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WILD RIDE

THE BALTIMORE SUN

If Richard Thompson quit right now, he'd look like a financial genius.

In the 18 months the Navy pilot-turned industrial sales executive has been head of Rockville-based General Kinetics Inc., the company has leapt into profitability, boosted its sales by a third and seen its stock jump by two-thirds.

CBut those familiar with GKI say the real test is just beginning for Mr. Thompson, whose company makes $10,000 spy-proof fax machines used at the White House, aboard Air Force One and by allied military commanders in the Persian Gulf.

GKI, which has seen its fortunes soar with the success of its recently introduced photograph-quality fax machine, has a history of taking fliers on wild, and occasionally profitable, new products.

Though the future for the 241-employee company looks bright now, GKI insiders and investors say this wouldn't be the first time a great idea has inflated the company's hopes only to see them --ed later by bad luck, shortsighted management or internal squabbling.

"GKI has been on a roller coaster for 30 years," says Charles Hoffman, a former GKI salesman who is now suing the firm. "It is unbelievable the ups and downs a tiny little company can have and survive."

This time around, GKI will be led by its first outside manager -- an engineer with a Harvard MBA who wants to strike a balance between creative engineers who invented the "Cryptek" facsimile machines and financial controllers who want to keep the company in the black.

Mr. Thompson says he aims to expand sales of GKI's best products to put the company on a steadily rising track to success. "We are not looking to jump up and be a flash in the pan. We've turned down opportunities for quick [growth]. We are looking for a future of high

integrity."

Although insiders and investors have praised the quick command the 44-year-old Naval Academy graduate has taken of the troubled company, they wonder whether he can resolve the controversies that still drain GKI of valuable cash and managerial energy.

Most importantly, Mr. Thompson must find some way to settle the battles for corporate control that have divided the company for years. And that may not be easy for an executive accused by some investors of attempting his own takeover as recently as last month.

If he is to steady the course of GKI, Mr. Thompson will have to overcome the company's history, which has been a wild ride from the start.

Founded by three scientists and a retired admiral in 1954, the company struggled at first, despite inventing a film-cleaning machine that won an Oscar for technological innovation.

But GKI struck it rich selling computer tape-cleaning equipment in the early 1960s, and spent the profits on dozens of ideas and companies. Some fell flat: GKI lost thousands on development of a one-of-a-kind machine that picked fly legs out of applesauce.

Others were winners: GKI still sells a device that tests crispness and readiness for Minute Rice, fresh peas and other foods. And a metal-working company that made the housings for GKI machines still is one of only two companies that make metal cabinets for electrical equipment on Navy ships.

But the wild spending spree took its toll. Cost-conscious Louis Schap, who was head of the metal-working company, started feuding with some of the founders who wanted to keep emphasizing research. GKI was nearly bankrupt by the time the original founders left the company in the early 1970s.

When Mr. Schap took over the presidency of the company in 1974, he slashed salaries, consolidated offices, renegotiated loans, abandoned development of a money-losing tomato-harvesting machine and eliminated research.

A decade of penny-pinching saved GKI, but left it with no strong business lines to buffer the downturn in defense spending in the mid-1980s, GKI executives say. Realizing the need to kick GKI out of its doldrums, in 1986 Mr. Schap asked company attorney Stephen P. Goldman to take over as board chairman.

Mr. Goldman says he immediately pushed Mr. Schap to invest the company's cash in start-up research companies, lobbying for the purchase of a tiny, cash-starved company called Cryptek Inc.

Taking a flier on Cryptek sent GKI on its wildest ride of all.

Steven Rogers, the young engineer who had founded Cryptek in his parents' garage in Herndon, Va., was developing a fax machine that would meet anti-eavesdropping standards set by the Department of Defense. While other fax producers deadened the tappable radio emissions from the works of their machines by shielding them with thick metal housings, Mr. Rogers' idea was to design computer chips that wouldn't give off any radio emissions.

The six founders of Cryptek had finished a working prototype by the summer of 1987, but had spent the $500,000 they had raised from relatives and second mortgages.

The merger was not an easy sell, however, since many inside GKI didn't like the idea of risking their cash on yet another unproven venture. In hindsight, many insiders say, GKI ended up betting the company on the success of Cryptek.

"When many of us first heard of the investment we nearly fell over dead in our tracks," says Steven Newby, a Washington investor with a large holding in the company. "We weren't that excited about launching into another hole to throw millions of dollars into."

But by mid-1987, Mr. Goldman convinced the board that it was a perfect match: Cryptek had a great idea but no cash or business infrastructure. And GKI was a cash-rich manufacturing company hungry for a new product.

Though the fax machine's development costs were soaring beyond expectations -- eventually reaching $3 million -- many of those familiar with GKI realized shortly after the purchase that the device was going to turn into a bonanza.

And that's where Mr. Thompson came in.

Mr. Thompson was looking for a chance to lead a small technology-based company. He had landed as a sales executive at General Electric after his own telecommunications start-up had failed in 1986.

He saw a notice in a local paper about GKI's purchase of Cryptek and started introducing himself to GKI stockholders and managers, impressing nearly everyone with whom he spoke. He stressed his experience in industrial marketing, including nearly a decade selling high-tech equipment for Bendix and GE.

knew how to sell Cryptek's fax machines, he told GKI officials. Since the machines were expensive, he wasn't about to mass-market them. "There isn't any impulse buying," he explains. "It's not like a Coke. You've got to convince as many as 10 or 12 people, including technical people and financial people, make a sale. It takes much longer to sell a product," in GKI's market.

