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, 1997 Commission File No. 0-1738
GENERAL KINETICS INCORPORATED
(Exact Name of Registrant as specified in its Charter)
Virginia 54-0594435
(State of Incorporation) (IRS Employer Identification No.)
14130-A Sullyfield Circle, Chantilly, VA 20151
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (703)-802-4848
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
- -------------------
Common Stock with par value of 25 cents per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Aggregate market value of the voting stock held by non-affiliates $ 205,196*
of the Registrant as of August 15, 1997
(*Executive officers, directors, ESOP and Rabo Investment Management, 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 1, 1997, was 6,658,925
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 1997 fiscal year are incorporated into Part III hereof.
<PAGE>
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 continue the necessary development of its operations on a profitable
basis; and the risk that the Company's Common Stock will not continue to be
quoted on the NASD OTC Bulletin Board services. In addition, the Company's
business, operations and financial condition are subject to substantial risks
which are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission, including this Report.
PART I
ITEM 1 - BUSINESS
(a) General Development of Business
General Kinetics Incorporated (the "Company" or "GKI"), through its Electronic
Enclosure Division ("EED"), designs and manufactures high-quality precision
enclosures for electronic systems, principally for sale to the U.S. Department
of Defense and the U.S. Navy.
Over the years the Company has operated a number of diversified businesses. The
Company was founded in 1954 and its Common Stock became publicly traded in
November 1961.
Beginning in December, 1992, the Company's operations have been financed to a
significant extent by debt and equity investments made by the Company's
principal shareholder, RABO Investment Management AG ("RABO"), a Swiss
investment bank (formerly Gutzwiller & Partner, A.G.) As of May 31, 1997, RABO
has invested approximately $3 million in equity, and approximately $9.4 million
in convertible debentures.
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As of December 5, 1996, GKI completed the sale of its Secure Communications
Division ("SCD") to Cryptek Secure Communications, LLC, a Delaware limited
liability company, the majority of whose equity interests are owned by
affiliates of Angelo Gordon & Co., L.P. The Company recognized a gain on the
sale of SCD of $117,000. As of May 30, 1997, the Company sold the stock in its
wholly owned Food Technology Corporation ("FTC") subsidiary to the former Vice
President and general manager of FTC. Net Sales were approximately $1,626,300
for SCD and $199,500 for FTC during fiscal 1997. Both SCD and FTC experienced
operating losses during fiscal 1997.
Both SCD and FTC are reflected as discontinued operations in the accompanying
financial statements.
(b) Financial Information About Industry Segments
Due to the sale of the Secure Communications Division and the Food Technology
Corporation subsidiary during fiscal 1997, the Company is currently operating in
a single industry segment.
(c) Narrative Description of Business
ELECTRONIC ENCLOSURE BUSINESS
GENERAL
The Electronic Enclosure Division designs and manufactures high-quality
precision enclosures for sophisticated electronic systems. EED is a
manufacturing and engineering services group which produces build-to-print as
well as custom engineered products. 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 98% of the Division's revenues in fiscal year
1997. EED sells these products as a prime contractor and also as a subcontractor
to major prime contractors such as Northrop Grumman, Palomar Products, Lockheed
Martin, and DRS Laurel Technologies.
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STRATEGY
The Company's long-term goals for EED are to increase market penetration with
the Department of Defense, and to expand into the non-government marketplace by
targeting build to print or engineering design opportunities for enclosures and
related products.
Management intends to use its current sales force, established customer base and
reputation for quality to expand into other departments and agencies within the
government. The Company is beginning to explore opportunities, using the current
sales force, in the non-government marketplace, and expects the emphasis to be
on those companies with requirements for high end precision enclosures as well
as related metal fabrication products. The Company does not expect the
non-government marketplace to provide a significant portion of its sales during
fiscal 1998.
The Company plans to finance their strategy through cash on hand as of May 31,
1997 and cash flow generated through operations during fiscal 1998. It is
anticipated that the Enclosure Division will achieve moderate overall growth
along with improved margins in its operations.
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.
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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 1997, 1996, and 1995 EED has sold 98%, 99%, and 96%,
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.
MARKETING AND SALES
The Enclosure Division currently markets its products through a direct sales
force as well as through outside agencies. In fiscal 1998 EED expects to expand
its direct sales effort through additional direct sales people or with outside
agencies contracted as 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, 1997 and May 31, 1996
was approximately $1.3 million and $2.4 million, respectively.
The Enclosure Division sells its products pursuant to both long and short-term
contracts with scheduled backlog and delivery
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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 than the Company.
RESEARCH AND DEVELOPMENT
The Company expensed approximately $59,200 and $93,500 during fiscal 1997 and
fiscal 1996, respectively, in connection with research and development with
respect to the feasibility of potential new products or services, outside of the
Company's present operating divisions, principally the new products and services
being pursued by Link2It, LLC, in which the Company has an ownership interest.
The Company has no further commitment for research and development expenditures
related to these products in fiscal 1998. (See Note 15 to the Consolidated
Financial Statements)
The Company does not expect the Electronic Enclosure Business to engage in any
significant research and development activities during fiscal 1998.
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THE U.S. GOVERNMENT PROCUREMENT PROCESS
Substantially all of the Company's 1997 revenues from continuing operations 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 98% of the Company's total revenues in
fiscal 1997. 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 1997
revenues were derived from contracts that are subject to termination for
convenience. In the event of such a termination, the Company is normally
entitled to receive the purchase price for delivered items, reimbursement for
allowable costs for work in process, and an allowance for profit thereon or
adjustment for loss if completion of performance would have resulted in a loss.
There were no terminations for convenience in fiscal 1997. 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.
The Company's sales to the U.S. Government are subject to numerous other factors
beyond the Company's control that apply to
7
<PAGE>
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.
EMPLOYEES AND LABOR AGREEMENTS
As of May 31, 1997, the Company had 92 employees, all located in the United
States. Of the 92 employees, 32 were salaried and 60 were paid hourly. At that
date on a Company-wide basis, there were 3 employees in engineering, 3 employees
in sales and marketing, 74 employees in manufacturing and assembly operations,
and 12 employees in an executive capacity or in finance and administration. 49
of the Company's employees were represented by the International Brotherhood of
Electrical Workers union in Johnstown, Pennsylvania, under a five year
collective bargaining agreement which will expire on May 31, 1999. The Company
considers its employee relations to be good.
The Company has a noncontributory, qualified ESOP plan covering its nonunion,
full-time employees, who are at least 21 years of age. The Company funded its
ESOP in April 1991. The shares held by the ESOP were earned as compensation by
eligible employees over a five-year period which ended May 31, 1996. The ESOP
holds 171,500 shares, or approximately 2.6% of the outstanding Common Stock of
the Company.
ENVIRONMENTAL MATTERS
The 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
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procedures and contaminant levels are now below the regulatory standards, and
they have reached an agreement with the Florida Department of Environmental
Protection. The Company 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 received all of the environmental
permits and approvals necessary for the operations of its facilities.
SECURE COMMUNICATIONS DIVISION
As of December 5, 1996, GKI completed the sale of its secure communications
business ("SCD") to Cryptek Secure Communications, LLC, a Delaware limited
liability company, the majority of whose equity interests are owned by
affiliates of Angelo Gordon & Co., L.P. The division had been in the business of
manufacturing and selling secure facsimile machines and secure local area
network products for customers handling classified information. The Division
incurred significant operating losses during fiscal 1997 and in each of the
prior three fiscal years. Management believed that the resources likely to be
involved in returning the division to profitable operations could more
effectively be generated and utilized in connection with the development of EED
and other activities. In addition, the $1.75 million in cash proceeds received
from the sale of the division provided the Company with operating capital for
its continuing business.
FOOD TECHNOLOGY CORPORATION
As of May 30, 1997, the Company sold the stock in its wholly owned Food
Technology Corporation ("FTC") subsidiary to the former Vice President and
general manager of FTC. FTC is a manufacturer of high-quality texture testing
instrumentation for the food industry and optical inspection equipment for the
plastics and related industries. The Company decided to exit the Food Technology
business primarily because it was a small operation which was not related to the
Company's primary business, and which had not experienced any significant growth
in recent years.
9
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(d) Foreign and Domestic Operations and Export Sales
The Electronic Enclosure Division does not have any significant foreign
operations or export sales.
ITEM 2 - PROPERTIES
The Company maintains its executive offices, in an approximately 7,700 square
foot subleased facility in northern Virginia. As part of the sale of the
Company's Secure Communications Division, the Company assigned a lease for
approximately 36,800 square feet of space in the building in Chantilly, Virginia
which previously housed SCD. The lease for the Chantilly facility requires the
Company to pay for its pro rata share of the taxes, insurance, and maintenance.
