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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, 1994
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. //
As of March 21, 1995, 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
$45,327,419 based on the closing price of the Common Stock on the
American Stock Exchange on March 21, 1995. 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 21, 1995
Common Stock,
par value $.01 per share 25,734,591 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 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of
Security Holders 23
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder
Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 26
Item 8. Financial Statements and Supplementary
Data 36
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 76
PART III
Item 10. Directors and Executive Officers
of the Registrant 76
Item 11. Executive Compensation 76
Item 12. Security Ownership of Certain
Beneficial Owners and Management 76
Item 13. Certain Relationships and Related
Transactions 76
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 76
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
three operating business segments: Physical Science,
Distribution and Optical Plastics. The Company also has an
investment in one company in the health care industry and an
investment in one company in the environmental technology and
consulting area. In addition, the Company owns approximately 54%
of the outstanding shares of common stock in a company that
distributes generic pharmaceutical products in Russia.
The Company's Physical Science Group consists of (i)SGLG,
Inc. (formerly, GPS Technologies, Inc.) ("SGLG"), an
approximately 92% owned subsidiary and (ii) General Physics
Corporation ("General Physics"), an approximately 51% owned
subsidiary.
General Physics provides a wide range of personnel
training, engineering, environmental and technical support
services to commercial nuclear and fossil power utilities, the
United States Departments of Defense ("DOD") and Energy (the
"DOE"), Fortune 500 companies and other commercial and
governmental customers. SGLG is a holding company that has a 35%
interest in GSE Systems, Inc., a software simulator company and
in addition owns a small finance subsidiary.
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 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.
In addition, the Company has a division, Hydro Med Sciences
("HMS"), involved in the manufacture of medical devices, drugs
and cosmetic polymer products.
The Company's investment in the health care industry
currently consists of approximately 31% investment in Interferon
Sciences, Inc. ("ISI"). ISI is a biopharmaceutical company
engaged in the manufacture and sale of ALFERON N Injection, the
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only product approved by the United States Food and Drug
Administration ("FDA") that is based upon a natural source,
multi-species alpha interferon ("Natural Alpha Interferon").
ALFERON N Injection is approved for the treatment of certain
types of genital warts. ISI also is developing its existing
injectable, topical, and/or oral formulations of Natural Alpha
Interferon for the potential treatment of HIV, hepatitis C,
hepatitis B, multiple sclerosis, cancers, and other indications.
The Company currently owns approximately 40% of the
currently outstanding shares of common stock of GTS Duratek,
Inc.("Duratek"). Duratek's operations consist of two operating
groups: (1) "Technology Group" (formerly Environmental Services)
is engaged in converting radioactive, hazardous and mixed (both
radioactive and hazardous) waste to glass, using in-furnace
vitrification processes, and removing radioactive and/or
hazardous contaminants from waste water and other liquids using
filtration and ion exchange processes, and (2) "Services Group"
(formerly Consulting and Staff Augmentation) engaged in
consulting, engineering, training and staff augmentation
services. Duratek provides services and technologies for various
utility, industrial, governmental and commercial clients.
The Company owns approximately 54% of the outstanding common
stock of American Drug Company ("ADC"), which was organized in
1993, as a wholly-owned subsidiary of the Company to initiate
marketing activities for American generic pharmaceutical and
medical pharmaceutical in Russia and the Commonwealth of
Independent states (the "CIS"). ADC's subsidiary, NPD Trading
(USA) Inc. provides consulting services to Western businesses in
Russia and Eastern Europe. ADC intends to make sales of American-
made generic pharmaceutical and health care products for sale
under its own label in Russia and the CIS.
In December 1994, the Company decided to sell its Eastern
Electronics Manufacturing Corporation subsidiary ("Eastern"),
which was the only company in the electronics group. As a result
of this decision, the Company has reflected Eastern as a
discontinued operation.
(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
2
PHYSICAL SCIENCE GROUP
GENERAL PHYSICS CORPORATION
General
General Physics Corporation ("General Physics") provides a
wide range of personnel training, engineering, environmental and
technical support services to commercial nuclear and fossil power
utilities, the United States Departments of Defense ("DOD") and
Energy (the "DOE"), Fortune 500 companies and other commercial
and governmental customers. 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.
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, materials
management and safety analysis services to the commercial nuclear
power industry and to the DOE.
On August 31, l994, General Physics acquired substantially
all of the assets and operations of SGLG, Inc. (formerly GPS
Technologies) and certain of its subsidiaries (together the "GPST
Businesses") for approximately $34 million, consisting of $10
million cash, 3,500,000 shares of General Physics common stock,
warrants to acquire up to 1,000,000 shares of General Physics
common stock at $6.00 per share, warrants to acquire up to
475,664 shares of General Physics common stock at $7.00 per
share, and General Physics' 6% ten year senior subordinated
debentures in the aggregate principal amount of $15 million. The
senior subordinated debentures require payment of interest only
on a quarterly basis for the first five years, quarterly
installments of $525,000 principal plus interest for the next
five years and the balance of $4.3 million at maturity. The fair
value of the senior subordinated debentures was estimated to be
$10.7 million at the date of the acquisition.
The Company which owned approximately 92% of the GPST
Businesses and 28% of General Physics prior to the transaction,
owned approximately 54% of the outstanding shares of General
Physics after the acquisition.
General Physics is organized into four groups: Training and
Technology, Engineering and Applied Sciences, Federal Systems and
Department of Energy. General Physics performance is
significantly affected by the timing of performance on contracts.
Results of operations are not seasonal, since contracts are
performed throughout the year.
3
While General Physics continues to provide services to the
DOE and DOD and the commercial nuclear power industry, it is
unsure what effect cutbacks will have on future results. In
response to these factors, General Physics has begun to focus its
marketing resources on expanding management and technical
training services to the manufacturing and process industries,
and specialized engineering services to Federal agencies. During
the latter part of 1994 General Physics experienced growth in
these areas and anticipates future growth to come from these
areas. In addition, General Physics continues to take steps to
reduce costs by eliminating positions and implementing other cost
cutting activities.
The following table sets forth the approximate pro forma
revenue attributable to the categories of services provided by
General Physics for the year ended December 31, 1994 assuming 12
months revenue for each of SGLG and General Physics.
(in thousands)
Training and Technology Services $ 46,466
DOD Services 18,078
DOE Services 18,805
Engineering Services 31,781
Total Revenue $115,130
General Physics currently provides services to more than 410
clients, including eight of the largest electric power companies
in the United States and four prime contractors serving the DOE.
During 1994, no customer accounted for more than 10% of General
Physics revenue. Prior to October, 1988, when it started its DOE
services business, General Physics derived virtually all of its
revenue from contracts with nuclear utilities.
TRAINING AND TECHNOLOGY GROUP
The Training and Technology Group focuses on training and
human performance improvement needs of commercial nuclear
utilities, Fortune 500 and other commercial companies, and
government customers, providing technical training and other
technical services to customers that design, operate, and
maintain equipment and facilities. This Group analyzes the
human, organizational and technical issues confronting its
customers and recommends solutions to improve performance.
