourth quarter of fiscal 1996, the Company wrote
off approximately $142,900 of capitalized software costs associated with VSLAN
products. This adjustment was included in product research, development and
improvements.
Software development costs at May 31, 1996 and 1995 consist of the following:
44
<PAGE>
1996 1995
Balance, beginning of year $300,600 $0
Costs capitalized 101,100 301,900
Write-offs (142,900) 0
Amortization (52,700) (1,300)
-------- --------
Balance, end of year $206,100 $300,600
======== ========
9. ADVANCES FROM FACTOR
The Company sells a portion of its trade receivables to a commercial factor with
recourse. The agreement allows the Company to take advances of 80% on all
factored receivables. The factor charges the Company a fee of 1.1% of all
amounts factored. The total amount of advances outstanding at May 31, 1996 and
May 31, 1995, including unpaid fees, was $146,500 and $407,000, respectively.
Outstanding advances are collateralized by the Company's accounts receivable.
10. ACCRUED EXPENSES AND OTHER PAYABLES:
Accrued expenses and other payables consisted of the following on May 31.
1996 1995
Billings in excess of costs incurred
$ 69,000 $ 83,600
Employee vacations 223,300 244,800
Outside commissions 24,400 31,100
Salaries and wages 78,300 125,300
Other 829,400 677,500
---------- ----------
$1,224,400 $1,162,300
========== ==========
45
<PAGE>
11. DEMAND NOTES PAYABLE AND LONG-TERM DEBT:
Demand notes payable and long-term debt consisted of the following on May 31:
1996 1995
Subordinated Debt Originally Issued to
Controlling Stockholder
(See discussion below
for terms)
1994 Convertible Subordinated
Debentures 9,500,000 9,500,000
Other
Real estate mortgage collateralized
by first deed of trust and security
interest in certain real property.
Payable in 180 equal installments
through November 2006, plus interest
at prime plus 1.0% (9.5% at May 31,
1996). 822,400 865,500
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 (5.78% at May 31, 1996). 168,500 253,600
Other notes payable and capitalized
leases with interest rates between
7% and 15.7% at May 31, 1996, and
approximate monthly aggregate payments
of $8,800. 233,800 109,000
---------- ----------
$10,724,700 $10,728,100
46
<PAGE>
Less: Current Maturities (391,300) (364,500)
Unamortized discount on
debentures (533,300) (597,900)
---------- ----------
Long-term debt $ 9,800,100 $ 9,765,700
========== ==========
The amount of unamortized discount on Convertible Subordinated Debentures
originally issued to Gutzwiller at May 31, 1996, is as follows:
Face Unamortized Carrying
Amount Due Discount Amount
Convertible Subordinated
Debentures $9,500,000 $533,300 $8,966,700
In connection with the restructuring of the Gutzwiller 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, 1996 and 1995 was $64,600 and
$94,400, respectively.
On December 14, 1992, the Company issued to Gutzwiller, Convertible Subordinated
Debentures (the Convertible Debentures) in an aggregate face amount of $2.75
million, with an effective date of October 20, 1993, the date of an initial cash
advance by Gutzwiller. The Convertible Debentures were sold for $2 million. The
entire principal was repaid in August 1994 with the proceeds from newly issued
convertible debentures discussed below.
On March 30, 1993, Gutzwiller provided a further $2.5 million subordinated loan
to the Company. This loan was evidenced by Series A and Series B Subordinated
Debentures. The Series A Debentures, issued in the aggregate face amount of $1.5
million, dated as of March 30, 1993, matured on March 30, 1994 and were repaid
in full (see discussion of Series D debentures below). The Series B Debentures,
dated as of March 30, 1993, were to mature in two years and were issued in the
aggregate face amount of $1 million with proceeds to the Company, net of prepaid
interest, equaling $920,000. The entire principal of the Series B Debentures was
repaid in August 1994 with the proceeds from newly issued convertible debentures
discussed below.
In the 1994 fiscal year, Gutzwiller provided a further $2 million subordinated
loan to the Company. This loan was evidenced by Series C Subordinated
Debentures. The Series C Debentures, dated as of August 15, 1993, matured in one
year and were issued in the
47
<PAGE>
aggregate face amount of $2 million, with proceeds to the Company, net of
discount, equaling $1.92 million. The entire principal was repaid in August
1994 with the proceeds from newly issued convertible debentures discussed
below.
