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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7234
NATIONAL PATENT DEVELOPMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-1926739
(State of Incorporation) (I.R.S. Employer
Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(212) 826-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, $.01 Par Value American Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
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 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. /X/
As of March 15, 1994, the aggregate market value of the
outstanding shares of the Registrant's Common Stock, par value
$.01 per share, held by non-affiliates was approximately
$87,454,237 based on the closing price of the Common Stock on the
American Stock Exchange on March 15, 1994. None of the Class B
Capital Stock, par value $.01 per share, was held by non-affiliates.
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the most recent
practicable date.
Class Outstanding at March 15, 1994
Common Stock,
par value $.01 per share 20,299,388 shares
Class B Capital Stock,
par value $.01 per share 250,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its
1994 Annual Meeting of Stockholders is incorporated by reference
into Part III hereof.
TABLE OF CONTENTS
Page
PART I
Item 1. Business
(a) General Development of Business 1
(b) Financial Information About
Industry Segments 2
(c) Narrative Description of Business 2
(d) Financial Information About Foreign
and Domestic Operations and Export
Sales 16
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder
Matters 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 20
Item 8. Financial Statements and Supplementary
Data 30
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 70
PART III
Item 10. Directors and Executive Officers of the
Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial
Owners and Management 70
Item 13. Certain Relationships and Related
Transactions 70
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 71
PART I
Item 1. Business
(a) General Development of Business
National Patent Development Corporation (the "Company"),
incorporated in Delaware in 1959, is primarily a holding company,
which is a legal entity separate and distinct from its various
operating subsidiaries. The Company's operations consist of four
operating business segments: Physical Science, Distribution,
Optical Plastics and Electronics. The Company also has an
investment in two companies in the Health Care industry.
The Company's Physical Science Group consists of (i) GPS
Technologies, Inc. ("GPS"), an approximately 92% owned subsidiary
and (ii) GTS Duratek, Inc. ("Duratek"), an approximately 66%
owned subsidiary.
GPS provides a wide range of management and technical
training as well as specialized engineering services to various
commercial industries and the United States government.
Principal clients of GPS include electric utilities, process
industries, manufacturing plants, Federal agencies, and the
aerospace industries. In addition, the Company currently owns
approximately a 28% investment in General Physics Corporation
("General Physics"), which provides a wide range of personnel
training and technical support services to the domestic
commercial nuclear power industry, United States Departments of
Energy and Defense, as well as environmental engineering,
training and support services to governmental and commercial
clients.
Duratek's operations consist of two operating groups: (1)
"Environmental Services" engaged in cleanup of water and other
liquids containing radioactive and/or hazardous (mixed waste)
contaminants and minimum additive vitrification for long-term
stabilization of such waste, and (2)"Consulting and Staff
Augmentation" services. Duratek provides services for various
utility, industry, government and commercial clients.
The Company's Distribution Group, incorporated under the
name Five Star Group, Inc. ("Five Star"), is engaged in the
wholesale distribution of home decorating, hardware and finishing
products.
The Company's Health Care Group consists of an approximately
36% investment in Interferon Sciences, Inc. ("ISI"). ISI is a
biopharmaceutical company engaged in the manufacture and sale of
ALFERON N Injection and the research and development of other
uses of ALFERON N Injection and other alpha interferon-based
formulations for the treatment of certain viral diseases,
cancers, and diseases of the immune system.
The Company currently owns approximately a 14% investment in
American White Cross, Inc. (formerly, NPM Healthcare Products,
Inc., "White Cross"). White Cross is a leading manufacturer and
marketer of private label adhesive and cotton based health and
personal care products.
The Company's Optical Plastics Group, through its wholly
owned subsidiary MXL Industries, Inc. ("MXL") manufactures molded
and coated optical products, such as shields and face masks and
non-optical plastic products.
The Company's Electronics Group, through its subsidiary
Eastern Electronics Mfg. Corporation is engaged in contract
manufacturing, such as printed circuit board assembly for the
electronics industry.
(b) Financial Information About Industry Segments
Certain financial information about business segments
(classes of similar products or services) is included in Note 17
of Notes to Consolidated Financial Statements.
(c) Narrative Description of Business
RECENT DEVELOPMENTS
GENERAL PHYSICS CORPORATION AND
GPS TECHNOLOGIES, INC. PROPOSED TRANSACTION
On January 13, 1994, General Physics signed a Letter of
Intent with GPS and the Company to acquire substantially all of
the operating assets of GPS and certain of its subsidiaries. The
Company currently owns approximately 92% of the outstanding
common stock of GPS and approximately 28% of the outstanding
common stock of General Physics. On March 28, 1994 the Board of
Directors of both GPS and General Physics approved the
transaction. The parties are currently negotiating the terms of
a definitive agreement and the transaction is anticipated to
close as soon as practicable in the second half of 1994, if all
necessary approvals are obtained and conditions satisfied.
The purchase price has a current present value of
approximately $36 million based on current market prices. The
purchase price will be payable to GPS as follows: $10 million
cash; 3.5 million shares of General Physics common stock valued
at approximately $13,500,000 (based upon the price per share of
General Physics common stock prior to the announcement of the
transaction which was $3.875); warrants to acquire 1,000,000
shares of General Physics common stock at $6.00 per share valued
at approximately $1,300,000; warrants to acquire up to 475,644
additional shares of General Physics common stock at $7 per share
valued at approximately $500,000; a $15 million ten-year senior
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subordinated debenture (the "Debentures") valued at approximately
$10,700,000, accruing interest at 6% per annum, interest payable
only for the first five years, with 70% of principal payable in
equal quarterly installments during the remaining five years
until maturity. The values assigned to each component of
consideration were based upon discussions with the independent
investment banker to the Independent Committee of General Physics
and the investment banker to GPS. Portions of the cash and stock
consideration of the purchase price will be (a) used to repay
outstanding bank debt of $5,650,000 (as of December 31, 1993) and
long-term debt of GPS of $8,809,000 (as of December 31, 1993) to
be repaid to the Company. In addition $1.5 million of Debentures
are held in escrow for the benefit of General Physics in
connection with certain indemnification obligations.
The transaction was recommended by an Independent Committee
of General Physics' Board of Directors and was approved by the
Board of Directors of both General Physics and GPS and is
contingent upon the occurrence of certain events, including,
without limitation: approval of the transaction by the
stockholders of both General Physics and GPS.
The Company anticipates that if the aforementioned
transaction is consummated, it will own approximately 52% of the
outstanding common stock of General Physics, and if the Company
were to exercise all of its warrants, it will own approximately
58% of the outstanding common stock of General Physics.
Although an agreement in principle has been reached, there
can be no assurance that a definitive agreement will be
successfully negotiated and signed, or that the transaction will
close as anticipated.
PHYSICAL SCIENCE GROUP
GPS TECHNOLOGIES, INC.
General
GPS Technologies, Inc. ("GPS"), provides a wide range of
management and technical training as well as specialized
engineering consulting services to various industries and the
United States Government. GPS's principal clients include
electric utilities, process industries, manufacturing plants,
Federal agencies, and the aerospace industry. As of December 31,
1993, GPS and its subsidiaries employed nearly 800 people and
maintained 27 office locations throughout the United States.
GPS is organized into three operating Business Units: the
Training and Technical Services Division Business Unit, the
Engineering and Technical Services Business Unit, and the Federal
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Systems Business Unit. The Training & Technical Services
Business Unit, and the Engineering & Technical Services Business
Unit are each comprised of several Strategic Business Units
("SBUs"), with each SBU focused on a specific customer, project,
industry, product, service, or geographic area or some
combination thereof. GPS Technologies, Inc. Federal Systems
Group, a wholly-owned subsidiary of GPS, forms the Federal
Systems Business Unit and is comprised of three divisions, each
providing services to a specifc segment of the Federal
government. GP Environmental Services, Inc. ("GPES"), General
Physics Asia Pte. Ltd., and General Physics (Malaysia) Sdn. Bhd.,
all wholly-owned subsidiaries of GPS, operate with other SBUs
within the Engineering & Technical Services Business Unit.
The Training & Technical Services Business Unit
The Training & Technical Services Business Unit focuses on
the human performance improvement needs of GPS' commercial and
government customers, providing technical training and other
technical services to customers who design, operate, and maintain
equipment and facilities. This Business Unit analyzes the human,
organizational, and technical issues confronting its customers
and recommends solutions to improve performance. Business Unit
staff possess expertise in a wide variety of subject matter and
instruction design, with a subject matter diversity frequently
allowing GPS to supplement the expertise within the customer
organization and offer comprehensive, turn-key solutions.
Customers of the Training & Technical Business Unit
represent a wide range of industries with diverse technical and
geographic needs. This Business Unit is organized into eleven
SBUs.
The Engineering & Technical Services Business Unit
The Engineering & Technical Services Business Unit provides
engineering services to the Government, utilities and
petrochemical industries. Multi-discipline capabilities include
mechanical, structural, chemical, electrical, environmental, and
systems engineering, augmented with nondestructive examination,
industrial chemistry, and computer aided design/drafting
technical services. Specialized engineering expertise is
recognized nationally in areas of mechanical integrity programs
including design, analysis, inspection and safety of capital
intensive and inherently hazardous facilities and systems, and in
electric power generation including operations, maintenance and
performance engineering.
This Business Unit's engineering and technical services are
designed to increase reliability and availability of plants and
facilities, reduce probability of component failure and address
consequences of component or system failure. Components include
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pressure vessels, above and underground tanks, boilers, piping
systems, rotating equipment and associated instrumentation and
controls. This Business Unit also provides a full service
environmental analytical laboratory with certified specialization
in soils, water, and military ordinance analysis and testing.
The Engineering & Technical Services Business Unit is comprised
of seven SBUs.
The Federal Systems Business Unit
GPS Technologies, Inc. Federal Systems Group, a wholly-owned
subsidiary of GPS, is comprised of three divisions providing
technical services to a variety of commands within the Department
of the Navy and other Federal government agencies. These
services include program management support, multi-media/video
production, technical training, quality assurance and independent
verification and validation of weapon systems, weapon systems
life cycle support,and full spectrum integrated logistics
support. Major customers include NAVAIR, NAVSEA, Naval Research,
Development, Test and Evaluation Laboratories, and related Naval
commands. Additionally, the Federal Systems Business Unit
provides services to several non-DOD agencies of the Federal
Government, including the Internal Revenue Service, the Office of
Personnel Management and the Department of Energy. The Business
Unit is organized into three divisions.
GP International Engineering and Simulation, Inc. provides
real-time, high fidelity, engineering grade modeling and
simulation of nuclear power plant systems for inclusion in new
full-scale power plant control room simulators, such as in used
in training simulators worldwide. Similar services are also
provided to upgrade existing simulators. Simulators and
engineering services are provided to a variety of domestic,
European, and far eastern clients.
Customers
GPS provides services to more than 320 customers,including
several of the largest companies in the United States. Other
significant customers include the Department of the Navy, the
Department of the Air Force, the Department of the Army, major
automotive manufacturers, major defense contractors and other
United States Government agencies. Revenue from the United
States Government accounted for approximately 46% of GPS' revenue
for the year ended December 31, 1993. However, such revenue was
derived from many separate contractors and subcontracts with a
variety of Government agencies and contractors, that are regarded
by GPS as separate customers. United States Government contracts
generally are terminable by the United States Government at any
time. However no significant terminations have occurred.
5
Contracts
GPS is currently providing services under more than 500
contracts, many of which are General Service Agreements pursuant
to which multiple purchase orders are placed. GPS' contracts
with its customers provide for charges on a time-and-materials
basis, a fixed-price basis and a cost-plus-fee basis.
Competition
The principal competitive factors in GPS's markets are the
experience and capability of technical personnel, performance,
reputation and price. GPS's principal resource is its technical
personnel.
GTS DURATEK, INC.
General
GTS Duratek, Inc. ("Duratek") was incorporated in the State
of Delaware in December 1982. At December 31, 1993 Duratek was an
approximately 66% controlled subsidiary of the Company.
Duratek's operations consist of two operating groups: (i)
"Environmental Services", engaged in cleanup of water and other
liquids containing radioactive and/or hazardous (mixed waste)
contaminants and in-furnance vitrification for long-term
stabilization of such waste, and (ii) "Consulting and Staff-
Augmentation" services. Duratek provides services for various
utility, industry, government and commercial clients.
During 1992, Environmental Services received a U.S.
Department of Energy ("DOE") funded contract called MAWS for
minimum additive waste stabilization. This agreement enabled
Environmental Services to further develop its vitrification
technology being used for processing actual mixed waste in a
demonstration at the DOE's Fernald facility.
During 1993 Duratek designed, constructed and operated a 300
kilogram per day vitrification melter ("Duramelter") at Fernald
under the first phase of the MAWS project and began the second
phase requiring processing of actual mixed waste through the
melter that it designed and built at Fernald under varying
controlled operating conditions. During 1993, Duratek was also
awarded a $1.2 million contract to study the chemical composition
of waste streams at DOE sites across the country to determine
their suitability for conversion into glass using the MAWS
technology. Additionally, at the end of 1993 Duratek was awarded
a $13.9 million three year contract to stabilize 700,000 gallons
of mixed waste sludges at the DOE's Savannah River nuclear
weapons production site. This project is Duratek's first
commercial scale project using its vitrification technology to
6
convert the nuclear weapons by-product waste materials into glass
for long term stabilization and storage.
Consulting and Staff Augmentation revenues decreased by 12%
due to lower utilization of contract services by its commercial
nuclear power customers. This decrease resulted from an overall
effort by electric utilities to reduce operating costs in
response to competitive pressures to become low cost producers of
electric power. The group continued to provide support to Duke
Power, Vermont Yankee, New York Power Authority, Tennessee Valley
Authority, GPUN, the DOE, and to a number of other utility,
commercial, and government customers. Duke Power accounted for
approximately 20% of Duratek's revenue in 1993. In addition, new
service contracts were won with Philadelphia Electric and Duke
Power. In response to the changing market conditions Duratek
implemented additional cost reduction efforts and expanded
services to include higher margin non-destructive examination
(NDE) and professional health physics training and consulting.
Environmental Services
Environmental Services provides products and services to
support the DOE and its prime contractors in research and
development, development and implementation of minimum additive
vitrification (glass making) process for long-term waste
stabilization, waste water cleanup, advanced site remediation
processes, consulting, and analysis. Environmental Services'
principal products are its proprietary DURASILR ion exchange
media, its Enhanced Volume Reduction (EVRTM) processing system,
Heat Enhanced Dewatering (HEDTM) system and Integrated Nuclear
Waste Removal System which is a combination of EVR and HED.
These systems and the DURASIL ion exchange media are similar to
those products formerly used in the domestic commercial nuclear
power plant low-level radioactive waste business sold to Chem-
Nuclear Systems, Inc. ("Chem-Nuclear") in 1990. Duratek
continues to sell DURASIL products to Chem-Nuclear. Duratek also
has the right to sell processing systems and ion exchange media
to government agencies such as the DOE and Department of Defense
("DOD") and to nuclear power plants outside the U.S. In addition
to liquid waste treatment, Environmental Services is engaged in
the development of in-furnace vitrification for long-term
stabilization of mixed waste.
DOE's Five Year Plan states that environmental cleanup and
refurbishment of inactive DOE nuclear facilities is a critical
objective. Many of the remediation tasks at these facilities
involve dealing with wastes that are both radioactive and
hazardous. Restrictions on disposal of these "mixed" wastes and
limited burial space further compound the problem. The DOE and
its prime contractors are looking for innovative new approaches
for separating the radioactive and hazardous components and for
long-term stabilization of these wastes. Management believes
7
that its experience in mixed waste streams and its newly
developed vitrification technology give Duratek an advantage in
this market.
Consulting and Staff Augmentation
Duratek's Consulting and Staff Augmentation Group
("Consulting") provides technicians, specialists, and
professionals in a wide range of consulting, training and staff
augmentation services for a broad base of utility, industrial,
commercial, and government clients.
According to the Nuclear News publication of "The World List
of Nuclear Power Plants", March 1993, there are 119 nuclear power
generating units in the United States. Of that number,
approximately 107 are operational and the remainder are in long-
term shutdown or under construction. To control costs, utilities
maintain their permanent staffs at the level needed for steady-
state power operations. They supplement their full-time staffs
during refueling and maintenance outages with skilled contract
personnel. These temporary personnel typically work under the
general supervision of members of the full-time staffs of
utilities.
Although services for operating nuclear power plants
provides a considerable market, the fact that no new plants have
been ordered in over 10 years means that the current market will
expand through incorporation of changes required by new
regulations; extensive overhaul required to extend the life of
aging plants; replacement of major components such as steam
generators; startup of newly built plants and those recovering
from long-term shutdown; and decommissioning of plants that have
reached the end of their useful lives.
Building on its solid base of nuclear power industry
clients, Duratek has expanded its services in quality
assurance/control, radiation protection, computer and
communications, and environmental technologies. Duratek's
potential client base has been expanded to include other
industries, government agencies and commercial businesses. Since
many of the skills needed for support at commercial nuclear power
plants are readily transferable to the DOE cleanup market,
Duratek is also expanding its consulting and staff augmentation
services in that area.