DOE SERVICES GROUP
The DOE has overall responsibility for the nation's nuclear
weapons complex. The operation of United States Government
nuclear weapons production and waste processing facilities
4
recently has, like the commercial nuclear power industry, come
under increasingly intense public scrutiny. The DOE has since the
late 1980's focused its attention upon the safe production of
nuclear weapons and, in particular, the cleanup of serious
pollution problems at active and inactive weapons plants in more
than 30 states. As a result, the DOE has begun a research and
cleanup program that it estimates could cost $200 billion or more
over the next 30 years. General Physics organized its DOE
services group in order to take advantage of the United States
Government's increased focus on environmental, health and safety
matters at DOE facilities (and the DOE's resulting desire to
improve personnel training and support services to a level
consistent with that of the commercial nuclear power industry).
The DOE typically does not itself perform many of the tasks
relating to nuclear weapons production and waste processing at
these facilities; rather, it awards large, multi-year, cost-plus-
award-fee prime contracts to companies such as Westinghouse,
Martin Marietta and EG & G. These prime contractors, in turn,
enter into a large number of contracts with firms such as General
Physics to provide a wide variety of services in support of
nuclear weapons production and waste processing facilities. The
Group at the DOE's Savannah River site, a 300-square mile nuclear
weapons production and waste processing site near Aiken, South
Carolina predominantly provides professional services in such
areas as the development and upgrade of detailed operating and
maintenance procedures, training program design, development and
accreditation assistance, maintenance engineering, technical
support and quality assurance and various other engineering and
operations support services. General Physics also has staff
augmentation contracts at many of the DOE's research laboratories
including Los Alamos National Laboratory, Princeton Plasma
Physics Laboratory, Lawrence Livermore National Laboratory, and
Brookhaven National Laboratory for similar services.
ENGINEERING AND APPLIED SCIENCES GROUP
The Engineering and Applied Sciences Group provides
engineering services to the Government, utilities and
petrochemical industries. Multi-discipline capabilities include
environmental, mechanical, structural, chemical, electrical, 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
electric power generation (including operations, maintenance and
performance engineering).
FEDERAL SYSTEMS GROUP (FSG)
GPS Technologies, Inc. Federal Systems Group, a wholly-owned
5
subsidiary, provides 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, this
Group provides services to several non-DOD agencies of the
Federal Government, including the Internal Revenue Service, the
Office of Personnel Management and the DOE, and to several
commercial clients including Electronic Data Systems Corp. and
Trane Air Conditioning.
CONTRACTS
General Physics is currently performing under approximately
700 contracts. General Physics' contracts with its clients
provide for charges on a time-and-materials basis, a fixed-price
basis or a cost-plus-fixed-fee basis. General Physics'
subcontracts with the Government have predominantly been cost-
plus-fixed-fee contracts and time-and-materials contracts. As
with all United States Government contractors, General Physics is
required to comply with the Federal Acquisition Regulations and
the Government Cost Accounting Standards with respect to all of
the services provided to the United States Government and
agencies thereof. These Regulations and Standards govern the
procurement of goods and services by the United States Government
and the nature of costs that can be charged with respect to such
goods and services. General Physics does not believe that
complying with these Regulations and Standards places it in any
competitive disadvantage. In addition, all such contracts are
subject to audit by a designated government audit agency, which
in most cases is the Defense Contract Audit Agency (the DCAA).
Although these contracts are subject to audit, General Physics
anticipates no material cost disallowances. The DCAA has audited
the General Physics contracts through 1989 without any material
disallowances. The following table illustrates the percentage of
total pro forma revenue attributable to each type of contract for
the year ended December 31, 1994 assuming 12 months for each of
SGLG and General Physics.
6
Percentage of Total Revenue
Year Ended December 31,
1994
Time-and Materials 37%
Fixed-Price 39%
Cost-plus-Fixed-Fee 24%
100%
CUSTOMERS
General Physics provides services to more than 410
customers, including several of the largest companies in the
United States. Significant customers include commercial nuclear
utilities, 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 48% of the pro forma revenue of the
Company for 1994 assuming 12 months for each of SGLG and General
Physics. However, such revenue was derived from many separate
contracts and subcontracts with a variety of Government agencies
and contractors that are regarded by General Physics as separate
customers. In 1994 no other customer accounted for more than 10%
of General Physics revenue.
COMPETITION
The principal competitive factors in General Physics markets
are the experience and capability of technical personnel,
performance, reputation and price. A significant factor
determining the business available to General Physics and its
competitors is the ability of customers to use their own
personnel to perform services provided by General Physics and its
competitors. Another factor affecting the competitive environment
is the small, specialty companies located at or near particular
customer facilities which are dedicated solely to servicing the
technical needs of those particular facilities. In the DOE
services industry, competition comes from a number of companies,
including defense contractors, architect-engineering firms,
smaller independent service companies such as the Company and
small and disadvantaged businesses under Section 8(a) of the
Small Business Administration Act. Competition in the industries
served by the Federal Systems Group is strong and comes from
large defense contractors and other service corporations, many of
which have significantly greater resources than General Physics
as well as competition from small and disadvantaged businesses,
which receive certain preferential treatment in the awarding of
government contracts.
7
PERSONNEL
As of March 1, 1995, General Physics employed 1312 persons.
Many of General Physics' employees perform multiple functions
depending upon changes in the mix of demand for the services
provided by General Physics. None of General Physics' employees
is represented by a labor union. General Physics generally has
not entered into employment agreements with its employees, but
has employment agreements with certain officers. General Physics
believes its relations with its employees are good.
BACKLOG
As of December 31, 1994, General Physics' backlog for
services under signed contracts and subcontracts was
approximately $64,844,000 consisting of approximately $22,278,000
respectively, for the Training and Technology Group,
approximately $6,613,000, for the DOE Group, approximately
$25,392,000, for the Engineering and Applied Sciences Group and
approximately $10,561,000, for the Federal Systems Group.
General Physics anticipates that most of its backlog as of
December 31, 1994 will be recognized as revenue during 1995;
however, the rate at which services are performed under certain
contracts, and thus the rate at which backlog will be recognized,
is at the discretion of the client, and most contracts are, as
mentioned above, subject to termination by the client upon
written notice.
ENVIRONMENTAL STATUTES AND REGULATIONS
General Physics provides environmental engineering services
to its clients, including the development and management of site
environmental remediation plans. Due to the increasingly strict
requirements imposed by Federal, state and local environmental
laws and regulations (including without limitation, the Clean
Water Act, the Clean Air Act, Superfund, the Resource
Conservation and Recovery Act and the Occupational Safety and
Health Act), General Physics' opportunities to provide such
services may increase.
General Physics activities in connection with providing
environmental engineering services may also subject General
Physics itself to such Federal, state and local environmental
laws and regulations. Although General Physics subcontracts most
remediation construction activities and all removal and off-site
disposal and treatment of hazardous substances, General Physics
could still be held liable for clean-up or violations of such
laws as an "operator" or otherwise under such Federal, state and
local environmental laws and regulations with respect to a site
8
where it has provided environmental engineering and support
services. General Physics believes, however, that it is in
compliance in all material respects with such environmental laws
and regulations.
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 two strategically located warehouses and office
locations, with approximately 380,000 square feet of space in New
Jersey 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 13% of Five
Star's sales in 1994 and its 10 largest customers accounted for
approximately 27% of such sales. No other customer accounted for
in excess of 10% of Five Star's sales in 1994. 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
9
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
the distribution of its line of private-label products sold under
the "Five Star" name.