The Company has subleased approximately 7,700 square feet of space from Cryptek
on substantially the same terms and conditions as the master lease for its
executive offices and the FTC operation. With the sale of FTC, the Company has
sub subleased approximately 2,300 square feet of this space to Food Technology
Corporation on substantially the same terms and conditions as the sublease with
Cryptek.
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. The Johnstown facility
is subject to a mortgage held by a local banking institution.
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 ($57,400 at May 31, 1997) and interest until the
remaining principal is paid in full. The loan is expected to be paid in full
during the 1998 fiscal year.
The Company has engaged a broker to assist in the potential sale or leasing of
the Orlando Facility. During fiscal 1997, approximately 2% of the Company's
sales were manufactured in the Orlando facility, and the Company believes that
the Johnstown facility is adequate to meet its current production requirements
and has
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adequate excess capacity to provide for the Company's expected short term
growth.
In addition, in July 1997, the Company sold a 19,000 square foot facility which
it owned in Johnstown, Pennsylvania. The building was sold under a lease
purchase option to an unrelated third party which had been leasing the building,
for approximately $7,500 after credit for lease payments received by the
Company.
The Company believes that its present facilities are adequate to meet its
current production requirements.
ITEM 3 - LEGAL PROCEEDINGS
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
At the Annual Meeting of Stockholders on April 9, 1997, the following matters
were voted on and approved:
1. Messrs. Marc Cotnoir and Richard McConnell were each elected as Class II
directors for a term expiring in 1999 or until, in each case, his
successor is elected and qualified. 5,454,805 shares of common stock, or
approximately 99.7% of the shares voting, voted in favor of Messrs.
Cotnoir and McConnell, and 14,026, or approximately 0.3% of the shares
voting, withheld authority to vote for them.
2. The Board's selection of BDO Seidman, LLP as the Company's independent
public accountants for the fiscal year ended May 31, 1997 was ratified.
5,438,470 shares of common stock, or approximately 99.4% of the shares
voting, voted in favor of the proposal. 15,012 shares, or approximately
0.3% of the shares voting, voted against and 15,349 or approximately 0.3%
of the shares voting, abstained.
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PART II
ITEM 5 - MARKET FOR GKI COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Effective June 1997, the Company's Common Stock, $.25 par value per share, began
to be quoted in the NASD OTC Bulletin Board service, under the symbol "GKIN".
Prior to that time, the Company's Common Stock traded on the American Stock
Exchange ("AMEX") under the symbol "GKI".
During May 1997, since the Company did not fully satisfy all of the financial
and market value guidelines of the American Stock Exchange ("AMEX") for
continued listing, it consented to the removal of its Common Stock from the
AMEX. The last day for trading the Company's Common Stock on the AMEX was May
23, 1997.
The table below presents the high and low sales prices as reported for the
fiscal quarters within the two most recent fiscal years (during periods that the
Common Stock traded on the AMEX):
Quarter Ended High Low
- ------------- ---- ---
May 31, 1997 5/16 1/16
February 28, 1997 7/16 3/16
November 30, 1996 9/16 3/16
August 31, 1996 5/8 3/8
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
The approximate number of holders of record of the Registrant's Common Stock,
$.25 par value, as of August 15, 1997, was 1,035.
The Company has not paid any dividends during the last five fiscal years and has
no present plans to pay dividends in the foreseeable future.
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ITEM 6 - SELECTED FINANCIAL DATA
Years ended May 31
- --------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Income Statement Data:
Net Sales $ 7,677 $ 7,803 $ 6,420 $ 7,585 $ 7,700
Cost of sales 7,122 7,519 5,438 5,654 5,542
------- ------- ------- ------- -------
Gross profit 555 284 982 1,931 2,158
Selling, general,
and administrative
expenses 3,404 2,693 1,663 1,668 1,470
Product research,
development, and
improvement
expenses 0 0 0 94 59
Write off of acquired
R & D costs 0 416 0 0 0
Write off of Goodwil1 0 862 0 0 0
------- ------- ------- ------- -------
Operating income
(loss) (2,849) (3,687) (681) 169 629
Gain on Sale of
Rockville Building 0 (553) 0 0 0
Interest expense, net 486 710 463 335 336
------- ------- ------- ------- -------
Income (loss) from con-
tinuing operations (3,335) (3,844) (1,144) (166) 293
Income (loss) from dis-
continued operations 252 (892) (419) (587) (217)
------- ------- ------- ------- -------
Net income (loss) (3,083) (4,736) (1,563) ( 753) 76
======= ======= ======= ======= =======
Net Income(loss per share:
Income (loss) from
continuing operations (.95) (.69) (.18) (.03) .011
Income (loss) from dis-
continued operations .07 (.16) (.06) (.09) (.008)
------- ------- ------- ------- -------
Net Income (loss) (.88) (.85) (.24) (.12) .003
Cash dividends
per common share 0 0 0 0 0
Weighted average shares
and dilutive equivalents
outstanding 3,498 5,543 6,509 6,509 25,747
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Balance Sheet and Other Data:
- --------------------------------------------------------------------------------
May 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Working capital $ (509) $ 2,084 $ 2,405 $ 2,063 $ 2,070
Cash 67 765 212 364 1,482
Total assets 9,918 7,812 8,694 7,026 5,334
Net property, plant
& equipment 2,554 2,121 1,747 1,482 1,249
Capital
expenditures 68 317 155 188 157
Long-term
liabilities 4,771 8,248 10,063 10,092 9,964
Total Stockholders'
Deficit (1,722) (3,950) (5,492) (6,224) (6,073)
Depreciation and
amortization 703 671 527 500 207
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from the Company's consolidated statements
of income from continuing operations for fiscal years 1995, 1996 and 1997 (each
ended May 31), and select items as a percent of revenue.
Percent of Revenue
------------------
1995 1996 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
----- ----- -----
Gross profit 15.3% 25.4% 28.0%
Operating expenses (25.9%) (22.0%) (19.9%)
----- ----- -----
Operating income (loss) (10.6%) (2.2%) 8.2%
Interest expense (6.5%) (4.4%) (4.4%)
Income/(loss) from discontinued operations
Income tax (provision) (7.2%) (7.7%) (2.8%)
Benefit 0.0% 0.0% 0.0%
----- ----- -----
Net income (loss) (24.3%) ( 9.9%) 1.0%
===== ===== =====
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Continuing Operations
Net sales for fiscal 1997 for the Electronic Enclosure Division were
approximately $7.70 million as compared with $7.58 million for fiscal 1995,
representing an increase of 1.5%. The increase was attributable to an increase
in volume as a result of an increased sales effort and an increase in customer
demand.
The principal customer for the Enclosure Division's products is the United
States Navy which, directly or through its prime contractors, accounted for 98%
of the Enclosure Division's revenues in fiscal year 1997.The Company's sales to
the United States government and its prime contractors represented approximately
98% and 99% of total net sales during the Company's fiscal years ended May 31,
1997 and May 31, 1996, respectively, and are expected to continue to account for
a substantial portion of the Company's revenues for the foreseeable future. The
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Company's contracts with the United States government are subject to the
availability of funds through annual appropriations, may be terminated by the
government for its convenience at any time and generally do not require the
purchase of a fixed quantity of products. Reductions in United States government
defense spending could adversely affect the Company's operating results. While
the Company is not aware of present or anticipated reductions in United States
government spending on specific programs or contracts pursuant to which the
Company has sold material quantities of its products, there can be no assurance
that such reductions will not occur or that decreases in United States
government defense spending in general will not have an adverse effect on sales
of the Company's products in the future.
Gross profit for fiscal 1997 was approximately $2.16 million compared with
approximately $1.93 million for fiscal 1996, representing an increase of
approximately 11.9%. Gross profit as a percentage of sales increased from 25.6%
in fiscal 1996 to 28.0% in fiscal 1997. The gross profit increase for the
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. The Company began implementing these procedures during fiscal 1995,
and the effect of these changes has resulted in improved gross profits over each
of the following two fiscal years. During fiscal 1998, the Company plans to
upgrade its MIS and accounting systems, which the Company expects will provide
more timely and accurate information about manufacturing operations.
Operating expenses for fiscal 1997 were approximately $1.53 million compared
with $1.77 million for fiscal 1995, representing a decrease of 15.7%. Operating
expenses as a percentage of net sales decreased from 23.2% in fiscal 1996 to
19.9% in fiscal 1997. Selling, General, and Administrative costs were
approximately $1.47 million in the fiscal year ended May 31, 1997 compared to
approximately $1.67 million in the prior fiscal year. This decrease was in part
due to the Company recording a $100,000 increase in its allowance for doubtful
accounts in the fourth quarter of fiscal 1996 as a specific reserve for a
customer who had experienced financial difficulties. Product Research,
Development & Improvement expenses decreased from $93,500 in fiscal 1996 to
$59,200 for the fiscal year ended May 31, 1997. These expenses are related to
the Company's investment in Link2It, LLC (see Note 15 to the Consolidated
Financial Statements), and are not expected to continue in fiscal 1998.