GENERAL PHYSICS CORPORATION
The Company currently owns approximately a 28% investment in
General Physics Corporation ("General Physics"). General Physics
provides a wide range of personnel training, engineering,
environmental and technical support services to the domestic
commercial nuclear power industry and to the DOE and DOD.
8
General Physics believes it is a leader in the field of
developing training materials, conducting training programs and
providing support services to operators, technical staff and
management personnel at commercial nuclear power plants and at
nuclear weapons production and waste processing sites in the
United States.
General Physics currently provides services to more than 400
clients, including eight of the largest electric power companies
in the United States and four prime contractors serving the DOE.
During 1993, Westinghouse Savannah River Company
("Westinghouse"), a prime contractor at DOE facilities, accounted
for approximately 23% of General Physics' revenue. No other
customer accounted for more than 10% of General Physics' revenue
during 1993. Prior to October, 1988, when it started its DOE
Services business, the Company derived virtually all of its
revenue from contracts with nuclear utilities.
From late 1988 through mid 1992, General Physics experienced
growth in revenue primarily from services provided to the DOE at
its Savannah River site under subcontracts with Westinghouse, and
to a lesser extent from services provided to the commercial
nuclear power industry. During 1992 and 1993, General Physics
experienced lower levels of contract activity at DOE facilities
which resulted in declining revenue. General Physics Nuclear
Services revenue was adversely affected in 1993 by cost reduction
efforts at many commercial nuclear utilities which are expected
to continue. Environmental Services revenue increased slightly
in 1993 and General Physics was recently awarded a one-year
contract with four option years to provide environmental
engineering support services at the DOD's Aberdeen Proving
Ground. This contract has a potential value of approximately $17
million if all option years are exercised.
In January 1994, General Physics acquired substantially all
of the operating businesses of Cygna Energy Services (CES), other
than its non-nuclear seismic engineering business. CES provides
design engineering, seismic engineering, systems engineering,
materials management and safety analysis services to the
commercial nuclear power industry and to the DOE.
In January 1994, General Physics also entered into a letter
of intent to acquire substantially all of the assets and
operations of GPS. GPS provides a wide range of training,
engineering, technical support and analytical services to various
commercial industries, fossil powered electric generating plants
and the DOD. Although an agreement in principle has been reached,
there can be no assurance that a definitive agreement will be
successfully negotiated or that the transaction will close as
anticipated. See "Recent Developments - General Physics'
Corporation and GPS Technologies, Inc. Proposed Transaction".
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DISTRIBUTION GROUP
FIVE STAR GROUP, INC.
The Distribution Group, incorporated under the name Five
Star Group, Inc. ("Five Star"), is engaged in the wholesale
distribution of home decorating, hardware and finishing products.
Five Star has three strategically located warehouses and office
locations, with approximately 380,000 square feet of space in New
Jersey, New York and Connecticut, which enables Five Star to
service the market from Maine to Virginia.
Five Star is the largest distributor in the U.S. of paint
sundry items, interior and exterior stains, brushes, rollers and
caulking compounds and offers products from leading manufacturers
such as Olympic, Cabot, Thompson, Dap, 3-M, Minwax and Rustoleum.
Five Star distributes its products to retail dealers which
include discount chains, lumber yards, "do-it-yourself" centers,
hardware stores and paint suppliers principally in the northeast
region. It carries an extensive inventory of the products it
distributes and provides delivery generally within 48 to 72 hours
from the placement of an order.
The primary working capital investment for Five Star is
inventory. Inventory levels will vary throughout the year
reflecting the seasonal nature of the business. Five Star's
strongest sales are typically in March through October because of
strong seasonal consumer demand for its products. As a result,
inventory levels tend to peak in the spring and reach their
lowest levels in late fall.
The largest customer accounted for approximately 12% of Five
Star's sales in 1993 and its 10 largest customers accounted for
approximately 29% of such sales. No other customer accounted for
in excess of 10% of Five Star's sales in 1993. All such
customers are unaffiliated companies and neither Five Star nor
the Company has a long-term contractual relationship with any of
them.
Competition within the industry is intense. There are much
larger national companies commonly associated with national
franchises such as Servistar and True Value as well as smaller
regional distributors all of whom offer similar products and
services. Additionally, in some instances manufacturers will
bypass the distributor and choose to sell and ship their products
directly to the retail outlet. The principal means of
competition for Five Star are its strategically placed
distribution centers and its extensive inventory of quality name
brand products. Five Star will continue to focus its efforts on
supplying its products to its customers at a competitive price
and on a timely, and consistent basis. In the future, Five Star
will attempt to acquire complementary distributors and to expand
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the distribution of its line of private-label products sold under
the "Five Star" name.
HEALTH CARE
INTERFERON SCIENCES, INC.
Interferon Sciences, Inc. ("ISI") is a biopharmaceutical
company engaged in the manufacture and sale of ALFERON N
Injection and the research and development of other uses of
ALFERON N Injection and other alpha interferon-based formulations
for the treatment of certain viral diseases, cancers,and diseases
of the immune system.
ALFERON N Injection is the only natural-source, multi-
species alpha interferon product approved by the FDA for sale in
the United States and is approved for the intralesional treatment
of refractory (resistant to other treatment) or recurring
external genital warts in patients 18 years of age or older.
On March 5, 1985, the United States Patent and Trademark
Office issued a patent to Hoffmann-La Roche Inc. ("Hoffmann")
claiming purified human alpha (leukocyte) interferon (regardless
of how it is produced). ISI obtained a non-exclusive license
from Hoffmann which allows ISI to make, use, and sell in the
United States, without a potential patent infringement claim from
Hoffmann, (i) ALFERON N Injection for the treatment of genital
warts, (ii) injectable formulations of interferon alfa-n3 (which
is the same active ingredient contained in ALFERON N Injection)
for the treatment of patients who are refractory to recombinant
interferon therapy, (iii) low dose oral formulations of alpha
interferon for the treatment of human disease, and (iv) topical
formulations of interferon alfa-n3(which is the same active
ingredient contained in ALFERON N Injection). Hoffmann presently
owns approximately 3% of the common stock of ISI.
ALFERON N Injection is marketed and distributed in the
United States exclusively by Purdue Pharma L.P. ("Purdue"),
utilizing the sales force of The Purdue Frederick Company, a
privately-held United States pharmaceutical company. In
addition, ISI has exclusive marketing and distribution agreements
with Mundipharma Pharmaceutical Company in Canada and with
Industria Farmaceutica Andromaco in Mexico. ISI has an option to
reacquire the United States, Canadian, and Mexican marketing and
distribution rights under certain terms and conditions.
Submissions for regulatory approval to sell ALFERON N Injection
have been filed in Austria, Canada, Israel, Mexico and the United
Kingdom.
At the present time, alpha interferon injectable products
are approved for 17 different medical uses in 63 countries. In
1993, the worldwide alpha interferon injectable market was
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estimated to be over $1 billion. In an effort to expand the
market for ALFERON N Injection in the United States and obtain
additional regulatory approvals around the world, ISI is
presently conducting three multi-center randomized, open dose
ranging studies with patients infected with hepatitis C virus.
In addition, based upon favorable results from an in vitro study
and a Phase 1 clinical study conducted at Walter Reed Army
Institute of Research in Bethesda, Maryland on 20 asymptomatic
HIV infected patients, ISI is planning a multi-center,
randomized, controlled clinical trial with asymptomatic HIV-
infected patients. ISI is also planning to conduct clinical
trials utilizing ALFERON N Injection for the treatment of
Kaposi's sarcoma in patients with AIDS and hepatitis B.
Additional products under development by ISI include ALFERON
N Gel and ALFERON LDO. ALFERON N Gel is a topical interferon
preparation which ISI believes has potential in the treatment of
cervical dysplasia, recurrent genital herpes, other viral
diseases, and cancers. A clinical trial using ALFERON N Gel for
the treatment of patients with cervical dysplasia is currently
underway at Columbia Presbyterian Medical Center. ALFERON LDO is
a low dose oral liquid alpha interferon preparation which ISI
believes has potential for treating the symptoms of patients
infected with the HIV virus and other viral diseases. ISI
conducted two clinical trials using ALFERON LDO on patients
infected with HIV virus at New York's Mount Sinai Hospital. The
National Institute of Allergy and Infectious Disease ("NIAID") is
planning to conduct a randomized, double-blind, placebo
controlled clinical study with low dose alpha interferons
administered orally (including ALFERON LDO) to determine
interferon's effect on HIV related symptoms.
On May 28, 1993, David Blech, the Chief Executive Officer,
sole shareholder and a director of D. Blech & Company,
Incorporated ("DBC"), and ISI entered into a Purchase Agreement
(the "Purchase Agreement"), pursuant to which David Blech or his
designees purchased for $4.00 per unit, an aggregate of 2,500,000
units ("Units"), each Unit consisting of two shares of common
stock, one Class A Warrant to purchase one share of common stock
at an exercise price of $3.25 per share and one Class B Warrant
to purchase one share of common stock at an exercise price of
$5.00 per share. The Class A Warrants and the Class B Warrants
expire on August 31, 2000.
Pursuant to the Purchase Agreement, a 10-year Voting
Agreement (the "Voting Agreement") among David Blech, the
Company, Five Star and MXL became effective as of May 28, 1993
pursuant to which the Company, Five Star and MXL agreed to (a)
vote all of their shares of common stock (an aggregate of
6,985,148 shares as of the date hereof), for the election of the
Blech Nominees as directors of ISI unless Blech or his designees
dispose of more than 1,000,000 shares of Common Stock and (b)
12
restrict transfer of the Common Stock held by them for one year,
subject to certain exceptions. Pursuant to the Voting Agreement,
Mr. Blech and any other purchasers under the Purchase Agreement
agreed to vote for the election of two nominees of NPDC as
directors of the Company unless NPDC, MXL and Five Star dispose
of more than 2,000,000 shares of Common Stock.
Concurrently with the execution of the Purchase Agreement,
ISI entered into a Consulting Agreement with DBC under which ISI
agreed to pay $100,000 per year, payable monthly, to DBC for
advisory services with respect to the Company's field of interest
and business, strategic and commercial matters related to the
biotechnology industry. The term of the Consulting Agreement was
one year and commenced on June 1, 1993.
AMERICAN WHITE CROSS, INC.
The Company currently owns approximately a 14% investment in
American White Cross, Inc. (formerly, NPM Healthcare Products,
Inc.), ("White Cross"). White Cross is a leading manufacturer
and marketer of private label adhesive and cotton based health
and personal care products. White Cross' primary products
include adhesive bandages, cotton swabs, cosmetic puffs, rounds
and squares, waterproof tape, sterile cotton balls, first aid
kits and cotton coil used in the packaging of drugs and vitamins
in bottles. White Cross also sells adhesive bandages under its
own national brand products, including Mickey & Pals (marketed
under license from The Walt Disney Company) and STAT-STRIP
(patented easy opening bandages).
OPTICAL PLASTICS GROUP
The Optical Plastics Group is engaged in the manufacture of
molded and coated optical products, such as shields and face
masks and non-optical plastic products through the Company's
wholly owned subsidiary MXL Industries, Inc. ("MXL").
MXL is a state-of-the-art injection molder and precision
coater of large optical products such as shields and face masks
and non-optical plastics. MXL believes that the principal
strengths of its business are its state-of-the-art injection
molding equipment, advanced production technology, high quality
standards, and on time deliveries. Through its Woodland Mold and
Tool Division, MXL also designs and engineers state-of-the-art
injection molding tools as well as providing a commodity custom
molding shop.
As the market for optical injection molding, tooling and
coating is focused, MXL believes that the combination of its
proprietary "Anti-Fog" coating, precise processing of the "Anti-
Scratch" coatings, and precise molding and proprietary grinding
and polishing methods for its injection tools will enable it to
13
increase its sales in the future and to expand into related
products.
MXL uses only polycarbonate resin to manufacture shields,
face masks and lenses for over 55 clients in the safety,
recreation and military industries. For its manufacturing work
as a subcontractor in the military industry, MXL is required to
comply with various federal regulations including Military
Specifications and Federal Acquisition Regulations for military
end use applications.
MXL is dependent upon one client which accounts for
approximately 27% of MXL's total sales and another client which
accounts for approximately 16% of MXL's total sales. Over the
last several years, MXL has implemented a variety of programs
designed to reduce its overhead expenses, enhance its processing
capabilities, improve operating efficiency and expand the range
of services offered to its customers.
The Company's sales and marketing effort concentrates on
industry trade shows. In addition, the Company employs one
marketing and sales executive and one sales engineer.
ELECTRONICS GROUP
The Electronics Group, through Eastern Electronics Mfg.
Corporation ("Eastern") is engaged in contract manufacturing for
the electronics industry. Eastern offers a variety of services
to its customers ranging from printed circuit board assemblies,
to in-circuit testing, to functional testing, to turnkey
production and to final system production. Eastern's customers
are among the largest United States electronics companies.
There is significant competition within the electronics
industry for contract manufacturing from much larger national
companies as well as smaller companies. While the electronics
industry at large is experiencing a downturn in business, Eastern
feels that the lessening of off-shore competition and "just in
time" manufacturing requirements will enable it to compete more
effectively in the changing environment. The principal means of
competition for Eastern are its twenty two years of experience in
printed circuit board assembly, state-of-the-art automatic
insertion, surface mount equipment and state-of-the-art in
circuit test equipment.
RESEARCH AND DEVELOPMENT
For the year ended December 31, 1993, NPDC incurred
$2,847,000 as research and development costs, $2,181,000 of which
were incurred at ISI.
14
EMPLOYEES
At December 31, 1993, the Company and its subsidiaries
employed approximately 1,722 persons, including approximately 16
in the Company's headquarters, 1,257 in the Physical Science
Group, 283 in the Distribution Group, 73 in the Optical Plastics
Group and 58 in the Electronics Group. Of these, approximately 4
persons were engaged in research and development. The Company
considers its employee relations to be satisfactory.
EXECUTIVE OFFICERS
The following table sets forth the names of the
principal executive officers of the Company as of March 15, 1994
and their positions with the Company. The principal business
experience of the executive officers for the last five years is
also described below.
Name Age Position
Jerome I. Feldman 65 President, Chief Executive
Officer and a Director since 1959
Martin M. Pollak 66 Executive Vice President,
Treasurer and a Director since 1959
Scott N. Greenberg 37 Vice President, Chief Financial
Officer since 1989, and a Director
since 1987
Lawrence M. Gordon 40 General Counsel since 1986,
Vice President since 1991
Jerome I. Feldman is a founder, and since 1959 has been
President, Chief Executive Officer and a director of the Company.
Martin M. Pollak is a founder, and since 1959 has been
Executive Vice President, Treasurer and a director of the
Company.
Scott N. Greenberg has been Vice President, Chief Financial
Officer of the Company since 1989 and a Director since 1987.
Lawrence M. Gordon is Vice President, General Counsel of the
Company. Mr. Gordon has been General Counsel of the Company
since 1986 and Vice President since 1991.
PATENTS AND LICENSES
The operating businesses of NPDC are not materially
dependent upon patents, or patent and know-how licenses. The
know-how and expertise gained with respect to the manufacture and
15
sale of its products, acquired as a result of its license and
ownership of patents, are of greater importance to its future
ability to manufacture and sell such products than are the
patents themselves.
(d) Financial Information about Foreign and Domestic
operations and Export Sales.
The Company has no material Foreign Operations or
Export Sales.
Item 2. Properties
The following table sets forth information with respect
to the material physical properties owned or leased by NPDC and
its subsidiaries:
Lease Square
Activity and Location Own Expires Footage Description
East Hanover, NJ No 2002 219,000 Office &
Warehouse
Port Washington, NY No 1996 49,000 Office &
Warehouse
Newington, CT No 1996 112,000 Office &
Warehouse
Optical Plastics
Lancaster, PA Yes N/A 33,000 Manufacturing,
Warehouse and
Office
Westmont, IL Yes N/A 12,594 Office,
Warehouse &
Manufacturing
Electronics
E. Hartford, CT No 1996 35,000 Office,
Warehouse &
Manufacturing
Physical Science
Columbia, MD No 1995 12,075 Office
Beltsville, MD No 1994 8,500 Office,
Manufacturing,
Warehouse &
Laboratory
16
Pittsburgh, PA No 1994 4,800 Repair Shop &
Warehouse
Groton, CT, No 1995 136,654 Office
Gaithersburg, MD &
Columbia, MD
The facilities owned or leased by NPDC are considered to be
suitable and adequate for their intended uses and are considered
to be well maintained and in good condition.
In addition to the above properties, NPDC also leases
office space in New York, New York.
Item 3. Legal Proceedings
The Company is a party to several lawsuits incidental
to its business. It is not possible at the present time to
estimate the ultimate legal and financial liability, if any, of
the Company in respect to such litigations; however, management
believes that the ultimate liability, if any, will not have a
material adverse effect on the Company's Consolidated Financial
Statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
report.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock, $.01 par value, is traded
on the American Stock Exchange, Inc. and the Pacific Stock
Exchange, Inc. The following tables present its high and low
market prices for the last two years.