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
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 38% of MXL's total sales and another client which
accounts for approximately 14% 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.
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HYDRO MED SCIENCES
Hydro Med Sciences ("HMS") is a division of the Company
involved in the manufacture of medical devices, drugs and
cosmetic polymer products. HMS was established to investigate
potential uses of a unique group of polymers called HydronR in
applications other than the soft contact lens area. These
polymers, which absorb water without dissolving, are excellent
candidates for biomedical applications.
HMS has been involved in the development of human and
veterinary drugs, as well as medical and dental devices since the
early 1970's. HMS developed the Syncro-Mate BR implant which is
presently manufactured by HMS and sold in the United States by
Sanofi Animal Health, Inc., and is used for the synchronized
breeding of bovine heifers. This product was the first veterinary
drug implant to be approved by the FDA.
HMS also commercially manufactures a solvent soluble, water
insoluble HydronR polymer for use in a series of cosmetic
products, such as hand and body lotions, facial, whole body and
fragile eye moisturizers and sunscreens.
HMS also has been collaborating with The Population Council
on the development of an implant for humans capable of delivering
luteinizing hormone releasing hormone (LHRH) at controlled
therapeutic levels for one to two years. This implant is
currently in Phase I clinical trials for the treatment of
prostatic cancer. The purpose of this study is to determine
appropriate dose and elicit any unexpected adverse reactions.
THE COMPANY'S INVESTMENTS
GTS DURATEK, INC.
GENERAL
GTS DURATEK INC. ("Duratek") was incorporated in the State
of Delaware in December 1982. At December 31, 1994, Duratek was
an approximately 61% controlled subsidiary of the Company.
However, as of March 1 1995, the Company owned approximately 40%
of the outstanding shares of common stock of Duratek.
Duratek's operations consist of two operating groups: (i)
"Technology Group" engaged in converting radioactive, hazardous
and mixed (both radioactive and hazardous waste to glass, using
in-furnace vitrification processes, and removing radioactive
and/or hazardous contaminants from waste water and other liquids
using filtration and ion exchange processes and (2) "Services
Group" (formerly Consulting and Staff Augmentation)engaged in
consulting, engineering, training, and staff augmentation
services. Duratek provides services and technologies for various
11
utility, industrial, governmental, and commercial clients.
On January 24, 1995, the Company sold 1,666,667 shares of
its Duratek common stock at a price of $3.00 per share to The
Carlyle Group ("Carlyle") in connection with a $16 million
financing by Duratek with Carlyle, a Washington, D.C. based
private merchant bank. In addition, the Company granted Carlyle
an option to purchase up to an additional 500,000 shares of the
Company's Duratek common stock over the next year at $3.75 per
share (the "Carlyle Transaction").
Duratek received $16 million from Carlyle in exchange for
160,000 shares of newly issued 8% cumulative convertible
preferred stock (convertible into 5,333,333 shares of Duratek
common stock at $3.00 per share). Duratek granted Carlyle an
option to purchase up to 1,250,000 shares of newly issued Duratek
common stock from Duratek over the next four years.
As of March 1, 1995, the Company owned 3,534,972 shares of
Duratek common stock (approximately 40% of the currently
outstanding shares of common stock). Assuming, (i) Carlyle
converted all of its cumulative convertible preferred stock into
Duratek common stock and exercised its option to purchase
additional shares of Duratek common stock from each of Duratek
and National Patent and (ii) National Patent employees exercised
their options to purchase an aggregate of 497,750 shares of
Duratek common stock, the Company would own 2,537,222 shares of
Duratek common stock (approximately 16.5% of the then outstanding
shares of common stock).
TECHNOLOGY GROUP
During 1991 and 1992, Duratek and The Catholic University of
America's Vitreous State Laboratory (VSL) jointly conducted
bench-scale vitrification research with the U.S. Department of
Energy ("DOE") waste simulants and actual DOE radioactive and
mixed waste samples. This led to the l992 award of a $3.4
million DOE-funded contract to conduct a minimum additive waste
stabilization (MAWS) demonstration, which enabled the Company to
significantly advance the development of its vitrification
technology. The MAWS project integrated soil washing, water
purification, and in-furnace vitrification to reduce waste volume
and then convert the reduced waste to a durable, leach-resistant
form (glass) for long-term storage or burial.
During the first half of l993, Duratek designed, built and
operated a l00 kilogram-per-day pilot-scale melter at the VSL to
gather test data while building a similar 300 kilogram-per-day
unit at the DOE's Fernald Environmental Management Project (FEMP)
for the MAWS demonstration. These melters were designated
DuraMelter 100 and 300, respectively.
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Duratek engineers and operators started up the DuraMelter
300 at the FEMP in September 1993 and began conducting continuous
melt campaigns with nonradioactive waste stimulants. In August
1994, following approximately one year of nonradioactive test
melts, the Company operators processed about 7,000 gallons of
FEMP wastes consisting of soil wash concentrates , contaminated
with uranium, thorium and other heavy metals, blended with
magnesium-fluoride sludge from Pit #5. Duratek thus became the
first company to successfully complete a continuous vitrification
run with low-level radioactive waste at a DOE site.
The MAWS success led to a $1.2 million DOE-funded contract
for Duratek and the VSL to characterize and catalog the physical
and chemical properties of nationwide DOE waste streams. The
data gathered will be the basis for a compositional envelope: a
sophisticated computerized model which will be used to determine
which waste streams can be blended in a vitrification process to
achieve the MAWS goals of substantial waste volume reduction and
long-term waste form stability.
Near the end of l993, Duratek won a $13.9 million, three-
year contract in competition with companies providing traditional
waste stabilization methods- to stabilize 700,000 gallons of
uranium-contaminated sludge at the DOE's Savannah River Site.
Duratek is designing and building its first commercial-scale
melter, a DuraMelter 5,000 for the project.
In 1994, Duratek won a DOE-funded contract worth
approximately $2 million to design, build and test a high-
temperature melter and "gem" matching ( a device which converts
the molten glass discharge stream into droplets) for Fernald
Environmental Restoration Management Company's (FERMCO) CRU4
project.
SERVICES GROUP
The Services Group provides technical personnel to support
nuclear power plant outages and operation and DOE environmental
restoration projects. The group has retained its major
customers: Duke Power Company, Vermont Yankee Nuclear Power
"Corporation, New York Power Authority, Tennessee Valley
Authority, GPU Nuclear Corporation, PECO Energy Company (formerly
Philadelphia Electric Company), and FERMCO.
Through efforts to expand its higher margin professional
services business, the Services Group has increased its
consulting and training sales.
The Services Group has also aligned its services to support
and complement the Technology Group's environmental restoration
business. These include environmental safety and health
consulting and training, hazardous materials training, quality
13
assurance/quality control and radiological controls. Waste
melter operator trainees are often recruited from the Services
Group Field Work Force.
INTERFERON SCIENCES, INC.
Interferon Sciences, Inc. ("ISI"), which was incorporated in
Delaware in May 1980, commenced operations in January 1981, by
obtaining from the Company, assets relating to its programs in
human alpha (leukocyte) interferon, recombinant DNA, and
hybridoma technology.