Interest expense increased slightly, from approximately $335,300 in fiscal 1997
to approximately $336,800 in fiscal 1996.
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Discontinued Operations
The Company recognized a gain on the sale of the Secure Communications Division
business of $117,000 during fiscal 1997. The Company incurred losses from
discontinued operations in both the Secure Communications Division and the Food
Technology Corporation Subsidiary. These losses from discontinued operations
totaled $333,800 in fiscal 1997 as compared to $587,100 during fiscal 1996.
There was a net loss from SCD of approximately $240,700 on net sales of
approximately $1.6 million from June 1, 1996 through November 30, 1996. During
the prior fiscal year, the Secure Communications Division had a net loss of
approximately $585,000 on net sales of approximately $7.3 million. Net sales and
net income for the fiscal year ended May 31, 1996 included deliveries totaling
$3.2 million on a contract to Bosch Telecom, a supplier of fax machines to the
German Government. Deliveries on the contract with Bosch Telecom were
substantially complete by April 1996. A provision of $40,000 was made at the
time of the sale for future contingencies, including certain legal and
administrative expenses, of which $5,000 remains at May 31, 1997.
There was a net loss from FTC of approximately $93,100 on net sales of
approximately $199,500 for fiscal 1997 compared to a net loss of $400 on net
sales of $530,400 for the year ended May 31, 1996. The reduction in sales and
increase in operating loss was primarily due to the sale of sorting equipment of
approximately $200,000 during fiscal 1996 as compared to no sales of sorting
equipment during fiscal 1997.
Due to the net losses for fiscal 1997 and 1996, 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 its ultimate realization. If the Company achieves profitable operations, it
will be subject to alternative minimum taxes.
17
<PAGE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Continuing Operations
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.
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.
The gross profit for the Enclosure Division was approximately $1.9 million for
fiscal 1996 compared to a gross profit of approximately $1.0 million for the
prior fiscal year. 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 for products which the Company can most efficiently
manufacture. These procedures were implemented during fiscal 1995, but the full
effect was not felt until 1996.
Operating expenses for fiscal 1996 were approximately $1.8 million compared with
$1.7 million for fiscal 1995, representing an increase of 5.9%. The increase was
primarily due to research and development expenses during fiscal 1996 of
approximately $93,500, relating to the development of a new product not
associated with the Company's then current lines of business. Selling, General,
and Administrative costs were approximately $1.7 million in the fiscal year
ended May 31, 1996 and 1995, even though 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 $463,400 in fiscal 1995 to
approximately $335,300 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.
18
<PAGE>
Discontinued Operations
There were combined losses from discontinued operations (the Secure
Communications Division and the Food Technology Corporation subsidiary) which
totaled $587,100 for the fiscal year ended May 31, 1996 and $419,000 for the
fiscal year ended May 31, 1995.
There was a net loss from SCD of approximately $585,000 on net sales of
approximately $7.3 million for fiscal 1996 compared to a net loss of
approximately $468,200 on net sales of $6.5 million for the year ended May 31,
1995. The increase in sales was due principally to deliveries to Bosch Telecom,
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. Even with the increase in
sales, the Company experienced a decrease in gross profit 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 the fax machines shipped to resellers for foreign
governments.
There was a net loss from FTC of approximately $400 on net sales of
approximately $530,400 for fiscal 1996 compared to net income of $50,500 on net
sales of $445,300 for the year ended May 31, 1995. The increase in sales was
primarily due to the sale of sorting equipment of approximately $200,000 during
fiscal 1996 as compared to no sales of sorting equipment during fiscal 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 5, 1996, GKI completed the sale of its secure communications
business to Cryptek Secure Communications, LLC, a Delaware limited liability
company, the majority of whose equity interests are owned by affiliates of
Angelo Gordon & Co., L.P. In the transaction, GKI received $1.75 million in
cash, a $750,000 secured promissory note, payable over three years (bearing
interest at 1% over the prime rate) and $1.5 million face amount of 6%
convertible preferred equity of the Purchaser which must be redeemed by the
Purchaser within five years (unless previously
19
<PAGE>
converted). Such preferred equity interest is convertible, at GKI's option, into
4.2% of the regular membership interests in the Purchaser on a diluted basis.
The Purchaser also assumed certain liabilities related to the secure
communications business, subject to the terms and conditions of the agreement of
sale. The cash proceeds from the sale were offset by estimated disposal costs
and a provision for operating losses during the phase out period of
approximately $214,200. The foregoing summary is not a complete description of
the terms and conditions of the reported transaction and is qualified in all
respects by reference to agreement between the Purchaser and GKI, a copy of
which is attached as Exhibit 2.1 to GKI's Form 8-K dated December 20, 1996.
As of May 30, 1997, the Company sold the stock in its wholly owned Food
Technology Corporation subsidiary to the former Vice President and general
manager of FTC. In the transaction GKI received approximately $139,000 in cash.
In addition, the Company may receive royalties for a period of ten years based
on total annual revenues from FTC of over $300,000. The purchaser also agreed to
pay up to $10,000 of the Company's legal expenses for the transaction.
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 results for fiscal 1997 showed
significant improvement over the prior three fiscal years. In addition, Company
received $1.75 million in cash from the sale of SCD, which improved the
Company's short term liquidity.
In the Electronic Enclosure Division, management has taken action to reduce
expenses, and to increase revenues and gross profit margins. In EED,
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 1997 fiscal year as compared to the prior three fiscal years.
The Company must continue to market electronic enclosure products to government
and commercial markets, and enter into contracts which the Company can complete
with favorable profit margins in order to operate profitably in fiscal 1998.
The Company has outstanding debentures issued to Gutzwiller & Partner, A.G., now
RABO Investment Management AG ("RABO") totaling $9.4 million. The debentures
mature in August 2004, are convertible into common stock at a conversion price
of 50 cents per share, and bear interest at 1% per annum payable annually.
20
<PAGE>
As discussed above, the Company received $1,750,000 in cash proceeds from the
sale of the Secure Communications Division. During the second half of fiscal
1997, the Company paid expenses associated with the sale, significantly reduced
accounts payable, and repaid all outstanding advances from the accounts
receivable factor. As of May 31, 1997, the Company had a balance of
approximately $1.48 million in cash and cash equivalents. Management believes
that cash on hand and careful management of operating costs and cash
disbursements should enable the Company to meet its cash requirements through
May 31, 1998.
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, 1997, there was no balance due Reservoir. The Company does not expect
to continue to draw on this credit facility, but it is available in the future
to alleviate short-term cash requirements.
The Company expects to spend approximately $150,000 during fiscal 1998 for
software, hardware, and consulting used to update its financial, accounting, and
management information systems. Commitments under operating leases, net of
sublessee income, amount to $51,300 in fiscal 1998. Current maturities of long
term debt, including obligations under capitalized leases, amount to $160,300 in
fiscal 1998.
21
<PAGE>
ANALYSIS OF CASH FLOWS
Operating activities provided approximately $.1 million in cash flows in fiscal
1997 as compared to providing approximately $.7 million in fiscal 1996. The $.6
million decrease principally reflects an improvement in the net loss of
approximately $.7 million, a decrease of $.1 million in cash used to fund
changes in working capital items, offset by an decrease of approximately $1.4
million in non-cash expenses. In fiscal 1997 the Company had a decrease in
accounts payable and accrued expenses of approximately $ 482,000 which was
related primarily to the payment of older accounts, including accrued
professional fees, as well as reduced purchases in the last quarter of the
fiscal year. In fiscal 1996 the Company also had a decrease in accounts payable
and accrued expenses of $585,400 which was related primarily to the payment of
older accounts, including accrued professional fees. Inventories decreased by
approximately $514,700 in the prior fiscal year as compared to a decrease of
approximately $731,200 in fiscal 1997. The decrease is primarily due to a lower
backlog in EED at May 31, 1997 as compared to May 31, 1996. In the prior year
accounts receivable increased by approximately $1.6 million as compared to an
increase of approximately $28,900 in the current fiscal year. The change was not
material in fiscal 1997 because EED sales in the last two months of fiscal 1997
were close to the sales for the same period in fiscal 1996. Non-cash items
decreased by $1.4 million, from $1.1 million in fiscal 1996 to $(0.3) million in
fiscal 1997. The non-cash items in fiscal 1997 were reduced by the gain on the
disposition of SCD of approximately $117,000 and a reduction in the inventory
reserve of approximately $419,100, which was primarily related to the
disposition of SCD. The fiscal 1996 non-cash items included an increased
inventory reserve of approximately $209,800 and the write off of capitalized
VSLAN software of approximately $142,900.