In addition, during fiscal 1994 Gutzwiller provided a further $2.0 million
subordinated loan to the company. This loan was evidenced by newly issued Series
D and E Subordinated Debentures. The Series D Debentures, dated as of March 30,
1994 were to mature in one year and were issued in the aggregate face amount of
$1.5 million, bearing interest at 4% per year, the proceeds of which were used
by the company to repay in full the Series A Debentures discussed above. The
Series E Debentures dated as of March 30, 1994 were to mature in one year and
were issued in the aggregate face amount of $500,000, bearing interest at 4% per
year. The entire principal of the Series D and E Subordinated Debentures was
repaid in August 1994 with the proceeds from newly issued convertible debentures
discussed below.
During the 1995 fiscal year, in August 1994, the Company restructured all of the
outstanding debentures by issuing new convertible debentures to Gutzwiller. The
debentures mature in 10 years, 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. Additionally, the Company received additional financing in
September 1994 of approximately $1.66 million under the same terms and
conditions as the restructured debentures. 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 debentures.
Shares issuable upon conversion of such 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
48
<PAGE>
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, 1996,
however, the lender has agreed to waive the violations through May 31, 1997.
Additionally, the above real estate mortgage agreement contains a subjective
covenant which could allow the bank to accelerate the maturity of the debt if
the bank determines that a material adverse change in the financial or business
condition of the Company has occurred.
During fiscal 1996 the Company entered into a Forbearance Agreement with the
holder of the real estate mortgage on the Company's Orlando facility. Pursuant
to the Forbearance Agreement, a redemption notice with respect to the bonds
originally issued to finance the facility, previously delivered by the mortgage
holder, was withdrawn and the Company has agreed to make accelerated payments of
$10,000 per month in principal($168,540 at May 31, 1996) and interest until the
remaining principal is paid in full.
Future principal maturities of debt are as follows:
Year Ending
May 31,
1996 $ 391,800
1997 110,000
1998 57,500
1999 63,300
2000 69,800
Thereafter 10,032,300
----------
$10,724,700
==========
12. INCOME TAXES:
The Company and its subsidiaries file consolidated Federal income tax returns.
Due to net losses for the years ended May 31, 1996, 1995 and 1994 there was no
material income tax expense for these years, nor were any additional income tax
benefits available from the carryback of net operating losses.
Principal items comprising net deferred income tax assets, at May 31, are as
follows:
49
<PAGE>
1996 1995
Net operating loss carryforward $3,202,000 $2,885,000
R & D and other credit carryforwards 148,000 148,000
Purchased R & D costs 134,000 144,000
Inventory reserves 258,000 175,000
Allowance for doubtful accounts 93,000 69,000
Excess financial statement depreciation 93,000 204,000
Accrued Vacations 60,000 72,000
Other accrued liabilities 66,000 67,000
Accrued professional fees 94,000 198,000
Interest & bond discount amortization - 85,000
Deferred compensation 111,000 113,000
---------- ----------
Total deferred tax assets $4,259,000 $4,160,000
Valuation allowance (4,259,000) (4,160,000)
---------- -----------
Net deferred tax asset - -
========== ===========
A valuation allowance is provided as management has determined that it is more
likely than not that the deferred tax assets will not be realized.
As of May 31, 1996, the Company has NOL carryforwards for Federal and state
income tax reporting purposes of approximately $8,427,000, 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. The amount of net operating losses and credits available to be used in
any given year will be limited as a result of the change in control described in
Note 1.
13. COMMITMENTS AND CONTINGENCIES:
Leases
The Company has completed negotiations during fiscal 1996 on a new five year
lease for approximately 36,800 square feet of space in the building in
Chantilly, Virginia which previously housed SCD. The Company moved its executive
offices and the FTC operation into this facility along with the SCD in September
1995. The lease for
50
<PAGE>
the Chantilly facility requires the Company to pay for its pro rata share of
the taxes, insurance, and maintenance. The Company also leases certain equipment
under noncancelable operating leases which expire at various dates through
2001.