ISI is a biopharmaceutical company engaged in the
manufacture and sale of ALFERON N Injection, the only product
approved by the United States Food and Drug Administration
("FDA") that is based upon a natural source, multi-species alpha
interferon ("Natural Alpha Interferon"). ALFERON N Injection is
approved for the treatment of certain types of genital warts. ISI
also is developing its existing injectable, topical, and/or oral
formulations of Natural Alpha Interferon for the potential
treatment of HIV, hepatitis C, hepatitis B, multiple sclerosis,
cancers, and other indications. Interferons occur naturally in
the body, in essence nature's own medicine. Interferons are a
group of proteins produced and secreted by cells to combat
diseases.
Currently, various alpha interferon products, approved for
17 different medical uses in over 60 countries, are, as a group,
one of the largest selling of all biopharmaceuticals with
estimated 1994 sales approaching $2 billion. The majority of
these sales consisted of sales of alpha interferon produced from
genetically engineered cells (recombinant alpha interferon).
ALFERON N Injection is approved for sale in the United
States for the intralesional treatment of adults with refractory
(resistant to other treatment) or recurring external genital
warts. ALFERON N Injection is marketed and distributed in the
United States exclusively by Purdue Pharma L.P. through its
affiliate, The Purdue Frederick Company (collectively,
"Purdue"). Submissions for regulatory approval to sell ALFERON N
Injection for the treatment of genital warts have been filed in
Austria, Canada, Hong Kong, Israel, Mexico, Singapore and the
United Kingdom. Regulatory approval to sell ALFERON N Injection
was recently obtained in Mexico.
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. ALFERON LDO is a low dose oral liquid
alpha interferon formulation which ISI believes has potential for
treating certain symptoms of patients infected with the HIV virus
14
and treating other viral diseases.
CLINICAL TRIALS SUMMARY
In an effort to obtain approval to market Natural Alpha
Interferon for additional indications in the United States and
around the world, ISI is focusing its research program on
conducting and planning various clinical trials for new
indications.
The table appearing below summarizes the data concerning
clinical trials of ALFERON N Injection, ALFERON N Gel, and
ALFERON LDO being conducted or proposed to be conducted.
15
PRODUCT POTENTIAL APPLICATION/ STATUS OF CLINICAL TRIAL(1) SPONSOR
INDICATIONS
ALFERON N HIV infected patients:
Injection
Asymptomatic Initial Phase 1 completed Walter
Reed(2)
Asymptomatic/Symptomatic Phase 2/3 in final stages of ISI
planning
Comparison of side effects in Phase 1 completed Purdue
healthy subjects with
recombinant alpha interferon
Hepatitis C Three multi-center Phase 2 ISI(3)
in progress
Kaposi's sarcoma Phase 2 in progress ISI
(in AID's patients)
Small cell lung cancer Phase 2 to commence shortly Investi-
gator(5)
Multiple Sclerosis Phase 2 being planned ISI
Hepatitis B Phase 2 proposed (4)
ALFERON N Cervical dysplasia Phase 2 completed ISI
Gel
Cervical dysplasia Phase 2 to commence shortly Investi-
(in HIV-infected patients) igator(5)
16
Mucocutaneous herpes in Phase 2 proposed (4)
immunocompromised patients
Recurrent genital herpes Phase 2 proposed (4)
ALFERON HIV-infected patients Initial Phase 2 completed ISI
LDO
HIV-infected patients Phase 2 in final stages of NIAID
planning
(1) Generally, clinical trials for pharmaceutical products are conducted in three
phases. In Phase 1, studies are conducted to determine safety and tolerance. In Phase
2, studies are conducted to gain preliminary evidence as to the efficacy of the
product as well as additional safety data. In Phase 3, studies are conducted to
provide sufficient data to establish safety and statistical proof of efficacy in a
specific dose. Phase 3 is the final stage of such clinical studies prior to the
submission of an application for approval of a new drug or licensure of a biological
product or for new uses of a previously-approved product.
(2) Partially funded by Purdue.
(3) Previously funded by Purdue; currently funded by ISI.
(4) The sponsor and the timing of this trial will be dependent upon future funding.
(5) Investigator-sponsored IND.
17
In March 1995, ISI entered into an amendment of the 1994
Purdue Amendments (the "1995 Purdue Amendment") pursuant to which
ISI obtained an option, exercisable until June 30, 1995, (the
"Option") to reacquire the marketing and distribution rights from
Purdue and Mundipharma. The 1995 Amendment provides for (i) the
payment of $3 million in cash upon exercise of the option and
(ii) the issuance of 2.5 million shares of Common Stock. Eighteen
months from the date of exercise of the Option by ISI (the
"Valuation Date"), the 2.5 million shares of Common Stock must
have a value of at least $9 million, which value will be
calculated using the average of the closing bid and asked prices
of the Common Stock as quoted by NASDAQ National Market System
for the ten trading days ending two days prior to the Valuation
Date. In the event of a shortfall, ISI has agreed to issue a
note, for such shortfall, if any, which will bear interest at the
prime rate, and will become due and payable 24 months from the
Valuation Date. ISI agrees that the 2.5 million shares of Common
Stock will be registered and freely tradeable 18 months from the
date of exercise of the ISI option. The 1995 Purdue Amendment, if
exercised, would replace in its entirety the royalty obligations
and the Repurchase Option contained in the 1994 Amendments with
Purdue and Mundipharma.
OTHER MARKETING AND DISTRIBUTION ARRANGEMENTS
In February 1994, ISI entered into an exclusive distribution
agreement for ALFERON N Injection in Mexico with Andromaco, a
privately-held pharmaceutical company headquartered in Mexico
City which specializes in oncology and immunology products.
Under the agreement, Andromaco applied for and recently obtained
approval from the Mexican regulatory authorities to sell ALFERON
N Injection in Mexico. As part of the agreement, Andromaco also
agreed to sponsor clinical research with ALFERON N Injection in
Mexico. The agreement also establishes performance milestones for
the maintenance of exclusive distribution rights by Andromaco in
Mexico. In addition, ISI has a buy-out option to reacquire the
marketing and distribution rights in Mexico under certain terms
and conditions.
On February 7, 1995 ISI concluded an agreement with Fujimoto
Diagnostics, Inc. ("Fujimoto") of Osaka, Japan, for the
commercialization of ALFERON N Injection in Japan (the "Fujimoto
Agreement"). Fujimoto is affiliated with Fujimoto Pharmaceutical
Company, a 60-year old company with facilities in Central Japan.
The Fujimoto Agreement grants Fujimoto exclusive rights to
develop, distribute and sell ALFERON N Injection and ALFERON N
Gel in Japan. Pursuant to the terms of the Fujimoto Agreement,
Fujimoto agreed to fund and conduct all preclinical and clinical
studies required for regulatory approval in Japan. For the
injectable product, ALFERON N Injection, Fujimoto will initially
focus on its use for the treatment of patients infected with the
hepatitis C virus. ISI will supply Fujimoto with ALFERON N
18
Injection and will also manufacture and supply Fujimoto with
ALFERON N Gel. The first indication to be developed for ALFERON N
Gel has not yet been finalized. Fujimoto will also purchase
certain quantities of ALFERON N Injection and ALFERON N Gel at
agreed-upon prices during the preclinical and clinical phases. In
connection with the Fujimoto Agreement, Fujimoto purchased
$1,500,000 of Common Stock and agreed to purchase an additional
$500,000 of Common Stock on February 6, 1996, based on the then
current market price.