Cash provided by investing activities was $1.4 million in fiscal 1997 as
compared to cash used in investing activities of $183,100 in fiscal 1996. The
increase was primarily caused by net proceeds from the disposition of
discontinued operations during fiscal 1997 totaling approximately $1.7 million.
The Company's primary investing activities in fiscal 1996 consisted of the
purchase of property, plant and equipment.
Cash used by financing activities amounted to approximately $.3 million in
fiscal 1997 as compared to approximately $.4 million in fiscal 1996. In fiscal
1997 the Company used the $.3 million to repay certain long term mortgage debt
and to repay all outstanding advances from the factor. In fiscal 1996 the
Company
22
<PAGE>
used the $.4 million to repay advances from the factor and to repay certain long
term mortgage debt.
Management believes that inflation did not have a material effect on the
operations of the Company during fiscal 1997.
ACCOUNTING PRONOUNCEMENTS
On March 3, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)". SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, Basic earnings
per share would have been $0.01, ($0.12), and ($0.24) per share for the fiscal
years ended May 31, 1997, 1996, and 1995, respectively. Diluted earnings per
share would have been $0.00, ($0.03), and ($0.06) per share for the fiscal years
ended May 31, 1997, 1996, and 1995, respectively.
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129") effective for periods ending after December
15, 1997, establishes standards for disclosing information about an entity's
capital structure. SFAS 129 requires disclosure of the pertinent rights and
privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards.
Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive
Income", establishes standards for reporting and
23
<PAGE>
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
24
<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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended May 31, 1997. We have also audited
the schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General Kinetics
Incorporated and subsidiary as of May 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 1997 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 plans 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 13, 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 15, 1997
25
General Kinetics Incorporated
Consolidated Balance Sheets
As of May 31, 1997, and 1996
<TABLE>
<CAPTION>
May 31, May 31,
1997 1996
---- ----
Assets
------
<S> <C>
Current Assets:
Cash and cash equivalents $ 1,482,300 $ 364,100
Accounts receivable, net of allowance, $208,000 and $249,700 1,011,000 1,325,500
Inventories 649,500 3,505,900
Prepaid expenses and other 20,000 24,600
Note Receivable, current 200,000
Note Receivable, affiliate 150,000 --
------------ ------------
Total Current Assets 3,512,800 5,220,100
------------ ------------
Property, Plant and Equipment 4,712,100 6,869,300
Less: Accumulated Depreciation (3,463,100) (5,387,600)
------------ ------------
1,249,000 1,481,700
Note Receivable, less current portion 550,000
Other Assets, in 1996, principally capitalized software of
$0 and $206,100 22,100 324,000
------------ ------------
Total Assets $ 5,333,900 $ 7,025,800
============ ============
Liablilities and Stockholders' Deficit
--------------------------------------
Current Liabilities:
Advances from factor $ -- $ 146,500
Current maturities of long-term debt 160,300 244,800
Accounts payable, trade 635,500 1,541,600
Accrued expenses and other payables 646,600 1,224,400
------------ ------------
Total Current Liabilities 1,442,400 3,157,300
------------ ------------
Long-Term debt - less current maturities (including
$8,956,400 and $8,966,700 due to controlling shareholder) 9,679,300 9,800,100
Other long-term liabilities 285,000 292,300
------------ ------------
Total Long-Term Liabilities 9,964,300 10,092,400
------------ ------------
Total Liabilities 11,406,700 13,249,700
------------ ------------
Stockholders' Deficit:
Common Stock, $0.25 par value, 50,000,000 and 10,000,000 1,796,500 1,759,000
shares authorized, 7,185,557 shares issued, 6,658,925
shares outstanding
Additional Contributed Capital 7,224,400 7,186,900
Accumulated Deficit (14,643,500) (14,719,600)
------------ ------------
(5,622,600) (5,773,700)
Less: Treasury Stock, at cost (526,632 shares) (450,200) (450,200)
------------ ------------
Total Stockholders' Deficit (6,072,800) (6,223,900)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 5,333,900 $ 7,025,800
============ ============
</TABLE>
The accompanying notes are an integral part of the above statements.
26
<PAGE>
General Kinetics Incorporated
Consolidated Statements of Operations
For the Years Ended May 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
May 31, May 31, May 31,
1997 1996 1995
---- ---- ----
<S> <C>
Net Sales $ 7,700,700 $7,584,800 $ 6,419,500
Cost of Sales 5,542,300 5,653,500 5,437,500
----------- ---------- -----------
Gross Profit 2,158,400 1,931,300 982,000
----------- ---------- -----------
Selling, General & Administrative 1,470,100 1,668,100 1,663,500
Product Research, Development & Improvement 59,200 93,500 --
----------- ---------- -----------
Total Operating Expenses 1,529,300 1,761,600 1,663,500
----------- ---------- -----------
Operating Income 629,100 169,700 (681,500)
Interest Expense 336,200 335,300 463,400
----------- ---------- -----------
Income (loss) from continuing operations 292,900 (165,600) (1,144,900)
Loss from Discontinued Operations (216,800) (587,100) (419,000)
----------- ---------- -----------
Net Income $ 76,100 $ (752,700) $(1,563,900)
=========== ========== ===========
Net Income (loss) per share
Income from continuing operations 0.011 (0.03) (0.18)
Income (loss) from discontinued operations (0.008) (0.09) (0.06)
----------- ---------- -----------
Net Income (loss) per share $ 0.003 $ (0.12) $ (0.24)
=========== ========== ===========
Weighted Average Number of Common Shares
and Dilutive Equivalents Outstanding 25,746,702 6,508,925 6,508,925
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the above statements.
27
<PAGE>
General Kinetics Incorporated
Statements of Stockholders' Deficit
For the Years Ended May 31, 1997, 1996, 1995
<TABLE>
<CAPTION>
Additional Total
Common Stock Contributed Accumulated Treasury Unearned Stockholders'
Shares Amount Capital Deficit Stock ESOP Shares Deficit
------ ------ ------- ------- ----- ----------- -------
<S> <C>
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)
Net Income $ 76,100 $ 76,100
Issuance of 150,000 shares
of common stock 150,000 $ 37,500 $ 37,500 $ -- $ -- $ -- $ 75,000
--------- ---------- ---------- ------------ --------- --------- -----------
Balance, May 31, 1997 7,185,557 $1,796,500 $7,224,400 $(14,643,500) $(450,200) -- $(6,072,800)
========= ========== ========== ============ ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the above statements.
28
<PAGE>
General Kinetics Incorporated
Statements of Cash Flows
For the years ended May 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ 76,100 $ (752,700) (1,563,900)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 207,000 500,400 527,300
Write off of VSLAN Software -- 142,900 --
Gain on disposition of discontinued operations (117,000) -- --
Loss (Gain) on disposal of equipment -- 1,100 (3,300)
ESOP compensation -- 20,500 22,200
Amortization of bond discount 64,600 64,600 94,400
Bad debt provision (36,000) 119,600 95,000
Inventory obsolescence (recovery) provision (419,100) 209,800 --
(Increase) Decrease in Assets:
Accounts Receivable (28,900) 1,599,900 (1,123,200)
Inventories 731,200 (514,700) (532,300)
Prepaid Expenses 4,900 44,700 78,000
Other assets - Software Development Costs -- (101,100) (301,900)
Other assets 100,600 900 (26,200)
Increase (Decrease) in Liabilities:
Accounts Payable - Trade (305,200) (647,500) 372,500
Accrued Expenses (176,800) 62,100 35,700
Other Long Term Liabilities (7,300) (5,100) 2,200
------------- ------------- -------------
Net cash provided by/(used) in Operating Activites 94,100 745,400 (2,323,500)
------------- ------------- -------------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (157,000) (187,500) (154,600)
Net proceeds from sale of property, plant and equipment -- 4,400 5,800
Issuance of notes receivable (150,000) -- --
Net proceeds from disposition of discontinued operations 1,672,500 -- --
------------- ------------- -------------
Net cash provided by/(used) in Investing Activities 1,365,500 (183,100) (148,800)
------------- ------------- -------------
Cash Flows from Financing Activities:
Advances from Factor/Borrowings
on Demand Notes Payable 1,543,900 1,639,700 3,255,400
Repayments of Advances from Factor/
Demand Notes Payable (1,690,400) (1,900,200) (2,848,400)
Borrowings on Long Term Debt 13,100 90,000 1,713,500
Repayments on Long Term Debt (208,000) (239,900) (201,200)
------------- ------------- -------------
Net cash provided by/(used) in Financing Activities (341,400) (410,400) 1,919,300
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 1,118,200 151,900 (553,000)
Cash and Cash Equivalents: Beginning of Period 364,100 212,200 765,200
------------- ------------- -------------
Cash and Cash Equivalents: End of Period $ 1,482,300 $ 364,100 212,200
============= ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 259,000 $ 355,088 $ 442,100
Income Taxes $ 800 $ -- 65,500
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
Note received upon disposition of discontinued operations $ 750,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the above statements.