Quarter High Low
1993 First 3 5/8 2 1/2
Second 4 1/4 2 1/2
Third 3 3/4 2 7/8
Fourth 5 3/4 3 7/16
1992 First 5 5/8 4 1/8
Second 4 5/8 3 3/8
Third 3 3/4 2 13/16
Fourth 3 1/4 2 1/16
17
The number of shareholders of record of the Common Stock as
of March 15, 1994 was 5,275. On March 15, 1994, the closing
price of the Common Stock on the American Stock Exchange was
$4.44. In March 1989, the Company decided to discontinue payment
of its quarterly dividend because the Board of Directors believed
that the resources available for the quarterly dividend would be
better invested in operations and the reduction of long-term
debt.
18
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES Item 6. Selected Financial Dat
Operating Data (in thousands, except per share data)
Years ended December 31, 1993 1992 1991 1990 1989
Revenues $193,041 $201,986 $261,723 $293,504 $278,470
Sales 189,683 195,765 258,933 293,091 268,168
Gross margin 27,519 29,772 36,013 42,711 45,402
Research and development costs 2,847 4,645 4,651 7,892 7,196
Interest expense 8,325 11,044 15,579 20,447 19,520
Income (loss) before discontinued
operations and extraordinary
items (7,796) (13,605) 608 (37,993) (17,014)
Net income (loss) (5,977) (11,943) 2,645 (32,738) 6,797
Earnings (loss) per share
Income (loss) before discontinued
operations and extraordinary
items $ (.46) $ (.86) $ .04 $ (3.32) $ (1.20)
Net income (loss) (.35) (.76) .17 (2.86) .62
Cash dividends declared per share
Balance Sheet Data
December 31, 1993 1992 1991 1990 1989
Cash, cash equivalents, restricted
cash and marketable securities $ 10,976 $ 23,674 $ 35,968 $ 16,722 $ 39,602
Short-term borrowings 21,390 28,977 26,317 62,144 42,926
Working capital 33,224 44,877 55,560 25,316 62,533
Total assets 166,057 192,649 214,041 269,564 302,179
Long-term debt 40,858 61,441 70,787 91,888 97,249
Stockholders' equity 67,438 63,823 72,405 55,416 84,379
19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Overview
During 1993, the Company took steps to significantly reduce its
long-term debt. The Company, through an Exchange Offer for a
large portion of its Swiss Denominated Debt (See Note 9(a) to
Notes to Consolidated Financial Statements), as well as other
repurchases from various bondholders throughout 1993, was able to
reduce its long-term debt by approximately $20,583,000. As a
result of the reduction in long-term debt, the Company will be
able to reduce its annual interest expense by approximately
$2,100,000. Due to the inclusion of a portion of the Company's
shares of common stock of Interferon Sciences, Inc. (ISI) as part
of the consideration in the Exchange Offer in the third quarter
of 1993, the Company currently owns less than 50% of ISI (36%),
and therefore now accounts for the results of ISI on the equity
basis. In 1993, the Company realized an extraordinary gain, net
of taxes, on the early extinguishment of debt of $1,819,000. In
1993, the Company also incurred reduced interest expense at the
corporate level on the Company's long-term Swiss Debt obligations
due to the Company's continuing practice of repurchasing and
reducing its Swiss Debt. In addition, the Company incurred
reduced interest relating to short-term borrowings due to reduced
borrowings at lower rates of interest.
In 1993, the loss before income taxes and extraordinary item was
$8,371,000, as compared to a loss of $13,178,000 in 1992 and
income of $1,157,000 in 1991. The decrease in the loss in 1993
is due to several factors. As a result of the Exchange Offer
discussed above, the Company realized a $3,795,000 gain from the
transfer of a portion of the Company's holdings of shares of ISI
and GTS Duratek, Inc.'s (Duratek) common stock. In addition, the
Company realized a gain of $1,353,000 on the issuance of common
stock and common stock warrants by Duratek, relating to its
acquisition of an option to acquire certain technologies relating
to the vitrification of certain medical and hazardous wastes.
The Health Care and the Electronics Groups experienced reduced
operating losses in 1993. The Health Care Group which is
comprised of the results of ISI experienced reduced operating
losses in 1993 as a result of ISI being accounted for on the
equity basis commencing in the third quarter of 1993. The
Electronics Group, which is Eastern Electronics Manufacturing
Corporation (Eastern), the Company's electronic assembly and
manufacturing subsidiary, incurred reduced operating losses as a
result of their successful efforts to reduce overhead and costs
of sales. The above improvements in 1993 were partially offset
by reduced operating profits at the Distribution and Physical
Science Groups, in addition to a foreign currency transaction
20
gain of $901,000 realized in 1993 as compared to a net foreign
currency transaction gain of $3,362,000 realized in 1992,
relating to the Company's decision not to hedge its Swiss
denominated debt. The Distribution Group, which is the Five Star
Group, Inc. (Five Star), the Company's distributor of home
decorating,hardware and finishing products had reduced operating
profits as a result of reduced gross margin percentages and
increased operating costs. The Physical Science Group, which is
comprised of GPS Technologies Inc. (GPS), a 92% owned subsidiary,
and GTS Duratek, Inc. (Duratek), a 66% owned subsidiary, had
reduced operating profits as a result of losses incurred by
Duratek due to reduced revenues and gross margin percentages
achieved. The Optical Plastics Group, which is MXL Industries,
Inc. (MXL), the Company's injection molding and coating
subsidiary, had a marginal decrease in operating profits.
During 1992, the loss before income taxes and extraordinary items
was $13,178,000 compared to income of $1,157,000 in 1991. The
change from a profit in 1991 to a loss in 1992 was primarily the
result of the public offering by General Physics Corporation (GP)
in October 1991, through which the Company sold 68% of its GP
common stock and recognized a gain on the transaction of
$18,844,000. The Company currently owns approximately 28% of GP.
The effect of the gain on GP was partially offset by improved
operating results achieved in 1992 by the remaining companies
within the Physical Science Group, GPS and Duratek. At the
corporate level, improved operating results in 1992 were
partially the result of gains recognized on the sale of certain
investments and the continuing reduction in interest expense as a
result of reduced short-term borrowings, lower rates of interest
on the Company's variable rate obligations and reduced interest
on the Company's Swiss Debt obligation due to the Company's
continuing practice of repurchasing its Swiss Debt from time to
time. The improved operating results within the Physical Science
Group were due to both GPS and Duratek achieving operating
profits in 1992 as opposed to operating losses in 1991. GPS
achieved a significant turnaround as a result of reduced losses
at its subsidiary, GP International Engineering & Simulation,
Inc. (GPI), an operating profit generated for the first time by
its subsidiary GP Environmental Services, Inc. (GPE) and an
overall improvement within the core businesses of GPS. Duratek
showed an improvement in operations during 1992 as a result of
increased sales and gross profit in both its Environmental
Services and Consulting and Staff Augmentation businesses, as
well as the impact of the effort in the latter half of 1991 to
consolidate and streamline its administrative structure. The
improvements in operations achieved by the current members of the
Physical Science Group and at the corporate level were partially
offset by an increased operating loss at the Electronics Group
and reduced operating profits at the Optical Plastics Group. The
Electronics Group, incurred increased operating losses due to
reduced sales and inceased operating costs and the effect of
21
reserves taken for obsolete inventory. The Optical Plastics
Group had a small decrease in operating profit as a result of
weakness in the precision tooling part of its business, as well
as reduced orders from a number of MXL's established customers in
the beginning of 1992. The Health Care Group's operating loss
and the Distribution Group's operating profit remained virtually
unchanged in 1992.
Sales
Consolidated sales from continuing operations decreased by
$6,082,000 in 1993 to $189,683,000 as a result of reduced sales
in the Physical Science, Health Care and Electronics Groups,
partially offset by increased sales achieved by the Distribution
Group. Sales decreased by $63,168,000 in 1992, to $195,765,000,
as a result of the transfer in April 1991 of a majority interest
in American White Cross, Inc. (AWC), formerly NPM Healthcare,
Inc., in which the Company currently has a 14% interest, and the
public offering by GP in October 1991, which resulted in GP and
AWC no longer being consolidated entities. The decrease in 1992
was partially offset by increased sales within the Distribution
Group and by the remaining companies in the Physical Science
Group.
The Physical Science Group sales decreased from $162,727,000 in
1991 to $109,303,000 in 1992 and to $102,977,000 in 1993. The
reduced sales of $6,326,000 in 1993 were primarily attributable
to reduced sales achieved by Duratek as a result of reduced
revenues generated by its consulting and staff augmentation
business, as a result of a reduced demand for services provided
to nuclear utilities. In addition, Duratek's sales decreased as
a result of reduced revenues achieved by the environmental
services business due to delays in the award of certain
technology contracts by the Department of Energy. During 1992,
sales decreased by $53,424,000, due to the public offering by GP
on October 3, 1991, from which time the results of GP were
accounted for on the equity basis, since the Company's percentage
of ownership was reduced to approximately 28%. In 1991, the
Physical Science Group included sales of $62,325,000 for GP. The
loss of GP's sales in 1992 was partially offset by increased
sales at both GPS and Duratek. Duratek generated increased sales
in 1992 as a result of work performed on two new environmental
technology projects, as well as an increase in services provided
by the consulting and staff augmentation business. GPS generated
increased revenues in new business areas such as environmental
analytical services and full scope simulation. These increases
at GPS were partially offset by a reduction in revenue for
certain subcontracts, which terminated in 1991, for construction
management services provided to the Department of the Army.
The Distribution Group sales increased from $64,788,000 in 1991
to $68,450,000 in 1992 and to $74,109,000 in 1993. The increase
22
of $5,659,000, or 8% in 1993 was due to reduced competition in
one of Five Star's geographic regions, as well as continued
growth in the hardware business, which was introduced in 1992.
The increase of $3,662,000, or 6%, in 1992 was attributable to
the introduction during the year of a new line of hardware
supplies.
The Health Care Group sales decreased from $14,607,000 in 1991 to
$4,042,000 in 1992 and to zero in 1993. The reduction in sales
in 1993 was due to ISI not having any sales of its product,
ALFERONR N Injection, in 1993. In January 1994, ISI received an
order for 45,000 vials of ALFERONR N Injection from the Purdue
Frederick Company (Purdue). As a result of the Exchange Offer,
through which the Company's interest in ISI fell below 50%, ISI
is currently being accounted for on the equity basis. The
$10,565,000 reduction in sales in 1992 was due to the transfer on
April 8, 1991 of a majority interest in AWC, partially offset by
increased sales by ISI of ALFERONR N Injection to its marketing
partner, Purdue. In December 1991, Purdue agreed to purchase an
aggregate of 45,000 vials of ALFERONR N Injection from the
Company over approximately a six month period which commenced in
March 1992 and was completed in September 1992.
The Optical Plastics Group sales decreased from $9,454,000 in
1991 to $7,862,000 in 1992 and to $7,817,000 in 1993. The
decreased sales in 1992 was due to weakness at MXL's precision
tooling division, as well as reduced orders from a number of
MXL's established customers in the beginning of 1992.
The Electronics Group sales decreased from $7,151,000 in 1991 to
$5,968,000 in 1992 and to $3,836,000 in 1993. The decreased
sales in 1992 and the continued weakness in 1993 was the result
of the weakness in the electronics industry and Eastern's plan to
concentrate its efforts on sales to customers who provide more
profitable margins.
Gross margin
Consolidated gross margin was $36,013,000 or 14% of net sales in
1991, $29,772,000 or 15% of net sales in 1992 and $27,519,000 or
15% in 1993. In 1993, the decrease in gross margin of $2,253,000
occurred within the Health Care, Distribution and Physical
Science Groups. In 1992, the decrease in gross margin of
$6,241,000 occurred primarily in the Physical Science Group as a
result of the public offering by GP in October 1991, and to a
lesser extent, in the Health Care Group due to the transfer in
April 1991 of a majority interest in AWC in which the Company
currently has a 14% interest. The reduced gross margin in 1992
was partially offset by increased gross margin achieved by the
Distribution Group as a result of increased sales.
The Physical Science Group gross margin decreased from
23
$18,370,000, or 11% of net sales in 1991 to $13,728,000 or 13% of
net sales in 1992 and to $12,941,000, or 13% of net sales in
1993. In 1993, the reduced gross margin was primarily
attributable to reduced gross margins achieved by Duratek as a
result of reduced sales as well as a decrease in the gross margin
percentage achieved within Duratek's consulting and staff
augmentation business because of increasing competitive pressures
within the industry. The reduced gross margin achieved by
Duratek was partially offset by GPS, which generated increased
gross margins as a result of an improved mix of services during
1993. In 1992, the decreased gross margin was due to the public
offering by GP in October 1991, partially offset by increased
gross margins at Duratek and GPS. The increased gross margin
dollars and percentage at GPS was due to increased sales,
significant profit improvements at GPI and GPE during 1992, as
well as an improved mix of services performed at higher margins
within the core businesses. Duratek achieved increased gross
margins in 1992 as a result of increased revenues generated by
its environmental technology projects.
The Distribution Group gross margin increased from $11,679,000 or
18% in 1991 to $12,355,000 or 18% of sales in 1992 and decreased
to $11,718,000 or 16% in 1993. In 1993, the reduced gross margin
was the result of the reduced gross margin percentage achieved in
1993. The reduced gross margin percentage in 1993 was the result
of a change in the product mix as well as competitive price
pressures within the industry. In 1994, the Group has started
taking steps to reduce its costs of sales in order to improve its
operating margins in the future. In 1992, the increased gross
margin was the result of increased sales due to the introduction
of a new line of hardware products.
The Health Care Group gross margin decreased from $2,509,000 or
17% of net sales in 1991 to $358,000 or 9% of net sales in 1992
and to $(699,000) in 1993. The negative gross margin in 1993 was
the result of facility costs incurred by ISI, notwithstanding the
suspension of production, and lack of sales of ALFERONR N
Injection during 1993. The decrease in gross margin in 1992 was
the result of the transfer on April 8, 1991 of a majority
interest in AWC, as discussed above. The reduced gross margin
percentage in 1992 is attributable to the low gross margin
percentages achieved by ISI due to the write-down of inventory to
its estimated net realizable value, as a result of increased unit
production costs caused by limited production volumes.
The Optical Plastics Group gross margin decreased from $3,231,000
or 34% of net sales in 1991 to $2,740,000 or 35% of net sales in
1992 and to $2,642,000 or 34% of net sales in 1993. The small
decrease in gross margin in 1993 was the result of marginally
reduced sales and gross margin percentage. In 1992, the reduced
gross margin was the result of reduced sales volume.
24
The Electronics Group gross margin increased from $221,000 or 3%
of net sales in 1991 to $561,000 or 9% of net sales in 1992 and
decreased to $546,000 or 14% of net sales in 1993. The small
decrease in gross margin in 1993 and increased gross margin in
1992, in spite of reduced sales at Eastern in both years, was
attributable to the continuing improvement in gross margin
percentages as a result of a better product mix, a reduction in
the fixed manufacturing costs and improved operating
efficiencies.
Investment and other income, net
Investment and other income was $2,790,000 in 1991, $6,221,000 in
1992 and $3,358,000 in 1993, respectively. In 1993 the decrease
in investment and other income, net was primarily attributable to
a net foreign currency transaction gain of $901,000 in 1993 as
compared to a gain of $3,362,000 in 1992. In addition, in 1993
the Company realized reduced revenues relating to interest
income, and in the equity in earnings of 20% to 50% owned
subsidiaries as compared to 1992. These decreases were partially
offset by reserves taken and losses realized by the Company on
certain assets and investments in 1992. In 1992, the increase in
investment and other income, net was primarily due to two
factors. In 1992, the Company realized increased gains on the
sales of certain investments, and recognized an expense for
reserves taken and losses realized on certain assets of
$1,336,000 in 1992 as compared to $4,774,000 in 1991. In 1992,
the Company realized a net foreign currency transaction gain of
$3,362,000, as compared to a gain of $3,042,000 in 1991. The
reserves were taken in 1992 and 1991 due primarily to reduced
values and impairments relating to long-term investments and
related assets accounted for on the cost basis. The Company
evaluates its long-term investments at least annually. An
investment is written down or written off if it is judged to have
sustained a decline in value which is other than temporary.
During 1991, a 19% interest in and advances to a vendor and
distributor of pay telephones was written down by $3,100,000, to
an estimated residual value of $175,000, since the telephone
company ceased marketing its principal product in 1991. This
resulted from (a) the loss by the telephone company of two major
vending accounts in 1991, which substantially reduced revenues
and (b) the telephone company's effort to sell telephones as well
as to vend them was unsuccessful in 1991. Based upon the fact
that the remaining vending revenues were insufficient to support
operations the telephone company ceased operations. In 1992, the
estimated residual value of $175,000 of this investment, which
was based upon estimated proceeds on liquidation of telephone
equipment, was written off since it was determined that such
sales could not be consummated. Additionally, in 1992, the
Company fully reserved its investment of $305,000 in a medical
blood center company. The blood center company ceased operations
in 1992 as its major investor, a large financial institution,
25
decided to no longer provide financing and working capital. In
1991 and prior years, the medical blood center company received
substantial funding for its centers and the financial institution
provided working capital and equity financing. In both 1991 and
1992, a number of other relatively small investments were written
off or written down because the Company's periodic evaluations
indicated declines in value which were judged to be other than
temporary.