Although ISI has exclusive marketing and distribution
agreements with Purdue, Mundipharma, Andromaco and Fujimoto and
has the right to sell ALFERON N Injection in the Returned
Territories, no sales of ALFERON N Injection can be made in
Canada, or the Returned Territories until such product is
approved for sale in these countries. Submissions for regulatory
approval to sell ALFERON N Injection for treatment of genital
warts have been filed in Canada, Austria, Hong Kong, Israel, and
the United Kingdom and has been obtained in Mexico. There can be
no assurance, however, that any such approval will be granted.
AMERICAN DRUG COMPANY
American Drug Company ("ADC") was organized in 1993, as a
wholly-owned subsidiary of the Company to initiate marketing
activities for American generic pharmaceutical and medical
products in Russia and the Commonwealth of Independent States
(the "CIS"). The Company's predecessor, NPD Trading (USA), Inc.
("NPD Trading"), was formed in January 1990 as a wholly-owned
subsidiary of the Company to provide consulting services to
Western businesses in Russia and Eastern Europe.
In August 1994, the Company entered into a Transfer and
Distribution Agreement (the "Distribution Agreement") with ADC
whereby the Company transferred to ADC, (the "Distribution")
immediately prior to the closing of the Distribution, all of its
interest in NPD Trading and in two newly-formed, 50% owned joint
ventures, in exchange for (i) the issuance by ADC of 6,990,990
shares of Common Stock to the Company (ii) the issuance of
approximately 6,017,775 shares of Common Stock to the Company's
stockholders and (iii) the issuance of 6,017,775 warrants to be
distributed to the Company's stockholders. Each warrant is
exercisable for a period of two years commencing on August 5,
1994, at an exercise price per share of $1.00, subject to ADC's
right to cancel unexercised warrants under certain circumstances.
Upon the consummation of this reorganization, NPD Trading became
a wholly-owned subsidiary of ADC.
The Distribution was at the rate of one share plus one
warrant to purchase one share of common stock at an exercise
price of $1.00, expiring August 5, 1996, for every four
outstanding shares of Common Stock of the Company. Upon
19
completion of the Distribution, ADC became a separate public
company.
ADC's diverse activities to date have focused on developing,
and assisting Western businesses to develop, trade, manufacturing
and investment opportunities in Russia, the Czech and Slovak
Republics and, to a lesser extent, other countries of the CIS and
Eastern Europe. ADC intends to make sales of American-made
generic pharmaceutical and health care products for sale under
its own label in Russia and the CIS.
In 1993, ADC initiated activities aimed at the export of
American-made generic pharmaceutical (prescription drugs and
over-the-counter personal care products) and other medical
products and equipment to Russia and the CIS. Among the products
anticipated to be sold by ADC are antibiotic ointments, pain
relief medication, vitamins, bandages, prescription injectable
anti-cancer drugs, antibiotics and other prescription drugs. ADC
has launched marketing operations with major Russian hospitals,
individual Russian pharmacies, and other hospitals and clinics
throughout the CIS, as well as with distributors in the region.
ADC has initiated these operations in order to enable consumers
to benefit from the superior quality and low cost of American-
made generic drug and medical products in markets in which ADC
believes demand for such products to be high and availability
limited. ADC intends to register, market and sell a wide variety
of products under its own label and to develop a distribution of
its products throughout the CIS. In October 1994, ADC's "Shiny"
brand baking soda toothpaste with fluoride and its "Aurora"
feminine maxi pads and mini shields received medical
certification by health authorities in Russia.
ADC believes that contracting for the supply of its products
enables it to avoid significant capital expenditures and the time
and expense associated with the U.S. Food and Drug Administration
(the "FDA") approval process. ADC has entered into some supply
agreements with chemical and pharmaceutical manufacturers to date
and is currently in negotiations with several others. The terms
of each of these agreements may vary, but generally provide for
the supply to ADC of approximately five or six generic
pharmaceutical products, in a variety of potency levels, for
marketing and resale under the ADC label in Russia and other
states which formerly comprised the Soviet Union. The agreements
generally carry a ten-year term with options to renew for
successive one-year periods. They prohibit price increases on
products supplied to ADC during the first year of the agreement
unless a substantial increase in the price of raw materials
occurs. The agreements also provide that ADC will pay all
foreign registration fees and labeling costs and that the
supplier will undertake the labeling and packaging of all
products sold to ADC in accordance with federal regulations. In
addition, the supplier represents that products will be
20
manufactured in accordance with the good manufacturing practices
established by the FDA and that it will name ADC as an additional
insured on product liability policies providing sufficient
coverage.
In its four years of operation, ADC has provided through its
subsidiary, NPD Trading, a broad range of business services to a
significant number of American and Western corporations. ADC's
employees have backgrounds in diverse disciplines, such as
medicine, law, engineering, physics and international economics,
which appropriately meet the industrial makeup of ADC's clients.
ADC is able to provide the contacts necessary for interested
clients to locate a venture partner and to establish viable
financing. Recognizing that successful conclusion of project
negotiations in this region often depends upon financing, ADC
works closely with the U.S. Exim-Bank, OPIC, the World Bank and
its affiliates, including the European Bank for Reconstruction
and Development, as well as private commercial banks.
Additionally, ADC advises its clients with respect to new
commercial, tax, currency and other laws of Eastern Europe, as
well as U.S. foreign government regulations and policies which
directly affect business operations.
RESEARCH AND DEVELOPMENT
For the year ended December 31, 1994, NPDC incurred $431,000
as research and development costs.
EMPLOYEES
At December 31, 1994, the Company and its subsidiaries
employed 2,368 persons, including 16 in the Company's
headquarters, 1,840 in the Physical Science Group, 340 in the
Distribution Group, 74 in the Optical Plastics Group and 51 at
Eastern Electronics, which is a discontinued operation. Of these,
4 persons were engaged in research and development. The Company
considers its employee relations to be satisfactory.
21
EXECUTIVE OFFICERS
The following table sets forth the names of the principal
executive officers of the Company as of March 21, 1995 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 66 President, Chief Executive
Officer and a Director since
1959
Martin M. Pollak 67 Executive Vice President,
Treasurer and a Director since
1959
Scott N. Greenberg 38 Vice President, Chief
Financial Officer since 1989,
and a Director since 1987
Lawrence M. Gordon 41 General Counsel since 1986,
Vice President since 1991
Robert A. Feinberg 32 Vice President Corporate
Development, since January
1995
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.
Robert A. Feinberg is Vice President, Corporate Development
of the Company since January 1995. From July 1990 to January
1995, Mr. Feinberg was an Assistant United States Attorney in the
Criminal Division of the United States Attorney's Office for the
Eastern District of New York. From October 1988 to June 1990, Mr.
Feinberg was an associate with the law firm of Debevoise &
Plimpton in New York City.
22
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
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 information describes the material physical
properties owned or leased by the Company and its subsidiaries.
The Company leases approximately 10,000 square feet of space
for its New York City principal executive offices. The Company's
Physical Science Group leases (i) approximately 78,000 square
feet of an office building in Columbia, Maryland and (ii)
approximately 275,000 square feet of office space at various
other locations throughout the United States and (iii) 37 branch
offices of General Physics occupy approximately 197,000 square
feet of this space.