29
<PAGE>
GENERAL KINETICS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 1997 AND 1996
1. FUTURE PROSPECTS AND RECENT OPERATIONS:
As of December 5, 1996, GKI completed the sale of the business of its secure
communications division ("SCD") to Cryptek Secure Communications, LLC, a
Delaware limited liability company, the majority of whose equity interests are
owned by affiliates of Angelo Gordon & Co., L.P. (see Note 4). As of May 30,
1997, the Company sold the stock in its wholly owned Food Technology Corporation
("FTC") subsidiary to the former Vice President and general manager of FTC (see
Note 4). Both SCD and FTC had experienced operating losses during fiscal 1997.
The Company has 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 results for fiscal 1997 showed
significant improvement over the prior three fiscal years. In addition, Company
received $1.75 million in cash from sale of SCD, which improved the Company's
short-term liquidity.
In the Electronic Enclosure Division ("EED"), management has taken action to
reduce expenses, and to increase revenues and gross profit margins. In EED,
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 1997 fiscal year as compared to the prior three fiscal years.
The Company must continue to market electronic enclosure products to government
and commercial markets, and enter into contracts which the Company can complete
with favorable profit margins in order to operate profitably in fiscal 1998.
The Company has outstanding debentures issued to Gutzwiller and Partner, A.G.,
now RABO Investment Management AG ("RABO") totaling $9.4 million. The debentures
mature in August 2004, are convertible into common stock at a conversion price
of 50 cents per share, and bear interest at 1% per annum payable annually.
As discussed in Note 4 the Company received $1,750,000 in cash proceeds from the
sale of the Secure Communications Division. During the second half of fiscal
1997, the Company paid expenses associated with the sale, significantly reduced
accounts payable, and repaid all outstanding advances from the accounts
receivable
30
<PAGE>
factor. As of May 31, 1997, the Company had a balance of approximately $1.48
million in cash and cash equivalents. Management believes that cash on hand and
careful management of operating costs and cash disbursements should enable the
Company to meet its cash requirements through May 31, 1998. Accounts receivable
financing is available if necessary to alleviate short term cash requirements.
2. SIGNIFICANT ACCOUNTING POLICIES:
The Company's significant accounting policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of General Kinetics
Incorporated, and its wholly owned subsidiary.
Cash and Cash Equivalents
The Company classifies all temporary investments 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 as
incurred. Profits expected to be realized on contracts are based on total sales
value and estimated costs at completion. These estimates are reviewed and
revised periodically throughout the lives of the contracts and adjustments to
profits resulting from such revisions are made cumulative to the date of change.
Amounts in excess of the agreed-upon contract price for customer caused delays,
errors, and change orders are recognized in contract value if it is probable
that the claim will result in additional revenue and the amount can be
reasonably estimated. Losses on contracts are recorded in full as soon as they
become known.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market (net realizable value).
31
<PAGE>
Property, Plant, and Equipment
Property, plant and equipment are recorded at cost. The Company provides for
depreciation and amortization on an accelerated basis for machinery and
equipment and furniture and fixtures and on a straight-line basis for all other
assets over the following estimated useful lives.
Buildings and improvements 18 to 45 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Transportation equipment and other 3 years
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the remaining term of the lease.
Expenditures for maintenance and repairs are charged against income as incurred;
betterments which increase the value or materially extend the life of the asset
are capitalized. When assets are sold or retired, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is included in
income.
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.
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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 10) and stock options (see Note 14). The net loss per share computations
excludes the common stock equivalents because they are antidilutive.
On March 3, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share (SFAS 128)". SFAS
128 provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to existing fully diluted
earnings per share. Using the principles set forth in SFAS 128, Basic earnings
per share would have been $0.01, ($0.12), and ($0.24) per share for the fiscal
years ended May 31, 1997, 1996, and 1995, respectively. Diluted earnings per
share would have been $0.00, ($0.03), and ($0.06) per share for the fiscal years
ended May 31, 1997, 1996, and 1995, respectively.
33
<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, 1997, the estimates used in the financial statements
are adequate based on the information currently available.
New Pronouncements
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.
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129") effective for periods ending after December
15, 1997, establishes standards for disclosing information about an entity's
capital structure. SFAS 129 requires disclosure of the pertinent rights and
privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.
34
<PAGE>
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards:
Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive
Income", establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas, and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
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.
3. NATURE OF BUSINESS:
After the sale of SCD and FTC during fiscal 1997, the Company has consolidated
its operations into a single primary line of business: Electronic Enclosure and
precision equipment. EED designs,
35
<PAGE>
manufactures, and sells specialty metal products such as environmental
enclosures and rack mounting systems for the installation of electronics.
4. DISCONTINUED OPERATIONS
During the 1997 fiscal year, the Company disposed of its Secure Communications
Division ("SCD") and its Food Technology Corporation ("FTC") subsidiary.
Management believed that the resources likely to be involved in returning the
division to profitable operations could more effectively be generated and
utilized in connection with the development of EED and other activities. In
addition the $1.75 million in cash proceeds received from the sale of the
division provided the Company with operating capital for its continuing
business. The Company decided to exit the Food Technology business primarily
because it was a small operation which was not related to the Company's primary
business, and which had not experienced any significant growth in recent years.
The following table summarizes the revenues and earnings (loss) from these
operations, including the gain on the sale of SCD.
(in thousands)
1995 1996 1997
---- ---- ----
Net sales:
SCD $ 6,549 $ 7,253 $ 1,626
FTC 445 530 200
Income/(loss) from discontinued
operations:
SCD (469) (587) (241)
FTC 51 (0) (93)
Gain on sale of SCD 117
Net income/(loss) from discontinued
Operations (419) (587) (217)
Loss per share from discontinued
operations ($.06) ($.09) ($.01)
36
<PAGE>
SALE OF THE SECURE COMMUNICATIONS BUSINESS
As of December 5, 1996, GKI completed the sale of its secure
communications business to Cryptek Secure Communications, LLC (the "Purchaser"),
a Delaware limited liability company, the majority of whose equity interests are
owned by affiliates of Angelo Gordon & Co., L.P.
In the transaction GKI received $1.75 million in cash, a $750,000
secured promissory note payable over three years (bearing interest at 1% over
the prime rate) and $1.5 million face amount of 6% convertible preferred equity
of the Purchaser which must be redeemed by the Purchaser within five years
(unless previously converted). Such preferred equity interest is convertible, at
GKI's option, into 4.2% of the regular membership interests in the Purchaser on
a diluted basis. The Purchaser also assumed certain liabilities related to the
secure communications business, subject to the terms and conditions of the
agreement of sale. The cash proceeds from the sale were offset by estimated
disposal costs and a provision for operating losses during the phase out period
of approximately $214,200. The foregoing summary is not a complete description
of the terms and conditions of the reported transaction; reference is made to
the copy of the agreement between the Purchaser and GKI attached as Exhibit 2.1
to GKI's Form 8-K dated December 20, 1996. Such summary is qualified in all
respects by such reference.
The consideration received by GKI for its secure communications
business was determined in arms-length negotiations with the Purchaser. GKI is
not aware of any material relationship between it or any of its directors and
officers, or between any affiliate or the directors or officers of any affiliate
and the Purchaser, that existed at the date of the disposition.
Operating results of SCD for the fiscal year ended May 31, 1997 are
shown separately as part of discontinued operations in the accompanying
statement of operations. The statements of operations for the fiscal years ended
May 31, 1996 and 1995 have been restated and operating results of SCD are also
shown separately as part of discontinued operations. Net sales of SCD for the
period ended December 5, 1996 and the fiscal years ended May 31, 1996 and 1995
were approximately $1.6 million, $7.3 million, and $6.5 million, respectively.
The net income/(loss) for the division for the period ended December 5, 1996 and
the fiscal years ended May 31, 1996 and 1995 were approximately ($240,700),
$(586,700) and
37
<PAGE>
$(469,500), respectively. These amounts are included as a discontinued operation
in the accompanying statement of operations.
Assets and liabilities of the SCD consisted of the following at
December 5, 1996 and May 31, 1996:
December 5, 1996 May 31, 1996
---------------- ------------
Accounts receivable $ 365,532 $ 429,839
Inventories 2,391,214 2,490,382
Prepaid expenses 1,547 6,910
Property, plant and Equip. 180,981 198,567
Other assets 201,269 304,429
---------- ----------
Total assets 3,140,543 3,429,667
---------- ----------
Accounts payable 582,023 692,798
Accrued expenses 387,936 419,163
---------- ----------
Net assets sold $2,170,584 $2,317,716
========== ==========
The accompanying balance sheet at May 31, 1996 has not been restated.
