There's good news and bad news at General Kinetics Inc. in Rockville these days. The good news is that the company's profit has been growing nicely. The bad news is that the board of directors may be headed for a confrontation with shareholders over a plan to create an anti-takeover defense for the company.
As a result, General Kinetics' annual meeting on Nov. 13 could be rather heated. The anti-takeover plan will need a two-thirds vote to pass. And while officers and directors already own 41 percent of the shares, getting 66 percent of the votes may be difficult.
The anti-takeover plan has been criticized by several major shareholders, including Calvin S. Koonce, head of Koonce Securities of Rockville, who holds 63,239 shares, or 6.5 percent, of the company's stock; Steve Newby, head of Newby & Co., Rockville, who represents about 38,000 shares, counting his holdings and those of clients; and Dominique Gignoux, chairman of Data Measurement Corp. of Gaithersburg, who also owns a sizable block of stock.
General Kinetics is an old-line manufacturing company that has found new life and profits in its Cryptek division, which manufactures facsimile machines that are secure from electronic eavesdropping. Cryptek machines are found at the White House, the Pentagon and other top-security agencies.
If shareholders approve the anti-takeover plan, it would allow the board of directors to create 500,000 shares of a new class of preferred stock. Each share would have 10 votes, while the common stock would continue to have only one vote per share.
If the directors were to issue the 500,000 shares of preferred stock representing 5 million votes, the individuals who buy the new stock would have far more votes than the common stock holders.
In short, the board members would be permitted to sell control of the company whenever they wanted, and to whomever they wanted, without going back to the shareholders for approval.
While it is not clear who the board would sell the preferred to, in the event of a hostile takeover, it could go to a friendly suitor, a so-called "white knight."
Newby, however, said he was concerned the board members might try to sell the shares to themselves or to company officers to ensure control.
Koonce, a long-time investor in General Kinetics, called the anti-takeover plan "a negative" move for the company, which would "disenfranchise the shareholders."
By limiting the company's chances to be acquired, Koonce said, General Kinetics would discourage public interest in the company, reduce the liquidity of its stock and cause the shares to trade at a lower than normal price. In the long run, that would cost shareholders money, he added.
Koonce said that with 41 percent of the stock already held by officers and directors, the chances for a hostile takeover seemed rather small.
Given the improving financial performance of General Kinetics, Koonce said, the stock should increase in price. But it is not likely to happen, he warned, if the board of directors is given a blank check.
Newby, who used to work at Koonce Securities, supported General Kinetics management during a 1988 palace revolt at the company.
"I'm just flabbergasted," Newby said of the anti-takeover plan. "I think it's a gross overreaction which could cost stockholders a ton of money."
Gignoux said his position was, "I'm against it." Gignoux continued, "This is an attempt by the board of directors to preserve its position. That's always been a problem for 10 years. The interests of the board members go far ahead of the stockholders."
Confronted with this wide-ranging criticism, Richard A. Thompson, the president of General Kinetics, said the purpose of the anti-takeover plan was to allow the board to keep enough control to forestall any unfriendly takeover effort that could cost the company a lot of time, money and energy and interrupt its forward momentum.
Thompson said the plan had been devised after consulting with financial advisers.
Thompson also stressed that any decision on issuing the preferred stock would rest in the hands of three "outside" directors, meaning directors who are not also company officers and employees.
One of those directors, David A. Shaw, managing director of the Manchester Group Ltd., echoed Thompson's views on the stock plan, saying, "The intent is to give the board the ability to control the destiny of the company."
Shaw also raised the question of what would happen if a foreign investor either tried to take over General Kinetics or bought a small interest in the company.
According to an attorney who is expert in the subject, if a foreign investor buys 5 percent or more of a U.S. company engaged in secret work for the Defense Department, the company may be deemed to be under foreign control. And, if so, that could open the door to the loss of the security-clearance needed to manufacture the product.
The lawyer said that there many ways to avoid losing that clearance -- and much depends on the nationality of the foreign investor.
But Shaw suggested that the foreign-investor question was one of the main reasons for bringing up the stock plan. And Thompson acknowledged he was fearful that the arrival of a foreign investor could derail the company.
Gignoux, however, asked why a foreign investor would buy into a company when the investor's mere presence could demolish the company's business.
The proxy, an official company statement prepared for the annual meeting, makes no mention of any foreign-investor problem.
However, the statement does acknowledge that if the preferred shares are issued, it could prevent a takeover bid and therefore deny stockholders a premium for their shares.
It also could result in General Kinetics being unable to list its common stock on the Nasdaq National Market System (NMS). Nasdaq rules prohibit companies on the National Market System from issuing new securities with two kinds of voting powers.
Although General Kinetics is not now on the National Market System -- it is on a second tier -- the company's common stock could be adversely affected if the company eventually wanted to move to the NMS.
"The inability of the common stock to be traded on a national exchange or on the NMS system could adversely affect the future liquidity of the market for shares of such stock," the proxy declared.
Gruntal & Co., a major brokerage firm owned by Home Insurance Co., is closing the doors of its downtown Washington office. The reason, according to Barry Richter, executive vice president, is simple. The office just didn't make money.
Despite all the surveys that said Washington was a perfect place for a branch office, Richter said, "nothing seemed to click." Gruntal has had an office in the District for the past seven years. During the past three years, the office has been managed by John J. Mulcahy, who had hoped to expand here.
Several brokers will move to Gruntal's Baltimore office. But the others will scatter. Toward the end, the office had about nine brokers and three staff members.
Two key executives have left Johnston, Lemon & Co. of Washington recently. Richard F. Waid, the head of investment banking at J&L has moved over to the Washington office of Tucker, Anthony Inc. at 1300 I St. NW. Waid said the parting with J&L was cordial but there wasn't much investment banking business being done at J&L these days. Waid's new job at Tucker, Anthony will involve covering the northeast region. Waid previously had a long career at Kidder, Peabody & Co.
F. Scott Valpey, director of pension services at J&L, left to open a small Alexandria investment banking boutique specializing in pension and retirement plans. Valpey is teaming up with Stephen R. Scorgie, vice president of finance for Build America Business Centers, a real estate development firm. Their new venture will be called the Valscore Consulting Group.
Valpey also will be associated with Investment Management & Research Inc., a brokerage owned by Raymond James Financial Inc.