The Distribution Group leases 219,000 square feet in New
Jersey and 112,000 square feet in Connecticut. The Optical
Plastics Group owns 33,000 square feet of office space in
Lancaster, PA and 12,594 square feet of office space in Westmont,
IL.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings the
outcome of which is believed by management to have a reasonable
likelihood of having any material effect upon the Company's
business, results of operations, or financial condition.
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.
23
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
1994 First 4 7/8 3 7/8
Second 3 15/16 2 11/16
Third 3 3/8 2 5/8
Fourth 2 13/16 1 1/2
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
The number of shareholders of record of the Common Stock as
of March 21, 1995 was 5,275. On March 21, 1995, the closing
price of the Common Stock on the American Stock Exchange was
1 13/16. 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.
24
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Item 6. Selected Financial Data
Operating Data (in thousands, except per share data)
Years ended December 31, 1994 1993 1992 1991 1990
Revenues $202,966 $189,225 $196,506 $254,452 $286,639
Sales 204,774 185,846 189,797 251,782 286,219
Gross margin 32,559 26,974 29,211 35,792 42,087
Research and development costs 431 2,847 4,645 4,651 7,892
Interest expense 6,458 8,199 10,866 15,438 20,261
Income (loss) before discontinued
operations and extraordinary
items (11,397) (6,849) (11,578) 1,456 (33,304)
Net income (loss) (13,971) (5,977) (11,943) 2,645 (32,738)
Earnings (loss) per share
Income (loss) before discontinued
operations and extraordinary
items $ (.52) $ (.40) $ (.73) $ .10 $ (2.91)
Net income (loss) (.64) (.35) (.76) .17 (2.86)
Cash dividends declared per share
Balance Sheet Data
December 31, 1994 1993 1992 1991
Cash, cash equivalents, restricted
cash and marketable securities $ 10,075 $ 10,976 $ 23,674 $ 35,968 $ 16,722
Short-term borrowings 31,060 21,390 28,977 26,317 62,144
Working capital 25,823 33,224 44,877 55,560 25,316
Total assets 175,546 166,057 192,649 214,041 269,564
Long-term debt 31,213 40,858 61,441 70,787 91,888
Stockholders' equity 65,165 67,438 63,823 72,405 55,416
25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Overview
During 1994 the Company continued its overall plan of debt
reduction, as well as the strengthening of its operating
companies. As a result of an Exchange Offer as well as several
other repurchases from various bondholders throughout the year,
(See Note 10 to Notes to Consolidated Financial Statements) the
Company was able to significantly reduce its Swiss Debt by
approximately $6,716,000. In addition, in the first quarter of
1995, the Company repurchased an additional SFr. 8,386,000 of
Swiss Debt. At March 24, 1995 the Company had approximately
$3,700,000 of Swiss Debt due in 1995 and approximately $3,300,000
of Swiss Debt due in 1996. The continuing reduction of the
Company's long-term debt has resulted in reduced interest expense
at the Corporate level. In September 1994, the Company
strengthened one of its core operating companies when General
Physics Corporation (GP) acquired substantially all the assets of
SGLG, Inc. (formerly GPS Technologies, Inc) (See Note 2 to
Consolidated Financial Statements).
In 1994, the loss before income taxes, discontinued operation and
extraordinary item was $10,648,000, as compared to a loss of
$7,424,000 in 1993. The increase in the loss is due to several
factors. Investment and other income (expense), net, decreased
from $3,379,000 in 1993 to a loss of $1,808,000 in 1994. The
$5,187,000 reduction is due to a foreign currency transaction
loss of $2,124,000 realized in 1994 as compared to a net foreign
currency transaction gain of $901,000 realized in 1993, related
to the Company's decision not to hedge its Swiss denominated
debt, as well as increased losses incurred on investments in 20%
to 50% owned subsidiaries due to increased losses attributable to
the Company's 36% investment in Interferon Sciences, Inc. (ISI).
The loss recognized in 1994 relating to ISI was $4,409,000,
compared to $1,599,000 in 1993. In 1993, an additional
$2,074,000 of ISI's loss was included in the Company's
consolidated results of operations through September 1993, when
the Company's investment in ISI fell below 50%. The increased
loss incurred on investments in 20% to 50% subsidiaries was
partially offset by gains realized on the sale of certain
investments. In addition, in 1993 the Company realized a
$3,975,000 gain from the transfer in an Exchange Offer of a
portion of the Company's holdings of shares of ISI and GTS
Duratek, Inc.'s (Duratek) common stock and an additional
$1,353,000 on the issuance of common stock and common stock
26
warrants by Duratek, relating to its acquisition of an option to
acquire certain technologies relating to the vitrification of
certain medical wastes. The above losses were partially offset
by increased operating profits at the Optical Plastics and
Physical Science Groups due to increased sales and gross margin
percentage and dollars within both groups. The Optical Plastics
Group, which is MXL Industries, Inc. (MXL), the Company's
injection molding and coating subsidiary, experienced increased
operating profits due to both increased sales and gross margin
percentage. The Physical Science Group was comprised of GP and
Duratek. GP provides engineering, environmental, training,
analytical and technical support services to the commercial power
industries, the US government and industry in general. Duratek
provides cleanup and vitrification of radioactive or contaminated
waste streams, as well as services to various utilities, the
government and commercial clients. 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 costs incurred to
close its Long Island, New York warehouse and consolidate its
sales volume into Five Star's New Jersey facility.
In 1993, the loss before income taxes, discontinued operation and
extraordinary item was $7,424,000, as compared to a loss of
$11,151,000 in 1992. 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
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. The Health Care Group experienced reduced
operating losses in 1993. The Health Care Group, which was
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 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 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 had reduced operating profits as a result of
reduced gross margin percentages and increased operating costs.
The Physical Science Group 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
had a marginal decrease in operating profits.
27
Sales
Consolidated sales from continuing operations decreased by
$3,951,000 in 1993 to $185,846,000 and increased by $18,928,000
in 1994 to $204,774,000. In 1994, the Company achieved increased
sales in the Physical Science, Distribution and Optical Plastics
Groups. In 1993 the reduced sales were the result of reduced
sales in the Physical Science and Health Care Groups, partially
offset by increased sales achieved by the Distribution Group.
The Physical Science Group's sales decreased from $109,303,000 in
1992 to $102,977,000 in 1993 and increased to $118,421,000 in
1994. The increased sales of $15,444,000 in 1994 were the result
of consolidating the sales of GP since September 1, 1994 (See
Note 2 to the consolidated Financial Statements). In addition,
Duratek also achieved increased sales as a result of work
performed under a three year contract to construct a
vitrification facility for the conversion of mixed waste into
stable glass. 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.
The Distribution Group sales increased from $68,450,000 in 1992
to $74,109,000 in 1993 and to $75,551,000 in 1994. The increase
of $1,442,000 in 1994 was due to the continued growth of the
hardware business. The increase 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 Health Care Group sales decreased from $4,042,000 in 1992 to
zero in 1993 and 1994. The reduction in sales in 1993 was due to
ISI not having any sales of its product, ALFERONR N Injection, in
1993. 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. In 1994, the results of ISI
were recorded on the equity basis, and therefore, its sales were
not included with those of the Company.
The Optical Plastics Group sales decreased from $7,862,000 in
1992 to $7,817,000 in 1993 and increased to $9,290,000 in 1994.