The Company realized a gain of approximately $117,000 on the sale of
the secure communications business, net of estimated disposal costs and a
provision for operating losses during the phase-out period. A provision of
$40,000 was made at the time of the sale for future contingencies, including
certain legal and administrative expenses, of which $5,000 remains at May 31,
1997.
SALE OF FOOD TECHNOLOGY CORPORATION
As of May 30, 1997, GKI completed the sale of all of its shares of
stock in its food technology subsidiary to the former Vice President and general
manager of FTC.
In the transaction GKI received approximately $139,000 in cash. In
addition, the Company may receive royalties for a period of ten years based on
total annual revenues from FTC in excess of $300,000. The purchaser also agreed
to pay up to $10,000 of the Company's legal expenses for the transaction.
The consideration received by GKI for FTC was determined in arms-length
negotiations with the purchaser.
Operating results of the Food Technology Corporation for the fiscal
year ended May 31, 1997 are shown separately as part of discontinued operations
in the accompanying statement of
38
<PAGE>
operations. The statements of operations for the fiscal years ended May 31, 1996
and 1995 have been restated and operating results of FTC are also shown
separately as part of discontinued operations. Net sales of FTC for the fiscal
years ended May 31, 1997, 1996 and 1995 were approximately $.2 million, $.5
million, and $.4 million, respectively. The net income/(loss) for the division
for the fiscal years ended May 31, 1997, 1996 and 1995 were approximately
$(93,100), $(400) and $50,500, respectively. These amounts are included in
discontinued operations in the accompanying statement of operations.
Assets and liabilities of the FTC consisted of the following at May 31,
1997 and 1996:
May 31, 1997 May 31, 1996
Accounts receivable 13,726 $ 40,880
Inventories 153,693 120,385
Property, plant and Equip. 1,634 3,138
------- --------
Total assets 169,053 164,403
------- --------
Accounts payable 18,854 35,621
Accrued expenses 13,057 27,481
------- --------
Net assets sold $137,142 $101,301
======== ========
The accompanying balance sheet at May 31, 1996 has not been restated.
The Company did not realize any gain or loss on the sale of FTC.
5. CREDIT RISK
For the years ended May 31, 1997, 1996, and 1995, the Company's net sales to the
U.S. government and/or subcontractors accounted for 98%, 99%, and 96%,
respectively, of consolidated net sales. A substantial portion of the Company's
sales are to the U.S. government and/or subcontractors, and consequently a
material decline in department of defense spending could have a material adverse
effect on the operations of the Company. Competition in the Company's EED
division is intense as it primarily operates in a mature industry. The Company's
uncollectible receivables have historically not been material. The Company has a
cash balance with a bank in excess of the federally insured limit.
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<PAGE>
6. INVENTORIES
Inventories consist of the following:
May 31,
---------------------------
1997 1996
---- ----
Work in process $539,300 $1,844,900
Raw materials 396,300 2,275,800
Inventory reserve (286,100) (614,800)
-------- ---------
Total 649,500 3,505,900
======== =========
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, 1996 raw material
inventory. Accordingly, an additional reserve of $125,000 was established during
the fourth quarter of fiscal 1996 for possible obsolete and defective inventory.
The inventory at May 31, 1996 includes $2,610,767 of inventory related to
discontinued operations.
7. PROPERTY, PLANT AND EQUIPMENT:
Major classes of property, plant and equipment consisted of the following on
May 31:
1997 1996
-------- ------
Machinery and equipment $2,060,700 $3,383,500
Buildings and improvements 1,747,900 1,899,300
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<PAGE>
Furniture and fixtures 715,100 921,000
Transportation equipment and other
88,400 565,500
Land 100,000 100,000
---------- ----------
4,712,100 6,869,300
Less- Accumulated
depreciation and
amortization 3,463,100 5,387,600
---------- ----------
Net property, plant and
equipment
$1,249,000 $1,481,700
========== ==========
Depreciation expense for the years ended May 31, 1996, 1995, and 1994 was
$447,700, $526,000, and $570,600, respectively.
The property, plant and equipment at May 31, 1996 includes $201,745 of property,
plant and equipment from discontinued operations.
8. ADVANCES FROM FACTOR
The Company has from time to time sold 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, 1997 and May 31, 1996, including unpaid fees, was $0 and $146,500,
respectively. Outstanding advances, if any, are collateralized by the Company's
accounts receivable.
9. ACCRUED EXPENSES AND OTHER PAYABLES:
Accrued expenses and other payables consisted of the following on May 31:
1997 1996
------ ------
Billings in excess of costs incurred
$ 0 $ 69,000
Employee vacations 176,600 223,300
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<PAGE>
Outside commissions 0 24,400
Salaries and wages 57,600 78,300
Other 412,400 829,400
-------- ----------
$646,600 $1,224,400
======== ==========
The accrued expenses at May 31, 1996 include $446,644 in accrued expenses
related to discontinued operations.
10. DEMAND NOTES PAYABLE AND LONG-TERM DEBT:
Demand notes payable and long-term debt consisted of the following on May 31:
1997 1996
-------- --------
Subordinated Debt Originally Issued to
- --------------------------------------
Controlling Stockholder
- -----------------------
(See discussion below
for terms)
1994 Convertible Subordinated
Debentures 9,425,000 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% (9.25% at May 31,
1997). 774,700 822,400
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
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<PAGE>
plus two points (7.78% at May 31,
1997). 57,400 168,500
Other notes payable and capitalized
leases with interest rates between
7% and 15.7% at May 31, 1997, and
approximate monthly aggregate
payments of $8,800. 51,100 233,800
----------- -----------
$10,308,200 $10,724,700
Less: Current Maturities (160,300) (391,300)
Unamortized discount on
debentures (468,600) (533,300)
----------- -----------
Long-term debt $ 9,679,300 $ 9,800,100
=========== =-=========
The amount of unamortized discount on Convertible Debentures originally issued
to RABO at May 31, 1996, is as follows:
Face Unamortized Carrying
Amount Due Discount Amount
---------- ----------- --------
Convertible Debentures $9,425,000 $468,600 $8,956,400
In connection with the restructuring of the RABO 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, 1997 and 1996 was $64,700 and $64,600,
respectively.
On December 14, 1992, the Company issued to RABO, 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 RABO. 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, RABO 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
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<PAGE>
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, RABO 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 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 RABO 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 RABO. 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.
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<PAGE>
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 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, 1997; however, the lender has agreed to waive the
violations through May 31, 1998.
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($57,400 at May 31, 1997) and interest until the
remaining principal is paid in full.
Future principal maturities of debt are as follows:
Year Ending
May 31,
1998 160,300
1999 62,700
2000 66,200
2001 69,900
2002 76,700
Thereafter 9,872,500
-----------
$10,308,200
===========
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<PAGE>
11. INCOME TAXES:
The Company has net income of $76,100 for fiscal 1997. However, due to
differences between financial reporting and income tax purposes, there is no
income tax expense for fiscal 1997. Due to net losses for the years ended May
31, 1996 and 1995 there was no material income tax expense for these years. As
of May 31, 1997, there are no additional income tax benefits available from the
carryback of net operating losses.
The difference between the Federal tax rate and the effective tax rate realized
as a percent of pretax earnings for the years ended May 31, 1997, 1996, and
1995, is as follows:
1997 1996 1995
---- ---- ----
Tax provision (benefit) at
statutory rates $ 26,000 $(256,000) $(532,000)
Non deductible related party
interest expense 95,000 95,000 128,000
Generation (utilization) of net
operating loss carryforward (121,000) 161,000 404,000
--------- --------- ---------
$ - $ - $ -
========= ========= =========
The primary difference between income (loss) for financial reporting purposes
and income tax purposes is the recognition of reserves for uncollectible
accounts receivable and obsolete inventory, accrued professional fees, deposits
on contracts, and research and development expenses, which are currently
deductible for income tax purposes.
Principal items comprising net deferred income tax assets, at May 31, are as
follows:
1997 1996
---- ----
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<PAGE>
Net operating loss carryforward $ 3,852,000 $ 3,202,000
R & D and other credit carryforwards 148,000 148,000
Purchased R & D costs 123,000 134,000
Inventory reserves 96,000 258,000
Allowance for doubtful accounts 79,000 93,000
Excess financial statement depreciation 120,000 93,000
Accrued Vacations 67,000 60,000
Other accrued liabilities 17,000 66,000
Excess gain on sale of SCD 69,000 -
Accrued professional fees 52,000 94,000
Interest & bond discount amortization - -
Deferred compensation 108,000 111,000
----------- -----------
Total deferred tax assets $ 4,731,000 $ 4,259,000
Valuation allowance (4,731,000) (4,259,000)
----------- -----------
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, 1997, the Company has NOL carryforwards for Federal and state
income tax reporting purposes of approximately $10,501,000, which expire at
various dates through 2010. The Company has research and development, and other
credit carryforwards for Federal income tax reporting purposes of approximately
$389,000. The amount of net operating losses and credits available to be used in
fiscal 1998 will be limited to $10,526,020.