At December 31, 1993, there was an aggregate of SFr. 25,398,000
of Swiss denominated indebtedness outstanding, of which SFr.
23,680,000 represents principal amount outstanding and SFr.
1,718,000 represents interest accrued thereon. Foreign currency
valuation fluctuations may adversely affect the results of
operations and financial condition of the Company. In order to
protect itself against currency valuation fluctuations, the
Company has at times swapped or hedged a portion of its obliga-
tions denominated in Swiss Francs. At December 31, 1993, the
Company had not hedged its Swiss Franc obligations. If the value
of the Swiss Franc to the U.S. Dollar increases, the Company will
recognize transaction losses on the portion of its Swiss Franc
obligations which are not hedged. On December 31, 1993, the
value of the Swiss Franc to the U.S. Dollar was 1.485 to 1.
There can be no assurance that the Company will be able to swap
or hedge obligations denominated in foreign currencies at prices
acceptable to the Company or at all. The Company will continue
to review this policy on a continuing basis.
Selling, general, and administrative expenses
Selling, general and administrative expenses (SG&A) decreased
from $38,356,000 in 1991 to $36,274,000 in 1992 and to
$35,600,000 in 1993. In 1993, the decrease in SG&A was primarily
attributable to ISI being accounted for on the equity basis
during the third quarter of 1993, as a result of the Exchange
Offer discussed above, in which the Company's interest in ISI
fell below 50%. In addition, the Electronics Group also
experienced reduced SG&A expenses as a result of reduced
personnel requirements due to reduced sales in 1993 and Eastern's
continuing effort to streamline its organization. The reduced
SG&A within the Health Care and Electronics Groups in 1993 were
partially offset by increased SG&A incurred by the Distribution
and Physical Science Groups. The increased SG&A at The Physical
Science Group was due to increased operating costs and the
increased SG&A at the Distribution Group was the result of the
large increase in sales which led to increased selling expenses,
as well as additional costs incurred by Five Star to support the
growth in sales. The Optical Plastics Group had a marginal
increase in SG&A in 1993. In 1992, the decrease in SG&A expenses
was primarily due to decreases in the Health Care Group and the
Physical Science Group as a result of the transfer on April 8,
1991 of a majority interest in AWC and the public offering by GP
26
in October 1991, respectively. The decrease was partially offset
by increased SG&A within the Distribution Group as a result of
Five Star's expansion into the hardware supply distribution
business and increased SG&A within the Electronics Group due to
costs connected with Eastern's efforts to restructure its
business operations.
Research and development costs
The Company's research and development activities are conducted
both internally and under various types of arrangements at
outside facilities. Research and development costs, which are
primarily attributable to ISI, were $4,651,000, $4,645,000 and
$2,847,000 for 1991, 1992, 1993, respectively. In 1993, the
reduced research and development costs were the result of the
Company's ownership in ISI falling below 50% in the third quarter
of 1993, due to the Exchange Offer discussed above, and
therefore, the Company began accounting for ISI on the equity
method from that time. In 1992, ISI experienced increased
research and development costs because of increased levels of
research on ALFERONR N Gel, ALFERONR LDO and other proprietary
research. The increased spending at ISI in 1992 was offset by
reduced spending on various corporate projects.
Interest expense
Interest expense aggregated $15,579,000 in 1991, $11,044,000 in
1992 and $8,325,000 in 1993. The reduced interest expense in
1992 and the further reduction in 1993, was the result of the
Company's continuing successful effort to reduce its interest
expense at the corporate level due to reduced short-term
borrowings, lower rates of interest on the Company's variable
rate obligations and reduced interest on the Company's Swiss Debt
obligations due to the Exchange Offer in 1993 and the Company's
practice of repurchasing Swiss Debt from time to time.
Income taxes and extraordinary item
Income tax benefit (expense) from operations for 1991, 1992 and
1993 was $(549,000), $(427,000) and $575,000, respectively.
In 1993, the Company recorded an income tax benefit of
$1,043,000, of which $973,000 relates to Federal income taxes, in
continuing operations as a result of the income tax expense
allocated to the extraordinary gain recognized on the early
extinguishment of debt under the provisions of FASB No. 109.
In 1992, the Company's loss before income taxes from operations
exceeded its gains from extraordinary items: therefore, pursuant
to accounting policies of the Company, then in effect under APB
No. 11, "Accounting for Income Taxes", no income tax expense
applicable to such extraordinary gains was recognized. The
27
income tax expense for 1992 of $427,000 represents state and
local income taxes.
In 1991, despite the Company's $1,157,000 income before income
taxes from operations, no Federal income tax expense was
recognized. This is due principally to significant permanent
differences between financial and tax reporting of 1991
transactions, including the elimination for tax purposes of the
$18,844,000 gain on the sale of GP stock, net of a gain
recognized only for tax purposes upon ISI ceasing to be a member
of the Company's consolidated Federal income tax return group on
May 31, 1991. The income tax expense for 1991 of $549,000
represents state and local income taxes.
As of December 31, 1993, the Company has approximately
$34,770,000 of consolidated net operating losses available for
financial statement reporting purposes.
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," was adopted by the Company in 1993 on a
prospective basis. (See Note 15 to the Consolidated Financial
Statements). This standard requires that deferred income taxes
be recorded following the liability method of accounting and
adjusted periodically when income tax rates change. As of
December 31, 1993, the Company was not carrying any deferred tax
accounts. Adoption of the new Statement did not have a material
effect on the Company's financial condition or results of
operations.
Liquidity and capital resources
At December 31, 1993, the Company had cash, cash equivalents and
marketable securities totaling $10,976,000. GPS and Duratek had
cash, cash equivalents and marketable securities of $547,000 at
December 31, 1993. The minority interests of these companies are
owned by the general public, and therefore, the assets of these
subsidiaries have been dedicated to the operations of these
companies and may not be readily available for the general
corporate purpose of the parent.
The Company believes that it has sufficient cash, cash
equivalents and marketable securities and borrowing availability
under existing and potential lines of credit to satisfy its cash
requirements until the first scheduled maturity of its Swiss
Franc denominated indebtedness on March 1, 1995. However, in
order for the Company to meet its long-term cash needs, which
include the repayment of $12,757,000 of Swiss Franc denominated
indebtedness scheduled to mature in 1995 and $7,115,000 of Swiss
Franc denominated indebtedness which is scheduled to mature in
1996, the Company must obtain additional funds from among various
sources. The Company has historically reduced its long-term debt
through the issuance of equity securities in exchange for long-
28
term debt. In addition to its ability to issue equity
securities, the Company believes that it has sufficient
marketable long-term investments, as well as the ability to
obtain additional funds from its operating subsidiaries and the
potential to enter into new credit arrangements. The Company
reasonably believes that it will be able to accomplish some or
all of the above transactions in order to fund the scheduled
repayment of the Company's long-term Swiss debt in 1995.
For the year ended December 31, 1993, the Company's working
capital decreased by $11,653,000 to $33,224,000, reflecting the
effect of the Company's interest in ISI falling below 50%, and
being accounted for on the equity basis. Consolidated cash and
cash equivalents decreased by $6,945,000 to $10,976,000 at
December 31, 1993.
The decrease in cash and cash equivalents of $6,945,000 in 1993
primarily resulted from the effect of the Company's interest in
ISI falling below 50%, and being accounted for on the equity
basis as well as cash used, in operations of $2,507,000,
investing activities of $2,593,000 and financing activities of
$1,845,000. Cash used in operations was primarily required to
fund the operating loss for the year. The cash used in investing
activities was for increases in certain investments and for
investment in property, plant and equipment and intangible
assets. Financing activities consisted primarily of repayments
and reductions in short-term borrowings and repayments of long-
term debt, offset by proceeds from short-term borrowings and
long-term debt. At December 31, 1993, the Company at the parent
company level had substantially exhausted its ability to borrow
funds from its subsidiaries under their respective line of credit
arrangements.
The Company's principal manufacturing facilities were constructed
subsequent to 1976 and management does not anticipate having to
replace major facilities in the near term. As of December 31,
1993, the Company has not contractually committed itself for any
other new major capital expenditures.
29
Item 8. Financial Statements and Supplementary Data
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 31
Financial Statements:
Consolidated Balance Sheets - December 31, 1993
and 1992 32
Consolidated Statements of Operations - Years ended
December 31, 1993, 1992, and 1991 34
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1993, 1992,
and 1991 35
Consolidated Statements of Cash Flows - Years ended
December 31, 1993, 1992, and 1991 37
Notes to Consolidated Financial Statements 40
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 69
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Patent Development Corporation:
We have audited the consolidated financial statements of National
Patent Development Corporation and subsidiaries as listed in the
accompanying index. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements 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 are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
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 National Patent Development Corporation and
subsidiaries at December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the years in
the three-year period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Note 15 the Company has adopted SFAS No. 109,
"Accounting for Income Taxes", as of January 1, 1993.
KPMG Peat Marwick
New York, New York
March 30, 1994
31
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, 1993 1992
Assets
Current assets
Cash and cash equivalents $ 10,976 $ 17,921
Restricted cash 1,200
Marketable securities, at lower of
aggregate cost or market 4,553
Accounts and other receivables (of which
$7,694 and $9,970 are from government
contracts) less allowance
for doubtful accounts of $1,689 and $1,581 36,285 41,171
Inventories 22,605 24,353
Costs and estimated earnings in excess of
billings on uncompleted contracts, of which
$2,913 and $5,073 relates to government
contracts 13,081 10,702
Prepaid expenses and other current assets 4,160 4,009
Total current assets 87,107 103,909
Investments and advances 28,303 23,168
Property, plant and equipment, at cost 33,873 43,583
Less accumulated depreciation and
amortization (20,035) (22,043)
13,838 21,540
Intangible assets, net of accumulated
amortization of $24,691 and $23,987
Goodwill 25,463 29,421
Patents, licenses and deferred charges 4,641 3,547
30,104 32,968
Investment in financed assets 2,797 5,507
Other assets 3,908 5,557
$166,057 $192,649
32
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
December 31, 1993 1992
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 6,750 $ 7,067
Short-term borrowings 21,390 28,977
Accounts payable and accrued expenses 20,256 18,992
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,487 3,996
Total current liabilities 53,883 59,032
Long-term debt less current maturities 36,638 57,085
Notes payable for financed assets 579 3,109
Minority interests 3,277 9,600
Commitments and contingencies
Common stock issued subject to
repurchase obligation 4,242
Stockholders' equity
Preferred stock, authorized 10,000,000
shares, par value $.01 per share, none
issued
Common stock, authorized 30,000,000
shares, par value $.01 per share,
issued 19,023,357 and 15,934,840
shares (of which 22,645
shares are held in the treasury) 190 159
Class B capital stock, authorized 2,800,000
shares, par value $.01 per share, issued
and outstanding 250,000 shares 2 2
Capital in excess of par value 106,274 96,713
Deficit (39,028) (33,051)
Total stockholders' equity 67,438 63,823
$166,057 $192,649
See accompanying notes to consolidated financial statements.
33
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 1993 1992 1991
Revenues
Sales $189,683 $195,765 $258,933
Investment and other income, net
(including interest income
of $875, $1,275 and $941) 3,358 6,221 2,790
193,041 201,986 261,723
Costs and expenses
Cost of goods sold 162,164 165,993 222,920
Selling, general and
administrative 35,600 36,274 38,356
Research and development 2,847 4,645 4,651
Interest 8,325 11,044 15,579
208,936 217,956 281,506
Gain on sale of stock of
a subsidiary 18,844
Gain on disposition of stock of
a subsidiary and an affiliate 3,795
Gain on issuance of stock by a
subsidiary 1,353
Minority interests 2,376 2,792 2,096
Income (loss) before income taxes
and extraordinary item (8,371) (13,178) 1,157
Income tax benefit (expense) 575 (427) (549)
Income (loss) before
extraordinary item (7,796) (13,605) 608
Extraordinary item
Early extinguishment of debt,
net of income tax in 1993 1,819 1,662 2,037
Net income (loss) $ (5,977) $(11,943) $ 2,645
Income (loss) per share
Income (loss) before
extraordinary item $ (.46) $ (.86) $ .04
Extraordinary item .11 .10 .13
Net income (loss) per share $ (.35) $ (.76) $ .17
See accompanying notes to consolidated financial statements.
34
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders Equity
Years ended December 31, 1993, 1992, and 1991
(in thousands, except shares, par value per share and per share amounts)
Class B Capital in Total
Common capital excess Treasury stock
stock stock of par stock holders'
($.01 Par) ($.01 Par) Value Deficit at cost equity
Balance at December 31, 1990 $132 $ 2 $93,522 $(23,753) $(14,487) $55,416
Exercise of stock options and warrants 2 526 528
Issuances of treasury stock
(1,153,621 common shares) (9,907) 13,019 3,112
Conversion of 12% debentures 10 4,377 4,387
Issuance of stock in connection with
Swiss Bonds 4 1,899 1,903
Shares issuable in settlement of debt 529 529
Issuances of stock to a subsidiary 2 1,156 1,158
Issuance and sale of common stock 1 382 383
Effect of issuance and sale of
stock by a subsidiary, net 2,344
Net income 2,645 2,645
Balance at December 31, 1991 $ 151 $ 2 $94,828 $(21,108) $ (1,468) $72,405
35
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (continued)
Years ended December 31, 1993, 1992, and 1991
(in thousands, except shares, par value per share and per share amounts)
Class B Capital in Total
Common capital excess Treasury stock-
stock stock of par stock holders'
($.01 Par) ($.01 Par) value Deficit at cost equity
Balance at December 31, 1991 $ 151 $ 2 $ 94,828 $(21,108) $ (1,468) $72,405
(102,772 common shares) (1,074) 1,468 394
Net loss (11,943) (11,943)
Conversion of 12% Debentures 1 164 165
Issuance of stock in connection
with Swiss Bonds 2 911 913
Effect of exercise of warrants to
purchase the stock of a subsidiary 674 674
Shares issuable in settlement of debt 186 186
Issuance and sale of common stock 3 744 747
Balance at December 31, 1992 159 2 96,713 (33,051) 63,823
Exercise of stock options and warrants 2 410 412
Net loss (5,977) (5,977)
Conversion of 12% Debentures 82 82
Issuance of stock in connection
with Swiss Bonds 26 8,694 8,720
Issuance and sale of common stock 3 375 378
Balance at December 31, 1993 $ 190 $ 2 $106,274 $(39,028) $67,438
See accompanying notes to consolidated financial statements.
36
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1993 1992 1991
Cash flows from operations:
Net income (loss) $ (5,977) $(11,943) $2,645
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and amortization 5,296 6,107 8,542
Income tax benefit allocated to
continuing operations (1,043)
Gain on sale of stock of
a subsidiary (18,844)
Gain from early extinguishment
of debt, net of income
tax in 1993 (1,819) (1,662) ( 2,037)
Gain on disposition of stock of a
subsidiary and an affiliate (3,795)
Gain on issuance of stock by
a subsidiary (1,353)
Changes in other operating items,
net of effect of acquisitions
and disposals:
Accounts and other receivables 4,817 1,641 (1,243)
Inventories (381) (2,223) 4,574
Costs and estimated earnings in
excess of billings on
uncompleted contracts (2,379) (2,012) 3,158
Prepaid expenses and other
current assets (44) 279 529
Accounts payable and accrued
expenses 2,680 (341) (3,040)
Billings in excess of costs and
estimated earnings on
uncompleted contracts 1,491 (1,861) 2,719
Income taxes payable (25) 452
Total adjustments 3,470 (97) (6,094)
Net cash used in operations $ (2,507) $(12,040) $(3,449)
37
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1993 1992 1991
Cash flows from investing activities:
Proceeds from public sale of
a subsidiary's stock $ $ $ 43,997
Proceeds from disposal of business 7,192
Proceeds from sale of an investment 4,500
Marketable securities 651 2,419 (6,743)
Additions to property, plant and
equipment, net (2,077) (3,399) (2,079)
Additions to intangible assets (303) (1,339) (705)
Reduction of (additions to)
investments and other assets (864) 3,096 1,018
Net cash provided by (used in)
investing activities (2,593) 5,277 42,680
Cash flows from financing activities:
Repayments of short-term
borrowings (28,011) (6,150) (31,827)
Proceeds from short-term borrowings 20,424 8,810
Decrease in restricted cash 1,200 3,800 10,000
Proceeds from issuance of
long-term debt 10,973 203 7,561
Reduction of long-term debt (8,515) (6,244) (15,675)
Repayments of notes payable for
financed assets (28) (207)
Proceeds from public sale of
common stock by a subsidiary 9,588
Proceeds from issuance of common stock 198 1,539
Proceeds from issuance of stock
by a subsidiary 1,473 750
Exercise of common stock options
and warrants 413 282 718
Issuance of treasury stock 15 825
Net cash provided by (used in)
financing activities (1,845) 688 (16,728)
Net (decrease) increase in cash
and cash equivalents (6,945) (6,075) 22,503
Cash and cash equivalents at
beginning of year 17,921 23,996 1,493
Cash and cash equivalents
at end of year $ 10,976 $ 17,921 $ 23,996
38
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Years ended December 31, 1993 1992 1991
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 5,344 $ 8,324 $ 14,138
Income taxes $ 692 $ 703 $ 1,472
Supplemental schedule of
noncash transactions:
Reduction of intangibles $ $ $ (532)
Reduction of debt 21,900 1,819 7,430
Issuances of treasury stock (1,468) (2,098)
Additions to other assets
and prepaid expenses 179 130 275
Reduction of accounts payable 597
Reduction of accrued interest payable 607 1,744
Issuances of common stock (8,981) (1,078) (6,819)
Issuance of long-term debt (3,006)
Common stock issued subject
to repurchase obligation (4,242)
Gain on disposition of stock of a
subsidiary and an affiliate (3,795)
Gain on exchange of debt before
income tax effect (2,662)
See accompanying notes to consolidated financial statements.