The increased sales in 1994 was the result of increased orders
from MXL's largest customer, due to increased worldwide demand
for its product.
28
Gross margin
Consolidated gross margin was $29,211,000 or 15% of net sales in
1992, $26,974,000 or 14% in 1993 and $32,559,000 or 16% in 1994.
The increased gross margin of $5,585,000 in 1994 occurred
primarily within the Optical Plastics and Physical Science
Groups. In 1993, the decrease in gross margin of $2,237,000
occurred within the Health Care, Distribution and Physical
Science Groups.
The Physical Science Group gross margin decreased from
$13,728,000 or 13% of net sales in 1992 to $12,941,000, or 13%
in 1993 and increased to $16,670,000 or 14% in 1994. In 1994,
the increased gross margin was attributable to both GP and
Duratek. GP realized increased gross margin due to higher
revenues, reduced overhead and higher direct labor utilization.
Duratek realized increased gross margin in 1994 as a result of
increased sales as well as higher margins achieved on both
technology and services contracts. 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 SGLG, which
generated increased gross margins as a result of an improved mix
of services during 1993.
The Distribution Group gross margin decreased from $12,355,000 or
18% of sales in 1992 to $11,718,000 or 16% in 1993 and increased
to $11,785,000 or 16% in 1994. In 1994, the increased gross
margin was due to increased sales. The gross margin in 1994 was
affected by increased warehousing costs incurred as a result of
the decision to close Five Star's New York facility and to
consolidate its operations into the New Jersey facility. The
increased warehousing costs were partially offset by increased
margins achieved due to changes in merchandising practices. In
1995, the Group has started taking steps to reduce its
warehousing costs through the implementation of advanced
warehouse management systems. 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.
The Health Care Group gross margin decreased from $358,000 or 9%
of net sales in 1992 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. As a result of the Exchange
29
Offer in 1993, through which the Company's interest in ISI fell
below 50%, ISI is currently being accounted for on the equity
basis.
The Optical Plastics Group gross margin decreased from $2,740,000
or 35% of net sales in 1992 to $2,642,000 or 34% of net sales in
1993 and increased to $3,635,000 or 39% of net sales in 1994.
The small decrease in gross margin in 1993 was the result of
marginally reduced sales and gross margin percentage. In 1994,
the increased gross margin was the result of increased sales as
well as an improved mix of products.
Investment and other income (expense), net
Investment and other income (expense) was $6,709,000 in 1992,
$3,379,000 in 1993 and $(1,808,000) in 1994, respectively. In
1994, the $5,187,000 reduction in Investment and other income
(expense), net was due to two factors. The Company realized a
foreign currency transaction loss of $2,124,000 in 1994, as
compared to a net foreign currency transaction gain of $901,000
realized in 1993, related to the Company's decision not to hedge
its Swiss denominated debt. In addition, the Company recognized
increased losses on their investments in 20% to 50% owned
subsidiaries as a result of the Company's share of ISI's loss,
which was $4,409,000, being included in Investment and other
income (expense), net for the year ended December 31, 1994. In
1993, the results of ISI were consolidated with the Company for
the first nine months of the year, until the Company's ownership
fell below 50%. The results of operations for ISI have been
accounted for on the equity method since the fourth quarter of
1993, and the Company recognized a $1,599,000 loss in 1993
related to its equity investment in ISI. The above losses were
partially offset by increased gains realized on the sale of
certain investments in 1994. In 1993, the decrease in Investment
and other income (expense), 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. The reserves were taken
in 1992 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. In 1992, the estimated residual value of a 19%
interest in, and advances to, a vendor and distributor of pay
telephones totaling $175,000, which was based upon estimated
30
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, decided to no longer provide financing and
working capital. In prior years, the blood center company
received substantial funding for its centers and the financial
institution provided working capital and equity financing. In
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, 1994, there was an aggregate of SFr. 15,963,000
of Swiss denominated indebtedness outstanding, of which SFr.
14,084,000 represents principal amount outstanding and SFr.
1,879,000 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, 1994, 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, 1994, the
value of the Swiss Franc to the U.S. Dollar was 1.308 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. As of March 24,
1995 the Company had reduced the aggregate principal amount
outstanding to SFr. 5,749,000.
Selling, general, and administrative expenses
Selling, general and administrative expenses (SG&A) decreased
from $34,352,000 in 1992 to $34,255,000 in 1993 and increased to
$34,301,000 in 1994. In 1994, the marginal increase was
primarily the result of increased general and administrative
expenses incurred by the Distribution Group, primarily as a
result of costs associated with the closing of Five Star's New
York warehouse and the consolidation of the New York sales and
operations into the New Jersey facility, as well as increased
depreciation and amortization expense. Five Star has taken steps
in 1995 to reduce their overall level of general & administrative
costs. American Drug Company (ADC) also incurred increased SG&A
as a result of increased consulting expenses and costs related to
the opening and staffing of the Moscow office. ADC is the
31
Company's 54% owned subsidiary which exports American made
generic and prescription drugs and over-the-counter healthcare
products in both Russia and the Commonwealth of Independent
States. The increased general & administrative costs at Five
Star and ADC were partially mitigated by ISI being accounted for
on the equity basis since the third quarter of 1993 and reduced
costs incurred at the corporate level. 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%. The reduced SG&A within the Health Care
Group in 1993 was 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.
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 were
primarily attributable to ISI, were $4,645,000, $2,847,000 and
$431,000 for 1992, 1993 and 1994, 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 the Company
began accounting for ISI on the equity method from that time.
Interest expense
Interest expense aggregated $10,866,000 in 1992, $8,199,000 in
1993 and $6,458,000 in 1994. The reduced interest expense in
1993 and the further reduction in 1994, was the result of the
Company's continuing successful effort to reduce its interest
expense at the corporate level due to reduced interest on the
Company's Swiss Debt obligations due to the Exchange Offers in
1993 and 1994, as well as the Company's practice of repurchasing
Swiss Debt from time to time.
Income taxes and accounting developments
Income tax expense (benefit) from operations for 1992, 1993 and
1994 was $427,000, $(575,000) and $749,000, respectively.
In 1994, the Company recorded an income tax expense of $749,000.
The current income tax provision of $283,000 represents the
32
estimated taxes payable by the Company for the year ended
December 31, 1994. The deferred income tax provision of $466,000
represents the deferred taxes of GP, the Company's 51% owned
subsidiary.
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
income tax expense for 1992 of $427,000 represents state and
local income taxes.
As of December 31, 1994, the Company has approximately
$23,920,000 of consolidated net operating losses available for
Federal income tax purposes.
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". There was no
material effect on the Company's financial condition or results
of operations as a result of the adoption of this principle.
Liquidity and capital resources
At December 31, 1994, the Company had cash and cash equivalents
totaling $10,075,000. GP, SGLG, ADC and Duratek had cash and
cash equivalents of $412,000 at December 31, 1994. 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 purposes of the parent. At
March 24, 1995 the Company had cash, cash equivalents and
marketable securities totaling $10,000,000, of which the
Company's publicly held subsidiaries, GP, SGLG, and ADC had cash,
cash equivalents and marketable securities totaling $66,000. In
addition, MXL had cash, cash equivalents and marketable
securities totaling $1,153,000, which is not available to the
Company due to restrictions within MXL's Line of credit agreement
(See Note 8 to the Consolidated Financial Statements).