12. COMMITMENTS AND CONTINGENCIES:
Leases
As part of the sale of the business of the Company's Secure Communications
Division, the Company assigned a lease for approximately 36,800 square feet of
space in the building in Chantilly, Virginia which previously housed SCD. The
lease for the Chantilly facility requires the Company to pay for its pro rata
share of the taxes, insurance, and maintenance. The Company has subleased
approximately 7,700 square feet of space from Cryptek on substantially the same
terms and conditions as the master lease for
47
<PAGE>
its executive offices and the FTC operation. With the sale of FTC, the Company
has sub-subleased approximately 2,300 square feet of this space to Food
Technology Corporation on substantially the same terms and conditions as the
sublease with Cryptek. The Company also leases certain equipment under
noncancelable operating leases which expire at various dates through 2001.
At May 31, 1997, approximate future minimum rental commitments for all
noncancelable operating leases are as follows:
Year Ending
May 31,
1998 51,300
1999 52,700
2000 54,000
2001 47,300
2002 4,600
---------
209,900
Less- sublease
income
(through May 31, 1997) 35,400
---------
174,500
=========
Amounts charged to operations for operating leases amounted to $119,200,
$228,800, and $293,000 for the years ended May 31, 1997, 1996 and 1995,
respectively. These amounts were offset by annual sublease income of
approximately $35,100, $49,000, and $47,900, 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
48
<PAGE>
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.
13. RETIREMENT PLANS:
The Company has the following retirement plans at May 31, 1997.
Defined Contribution Plans
The Company has a defined contribution plan covering its union employees. Total
related pension expense charged to income was approximately $58,300, $56,500,
and $50,300, in fiscal 1997, 1996 and 1995, 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 $17,400, $25,400, and $24,000, for fiscal years 1997, 1996 and
1995, 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
49
<PAGE>
average market value of the common shares at the time such shares 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
$38,400, in fiscal 1997, 1996 and 1995, respectively. As of May 31, 1997, 1996
and 1995, deferred compensation recorded in the consolidated balance sheets was
approximately $285,400, $292,300, and $297,400, respectively, and was all
attributable to retirees currently receiving benefits.
14. STOCK OPTIONS:
The Company has seven incentive stock option plans under which stock options may
be granted. The Company has reserved 2,100,000
50
<PAGE>
common shares for issuance under these plans. Under all five plans, options are
granted for periods up to ten years and at the fair market value at the date of
grant. Canceled options become available for grant upon cancellation.
The 1989 Stock Option Plan was approved by the stockholders on November 30,
1989. Under the 1989 plan, of the 150,000 options available, 7,250 options, net
of cancellations, have been granted at an average exercise price of $7.00. No
options were exercised under this plan during the past three fiscal years. There
are 7,250 outstanding options under this plan as of May 31, 1997.
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, 1997. No options were
exercised under this plan during the prior three fiscal years.
The 1991 Stock Option Plan was approved by the stockholders on November 19,
1991. Under the 1991 plan, 375,000 options are available for grant through
November 18, 2001, with no more than 125,000 options granted in any one fiscal
year. There are 47,250 options outstanding, net of cancellations, of which
47,250 are exercisable at May 31, 1997 at an average exercise price of $.7675.
The Company adopted the 1991 Nonemployee and Directors Stock Option Plan on
November 19, 1991. This plan provides for grants to nonemployees (consultants
and advisors) and to nonemployee directors of options to purchase up to 100,000
shares of the Company's common stock. Options may be granted through November
18, 2001. As of May 31, 1997, there are no options outstanding.
The 1994 Stock Option Plan was approved by stockholders on October 28, 1994.
Under the 1994 plan, 525,000 options are available for grant through October 28,
2004, with no more than 225,000 options granted in any one fiscal year. At May
31, 1997 there are 38,277 options, net of cancellations, outstanding, of which
38,277 are currently exercisable at an average price of $.5135.
The 1994 Nonemployee and Directors Stock Option Plan was approved by
stockholders on October 28, 1994. This plan provides for grants to nonemployees
(consultants and advisors) and to nonemployee directors of options to purchase
up to 850,000 shares of the Company's common stock. Options may be granted
through October 28, 2004. There were 32,500 options granted under this plan
during the fiscal year ended May 31, 1997 at an exercise price of $.06 per
share. There were 170,833 options granted under this plan during fiscal year
1995 at an exercise price of $.67 per share.
51
<PAGE>
Additionally, 358,333 incentive stock options were granted to nonemployee
directors during 1995 at an exercise price of $.6875. These incentive options
become vested based on the increase of the Company stock price over the average
stock price during the base period from March 8, 1994 through October 27, 1994.
Vesting begins when the stock price reaches 300% of the base period price and
the options become fully vested when the stock price reaches 600% of the base
period price. There are a total of 552,500 options outstanding, of which 145,000
are exercisable at May 31, 1996 at an average exercise price of $.657.
A summary of the option plans is as follows for the years ended May 31 :
1997 1996 1995
-------- -------- --------
Options outstanding June 1, 799,193 756,166 225,250
Granted 32,500 70,777 584,166
Exercised 0 0 0
Canceled (186,416) (27,750) (53,250)
---------- ---------- ----------
Options outstanding
at end of period 645,277 799,193 756,166
---------- ---------- ----------
Options exercisable
at end of period 237,777 341,333 258,417
========== ========== ==========
Options available
for grant 1,424,723 1,300,807 1,343,834
========== ========== ==========
Exercise price range of
options granted $ .06 $ .38-.56 $.25-$1.00
========== ========== ==========
Price range of options
Exercised - - -
========== ========== ==========
Exercise price range of
outstanding
options $.06-$7.00 $.38-$7.00 $.25-$7.00
========== ========== ==========
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
plans. For SFAS 123 purposes, the weighed average fair value of each option
grant has been estimated as of the date of the grant using the Black-Scholes
52
<PAGE>
option pricing model with the following assumptions; Risk-free interest rate of
6.45% and 5.72% and expected volatility of 50% for the years ended May 31, 1997
and 1996, respectively, a dividend payment rate of zero for each year and an
expected option life of five years. Using these assumptions, the weighted
average fair value of the stock options granted is $.46 and $.58 for fiscal 1997
and 1996, respectively. There were no adjustments made in calculating the fair
value to account for vesting provisions or for non-transferability or risk of
forfeiture.
If the Company had elected to recognize compensation expenses based on the fair
value at the grant dates consistent with the method prescribed by SFAS 123, net
income (loss) and earnings (loss) per share would have been changed to the pro
forma amounts indicated below.
1997 1998
-----------------------
Net Income (loss):
As reported $76,100 $(752,700)
Pro forma 61,277 (793,547)
Earnings (loss) per share:
As reported $ .003 $ (.12)
Pro forma .002 $ (.12)
15. RELATED PARTY TRANSACTIONS
During fiscal 1996 and 1997, Square Systems, Corp., whose president, Richard J.
McConnell, is a director of the Company, provided consulting services to the
Company in connection with its work with respect to certain research and
development activities. Total charges to the Company for these consulting
services were approximately $123,500 through May 31, 1996. Of that amount,
$30,000 was attributable to software development work in connection with a
facsimile product of the Company's Secure Communications Division, and the
balance was attributable to work in connection with a contemplated joint venture
with Link2It, LLC ("Link2It"), a company formed by Larry M. Heimendinger and Mr.
McConnell. An additional $59,200 was charged to the Company by Square Systems
during fiscal 1997, between June 1 and December 31, 1996, which was attributable
to work in connection with Link2It. Additional funds advanced by the Company in
that connection include payments of $14,300 to third parties and certain Company
expenses allocated to the new venture totaling approximately $38,500.
53
<PAGE>
In consideration of, among other things, the foregoing amounts advanced by the
Company through January 21, 1997, in the total amount of approximately $205,500,
the Company received a common membership interest in Link2It representing 10% of
the total and a convertible preferred membership interest in Link2It with a face
amount of $112,500 convertible into 9% of the total membership interests
(subject to adjustment under certain circumstances as described below). In
addition, the Company provided Link2It with $150,000 reflected in convertible
promissory notes due one year from the date of issuance and bearing interest at
9 1/4% per annum. An additional $100,000 (of which $25,000 has been released to
date) was provided to become available upon the satisfaction of certain
conditions in such amounts and at such times as may be mutually agreed in good
faith. In each case, Link2It's obligation with respect to advances from the
Company is evidenced in a convertible promissory note convertible into
additional common membership interests in Link2It at the rate of 1% of the
aggregate interests for each $12,500 principal amount of the note so converted
(subject to adjustment under certain circumstances described below). In the
event of further investment in Link2It by independent third-party investors the
conversion price at which both the note and the preferred membership interest
described above are convertible into common membership interests in Link2It
shall be subject to adjustment to such lesser percentage as the principal or
face amount so converted could have then purchased at a purchase price
proportionate to the lowest price actually paid for membership interests by such
an independent third-party investor less a discount of 15%. Prior to such an
adjustment, the Company's aggregate common membership interest in Link2It,
assuming advances in the total amount available, and conversion in full of both
the promissory notes evidencing such advances and its preferred membership
interest, would represent 39% of the total.