39
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Principles of consolidation and investments. The consolidated
financial statements include the operations of National Patent
Development Corporation and its majority-owned subsidiaries (the
Company). Investments in 20% - 50% owned companies are accounted
for on the equity basis, and marketable equity securities of less
than 20% owned companies are accounted for at the lower of
aggregate cost or market. Other investments in less than 20%
owned companies are accounted for on the cost basis. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Statements of cash flows. For purposes of the statement of cash
flows, the Company considers all highly liquid instruments with
maturities of three months or less from purchase date to be cash
equivalents.
Marketable securities. Marketable securities at December 31,
1992 consisted of United States Government obligations, carried
on the balance sheet at cost by the Company. The market value of
marketable securities at December 31, 1992 was $4,606,000.
Inventories. Inventories are valued at the lower of cost or
market, principally using the first-in, first-out (FIFO) method.
Foreign currency transactions. The Company's Swiss Bonds (see
Note 9) are subject to currency fluctuations and the Company has
hedged portions of such debt from time to time. During the years
ended December 31, 1993, 1992, and 1991, the Company realized
foreign currency transaction gains of $901,000, $3,362,000 and
$3,042,000, respectively. These amounts are included in
investment and other income, net. At December 31, 1993, the
Company had not hedged its Swiss Franc obligations.
Contract revenue and cost recognition. The Company provides
services under time-and-materials, cost-plus-fixed-fee, and
fixed-price contracts. Revenue from contracts is recognized on
the percentage-of-completion method as costs are incurred and
includes estimated fees at predetermined rates. Differences
between recorded costs, estimated fees, and final billings are
recognized in the period in which they become determinable.
Costs and estimated earnings in excess of billings on uncompleted
contracts are recorded as an asset. Billings in excess of costs
and estimated earnings on uncompleted contracts are recorded as a
liability. Generally, contracts provide for the billing of costs
incurred and estimated fees on a monthly basis and do not provide
for retainage. Retainages, amounts subject to future
40
negotiation, amounts expected to be collected after one year, and
amounts related to claims are not material.
Property, plant, and equipment. Property, plant, and equipment
are carried at cost. Major additions and improvements are
capitalized while maintenance and repairs which do not extend the
lives of the assets are expensed currently. Gain or loss on the
disposition of property, plant, and equipment is recognized in
operations when realized.
Depreciation. The Company provides for depreciation of property,
plant and equipment primarily on a straight-line basis over the
following estimated useful lives:
CLASS OF ASSETS USEFUL LIFE
Buildings and improvements 5 to 40 years
Machinery, equipment and furniture
and fixtures 3 to 20 years
Leasehold improvements Shorter of asset life
or term of lease
Intangible assets. The excess of cost over the fair value of net
assets of businesses acquired is recorded as goodwill and is
amortized on a straight-line basis generally over periods ranging
from 5 to 40 years. The Company capitalizes costs incurred to
obtain and maintain patents and licenses. Patent costs are
amortized over the lesser of 17 years or the remaining lives of
the patents, and license costs over the lives of the licenses.
The Company also capitalizes costs incurred to obtain long-term
debt financing. Such costs are amortized on an effective yield
basis over the terms of the related debt and such amortization is
classified as interest expense in the Consolidated Statements of
Operations.
The periods of amortization of goodwill are evaluated at least
annually to determine whether events and circumstances warrant
revised estimates of useful lives. This evaluation considers,
among other factors, expected cash flows and profits of the
businesses to which the goodwill relates. Goodwill is written
off when it becomes evident that it has become permanently
impaired.
Treasury stock. Treasury stock is recorded at cost. Reissuances
of treasury stock are valued at market value at the date of
reissuance. The cost of the treasury stock is relieved from the
treasury stock account and the difference between the cost and
market value is recorded as additional paid in capital
Sales of stock by a subsidiary. The Company records in the
Consolidated Statement of Operations any gain or loss realized
when a subsidiary sells its shares at an offering price which
41
differs from the Company's carrying amount per share of such
subsidiary's stock.
Income taxes. The Company files a consolidated Federal income
tax return that includes each domestic subsidiary in which the
Company has at least 80% voting control. The Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", effective Janaury 1, 1993. Adoption of the
new Statement did not have a significant effect on the Company's
financial condition or results of operations.
Income (loss) per share. Per share data is based on the weighted
average number of shares outstanding, including Class B capital
stock, and dilutive common stock equivalents. Presentation of
fully diluted earnings per share is not required because the
effect is less than 3% or is antidilutive. The weighted average
number of shares outstanding for the years ended December 31,
1993, 1992 and 1991 were 17,125,900, 15,771,301 and 15,393,781,
respectively.
2. GPS Technologies, Inc.
On October 3, 1991, General Physics Corporation (GP) completed a
public offering of 4 million shares of common stock at a price of
$13 per share. The Company offered 3,846,540 shares of stock,
and the remainder was offered by certain non-affiliated
shareholders. The Company received net proceeds after expenses
of $43,997,000, and from the proceeds was required to make
several repayments of long-term debt and short-term borrowings.
The Company repaid $16,735,000 of short-term borrowings,
$5,163,000 of long-term debt and $2,039,000 of accrued interest
payable on its Swiss Convertible Bonds. Included in expenses
were legal, printing and accounting costs, bonuses paid to key
employees of the Company, as well as other costs. The Company
recognized a gain of $18,844,000 from this transaction.
In connection with the public offering, a reorganization was
effected on September 25, 1991 whereby GP transferred certain
operations and related assets and liabilities to a new
subsidiary, GPS Technologies, Inc. (GPS), formerly named General
Physics Services Corp. GP retained the business, assets and
liabilities of its Nuclear Services, Department of Energy
Services and Environmental Services Groups. Included among the
businesses and assets transferred to GPS were certain leases of
property and equipment, and two finance subsidiaries that own
power plant control room simulators. As a result of the public
offering and the reorganization, the Company owns approximately
28% of GP and 92% of GPS. The financial position and results of
operations of GP are included in the consolidated accounts of the
Company for all periods presented through September 30, 1991. On
October 3, 1991, the Company's ownership fell below 50%.
Thereafter, the Company's investment in GP has been accounted for
42
on the equity basis and the Company's share of GP's income (loss)
for the three months ended December 31, 1991 and years ended
December 31, 1992 and 1993 in the amount of $432,000, $(144,000)
and $316,000, respectively, after the amortization of the
underlying goodwill, is included in the caption "Investment and
other income, net" appearing in the consolidated statements of
operations. The financial position and results of operations of
GPS are included in the consolidated accounts of the Company. At
December 31, 1993, the Company's investment in GP was
approximately $11,753,000, of which $6,829,000 represents the
difference between the carrying amount of the investment and the
amount of the underlying equity in the net assets. Such amount
is included in investments and advances on the Company's
consolidated balance sheet and is being amortized on a straight-
line basis over its estimated benefit period, 30 years. At
December 31, 1993, the Company owned 1,771,407 shares of GP with
a total market value of $6,864,000.
Condensed financial information for GP is as follows as of
December 31, 1993 and 1992 and for the years then ended (in
thousands):
1993 1992
Total assets $21,872 $23,086
Stockholders' equity 17,584 17,052
Revenues 62,402 73,314
Net income 1,763 139
3. GTS Duratek, Inc.
On November 2, 1990, GTS Duratek, Inc. (Duratek), a majority
owned subsidiary, purchased General Technical Services, Inc.
(GTS) from GP for a purchase price of $7,500,000 in cash,
3,500,000 shares of Duratek's common stock and a $1,250,000 note.
GTS, based in Columbia, Maryland, is a supplier of consulting
and staff augmentation services to utilities, Government
agencies, and commercial businesses. On December 31, 1992,
Duratek issued 450,000 shares of Duratek common stock to GPS in
exchange for the $1,250,000 note and $150,000 of accrued
interest. In 1993, the Company distributed 667,134 shares of
Duratek stock as part of an Exchange Offer (See Note 9(a)).
After the acquisition of GTS, the retirement of the note and
accrued interest and the Exchange Offer, approximately 46% of the
outstanding shares of Duratek's common stock is owned by GPS
(after the reorganization discussed in Note 2) and 20% of the
shares are owned by the Company. The Company, as a result of
owning 92% of GPS, now controls approximately 66% of Duratek.
Duratek also provides environmental services which includes the
cleanup of water and other liquids containing radioactive and/or
hazardous (mixed waste) contaminants and in-furnace vitrification
for long-term stabilization of such waste.
43
In the fourth quarter of 1993, Duratek entered into a series of
agreements which resulted in the formation of a 50% owned
company,Vitritek Environmental, Inc. (Vitritek). The purpose of
Vitritek is to develop technologies relating to the vitrification
of medical, hazardous and asbestos waste. In consideration for
its 50% interest in Vitritek, Duratek contributed its option to
acquire all rights, title and interest in certain medical and
hazardous waste vitrification technologies. Duratek acquired
this option for warrants to purchase 500,000 shares of Duratek's
common stock for $4.00 per share and cash of $500,000 provided by
the owners of the other 50% interest in Vitritek. The warrants
expire on September 30, 1997. In connection with these
transactions, Duratek agreed to sell to the two principal
shareholders of the corporation which contributed certain
technologies relating to asbestos waste vitrification, and who
hold the other 50% interest in Vitritek, a total of 562,500
shares of Duratek's common stock at $4.00 per share. Duratek
received in consideration for the shares, $1,500,000 in cash, and
the two shareholders' interests in other assets valued at
$750,000.
4. Interferon Sciences, Inc.
Interferon Sciences, Inc. (ISI) is a 36% owned affiliate of the
Company. It is engaged in the manufacture and sale of ALFERONR N
Injection, ISI's first product commercially approved by the FDA
for the treatment of recurring and refractory external genital
warts, and the research and development of other alpha interferon
based products for the treatment of viral diseases, cancers and
diseases of the immune system.
On July 12, 1993, the Company commenced an Exchange Offer for its
Swiss Franc denominated Bonds and its Dual Currency Bonds. (See
Note 9(a)). As a result of the inclusion of a portion of the
Company's shares of Common Stock of ISI as part of the
consideration in the Exchange Offer, the Company's ownership in
ISI fell below 50%, and therefore, commencing during the third
quarter of 1993, the Company accounted for the results of ISI on
the equity basis. The Company's investment in ISI of
approximately $6,167,000 is included in "Investments and
Advances" on the Consolidated Balance Sheet. At December 31,
1993, the Company owned 6,985,000 shares of ISI, with a market
value of $32,743,000. The Company's share of ISI's loss included
in Investment and other income, net is $857,000 in 1993.
At December 31, 1993 and for the year then ended, condensed
financial information for ISI is as follows (in thousands):
Total assets $20,301
Stockholders' equity 17,131
44
Revenues 51
Net loss (8,460)
On May 28, 1993, David Blech, the Chief Executive Officer, sole
shareholder and a director of D. Blech & Company, Incorporated
(DBC), and ISI entered into a Purchase Agreement (the Purchase
Agreement), pursuant to which David Blech or his designees
purchased for $4.00 per unit, an aggregate of 2,500,000 units
(Units), each Unit consisting of two shares of common stock of
ISI; one Class A Warrant to purchase one share of common stock of
ISI at an exercise price of $3.25 per share and one Class B
Warrant to purchase one share of common stock of ISI at an
exercise price of $5.00 per share. The Class A Warrants and the
Class B Warrants expire on August 31, 2000. The purchasers have
certain registration rights as to the securities acquired by them
under the Purchase Agreement.
On October 29, 1991, ISI completed a public offering of 2,300,000
shares of its common stock at $5.00 per share resulting in net
proceeds to ISI of approximately $9,588,000. In connection with
the public offering, the Company converted its outstanding
advance to ISI at September 30, 1991 of $4,985,000 into
$2,200,000 of common stock and contributed the remainder to
capital in excess of par value.
On May 30, 1991, the Company exchanged its ISI Class B common
stock for an equal number of shares of common stock. As a
result, on that date, ISI ceased to be included in the Company's
consolidated Federal income tax return.
On April 12, 1991, ISI, the Company, The Purdue Frederick Company
(Purdue Frederick) and certain other companies (The Purdue
Affiliates) entered into an agreement (the Funding Agreement).
Under the terms of the Funding Agreement, (i) The Purdue
Affiliates agreed to purchase $3,600,000 of ISI common stock at a
price of $4.10 per share (which occurred on June 14, 1991), (ii)
on June 3, 1991, the Company exchanged $3,800,000 of the
Company's common stock (with a guaranteed value of $3,800,000 of
proceeds for ISI from the sale of the Company's common stock) for
an equal value of ISI common stock and, (iii) Purdue Frederick
agreed to convert $1,975,000 of the prepayments for product made
by it, $850,000 in 1990, $425,000 in January 1991, and $700,000
in February 1991 into shares of ISI common stock at $4.10 per
share (which occurred on June 14, 1991). Between August and
October, 1991, ISI received $1,200,000 in net proceeds from the
sale of the Company's common stock and the Company paid ISI the
remaining $2,600,000 on October 31, 1991 (which represents the
difference between the guaranteed amount of $3,800,000 and the
amount realized from the sale of the ISI common stock which was
$1,200,000).
5. Inventories
45
Inventories, consisting of material, labor, and overhead, are
classified as follows (in thousands):
December 31, 1993 1992
Raw materials $ 2,836 $ 2,536
Work in process 675 1,713
Finished goods 16,394 17,316
Land held for resale 2,700 2,788
$ 22,605 $ 24,353
6. Property, plant, and equipment
Property, plant and equipment consists of the following
(in thousands):
December 31, 1993 1992
Land $ 173 $ 314
Buildings and improvements 1,365 8,754
Machinery and equipment 19,308 22,039
Furniture and fixtures 7,951 7,175
Leasehold improvements 5,076 4,829
Construction in progress 472
33,873 43,583
Accumulated depreciation and
amortization (20,035) (22,043)
$ 13,838 $ 21,540
7. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1993 1992
Revolving Credit and Term Loan
Agreement (a) $ $ 4,196
Line of Credit Agreement (b) 11,732 13,506
Revolving Credit and Term Loan
Agreement (c) 5,650 3,700
Revolving Loan and Line of Credit
Arrangements (d) 898 1,153
Revolving Line of Credit
Agreement (e) 3,110 6,239
Notes Payable (f) 183
$ 21,390 $ 28,977
(a) On April 8 and October 3, 1991, the Company entered into two
amendments to its November 1, 1989, $15,000,000 Revolving Credit
and Term Loan Agreement (the Loan Agreement). Under the terms of
the amendments, the outstanding balance of $10,346,000 at October
3, 1991, was payable in nine equal quarterly installments of
$1,150,000 which commenced on March 31, 1992. The loan bore
interest at a rate equal to % in excess of the bank's prime
46
rate. On September 9, 1992, the Company amended the Loan
Agreement. Under the terms of the amendment, the outstanding
balance at January 1, 1992 is payable in four quarterly
installments of $1,150,000, $2,308,000, $1,156,000 and
$5,732,000, commencing September 30, 1992. In October 1992, the
bank released the $5,000,000 in cash collateral, which was used
to reduce the loan balance and the last scheduled payment by
$5,000,000. The bank agreed to defer the December 31, 1992
payment of $2,308,000 to April 1993. The entire loan balance of
$4,196,000 at December 31, 1992 was classified as a current
liability. In April 1993, the Company repaid the balance of the
loan. (See Note 7(b)).
(b) In April 1990, the Five Star Group, Inc., (Five Star)
entered into a three year line of credit arrangement with a bank.
Five Star could borrow up to a maximum of $17,000,000, subject to
the level of its qualified accounts receivable and inventory, at
an interest rate of 3/4% in excess of the prime rate, subject to
reduction, based upon certain financial criteria. The line of
credit was secured by substantially all the intangible and
tangible property of Five Star. As part of the agreement, the
Company could borrow up to a maximum of $7,000,000 from Five
Star. As of December 31, 1992, $13,506,000 was borrowed by Five
Star.