At May 31, 1996, approximate future minimum rental commitments for all
noncancelable operating leases are as follows:
Year Ending
May 31,
1997 $219,600
1998 205,500
1999 211,700
2000 217,800
2001 186,300
---------
1,040,900
Less- Sublease
income
(through May 31, 1997) 30,700
---------
1,010,200
=========
Amounts charged to operations for operating leases amounted to $228,800,
$293,000, and $266,300, for the years ended May 31, 1996, 1995 and 1994,
respectively. These amounts were offset by annual sublease income of
approximately 49,000, $47,900, and $74,300, respectively.
Orlando Facility
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. The Company is currently awaiting notification from the
Florida Department of Environmental Protection that it has been released from
further responsibility associated with this
51
<PAGE>
matter and does not believe that they will incur any future costs in this
regard. Accordingly, the Company has not recorded any provision for loss with
respect to this matter.
14. RETIREMENT PLANS:
The Company has the following retirement plans at May 31, 1996.
Defined Contribution Plans
The Company has a defined contribution plan covering its union employees. Total
related pension expense charged to income was approximately $56,500, $50,300,
and $63,500, in fiscal 1996, 1995 and 1994, 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 25,400, $24,000, and $39,100, for fiscal years 1996, 1995 and
1994, respectively.
Employee Stock Ownership Plan and Trust Agreement (ESOP)
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, 1996, 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.
Effective June 1, 1994, the Company adopted Statement of Position 93-6:
Employer's Accounting for Employee Stock Ownership Plans (SOP 93-6) issued by
the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants. Under SOP 93-6, the Company records compensation
expense based on the average market value of the common shares at the time such
shares
52
<PAGE>
are earned by participants in the ESOP plan, at which time such shares become
outstanding for earnings-per-share computations. Prior to the adoption of SOP
93-6, the Company recorded compensation expense based on the market value of the
common shares, earned by participants, at the time the plan was funded.
Dividends on shares held by the ESOP, if any, are expected to be clearly
immaterial. Compensation expense related to the ESOP plan for the fiscal years
ended May 31, 1996, 1995, and 1994 amounted to $20,500, 22,100, and $300,000,
respectively.
The application of SOP 93-6 is accounted for prospectively from the June 1, 1994
effective date and, accordingly, implementation of the SOP does not give rise to
a cumulative effect adjustment or a restatement of previously released financial
statements. The effect on the results of operations from the implementation of
this SOP was to reduce both operating expenses and net loss for fiscal years
ended May 31, 1996 and 1995 by $279,500 and $277,900, respectively, as compared
with the fiscal year ended May 31, 1994. Prior to April 19, 1991, the Company's
ESOP was inactive.
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 $38,400, $38,400, and
$37,400, in fiscal 1996, 1995 and 1994, respectively. As of May 31, 1996, 1995
and 1994, deferred compensation recorded in the consolidated balance sheets was
approximately $292,300, $297,400, and $295,200, respectively, and was all
attributable to retirees currently receiving benefits.
15. STOCK OPTIONS:
The Company has seven incentive stock option plans under which stock options may
be granted. The Company has reserved 2,100,000 common shares for issuance under
these plans. Under all five
53
<PAGE>
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, 11,500 options, net
of cancellations, have been granted at an average exercise price of $7.00. No
options were exercised under this plan during fiscal 1995, 1994 and 1993. There
are 11,500 outstanding options under this plan as of May 31, 1996.
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, 1996. No options were
exercised under this plan during fiscal 1996, 1995 and 1994.
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 128,250 options outstanding, net of cancellations, of which
128,250 are exercisable at May 31, 1996 at an average exercise price of $2.17.
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, 1996, there are 9,500 options outstanding at an average
exercise price of $2.57.
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. Of the
options available, 105,000 options were granted during fiscal 1995, at an
average exercise price of $.32, and 28,277 were granted during fiscal 1996, at
an average exercise price of $.563. At May 31, 1996 there are 78,277 options,
net of cancellations, outstanding, of which 50,000 are currently exercisable at
an average price of $.47.
The 1994 Nonemployee and Directors Stock Option Plan was approved by
stockholders on October 28, 1994. This plan provides for grants to nonemployees
(consultants and advisors) and to nonemployee directors of options to purchase
up to 850,000 shares of the Company's common stock. Options may be granted
through October 28, 2004. There were 42,500 options granted under this plan
during the
54
<PAGE>
fiscal year ended May 31, 1996 at an exercise price of $.375 per share.