"He was the right man for the job," says Dominique Gignoux, president of Rockville-based Data Measurement and the first GKI investor Mr. Thompson approached.

But Mr. Thompson wasn't the only one interested in leading GKI. As he delved deeper into corporate affairs, he realized he had walked into a fierce battle for control of the company.

GKI's stock dropped to as low as $1.50 a share as Cryptek went over schedule and over budget. Sniffing a chance to make a killing, several investor groups started jockeying for control of GKI's stock.

Mr. Goldman realized in early 1988 that it was the perfect time to take GKI private.

"It didn't take a financial genius to want to buy the company," explains David Shaw, the investment adviser who had introduced Cryptek to GKI and later assisted the buyout plans.

Although GKI was losing money -- it reported a $1.5 million loss in fiscal 1989 -- "it owned its headquarters building in Rockville and had a total of cash and liquid assets that exceeded the stock's market price. You'd spend $1 and get $1.20," Mr. Shaw says.

Mr. Goldman brought in friends such as Washington investor David Cohn to buy up GKI stock, and told board members that GKI needed fresh management.

"Steve [Goldman] is young and tigerlike," while GKI's old management was suffering from "general inertia," explains Mr. Cohn. "The board was made up of old-timers. It was hard to get them to move much," he said.

OC Mr. Rogers, Cryptek's founder, realized that the executives and

investors were, essentially, battling for control of Cryptek. He weighed in against the takeover.

"For all of his wonderful ideas, Mr. Goldman didn't have that much business experience," Mr. Rogers says, explaining that Cryptek needed the manufacturing expertise of GKI's older managers.

Thus, an expensive and divisive corporate battle was joined. GKI spent more than $200,000 on a law firm that finally convinced a majority of the shareholders to oust Mr. Goldman from the board.

Despite the defeat of Mr. Goldman, several board members had become convinced that the former chairman's complaints about the management were right.

Mr. Thompson's carefully prepared groundwork -- he had talked to both sides during the proxy battle -- paid off. In the fall of 1989, just as fax machine sales were taking off, Mr. Thompson was named president of GKI.

"What I saw in GKI was a small company in need of professionamanagement," Mr. Thompson says. "It was undercapitalized but it had good potential."

Mr. Thompson, a vigorous man who rises at 5 each morning, moved quickly to right the badly shaken and divided company.

But one of his first actions may have only plunged the company into further controversy.

When he arrived, he learned that one division, the Food Technology Corp., had just lost Charles Hoffman, a sales manager who was expected to bring in $3 million in sales the next year, leaving GKI with only a few hundred thousand dollars' worth of contracts.

In an effort to recoup the lost contracts, Mr. Thompson started calling food equipment customers, asking them to stay loyal to ++ GKI despite the departure of Mr. Hoffman. According to documents filed in Montgomery County Circuit Court, Mr. Thompson allegedly told these customers that Mr. Hoff

man had improperly taken their sales to his new employer.

Mr. Hoffman sued GKI and Mr. Thompson, accusing them of making false and malicious statements. Mr. Hoffman has won an injunction prohibiting the company's executives from making statements about him. The case is scheduled to go to trial in August.

Meanwhile, at Cryptek, sales of the fax machines were booming. GKI sold $8 million worth in the first year they were offered and has sold another $7 million worth in the six months since the United States began its Persian Gulf operations.

Fax machine sales have risen from nothing to about 50 percent of GKI's total revenues.

But Mr. Thompson began to impose financial controls on the division in order to begin to reclaim the cash the company had invested.

While trying to control the research budget, Mr. Thompson says he wants to make sure GKI maintains its technological lead in the high-end fax machine market.

So, researchers are working on improvements requested by customers, such as Paul Davies, commercial director for Siemens Plessy in Australia.

Siemens bought several Cryptek machines for a telecommunications package that it put together for the Australian Defense Department because GKI had the only fax machine that met all of their security specifications. But now, Mr. Davies says, he is "waiting for colorization" in order to make a new sales push.

In addition, because the government has placed export restrictions on Cryptek's NATO-approved fax machines, GKI is developing a less expensive and less secure machine that can be sold commercially, Mr. Thompson says.

"We want to bring new products to market," Mr. Thompson says. "We want to find niches, small market segments, that this type of high-end of machine can be a candidate for."

Though his strength lies in marketing, Mr. Thompson says

his "biggest challenge is pulling together a management team." So far, he has brought in a new financial manager and has begun hiring executives to revive the shipboard cabinet business.

But all of his plans will come to nought if Mr. Thompson cannot stop the corporate battles over who has control at GKI.

Though he says he wants to settle GKI down to steady progress, some investors complain that Mr. Thompson appeared to be in (( the center of a battle for control that ended only last month.

Calvin Koonce, head of a Rockville investment firm that has a large holding in GKI, says he was shocked when GKI's management asked last fall for permission to issue a new kind of preferred stock. That could have wiped out common shareholders' control of the company.

"It was absurd," Mr. Koonce says. "It seemed that management was looking to advance themselves at the expense of shareholders."

Mr. Thompson denies the move was an attempt by management to take over the company. He says it was designed, instead, to prevent an unfriendly takeover.

He dropped the stock proposal in January as soon as he realized the shareholders were against it, Mr. Thompson says.

And he says he was trying to make peace with investors and insiders so that "in a couple years this will be a $100 million company."

Mr. Rogers, the engineer whose fax machine revived the company, says it's been a turbulent three years, and that he has had disagreements with Mr. Thompson.

But, he says, "Mr. Thompson has done a lot of things that made a lot of business sense for the company. . . . He knows what he's doing.

"The chances of getting off the roller coaster are very good."

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