In April 1993, Five Star and MXL Industries, Inc. ("MXL") entered
into a revolving credit and term loan agreement (the "Five Star
Loan Agreement" and "MXL Loan Agreement"). The Five Star Loan
Agreement, which replaced the above agreement, provided for a
$20,000,000 revolving credit facility (the "Five Star Revolving
Credit Facility") and a $5,000,000 term loan (the "Five Star Term
Loan"). The Five Star Revolving Credit Facility is a three year
committed facility which allows Five Star to borrow amounts equal
to 40% of Eligible Inventory (as defined) and 75% of Eligible
Receivables (as defined) at an interest rate of 1% in excess of
the prime rate. At December 31, 1993, the interest rate was 7%.
As of December 31 1993, $11,732,000 was borrowed under the Five
Star Revolving Credit Facility and Five Star had no additional
availability.
The Five Star Term Loan is repayable in 10 quarterly payments of
approximately $417,000 which commenced October 31, 1993, and a
final payment of approximately $830,000 on April 30, 1996. The
Five Star Term Loan bears interest at 1 % in excess of the prime
rate, and was 7 % at December 31, 1993. The Five Star Revolving
Credit Agreement and the Five Star Term Loan are secured by all
of the assets of Five Star and 1,359,375 shares of common stock
of ISI and 1,062,500 shares of common stock of GP, which were
contributed to Five Star in connection with the forgoing
transactions. At December 31, 1993, $4,583,000 was outstanding
under the Five Star Term Loan.
47
The MXL Loan Agreement provides for a $1,500,000 revolving credit
facility (the "MXL Revolving Credit Facility") and a $4,500,000
term loan (The "MXL Term Loan"). The MXL Revolving Credit
Facility is a three year committed facility which allows MXL to
borrow amounts equal to 25% of Eligible Inventory (as defined)
and 80% of Eligible Receivables (as defined) at an interest rate
of 1% in excess of the prime rate. At December 31, 1993, the
interest rate was 7%. As of December 31, 1993, there were no
borrowings under the MXL Revolving Credit Facility and the
balance of the MXL Term Loan was $4,125,000. The MXL Term Loan
is repayable in 10 quarterly payments of approximately $375,000,
which commenced on October 31, 1993 with a final payment of
$750,000 on April 30, 1996. The MXL Term Loan bears interest at
1 % in excess of the prime rate, and was 7 % at December 31,
1993. The facilities are secured by all of the assets (other
than certain equipment) of MXL and by 815,625 shares of common
stock of ISI and 637,500 shares of common stock of GP, which were
contributed to MXL in connection with the forgoing transactions.
The Five Star Revolving Credit Facility and Five Star Term Loan
and the MXL Revolving Credit Agreement and MXL Term Loan are
guaranteed by the Company. The Agreements, among other things,
limit the amount that Five Star and MXL may borrow from other
sources,the amount and nature of certain expenditures,
acquisitions and sales of assets, and the amount that Five Star
and MXL can loan or dividend to the Company. The agreements have
several covenants, including provisions regarding working
capital, tangible net worth, leverage and cash flow ratios.
(c) On October 3, 1991, GPS entered into an Amended and Restated
Revolving Credit and Term Loan and Security Agreement (the
Agreement) with two banks. The Agreement provided for a Term
Loan of $5,000,000 and additional Revolving Credit borrowings of
up to $5,000,000. Borrowings under the Agreement were provided
equally by the participating banks, secured by accounts
receivable, and bore interest at rates set by such banks under
options provided for in the Agreement. Such Agreement, among
other things, limited the amount that GPS may borrow from other
sources and the amount and nature of certain expenditures and
required GPS to maintain tangible net worth, working capital,
cash flow, and debt ratios, as defined in the Agreement. Term
Loan borrowings were due in quarterly installments which
commenced December 31, 1991 and were to end on September 30,
1994.
On June 30, 1993, GPS replaced the above agreement with a new
three year $10,000,000 credit facility. The credit facility is
secured by the accounts receivable and fixed assets of GPS. The
initial $5,000,000 of the credit facility is fixed at an interest
rate of 7.98% and the second $5,000,000 of the credit facility
bears interest at a rate equal to 1.25% in excess of the bank's
prime rate. At December 31, 1993, $5,650,000 was borrowed under
48
the credit facility.
(d) In August 1991, Eastern Electronics Manufacturing
Corporation (Eastern) assigned the remaining balance on its line
of credit with a bank to a finance company, with whom Eastern
entered into a Security Agreement. Under the terms of the
Agreement, Eastern can borrow up to 80% of the net amount of
eligible and outstanding accounts receivable, as defined, at an
interest rate of 5 1/2% over the prime rate of interest (11.5% at
December 31, 1993). At December 31, 1993, $898,000 was borrowed
under the Agreement.
(e) On February 9, 1993, Duratek entered into a $7,000,000
Revolving Line of Credit (the Line) and a $400,000 Loans to
Facility (the Facility) for fixed asset purchases with a
commercial bank. On June 11, 1993, the Line was increased to
$7,750,000 and the Facility was increased to $750,000. Term
Loans under the Facility will be due over a 36 month period from
the date of issue and bear interest at the bank's prime rate plus
1 %. The Facility is secured by the specific fixed assets
financed under the Facility. The Line bears interest at the
bank's prime interest rate plus 1% and is secured by the accounts
receivable, inventory and property, plant and equipment of
Duratek. The Line requires Duratek to meet certain covenants
concerning, among other things, minimum tangible net worth, total
liabilities to tangible net worth, and profitability. It also
contains limitations with respect to dividends or other
distributions to stockholders, mergers, acquisitions, and
research and development expenses. Short-term borrowings during
1992 were under an agreement similar to the current agreement
described above. At December 31, 1993, borrowings were
$3,110,000 under the Line and $500,000 is outstanding under the
Facility.
(f) In December 1992, the Company repurchased SFr. 1,264,000 of
its outstanding Swiss Bonds for a $466,000 Note, which bore
interest at 1/2% per month, due February 24, 1993. The Note was
secured by 250,000 shares of the Company's common stock. The
principal amount of the Note could be reduced by the proceeds
from the sale of the common stock by the Company. At December
31, 1992, the balance of the Note, reduced for the proceeds from
the sale of the Company's common stock, was $183,000. The
balance was repaid in February 1993.
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the
following (in thousands):
December 31, 1993 1992
Accounts payable $ 10,234 $ 9,824
49
Payroll and related costs 4,202 3,969
Interest 1,369 1,385
Other 4,451 3,814
$ 20,256 $ 18,992
9. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1993 1992
5% Convertible Bonds due 1999 (a) $ 2,300 $
8% Swiss Bonds due 1995 (b) 4,572 20,075
6% Convertible Swiss Bonds due 1995 (c) 5,815 9,733
5.75% Convertible Swiss Bonds
due 1995 (c) 2,370 4,436
5.625% Convertible Swiss Bonds
due 1996 (d) 3,189 5,887
7% Dual Currency Convertible Bonds
due 1996 (d) 3,926 5,118
12% Subordinated Debentures due 1997 (e) 6,829 6,932
Term loan with banks (Note 7(b)) 8,708 2,917
Note payable for manufacturing facility
and equipment (i) 3,026
Notes payable in connection with
settlement of litigation (f) and (g) 951 951
Equipment lease obligations (2) 2,198 1,582
9.6% Industrial Revenue Bond (3) (h) 195
Mortgage Notes maturing 1993 (1) 130
Note payable (j) 459
40,858 61,441
Less current maturities 4,220 4,356
$ 36,638 $ 57,085
(1) Secured by manufacturing and other facilities.
(2) Secured by assets held under capital lease obligations.
(3) Secured by equipment of ISI.
(a) The Company commenced an Exchange Offer on July 12, 1993,
for any and all of its Swiss Franc denominated 8% Bonds due March
1, 1995, 6% Convertible Bonds due March 7, 1995, 5 % Convertible
Bonds due May 9, 1995, 5 % Convertible bonds due March 18, 1996
(collectively, the "Old Swiss Franc Bonds") and 7% Dual Currency
Bonds due March 18, 1996 (the "Old U.S. Dollar Bonds" and
collectively with the Old Swiss Franc Bonds, the "Old Bonds").
The purpose of the Exchange Offer was to reduce the Company's
long-term indebtedness and related interest expense.
The consideration offered by the Company for each SFr. 1,000
principal amount of Old Swiss Franc Bonds validly tendered and
not withdrawn prior to the Expiration Date (August 19, 1993) was:
a) 5% U.S. dollar denominated Convertible Bonds of the Company
due August 31, 1999 (the "New 5% Bonds") in a principal amount of
50
$130 and convertible into 30 shares of the Company's Common Stock
("Common Stock"), b) 54 shares of Common Stock, c) 26 shares of
Common Stock of ISI (the "ISI Common Stock"), d) 26 shares of
Common Stock of Duratek (the "Duratek Common Stock") and e) $43
in cash.
The consideration offered by the Company for each $1,000
principal amount of Old U.S. Dollar Bonds validly tendered and
not withdrawn prior to the Expiration Date was: a) New 5% Bonds
in a principal amount of $200 and convertible into 46 shares of
Common Stock, b) 81 shares of Common Stock, c) 39 shares of ISI
Common Stock, d) 39 shares of Duratek Common Stock and e) $60 in
cash.
On the Expiration Date the Company accepted the following
amounts of Old Bonds for exchange: SFr. 3,640,000 of the 6% Bonds
due March 7, 1995, SFr. 1,125,000 of the 5 % Bonds due May 9,
1995, SFr. 2,765,000 of the 5 % Bonds due March 18, 1996, SFr.
16,806,000 of the 8% Bonds due March 1, 1995 and $882,000 of the
7% Bonds due March 18, 1996. Under the terms of the Offer,
which included all unpaid accrued interest thereon, the Company
issued the following amounts of consideration to the exchanging
bondholders a) 1,385,586 shares of Common Stock, valued at
$5,582,000, b) 667,134 shares of ISI Common Stock, valued at
$2,536,000, c) 667,134 shares of Duratek Common Stock, valued at
$2,536,000, d) $3,340,080 principal amount of New 5% Bonds which
will be convertible into 767,833 shares of the Common Stock, and
e) $1,099,368 in cash. The Company recorded an original issue
discount on the New 5% Bonds of 10%. At December 31, 1993,
$2,536,000 of the New 5% Bonds were outstanding.
As a result of the Exchange Offer, the Company realized a
gain of $3,795,000 from the issuance of the ISI and Duratek
Common Stock, and an extraordinary gain from the early
extinguishment of debt, before income tax effect, of $1,227,000.
(b) On December 20, 1989, in exchange for Swiss Francs (SFr.)
32,420,000 ($20,318,000) of its 6% Convertible Swiss Bonds due
March 7, 1995, SFr. 26,335,000 ($16,515,000) of its 5.75%
Convertible Swiss Bonds due May 9, 1995, and SFr. 26,685,000
($16,734,000) of its 5.625% Convertible Swiss Bonds due March 18,
1996, (collectively, the Old Bonds), each in the principal amount
of SFr. 5,000, plus all unpaid accrued interest thereon, the
Company issued: (a) SFr. 51,264,000 ($32,140,000) of its 8% Swiss
Bonds due March 1, 1995, each in the principal amount of SFr.
3,000, (the New Bonds) of which SFr. 7,401,000 are currently
outstanding, (b) 17,088 Reset Warrants, each of which entitles
the holder to purchase 75 shares of the Company's common stock,
at a price determined by formula, exercisable until March 1,
1995, (c) 17,088 Common Stock Warrants, each of which entitles
the holder to acquire without further consideration shares of the
Company's common stock with a market value of SFr. 250,
51
exercisable until March 1, 1995, and (d) SFr. 750 in cash.
The Company recorded an original issue discount on the New Bonds
of 40%, based upon exchange values estimated by the Swiss
exchange agent. Expenses of the exchange offer totaled
$2,116,000. The discount and the offering expenses, which have
been deferred, are being amortized over the term of the New
Bonds.
(c) On March 7, 1985, the Company issued, pursuant to a Swiss
Public Bond Issue Agreement, 6% Convertible Bonds due March 7,
1995 representing an aggregate principal amount of SFr.
60,000,000, of which SFr. 8,635,000 are currently outstanding
(see (a) and (b) above). The outstanding bonds are convertible
into 148,522 shares of the Company's common stock at any time
prior to February 10, 1995 at a conversion price of approximately
$39.15 per share based on an exchange rate of SFr 1.485 per U.S.
$1.00. In addition, on May 9, 1985, the Company issued, pursuant
to a second Swiss Public Bond Issue Agreement, 5.75% Convertible
Bonds due May 9, 1995, representing an aggregate principal amount
of SFr. 50,000,000, of which SFr. 3,520,000 are currently
outstanding (see (a) and (b) above). These outstanding bonds are
convertible into 75,328 shares of the Company's common stock at a
conversion price of $31.47 per share based on an exchange rate of
SFr 1.485 per U.S. $1.00 at any time prior to April 22, 1995.
Expenses of both Swiss Public Bond Issues totaled approximately
$1,793,000 and at December 31, 1993 and 1992, the unamortized
balances of such expenses were $30,000 and $91,000, respectively.
(d) On March 18, 1986, the Company issued, pursuant to a third
Swiss Public Bond Issue Agreement, 5.625% Convertible Bonds
payable in 1996, representing an aggregate principal amount of
SFr. 50,000,000, of which SFr. 4,735,000 are currently
outstanding (see (a) and (b) above). Additionally, the Company
issued 7% Dual Currency Convertible Bonds, payable in 1996,
representing an aggregate principal amount of SFr. 25,000,000,
but payable at maturity at the fixed amount of $15,000,000. The
outstanding Bonds are convertible into 218,800 shares of the
Company's common stock at any time prior to March 8, 1996 at a
conversion price of $34.71 per share based on an exchange rate of
SFr 1.485 per U.S. $1.00. Under certain circumstances, the
Company may redeem all of the Bonds (but not a part only) at a
redemption price equal to par value. Expenses related to the
issuance of the Bonds totaled approximately $1,660,000 and at
December 31, 1993 and 1992, the unamortized balances of such
expenses were $61,000 and $132,000, respectively. The Dual
Currency Bonds were issued as part of the Company's overall
financing strategy, without any intent to either speculate in
foreign exchange or to hedge any existing foreign currency
exposure. It is the Company's policy to record periodic interest
expense on the Dual Currency Bonds at the then current exchange
rate. At December 31, 1993 and 1992, based on year end exchange
52
rates, the effective rates of interest would be approximately 8%.
At December 31, 1993, the effective rate of interest of
approximately 8% would result in an additional $33,000 of
interest expense per year, through March 1996.
On August 10, 1990, the Company completed an Exchange Offer
pursuant to which it received $4,659,000 of its 7% Dual Currency
Convertible Bonds due March 18, 1996 (Bonds). In exchange, the
Company issued 540,444 shares of its Common Stock and warrants to
purchase 465,900 shares of the Common Stock, par value $.01 per
share, of ISI, currently the Company's 36% owned affiliate,
exercisable at a price of $6.88 per share until August 16, 1992.
The Exchange Offer was completed on August 10, 1990 and the
Company recorded an extraordinary gain of $1,477,000 on the early
extinguishment of the Bonds. During February 1992, ISI called
the warrants, resulting in net proceeds to ISI of $2,956,000 from
the issuance of 432,600 shares of ISI common stock upon exercise
of the warrants.
In addition to the bonds exchanged (see (a) and (b) above),
during 1993, 1992 and 1991 the Company repurchased a portion of
each of the Swiss Public Bond Issues as well as Dual Currency
Convertible Bonds. Extraordinary gains from the early
extinguishment of the Bonds in all such transactions amounted to
$1,819,000 (net of income taxes), $1,662,000 and $2,037,000,
respectively.
(e) During the third quarter of 1987, the Company issued
$12,500,000 of Subordinated Debentures (Debentures) which mature
in 1997. Each $100 principal amount Debenture was sold with
warrants to purchase four shares of the Company's common stock at
a price of $18.50 per share. Expenses of the offering amounted
to approximately $1,908,000 and as of December 31, 1993 and 1992,
the unamortized balances of such expenses were $432,000 and
$550,000. In connection with the terms of the Debentures, the
Company is subject to certain covenants which limit the amount
that may be used for the payment of dividends and for the
purchase of the Company's outstanding equity securities (common
or Class B). In September 1990, under the terms of an Indenture,
the Debentures became exchangeable for the Company's Common
Stock, for the remaining term of the Debentures, at a price of
approximately $5.00 per share. In 1993 and 1992, $82,000 and
$179,000, respectively, of Debentures were converted into 16,579
and 35,933 shares, respectively, of the Company's Common Stock.
At December 31, 1993, the Debentures are convertible into
approximately 1,374,000 shares of the Company's Common Stock.
(f) In March 1987, the Company and Ryder International
Corporation (Ryder) agreed to a settlement of litigation relating
to the Company's CaridexR system. Under the terms of the
settlement agreement, the Company agreed to pay Ryder (i)
$1,000,000 in cash; (ii) $2,000,000 in common stock of the
53
Company (133,333 shares, valued at $2,000,000 were issued from
treasury stock during 1987, and subsequently repurchased for
$2,000,000 during 1988); and (iii) $300,000 per year (in cash or
common stock of the Company) for a ten year period commencing
January 15, 1988, the present value of which is discounted at
10%, and included in long-term debt.