There were 170,833 options granted under this plan during fiscal year 1995 at
an exercise price of $.67 per share. 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
571,666 options outstanding, of which 142,083 are exercisable at May 31, 1996 at
an average exercise price of $.66.
A summary of the option plans is as follows for the years ended May 31 :
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C>
Options outstanding June 1, 756,166 225,250 120,250
Granted 70,777 584,166 129,500
Exercised 0 0 0
Canceled (27,750) (53,250) (24,500)
-------- -------- --------
Options outstanding at end of
period 799,193 756,166 225,250
-------- -------- --------
Options exercisable at end of
period 341,333 258,417 108,250
======== ======== ========
Options available for grant
1,300,807 1,343,834 499,750
========= ========= ========
Exercise price range of
options granted $.38-.56 $.25-$1.00 $.56-$2.50
========== =========== ===========
Price range of options
exercised - - -
========== =========== ===========
Exercise price range of
outstanding options $.38-$7.00 $.25-$7.00 $.56-$7.63
========== =========== ===========
</TABLE>
16. RELATED PARTY TRANSACTIONS
During 1996, the Company made payments to Square Systems, Inc., whose president
is a director of the Company, in connection with
55
<PAGE>
its work with respect to certain research and development activities. Total
charges for the Company were approximately $123,500 of which $7,125 remains
unpaid at May 31, 1996.
17. SEGMENT INFORMATION:
Segment information by major product group is as follows for the years ended
May 31,
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C>
NET SALES:
Electronic enclosure $ 7,584,800 $ 6,419,500 $ 7,802,600
Secured communications 7,253,200 6,549,700 4,193,900
Food processing 530,400 445,300 599,800
----------- ----------- -----------
$15,368,400 $13,414,500 $12,596,300
=========== =========== ===========
OPERATING INCOME (LOSS):
Electronic enclosure $ 1,488,400 $ 486,100 $ (660,300)
Secured communications (585,000) (468,200) (1,055,200)
Food processing (400) 50,500 237,000
Unallocated corporate
expenses (1,318,600) (1,167,700) (3,028,100)
----------- ----------- -----------
$ (415,600) $(1,099,300) $(4,506,600)
=========== =========== ===========
IDENTIFIABLE ASSETS:
Electronic enclosure $ 2,859,900 $ 3,707,400 $ 3,763,300
Secure communications 3,503,600 4,270,800 2,717,900
Food processing 164,700 188,600 187,800
Corporate 497,600 527,500 1,142,900
----------- ----------- -----------
$ 7,025,800 $ 8,694,300 $ 7,811,900
=========== =========== ===========
GROSS ADDITIONS TO PROPERTY,
PLANT AND EQUIPMENT:
Electronic enclosure $ 20,200 $ 104,000 $ 283,200
Secure communications 115,200 39,200 196,500
Food processing 2,700 0 0
Corporate 49,400 11,400 2,300
----------- ----------- -----------
$ 187,500 $ 154,600 $ 482,000
=========== =========== ===========
56
<PAGE>
DEPRECIATION AND AMORTIZATION:
Electronic enclosure $ 159,200 $ 165,700 $ 187,900
Secure communications 280,400 307,900 314,500
Food processing 0 0 0
Corporate 60,800 53,700 1,030,700
----------- ----------- -----------
$ 500,400 $ 527,300 $ 1,533,100
=========== =========== ===========
</TABLE>
Net sales represent shipments and services provided to third parties. Operating
expenses directly traceable to individual segments were deducted from net sales
to arrive at operating income (loss). Identifiable assets by segment are those
assets that are used in the Company's operations in each segment. Corporate
assets consist primarily of cash, the land and building used as corporate
headquarters, refundable income taxes, and costs in excess of net assets
acquired.