Link2It is engaged in the development of certain proprietary products and
services in the area of telecommunications and facsimile transmission. Link2It
has announced that it plans to introduce in the second half of 1997 a line of
products that will enable organizations to integrate their standard fax machines
into corporate network environments, Intranets, and the Internet.
The terms of the Company's investment in Link2It were negotiated on an
arm's-length basis between Mr. Heimendinger and Marc E. Cotnoir as an
independent director and approved by Mr. Cotnoir and by the Board as a whole.
Such investment was also reviewed with and approved in principle by the
Company's principal shareholder.
54
<PAGE>
In fiscal 1997, a company of which Mr. Robert K. Gardner, a former director of
the Company, was a principal received payments totaling approximately $57,800
representing fees and expenses in connection with the December 1996 disposition
of the Company's Secure Communications Division. During 1996, the Company made
payments to Mr. Gardner, or a company of which he is a principal, in connection
with consulting services rendered to the Company by Mr. Gardner. Total amounts
paid in respect of such services were $82,000 in fiscal year 1996 during which
time Mr. Gardner also served as Vice Chairman of the Board.
As discussed in Note 3 above, the Company sold all of its stock in its Food
Technology Corporation subsidiary as of May 30, 1997 to the former Vice
President and general manager of FTC.
16. SEGMENT INFORMATION:
Due to the sale of SCD and FTC discussed above, as of May 31, 1997, the Company
operates as a single business segment.
17. MARKET VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures About Fair Value of Financial Instruments", requires all entities
to disclose the fair value of financial instruments; however, this information
does not represent the aggregate net fair value of the Company. Some of the
information used to determine fair value is subjective and judgmental in nature;
therefore, fair value estimates, especially for less marketable securities, may
vary. The amounts actually realized or paid upon settlement or maturity could be
significantly different.
Unless quoted market price indicates otherwise, the fair values of cash
and cash equivalents generally approximate market because of the short maturity
of these instruments. The Company has estimated the fair value of bonds payable
based on the present value using interest rates of similar debt instruments.
The estimated fair values of the Company's financial instruments, none
of which are held for trading purposes, are summarized as follows (brackets
denote liability):
55
<PAGE>
(000's)
May 31, 1996 May 31, 1997
---------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Bonds Payable $(9,500) $(3,528) $(9,425) $(3,123)
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
56
<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 1997 fiscal year or shall be
filed by amendment to this Form 10-K not later than such 120 day period.
57
<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, 1997 and 1996
Consolidated Statements of Operations for the years ended May
31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Deficit for the years
ended May 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended May
31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Included in Part IV of this report:
Financial Statements and Supplementary Data for the years
ended May 31, 1997, 1996, and 1995:
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, 1997.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description Note No.
- -------------- ----------- --------
<S> <C>
2.1 Agreement between GKI and Link2It, L.L.C. dated as of (17)
January 21, 1997
58
<PAGE>
3.1 Articles of Incorporation (1)
3.2 Articles of Incorporation, as amended at the Annual (7)
Meeting of GKI shareholders on November 19, 1991
3.3 Articles of Incorporation, as amended at the Annual (16)
Meeting of GKI shareholders on October 28, 1994
3.4 By-Laws (1)
3.5 By-Laws, as amended at a Board of Directors meeting on
September 24, 1992 (7)
3.6 By-Laws, as amended at a Board of Directors meeting on (12)
March 2, 1994
3.7 By-Laws, as amended at a Board of Directors meeting on
January 19, 1995
4.1 Agreement by and between GKI (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 & Partner, A.G., on December 14, 1992 with an
effective date of October 20, 1992
4.3 Form of 4% Subordinated Debentures, Series A, due March (9)
30, 1994
4.4 Form of 4% Subordinated Debentures, Series B, due March (9)
30, 1995
59
<PAGE>
4.5 Form of 4% Subordinated Debentures, Series C, due August (9)
15, 1994
4.6 Form of Convertible Debentures Issued to Gutzwiller & (14)
Partner, A.G., dated August 14, 1994.
10.1* 1988 Stock Option Plan (2)
10.2 Agreement and Plan of Merger
and Reorganization dated
August 31, 1990 (1)
10.3* 1991 Executive Bonus Plan (5)
10.6* 1991 Stock Option Plan (4)
10.7* 1991 Nonemployee and Directors Stock Option Plan (4)
10.8* 401(k) Retirement, Investment & Savings Plan (7)
10.9* 1989 Stock Option Plan (5)
10.10* 1990 Stock Option Plan (5)
10.11* 1994 Stock Option Plan (15)
10.12* 1994 Nonemployee and Directors Stock Option Plan (15)
10.13 Verdix Asset Purchase Agreement dated October 1, 1993 (10)
10.14 Amendment to Verdix Asset Purchase Agreement dated (11)
January 26, 1994
10.15 Asset Purchase Agreement between General Kinetics (18)
Incorporated and Cryptek Secure Communications, LLC, a
Delaware limited liability company, dated
60
<PAGE>
as of November 1, 1996
16.0 Letter re Change in Certifying Accountants (3)
16.1 Letter re Change in Certifying Accountants (13)
21.1 List of Subsidiaries (16)
27 Financial Data Schedule
</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,
61
<PAGE>
1992 and incorporated herein by reference.
(8) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1992 and incorporated
herein by reference.
(9) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended May 31, 1993 and incorporated herein by
reference.
(10) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 31, 1993 and incorporated herein
by reference.
(11) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Current Report on Form 8-K
dated February 9, 1994 and incorporated herein by reference.
(12) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Current Report on Form 8-K
dated March 17, 1994 and incorporated herein by reference.
(13) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's amended Current Report on Form
8-K/A dated June 16, 1994, and incorporated herein by
reference.
(14) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended May 31, 1994, and incorporated herein by
reference.
(15) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Proxy Statement for the 1994
Annual Shareholders' Meeting, and incorporated herein by
reference.
(16) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Annual Report on Form 10-K for
the year ended May 31, 1995, and incorporated herein by
reference.
(17) Previously filed with the Securities and Exchange
62
<PAGE>
Commission as an Exhibit to the Company's Current Report on
Form 8-K dated December 20, 1996 and incorporated herein by
reference.
(18) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended February 28, 1997 and incorporated
herein by reference.
(d) Schedules
63
<PAGE>
Schedule II
General Kinetics Incorporated
Schedule of Valuation and Qualifying Accounts
For the years ended May 31, 1997, 1996, and 1995
<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, 1997
Inventory Reserve 614,800 60,000 (388,700) -- 286,100
Allowance for doubtful accounts 249,700 40,000 (81,700) -- 208,000
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
</TABLE>
64
<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, 1997
--------------------------------------------
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 8/28/97 /s/ Sandy B. Sewitch 8/28/97
- ----------------------------------- ---------------------------------
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)
65
<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, 1997
- ------------------------------ ---------------
Marc E. Cotnoir, Director Date
/s/ Richard J. McConnell August 28, 1997
- ------------------------------ ---------------
Richard J. McConnell, Director Date
66
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 1,482,300
<SECURITIES> 0
<RECEIVABLES> 2,119,000
<ALLOWANCES> 208,000
<INVENTORY> 649,500
<CURRENT-ASSETS> 3,512,800
<PP&E> 4,712,100
<DEPRECIATION> 3,463,100
<TOTAL-ASSETS> 5,333,900
<CURRENT-LIABILITIES> 1,442,400
<BONDS> 9,679,300
0
0
<COMMON> 1,796,500
<OTHER-SE> (7,869,300)
<TOTAL-LIABILITY-AND-EQUITY> 5,333,900
<SALES> 7,700,700
<TOTAL-REVENUES> 7,700,700
<CGS> 5,542,300
<TOTAL-COSTS> 5,542,300
<OTHER-EXPENSES> 1,529,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336,200
<INCOME-PRETAX> 292,900
<INCOME-TAX> 0
<INCOME-CONTINUING> 292,900
<DISCONTINUED> (216,800)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,100
<EPS-PRIMARY> .01
<EPS-DILUTED> .00
</TABLE>