(g) In May 1987, the Company and George K. Burke, Sr. and
Concetta J. Burke (the Burkes) settled a lawsuit asserting
various claims for relief against the Company with respect to
several agreements concerning the marketing and development of
the EPICR system of intravenous devices, which the Company had
discontinued in December 1983. As a result of the settlement the
Burkes received $500,000 in cash upon execution of the settlement
agreement and received $250,000 a year (in cash or common stock
of the Company) for a five year period commencing in May 1988.
In 1987, the Company recorded an additional loss from this
discontinued operation totaling $1,500,000, representing the
present value of the amounts due the Burkes plus the costs
relating to the litigation and settlement. The final payment was
made in the common stock of the Company in 1992.
(h) During May 1983, ISI, a currently 36% controlled affiliate
of the Company, completed the sale of a 9.6% $1,450,000
Industrial Revenue Bond to the New Jersey Economic Development
Authority. The net proceeds were used to pay for laboratory
construction and equipment. The terms of the bond indenture call
for annual principal installments of $195,000 through 1993.
(i) In March 1990, ISI borrowed $4,200,000 from a subsidiary of
a bank at an effective interest rate of 12.4% principally for the
expansion of its manufacturing facility. The loan calls for
monthly payments of $41,500 for months 1 to 24, which is
comprised of interest only, and $139,500 (principal and interest)
for months 25 to 60. The loan is secured by certain equipment of
ISI and is guaranteed by the Company.
(j) In December 1991, ISI issued a $459,000 note to Purdue
Pharma L.P., an affiliate of The Purdue Frederick Company, its
marketing partner. The note bears interest at 7.5% per annum,
and required payment of interest and principal on December 31,
1993, which was subsequently extended to April 27, 1994. As a
result of the Exchange Offer (See (a)), ISI is currently
accounted for on the equity basis.
Aggregate annual maturities of long-term debt outstanding at
December 31, 1993 for each of the next five years are as follows
(in thousands):
1994 $ 4,220
1995 17,052
1996 10,007
54
1997 7,235
1998 44
10. Investment in finance subsidiaries
GPS Technologies, Inc. is a high technology service company that
assists industry and the Navy in maximizing the effectiveness of
their equipment and facilities through the rigorous training of
technical personnel and the development and implementation of
operational procedures and maintenance programs. GPS conducts
certain of its services using power plant training simulators,
the majority of which are owned by its clients. However, at
December 31, 1993, two simulators are owned by wholly owned
subsidiaries of GPS.
Through these subsidiaries, GPS has entered into long-term
agreements with two domestic utilities to provide nuclear power
plant simulator training services along with the attendant
nuclear power plant training simulators and related training
equipment. Under the provisions of the agreements, the
subsidiaries obtained non-recourse long-term financing from a
bank to finance the purchase of the simulators and training
equipment. The agreements provide that the subsidiaries are
compensated, in part, for use of the simulators on essentially a
lease financing basis.
The agreements provide that the payments by the utilities will
enable the subsidiaries to recover the cost of the simulators
plus interest at floating rates which range from prime to 115% of
prime, as well as the cost of simulator replacement parts, taxes,
and insurance. Such amounts will be sufficient to fully service
the related long-term debt discussed below. All training
services are performed by GPS personnel and are billed at
established hourly rates. Revenues for these services are
recognized by GPS.
Under the agreements, the utilities have options to purchase the
simulators and other training equipment at the end of the loan
terms.
Non-recourse long-term debt relating to the simulators consists
of the following (in thousands):
December 31, 1993 1992
Notes payable to bank (1) $ 3,109 $ 5,820
Less current maturities 2,530 2,711
Long-term debt $ 579 $ 3,109
(1) These loans bear interest at floating rates, which range
from the bank's prime rate to 115% of the bank's prime rate, and
are payable in monthly installments over periods of up to 15
55
years from the initial dates of each of the loans.
The loans are secured by the equipment and all rights under the
agreements with the utilities. Under these agreements, GPS has
agreed to guarantee the service performance with the utilities
but has not guaranteed the obligations of its subsidiaries under
the loan agreements. GPS has also agreed to maintain a minimum
debt to equity ratio, a minimum tangible net worth and a minimum
working capital, as defined.
Aggregate annual maturities of the non-recourse notes payable at
December 31, 1993 for each of the succeeding years are as follows
(in thousands):
1994 $ 2,530
1995 579
Summarized combined financial information of the finance
subsidiaries is as follows (in thousands):
December 31, 1993 1992
Balance Sheet Data
Assets
Investments in financed assets $ 2,797 $ 5,507
Other assets 413 439
Total assets $ 3,210 $ 5,946
Liabilities and stockholders'
equity
Non-recourse notes payable $ 3,109 $ 5,820
Other liabilities 27
Stockholders' equity 101 99
Total liabilities and
stockholders' equity $ 3,210 $ 5,946
11. Common stock issued subject to repurchase obligation
During the fourth quarter of 1993, the Company entered into
several privately negotiated agreements (the Agreements),
pursuant to which it reacquired previously outstanding Swiss
Bonds in exchange for newly issued common stock. In addition to
common stock, the Company issued to the exchanging bondholder in
each transaction a non-negotiable, non interest bearing
promissory note (the Note) in a principal amount equal to the
market value of the common stock issued in the exchange. The
recipient in each transaction obtained the rights, exercisable
within approximately a one year period from the date of the
Agreement, to sell, retain, or return to the Company the common
stock received, in whole or in part. Net proceeds of any sales
of common stock by the recipient during the period reduces the
amount due under the Note, and sales of common stock for net
proceeds equal to or in excess of the principal amount of the
56
Note would cause the Note to be deemed as paid in full. Any
excess proceeds of sale of the stock over the principal amount of
the Note are retained by the stockholder.
The Company has accounted for the issuance of the common stock as
permanent equity to the extent of the proceeds of subsequent
sales of stock by the recipients, and as temporary equity for the
balance of the market value of the common stock issued. The
Notes serve as a guarantee of the amounts which may be refundable
to the recipients of the common stock under the Agreement. The
Company's maximum repurchase or refund obligation under these
Agreements as of December 31, 1993 aggregated $4,242,000.
12. Treasury stock transactions
Treasury stock was issued as follows in 1992 and 1991:
Number of Shares
1992 1991
In settlement of litigation
(see Note 9(f) and (g)) 205,245
Investment banking fees 78,348
Interest due on note payable 225,763
Note payable 93,788
Purchase stock of subsidiary 19,608
Employee bonuses 2,250
Repurchase 8% Swiss Bonds 97,772 69,142
ISI funding agreement 50,000
In payment of interest due
on 8% Swiss Bonds 200,000
Consulting fees 5,000 73,335
Other 136,142
102,772 1,153,621
There were no issuances of treasury stock in 1993.
13. Disposal of business
On April 8, 1991, the Company transferred substantially all
the assets of its National Patent Medical Division to a new
partnership, National Patent Medical Partnership, L.P. (NPM). In
return, the Company received a 49% interest in the partnership,
$7,200,000 in cash and a $1,800,000 note at the prime rate of
interest plus 1/2%. The note is due in two equal installments in
1996 and 1997. In addition, the new partnership repaid
$4,000,000 of short-term borrowings attributable to the National
Patent Medical Division. The Company did not recognize any gain
or loss as a result of this transaction. NPM is involved in the
manufacturing and distribution of first-aid products, surgical
dressings and other disposable hospital products. The financial
position and results of operations of NPM are included in the
57
consolidated accounts of the Company for all periods presented
through April 8, 1991, the date that the Company's ownership of
NPM fell below 50%. Since then, the accounts of NPM have not
been consolidated with those of the Company. NPM's net sales and
operating loss through April 8, 1991 were $11,129,000 and
$(81,000), respectively. In November 1992, NPM Healthcare
Products, Inc. (NPMH), a successor to NPM, completed an initial
public offering. As a result of the public offering, the Company
received approximately $4,500,000 in net proceeds, which
approximated the carrying value of the shares sold.
The Company has accounted for its investment in NPMH on the
equity basis for the period from April 9, 1991, when its equity
in NPMH fell below 50%, to December 31, 1991, and for the period
from January 1, 1992 to October 1992, when its equity fell to
approximately 14% as a result of the public offering. The
Company's share in the net income (loss) of NPMH for the periods
ended December 31, 1991 and October 31, 1992, amounted to
$(805,000) and $35,000, respectively, after amortization of the
underlying goodwill. At December 31, 1993, the Company's
investment in NPMH was $3,914,000. In 1994, NPMH changed its
name to American White Cross, Inc.
14. Employee benefit plans
The Company had a Defined Benefit Pension Plan (the Plan) for
employees of certain divisions and subsidiaries. Benefits were
based primarily on years of service and a fixed rate of benefits
per year of service. Contributions were intended to provide not
only for benefits attributed to service to date but also for
those expected to be earned in the future.
Effective December 31, 1991, the Plan benefits were frozen.
Accrued vested benefits will be paid to terminated participants
in the form of a lump sum distribution in cases where the accrued
vested benefit is less than $3,500. Terminated participants can
elect a lump sum distribution if the accrued vested benefit is
greater than $3,500 but less than $7,500.
In the event that the accrued vested benefit exceeds the $7,500
payable limit as outlined in the Plan, payment will be deferred
until a terminated vested participant reaches age 65 or elects
early retirement at an earlier date, at age 60 or later. The
pension expense amounted to $377,000, $23,000 and $552,000, for
1993, 1992 and 1991, respectively.
The following table sets forth the funded status of the plan and
the amount recognized in the Company's Consolidated Balance
Sheets (in thousands):
December 31, 1993 1992 1991
58
Actuarial present value of benefit
plan obligations:
Accumulated benefit obligation (including
vested benefits of $4,838,
$3,976 and $3,967) $ (4,917)$ (3,976) $(3,967)
Projected benefit obligation for
service rendered to date $ (4,917)$ (3,976) $(3,967)
Plan assets at fair value 3,528 3,120 2,659
Projected benefit obligation in
excess of plan assets (1,389) (856) (1,308)
Unrecognized net loss from past
experience different
from that assumed 339
Accrued pension cost included in accounts
payable and accrued expenses in the
consolidated balance sheets $(1,050) $ (856) $(1,308)
The net periodic pension expense
is as follows:
Service cost-benefits earned $ $ $ 346
Interest cost on projected benefit
obligations 341 340 360
Actual return on plan assets (414) (317) (209)
Net amortization and deferral
and other 450 55
Net periodic pension expense $ 377 $ 23 $ 552
The Company's assumptions used as of December 31, 1993, 1992, and
1991 in determining the pension cost and pension cost liability
shown above were as follows:
Percent
1993 1992 1991
Discount rate 7.5 8.5 8.5
Long-term rate of return
on assets 10.0 10.0 10.0
Effective March 1, 1992, the Company adopted the 1992 401(K)
Savings Plan (the Savings Plan). Effective December 31, 1991,
the Plan participants would no longer accrue benefits under the
Defined Benefit Pension Plan, but became eligible to participate
in the Company's Savings Plan.
The Company's Savings Plan is for employees who have completed
one year of service; however, past vesting service credit was
recognized for employees who participated in the Savings Plan at
the date of initial enrollment, March 1, 1992.
The Savings Plan permits pre-tax contributions to the Savings
Plan by participants pursuant to Section 401(K) of the Internal
Revenue Code of 2% to 6% of base compensation. The Company
matches 40% of the participants' eligible contributions based on
a formula set forth in the Savings Plan. Participants are fully
vested in their contributions and may withdraw such contributions
59
at time of employment termination, or at age 59 or earlier in
the event of financial hardship. Amounts otherwise are paid at
retirement or in the event of death or disability. Employer
contributions vest at a rate of 20% per year.
The Savings Plan is administered by a trustee appointed by the
Board of Directors of the Company and all contributions are held
by the trustee and invested at the participants' direction in
various mutual funds. The expense associated with the Savings
Plan was $236,000 and $214,000 in 1993 and 1992, respectively.
During the first quarter of 1993, the Company adopted Statement
of Financial Accounting Standard No. 106 (SFAS No. 106),
"Employers' Accounting for Post Retirement Benefits Other Than
Pensions". This statement requires that the expected cost of
post retirement benefits be fully accrued by the first date of
full benefit eligibility, rather then expensing the benefit when
payment is made. As the Company generally does not provide post
retirement benefits, other than pension, the new statement did
not have any material effect on the Company's financial condition
or results of operations.
15. Income taxes
The components of pretax income (loss) are as follows (in
thousands):
Years ended December 31, 1993 1992 1991
Continuing operations $(8,371) $(13,178) $ 1,157
Extraordinary gain 2,862 1,662 2,037
$(5,509) $(11,516) $ 3,194
The components of income tax benefit (expense) from continuing
operations are as follows (in thousands):
Years ended December 31, 1993 1992 1991
Current
State and local,net $ (398) $ (427) $ (549)
Federal tax benefit 973
$ 575 $ (427) $ (549)
In 1991, despite the Company's $1,157,000 income before income
taxes, as well as its $2,037,000 gain from extraordinary item, no
Federal income tax expense was recognized. This is due
principally to significant permanent differences between
financial and tax reporting of 1991 transactions, including the
elimination for tax purposes of the $18,844,000 gain on the sale
of GP stock net of a gain recognized only for tax purposes upon
ISI ceasing to be a member of the Company's consolidated Federal
income tax return group on May 31, 1991. The income tax expense
for 1991 of $549,000 represents state and local income taxes.
In 1992, the Company's loss before income taxes exceeded its
60
gains from extraordinary items; therefore, no income tax expense
applicable to such extraordinary gains was recognized. The
income tax expense for 1992 of $427,000 represents state and
local income taxes.
In 1993, the Company recorded an income tax benefit of
$1,043,000, of which $973,000 relates to Federal income taxes, in
continuing operations as a result of the income tax expense
allocated to the extraordinary gain recognized on the early
extinguishment of debt under the provisions of FASB No. 109.
As of December 31, 1993, the Company has approximately
$22,520,000 of consolidated net operating loss carryovers for
Federal income tax return purposes, which expire beginning in the
years 2002 through 2008. In addition, the Company has
approximately $2,784,000 of available credit carryovers.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). This statement requires that deferred
income taxes be recorded following the liability method of
accounting and adjusted periodically when income tax rates
change. Adoption of the new Statement did not have a material
effect on the Company's financial condition or results of
operations since the Company does not carry any deferred tax
accounts on its balance sheet.
A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be realized.
The Company has determined, based on the Company's recent history
of annual net losses, that a full valuation allowance is
appropriate.
The Company has, as of December 31, 1993, deferred tax assets of
approximately $19,267,000, deferred tax liabilities of
approximately $5,909,000 and a valuation allowance of
approximately $13,358,000.
These deferred tax assets and liabilities relate to the following
as of December 31, 1993 (in thousands):
Deferred tax assets
Accounts receivable, principally due
to allowance for doubtful accounts $ 618
Investment in partially owned companies 6,492
Inventory 55
Lawsuit settlements 468
Accrued expenses 67
Net operating loss carryforwards 8,783
Investment tax credit carryforwards 2,784
Deferred tax liabilities 19,267
61
Property and equipment, principally due to
differences in depreciation 1,885
Unamortized debt discount 1,224
Unrealized exchange gain 2,383
State taxes 417
5,909
Net deferred tax assets 13,358
Less valuation allowance (13,358)
Net deferred taxes $
16. Stock options, warrants and other shares reserved
Under the Company's non-qualified stock option plan, employees
and certain other parties may be granted options to purchase
shares of common stock. The options may be granted at a price
not less than 85% of the fair market value of the common stock on
the date of grant and are exercisable over periods not exceeding
ten years from the date of grant. Shares of common stock are
also reserved for issuance pursuant to other agreements, as
described below. Changes in options and warrants outstanding
during 1991, 1992, and 1993, options and warrants exercisable and
shares reserved for issuance at December 31, 1991, 1992, and 1993
are as follows:
Common Stock Class B Capital Stock
Options and warrants Price Range Number Price Range Number
outstanding per share of Shares Per Share of shares
December 31, 1990 2.25 - 18.50 5,609,334 2.25 1,550,000
Granted 3.75 - 5.625 90,000
Exercised 2.25 - 3.75 (247,700)
Terminated 2.25 - 15.00 (232,750)
December 31, 1991 2.25 - 18.50 5,218,885 2.25 1,550,000
Granted 2.25 - 2.75 32,500
Exercised 2.25 (128,930)
Terminated 2.25 -18.50 (540,850)
December 31, 1992 2.25 - 6.00 4,581,604 2.25 1,550,000
Granted 2.875- 4.125 18,000
Exercised 2.25 - 5.15 (175,125)
Terminated 2.25 - 5.625 (47,040)
December 31, 1993 2.25 - 6.00 4,377,439 2.25 1,550,000
Options and warrants
exercisable
December 31, 1991 2.25 -18.50 4,853,464 2.25 1,550,000
December 31, 1992 2.25 - 6.00 4,458,864 2.25 1,550,000
December 31, 1993 2.25 - 6.00 4,317,679 2.25 1,550,000
Shares reserved for
issuance
December 1991 11,258,647 1,550,000
December 1992 10,583,723 1,550,000
December 1993 11,387,458 1,550,000
62
At December 31, 1993, 1992, and 1991, options outstanding
included 2,017,334 shares for two officers who are principal
shareholders of the Company. In December 1992, the exercisable
period of 200,000 options previously granted in December 1987,
was extended to December 1997.