Net sales to the U.S. Government or their prime contractors were as follows:
1996 1995 1994
Electronic enclosure $ 7,474,200 $ 6,185,900 $ 7,221,500
Secure communications 2,309,300 2,186,300 1,507,300
Food Processing 100 400 2,000
------------ ------------ ------------
$ 9,783,600 $ 8,372,600 $ 8,730,800
============ ============ ============
Net sales to foreign customers, primarily in Europe, were as follows:
1996 1995 1994
Electronic enclosure $ 0 $ 0 $ 0
Secure communications 4,622,400 3,389,100 2,069,500
Food processing 257,400 148,200 238,500
------------ ------------ ------------
Total $ 4,879,800 $ 3,537,300 $ 2,308,000
============ ============ ============
57
<PAGE>
18. MARKET VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
On December 16, 1991, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 107 (SFAS 107), Disclosures
About Fair Value of Financial Instruments, that requires all entities to
disclose the fair value of financial instruments in the notes to the financial
statements. SFAS 107 applies to both assets and liabilities, both on and off the
balance sheet. Under the standard, fair value is defined as the amount at which
a financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced liquidation sale. The Company adopted
SFAS 107 for the year ended May 31, 1996.
The Company's only financial instruments are cash, short-term receivables and
payables, for which carrying amounts approximate fair values, and long-term
debt. Based on the current financial condition of the Company, and the
relationship between the Company and the issuer, it is not practical to
determine the fair value of the subordinated debt.
19. NEW PRONOUNCEMENTS
In March 1995, FASB issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets (SFAS 121). SFAS 121
requires long-lived assets and certain identifiable intangibles to be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. The Company adopted the
provisions of SFAS 121 in fiscal 1996 and evaluated its long-lived and
intangible assets for possible impairment. As discussed in Note 1, during the
fourth quarter of fiscal 1996 the Company wrote off approximately $142,900 of
capitalized software costs associated with VSLAN products.
In December 1995 FASB issued Statement of Financial Accounting Standards No.
123, Accounting For Stock Based Compensation Plans (SFAS 123). SFAS 123 allows
a company the option of continuing to follow existing accounting principles for
employee stock option plans or to adopt the new principles set forth. Generally,
existing accounting principals do not require a company to record compensation
expense as long as it issues stock options with an exercise price equal to the
existing market price of the stock at the grant date. The new accounting
principles set forth in SFAS 123 would require a company to record compensation
expense regardless of the exercise price at the grant date. If a company chooses
to continue to apply existing accounting principles, it
58
<PAGE>
will have to include detailed disclosures of the effect on net income had
it followed the new accounting principles set forth in SFAS 123. The Company
will continue to follow existing accounting principles and ,accordingly,
will include the detailed disclosure required by SFAS 123 in its financial
statements of the year ending May 31, 1997.
In June 1996 FASB issued Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (SFAS 125), which may affect how the Company accounts for trade
receivables which it sells to a commercial factor with recourse. This statement
will become effective for the Company in fiscal 1998. At this time the Company
does not anticipate a material effect on the financial statements of adopting
SFAS 125.
59
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
60
<PAGE>
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 1996 fiscal year or shall be
filed by amendment to this Form 10-K not later than such 120 day period.
61
<PAGE>
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, 1996 and 1995
Consolidated Statements of Operations for the years ended May
31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Deficit for the years
ended May 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended May
31, 1996, 1995 and 1994
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
Included in Part IV of this report:
Financial Statements and Supplementary Data
For the years ended May 31, 1996, 1995, and 1994:
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, 1996.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description Note No.
<S> <C>
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
62
<PAGE>
3.4 By-Laws (1)
3.5 By-Laws, as amended at a Board of Directors meeting (7)
on September 24, 1992
3.6 By-Laws, as amended at a Board of Directors meeting (12)
on March 2, 1994
3.7 By-Laws, as amended at a Board of Directors meeting
on January 19, 1995
4.1 Agreement by and between GKI (7)
and Gutzwiller & Partner, A.G., dated October 20,
1992, and a letter of clarification regarding such
agreement from Edward J. Stucky to David A. Shaw,
dated October 23, 1992
4.2 Form of Convertible Subordinated Debentures Issued to (8)
Gutzwiller and 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 (9)
March 30, 1994
4.4 Form of 4% Subordinated Debentures, Series B, due (9)
March 30, 1995
4.5 Form of 4% Subordinated Debentures, Series C, due (9)
August 15, 1994
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description Note No.