Class B capital stock aggregating 1,550,000 shares at December
31, 1993, 1992, and 1991 were reserved for issuance to these same
two officers.
The holders of common stock are entitled to one vote per share
and the holders of Class B capital stock are entitled to ten
votes per share on all matters without distinction between
classes, except when approval of a majority of each class is
required by statute. The Class B capital stock is convertible at
any time, at the option of the holders of such stock, into shares
of common stock on a share-for-share basis. Common shares
reserved for issuance at December 31, 1993, 1992, and 1991
include 1,800,000 shares in connection with Class B shares.
At December 31, 1993, 1992, and 1991, shares reserved for
issuance were primarily related to shares reserved for options,
warrants and the conversion of long-term debt.
17. Business segments
The operations of the Company consist of the following business
segments:
Physical Science Group - products and services for the power
industry, as well as for governmental agencies and industry in
general; Distribution Group - wholesale distribution of home
decorating, hardware and finishing products; Health Care Group -
interferon research and production; Optical Plastics Group - the
manufacture and distribution of coated and molded plastic
products; Electronics Group - electronic manufacturing and
assembly.
As a result of the Exchange Offer, (See Note 9(a)), ISI is
currently accounted for on the equity basis. Therefore, its
operating activities are reflected in the Health Care Group only
through the completion of the Exchange Offer (See Note 4).
The following tables set forth the revenues and operating results
(in thousands) attributable to each line of business and include
a reconciliation of the groups' revenues to consolidated revenues
and operating results to consolidated income (loss) from
operations before income taxes and extraordinary items for the
periods presented.
Years ended December 31, 1993 1992 1991
63
Revenues
Physical Science $103,152 $109,966 $163,922
Distribution 74,974 69,121 65,624
Health Care 1,533 4,762 14,909
Optical Plastics 7,952 8,015 9,573
Electronics 3,815 5,481 7,271
Other 989 851 461
192,415 198,196 261,760
Investment and other
income, net 626 3,790 (37)
Total revenues $193,041 $201,986 $261,723
Operating results
Physical Science $ 500 $ 2,410 $ 5,346
Distribution 1,948 2,877 2,852
Health Care (4,431) (6,583) (5,690)
Optical Plastics 1,378 1,565 1,855
Electronics (821) (1,849) (707)
Other (587) (99) (463)
Total operating profit (loss) (2,013) (1,679) 3,193
Interest expense (8,325) (11,044) (15,579)
Indirect administrative expenses,
net of gains or losses from
dispositions of investments,
minority interests, foreign
currency exchange gains
or losses, and other revenue 1,967 (455) 13,543
Income (loss) from operations
before income taxes and
extraordinary item $ (8,371) $ (13,178) $ 1,157
Operating profits represent gross revenues less operating
expenses. In computing operating profits, none of the following
items have been added or deducted; general corporate expenses,
foreign currency transaction gains and losses, investment income
and interest expense.
For the years ended December 31, 1993, 1992 and 1991, sales to
the United States government and its agencies represented
approximately 17%, 18% and 9%, respectively, of sales.
Additional information relating to the Company's business
segments is as follows (in thousands):
December 31, 1993 1992 1991
Identifiable assets
Physical Science $ 74,551 $ 79,271 $ 92,959
Distribution 34,255 32,584 29,306
Health Care 21,486 37,407
Optical Plastics 7,129 7,051 6,714
64
Electronics 6,001 6,858 7,364
Corporate and other 44,121 45,399 40,291
$166,057 $192,649 $214,041
Years ended December 31, 1993 1992 1991
Additions to property,
plant, and equipment, net
Physical Science $ 1,360 $ 1,490 $ 705
Distribution 557 723 338
Health Care 241 441
Optical Plastics 41 887 588
Electronics 30 20 (22)
Corporate and other 89 38 29
$ 2,077 $ 3,399 $ 2,079
Years ended December 31, 1993 1992 1991
Depreciation and amortization
Physical Science $ 2,193 $ 2,299 $ 2,940
Distribution 710 718 688
Health Care 552 1,048 1,248
Optical Plastics 876 578 660
Electronics 165 165 357
Corporate and other 800 1,299 2,649
$ 5,296 $ 6,107 $ 8,542
Identifiable assets by industry segment are those assets that are
used in the Company's operations in each segment. Corporate and
other assets are principally cash and cash equivalents,
marketable securities and un-allocated intangibles.
18. Fair value of financial instruments
The carrying value of financial instruments including cash,
short-term investments, accounts receivable,restricted cash,
accounts payable and short-term borrowings approximate estimated
market values because of short maturities and interest rates that
approximate current rates.
The carrying values of investments, other than those accounted
for on the equity basis, approximate fair values based upon
quoted market prices. The investments for which there is no
quoted market price are not significant.
The estimated fair value for the Company's major long-term debt
components are as follows (in thousands):
December 31, 1993 December 31, 1992
Carrying Estimated Carrying Estimated
amount fair value amount fair value
65
Swiss Bonds $15,946 $12,429 $40,131 $15,048
5% Convertible Bonds 2,300 2,231
7% Dual Currency
Convertible Bonds 3,926 1,743 5,118 1,459
12% Subordinated
Debentures 6,829 5,805 6,932 4,159
Other long-term debt 11,857 11,857 9,260 9,260
Limitations. Fair value estimates are made at a specific point
in time, based on relevant market information and information
about the financial instrument. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgement and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
19. Commitments and contingencies
The Company has several noncancellable leases which cover real
property, machinery and equipment and certain manufacturing
facilities. Such leases expire at various dates with, in some
cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows
(in thousands):
Real Machinery &
property equipment Total
1994 $ 5,191 $ 1,536 $ 6,727
1995 4,188 737 4,925
1996 2,083 336 2,419
1997 1,462 131 1,593
1998 1,252 26 1,278
After 1998 5,203 12 5,215
Total $19,379 $ 2,778 $22,157
Several of the leases contain provisions for rent escalation
based primarily on increases in real estate taxes and operating
costs incurred by the lessor. Rent expense for real and personal
property was approximately $7,792,000, $7,806,000 and $4,691,000
for 1993, 1992 and 1991, respectively.
In February 1986, Duratek completed its initial public offering
of common stock. In connection with Duratek's public offering,
the Company issued to certain officers of Duratek and the Company
358,609 options for the purchase of Duratek common stock owned by
the Company at a price equal to the greater of (a) $1.75 per
share or (b) the net book value per share of Duratek's common
stock as of the end of the most recently completed fiscal quarter
which ends not less than 60 days before the date of exercise of
such option. In 1991, an additional 270,000 options for the
purchase of Duratek common stock owned by the Company at a price
of $1.90 per share were issued to certain employees and officers
of the Company. Through December 31, 1993, 28,600 options under
66
the plan were exercised, 57,500 were cancelled, and at December
31, 1993, 369,750 options are currently exercisable. At December
31, 1993, the Company owned approximately 66% of Duratek.
The Company is party to several lawsuits and claims incidental to
its business, including claims regarding environmental matters,
one of which is in the early stages of investigation. It is not
possible at the present time to estimate the ultimate legal and
financial liability, if any, of the Company in respect to such
litigation and claims; however, management believes that the
ultimate liability, if any, will not have a material adverse
effect on the Company's Consolidated Financial Statements.
20. Subsequent event
On January 13, 1994, GP signed a Letter of Intent with GPS and
the Company to acquire substantially all of the operating assets
of GPS and certain of its subsidiaries. The Company currently
owns approximately 92% of the outstanding common stock of GPS and
approximately 28% of the outstanding common stock of GP. On March
28, 1994, the Board of Directors of both GP and GPS approved the
transaction. The parties are currently negotiating the terms of
a definitive agreement and the transaction is anticipated to
close as soon as practicable in the second half of 1994, if all
necessary approvals are obtained and conditions satisfied.
The purchase price has a current present value of approximately
$36 million based on current market prices. The purchase price
will be payable to GPS as follows: $10 million cash; 3.5 million
shares of GP common stock valued at approximately $13,500,000
(based upon the price per share of GP common stock prior to the
announcement of the transaction which was $3.875); warrants to
acquire 1,000,000 shares of GP common stock at $6.00 per share
valued at approximately $1,300,000; warrants to acquire up to
475,644 additional shares of GP common stock at $7 per share
valued at approximately $500,000; a $15 million ten-year senior
subordinated debenture valued at approximately $10,700,000,
accruing interest at 6% per annum, interest payable only for the
first five years, with 70% of principal payable in equal
quarterly installments during the remaining five years until
maturity.
Portions of the cash and stock consideration of the purchase
price will be (a) used to repay outstanding bank debt of
$5,650,000 (as of December 31, 1993) and long-term debt of GPS of
$8,809,000 (as of December 31, 1993) to be repaid to the Company.
In addition, $1.5 million of Debentures are held in escrow for
the benefit of GP in connection with certain indemnification
obligations.
The transaction is contingent upon the occurrence of certain
events, including, without limitation, approval of the
67
transaction by the stockholders of both GPS and GP.
The Company anticipates that if the aforementioned transaction is
consummated, it will own approximately 52% of the outstanding
common stock of GP, and if the Company were to exercise all of
its warrants, it will own approximately 58% of the outstanding
common stock of GP.
The Company will account for this transaction as a purchase of
GP. The Company believes that any gain or loss to be recognized
on this transaction would not be significant, since the
transaction (based upon the currently contemplated assets to be
sold), if consummated, is expected to be consummated at or near
the carrying value of the underlying assets.
Although an agreement in principle has been reached, there can be
no assurance that a definitive agreement will be successfully
negotiated and signed, or that the transaction will close as
anticipated.
68
National Patent Supplementary Data
Development Corporation
and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share data)
Three Months Ended
March 31,June 30, Sept. 30,Dec. 31,March 31,June 30, Sept. 30,Dec. 31,
1993 1993 1993 1993 1992 1992 1992 1992
Sales $44,964 $55,114 $47,250 $42,355 $45,759 $51,594 $52,554 $45,858
Gross margin 6,193 8,960 7,601 4,765 6,562 9,297 8,664 5,249
Income (loss) before
extraordinary item * (2,904) (1,988) (581) (2,323) 384 (5,674) (7,284) (1,031)
Net income (loss) (2,778) (1,887) 348 (1,660) 1,321 (5,228) (7,284) (752)
Earnings (loss) per share:
Before extraordinary
item * (.18) (.12) (.03) (.12) .02 (.3
Net income (loss) (.17) (.11) .02 (.09) .07 (.33) (.46) (.05)
* Reclassified in 1993 to conform with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" presentation.
69
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no Reports on Form 8-K filed within 24
months prior to the date of the most recent financial statements
reporting a change of accountants and/or reporting a disagreement
on any matter of accounting principle or financial statement
disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of NPDC is
incorporated herein by reference to NPDC's definitive proxy
statement pursuant to Regulation 14A, which proxy statement will
be filed not later than 120 days after the end of the fiscal year
covered by this Report.
Item 11. Executive Compensation
Information with respect to Executive Compensation is
incorporated herein by reference to NPDC's definitive proxy
statement pursuant to Regulation 14A, which statement will be
filed not later than 120 days after the end of the fiscal year
covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to Security Ownership of Certain
Beneficial Owners and Management is incorporated herein by
reference to NPDC's definitive proxy statement pursuant to
Regulation 14A, which statement will be filed not later than 120
days after the end of the fiscal year covered by this Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain relationships and
related transactions is incorporated herein by reference to
NPDC's definitive proxy statement pursuant to Regulation 14A,
which statement will be filed not later than 120 days after the
end of the fiscal year covered by this Report.
70
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
Page
(a)(1) The following financial statements are included
in Part II,
Item 8. Financial Statements and Supplementary
Data:
Independent Auditors' Report 31
Financial Statements:
Consolidated Balance Sheets - December 31,
1993 and 1992 32
Consolidated Statements of Operations -
Years ended December 31, 1993, 1992 and 1991 34
Consolidated Statements of Changes in
Stockholders' Equity - Years ended
December 31, 1993, 1992 and 1991 35
Consolidated Statements of Cash Flows -
Years ended December 31, 1993, 1992 and 1991 37
Notes to Consolidated Financial
Statements 40
(a)(2) Financial Statement Schedules.*
(a)(3) Exhibit - Consent of Independent Auditors.
(b) There were no Reports on Form 8-K filed by the
Registrant during the last quarter of the period
covered by this report.
*To be filed by Amendment.
71
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.
NATIONAL PATENT DEVELOPMENT
CORPORATION
BY: /s/ Jerome I. Feldman
Jerome I. Feldman, President
and Chief Executive Officer
Dated: March 30, 1994
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title
/s/Jerome I. Feldman President and Chief Executive
Jerome I. Feldman Officer and Director (Principal
Executive Officer)
/s/Martin M. Pollak Executive Vice President,Treasurer
Martin M. Pollak and Director
/s/Scott N. Greenberg Vice President, Chief Financial
Scott N. Greenberg a Director (Principal Financial and
Accounting Officer)
/s/Ogden R. Reid Director
Ogden R. Reid
/s/Roald Hoffmann, Ph.D. Director
Roald Hoffmann, Ph.D.
/s/Paul A. Gould Director
Paul A. Gould
Dated: March 30, 1994
72
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part
of this Report.
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NO.
3.1 Certificate of Amendment of Restated
Certificate of Incorporation of the
Registrant filed on July 2, 1984.
Incorporated by reference to Exhibit
3.1 of the Registrant's Form 10-K for
the year ended December 31, 1984.
3.2 Amendment to the Restated Certificate
of Incorporation dated June 30, 1987.
Incorporated by reference to Exhibit
3.2 of the Registrants Annual Report
on Form 10-K for the year ended
December 31, 1987.
3.3 Amended By-Laws of the Registrant.
Incorporated by reference to Exhibit
3.3 of the Registrants Annual Report
on Form 10-K for the year ended
December 31, 1986.
10.1 1973 Non-Qualified Stock Option Plan of
the Registrant, as amended. Incorporated
herein by reference to Exhibit 10.3 of the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992.
10.2 Swiss Public Bond Issue Agreement dated
as of February 8, 1985 between the Regis-
trant and a consortium of Swiss banks.
Incorporated by reference to the Regis-
srant's Form 8-K filed on March 8, 1985.
10.3 Swiss Public Bond Issue Agreement dated
as of May 9, 1985, between the Registrant
and a consortium of Swiss banks. Incor-
porated herein by reference to Exhibit
10.37 of the Registrant's Form 10-K for
the year ended December 31, 1985.
10.4 Swiss Public Bond Issue Agreement dated
as of February 28, 1986, between the
Registrant and a consortium of Swiss
Banks. Incorporated herein by reference
to Exhibit 10.38 of the Registrant's Form
10-K for the year ended December 31,
1985.
10.5 Registrant's 401(k) Savings Plan,
dated January 29, 1992, effective
March 1, 1992. Incorporated herein
by reference to Exhibit 10.12 of
the Registrant's Annual Report on
Form 10-K for the year ended December
31, 1991.
10.6 $25,000,000 Secured Revolving Credit and
Term Loan Agreement by and among Five Star
Group, Inc., National Westminster Bank,
USA, United Jersey Bank/Central, N.A., and
National Westminster Bank, N.J., as agent,
dated April 29, 1993. Incorporated herein
by reference to the Registrants Form 8-K
dated July 12, 1993.
10.7 $6,000,000 Secured Revolving Credit and
Term Loan Agreement by and among MXL
Industries, Inc., National Westminster Bank,
USA, United Jersey Bank/Central, N.A., and
National Westminster Bank, N.J., as agent,
dated April 29, 1993. Incorporated herein
by reference to the Registrants Form 8-K
dated July 12, 1993.
10.8 Schedule 13E-4 dated July 12, 1993. Incor-
porated herein by reference to Exhibit 4.2
of the Registrant's Registration Statement
on Form S-3 No. (33-66634) filed on
July 28, 1993.
10.9 Amendment No. 1 to Schedule 13E-4 dated August
12, 1993. Incorporated herein by reference to
Exhibit 4.4 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 No. (33-66634)
filed on September 9, 1993.
10.10 Amendment No. 2 to Schedule 13E-4 dated September
1, 1993. Incorporated herein by reference to
Exhibit 4.5 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 No. (33-
66634) filed on September 9, 1993.
13 Not Applicable
18 Not Applicable
19 Not Applicable
22 Subsidiaries of the Registrant*
23 Not Applicable
24 Consent of Independent Auditors*
27 Not Applicable
28 Not Applicable
* Filed herewith.