<S> <C>
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
16.0 Letter re Change in Certifying Accountants (3)
16.1 Letter re Change in Certifying Accountants (13)
21.1 List of Subsidiaries (16)
64
<PAGE>
27 Financial Data Schedule
</TABLE>
* Management contract, compensatory plan or arrangement
(1) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Annual Report on Form 10-K for the
year ended May 31, 1990, and incorporated herein by reference.
(2) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Annual Report on Form 10-K for the
year ended May 31, 1989, and incorporated herein by reference.
(3) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Current Report on Form 8-K dated
April 3, 1990, and incorporated herein by reference.
(4) Previously filed with Securities and Exchange Commission as an
Exhibit to the Company's Proxy Statement for the 1991 Annual
Shareholders' Meeting, and incorporated herein by reference.
(5) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Annual Report on Form 10-K for the
year ended May 31, 1991, and incorporated herein by reference.
(6) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Amendment No. 2 to the Annual
Report on Form 10-K for the year ended May 31, 1991, and
incorporated herein by reference.
(7) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Annual Report on Form 10-K for the
year ended May 31, 1992 and incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended November 30, 1992 and incorporated herein by
reference.
(9) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Annual Report on Form 10-K for the
year ended May 31, 1993 and incorporated herein by reference.
65
<PAGE>
(10) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1993 and incorporated herein by
reference.
(11) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Current Report on Form 8-K dated
February 9, 1994 and incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Current Report on Form 8-K dated
March 17, 1994 and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's amended Current Report on Form
8-K/A dated June 16, 1994, and incorporated herein by
reference.
(14) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Annual Report on Form 10-K for the
year ended May 31, 1994, and incorporated herein by reference.
(15) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Proxy Statement for the 1994 Annual
Shareholders' Meeting, and incorporated herein by reference.
(16) Previously filed with the Securities and Exchange Commission as
an Exhibit to the Company's Annual Report on Form 10-K for the
year ended May 31, 1995, and incorporated herein by reference.
(d) Schedules
66
<PAGE>
General Kinetics Incorporated and Subsidiary
Schedule of Valuation and Qualifying Accounts
For the years ended May 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
<S> <C>
FOR THE YEAR ENDED MAY 31, 1996
Inventory Reserve 405,000 209,800 - 614,800
Allowance for doubtful accounts 181,400 119,600 (51,300) 249,700
FOR THE YEAR ENDED MAY 31, 1995
Inventory Reserve 405,000 - - 405,000
Allowance for doubtful accounts 86,400 95,000 181,400
FOR THE YEAR ENDED MAY 31, 1994
Inventory Reserve 56,000 349,000 405,000
Allowance for doubtful accounts 61,000 40,700 15,300 86,400
</TABLE>
67
<PAGE>
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, 1996
---------------------------
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 8/28/96 /s/ Sandy B. Sewitch 8/28/96
- --------------------------------- -----------------------------------
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)
68
<PAGE>
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, 1996
- ---------------------------------- ---------------
Marc E. Cotnoir, Director Date
/s/ Robert K. Gardner August 28, 1996
- ---------------------------------- ---------------
Robert K. Gardner, Director Date
/s/ Richard J. McConnell August 28, 1996
- ---------------------------------- ---------------
Richard J. McConnell, Director Date
69
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> May-31-1996
<PERIOD-END> May-31-1996
<CASH> 364,100
<SECURITIES> 0
<RECEIVABLES> 1,575,200
<ALLOWANCES> 249,700
<INVENTORY> 3,505,900
<CURRENT-ASSETS> 5,220,100
<PP&E> 6,869,300
<DEPRECIATION> 5,387,600
<TOTAL-ASSETS> 7,025,800
<CURRENT-LIABILITIES> 3,157,300
<BONDS> 9,800,100
0
0
<COMMON> 1,759,000
<OTHER-SE> (7,982,900)
<TOTAL-LIABILITY-AND-EQUITY> 7,025,800
<SALES> 15,368,400
<TOTAL-REVENUES> 15,368,400
<CGS> 11,668,200
<TOTAL-COSTS> 11,668,200
<OTHER-EXPENSES> 4,115,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 337,000
<INCOME-PRETAX> (752,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (752,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (752,700)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