33
The Company has sufficient cash, cash equivalents and marketable
securities and borrowing availability under existing and
potential lines of credit to satisfy its cash requirements for
its Swiss Franc denominated indebtedness due in 1995, which
totaled approximately $3,700,000 at March 24, 1995. As
of April 3, 1995, the Company had not yet paid approximately
$3,000,000 of such indebtedness which was due in March 1995
(See Note 10(a) to the Consolidated Financial Statements).
In order for the Company to meet its long-term cash needs,
which include the repayment of approximately $3,300,000 of
Dual Currency and Swiss Franc denominated indebtedness
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-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 1996.
For the year ended December 31, 1994, the Company's working
capital decreased by $7,401,000 to $25,823,000, reflecting the
effect of increased current maturities of long-term debt and
short-term borrowings, partially offset by increased current
assets related to GP. Consolidated cash and cash equivalents
decreased by $901,000 to $10,075,000 at December 31, 1994.
The decrease in cash and cash equivalents of $901,000 in 1994
primarily resulted from the effect of cash used, in operations of
$4,918,000 and investing activities of $4,696,000, partially
offset by cash provided by financing activities of $8,713,000.
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 investments in property, plant
and equipment and intangible assets, partially offset by cash
provided from the sale of certain assets and businesses of a
subsidiary. 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, 1994, 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,
34
1994, the Company has not contractually committed itself for any
other new major capital expenditures.
35
Item 8. Financial Statements and Supplementary Data
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 37
Financial Statements:
Consolidated Balance Sheets - December 31, 1994
and 1993 38
Consolidated Statements of Operations - Years ended
December 31, 1994, 1993, and 1992 40
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1994, 1993,
and 1992 41
Consolidated Statements of Cash Flows - Years ended
December 31, 1994, 1993, and 1992 43
Notes to Consolidated Financial Statements 46
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 75
36
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, 1994 and 1993, and the results of
their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 19, the Company has adopted SFAS 115,
"Accounting for Certain Investments in Debt and Equity
Securities," as of January 1, 1994.
KPMG Peat Marwick LLP
New York, New York
April 3, 1995
37
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1994 1993
Assets
Current assets
Cash and cash equivalents $ 10,075 $ 10,976
Accounts and other receivables (of which
$15,152 and $7,694 are from government
contracts) less allowance for doubtful
accounts of $2,092 and $1,689 52,487 36,285
Inventories 20,642 22,605
Costs and estimated earnings in excess of
billings on uncompleted contracts, of which
$6,897 and $2,913 relates to government
contracts 15,237 13,081
Prepaid expenses and other current assets 6,770 4,160
Total current assets 105,211 87,107
Investments and advances 11,600 28,303
Property, plant and equipment, at cost 37,423 33,873
Less accumulated depreciation and
amortization (22,843) (20,035)
14,580 13,838
Intangible assets, net of accumulated
amortization of $26,970 and $24,691
Goodwill 35,986 25,463
Patents, licenses and deferred charges 1,039 4,641
37,025 30,104
Investment in financed assets 684 2,797
Other assets 6,446 3,908
$175,546 $166,057
38
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
December 31, 1994 1993
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 14,279 $ 6,750
Short-term borrowings 31,060 21,390
Accounts payable and accrued expenses 27,958 20,256
Billings in excess of costs and estimated
earnings on uncompleted contracts 6,091 5,487
Total current liabilities 79,388 53,883
Long-term debt less current maturities 17,513 36,638
Notes payable for financed assets 579
Minority interests 11,970 3,277
Commitments and contingencies
Common stock issued subject to
repurchase obligation 1,510 4,242
Stockholders' equity
Preferred stock, authorized 10,000,000
shares, par value $.01 per share, none
issued
Common stock, authorized 40,000,000
and 30,000,000 shares, par value
$.01 per share, issued 24,140,757
and 19,023,357 shares (of which 22,645
shares are held in treasury) 241 190
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 119,856 106,274
Deficit (53,151) (39,028)
Net unrealized loss on
available-for-sale securities (1,783)
Total stockholders' equity 65,165 67,438
$175,546 $166,057
See accompanying notes to consolidated financial statements.
39
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 1994 1993 1992
Revenues
Sales $204,774 $185,846 $189,797
Investment and other income
(expense), net (including
interest income of $360,
$875 and $1,275) (1,808) 3,379 6,709
202,966 189,225 196,506
Costs and expenses
Cost of goods sold 172,215 158,872 160,586
Selling, general and
administrative 34,301 34,255 34,352
Research and development 431 2,847 4,645
Interest 6,458 8,199 10,866
213,405 204,173 210,449
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 (209) 2,376 2,792
Loss before income taxes,
discontinued operation
and extraordinary item (10,648) (7,424) (11,151)
Income tax expense (benefit) 749 (575) 427
Loss before discontinued operation
and extraordinary item (11,397) (6,849) (11,578)
Discontinued operation
Loss from discontinued operation (2,574) (947) (2,027)
Loss before extraordinary item (13,971) (7,796) (13,605)
Extraordinary item
Early extinguishment of debt,
net of income tax in 1993 1,819 1,662
Net loss $ (13,971) $ (5,977) $(11,943)
Loss per share
Loss before discontinued
operation and extraordinary
item $ (.52) $ (.40) $ (.73)
Discontinued operation (.12) (.06) (.13)
Extraordinary item .11 .10
Net loss per share $ (.64) $ (.35) $ (.76)
See accompanying notes to consolidated financial statements.
40
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1994, 1993, and 1992
(in thousands, except shares, par value per share and per share amounts)
Net
unrealized
Class B Capital in
Common capital excess
stock stock of par for-sales stock holders'
($.01 Par)($.01 Par) value Deficit securities at cost equity
Balance at December 31, 1991 $ 151 $ 2 $ 94,828 $(21,108) $ (1,468) $72,405
Exercise of stock options
and warrants 2 280 282
Issuances of treasury stock
(102,772 common shares) (1,074) 1,468 394
Net loss (11,943) (11,943)
Conversion of 12% Debentures 1 164 165
Issuance of stock in
connection with Swiss Bonds 2 911 913
Effect of exercise of
warrants to purchase the
stock of a subsidiary 674 674
Shares issuable in
settlement of debt 186 186
Issuance and sale of
common stock 3 744 747
Balance at December 31, 1992 159 2 96,713 (33,051) 63,823
Exercise of stock options
and warrants 2 410 412
Net loss (5,977) (5,977)
Conversion of 12% Debentures 82 82
Issuance of stock
in connection with
Swiss Bonds 26 8,694 8,720
Issuance and sale of
common stock 3 375 378
41
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Years ended December 31, 1994, 1993, and 1992
(in thousands, except shares, par value per share and per share amounts)
Net
unrealized
Class B Capital in
Common capital excess available- Treasury stock-
stock stock of par for-sales stock holders'
($.01 Par)($.01 Par) value Deficit securities at cost equity
Balance at December 31, 1993 190 2 106,274 (39,028) 67,438
Implementation of SFAS 115 1,157 1,157
Exercise of stock options
and warrants 1 98 99
Issuance of stock in
connection with
Swiss Bonds 42 9,953 9,995
Transfer from common stock issued
subject to repurchase obligation 5 2,727 2,732
Conversion of 12% Debentures 35 35
Distribution of shares in
a subsidiary (152) (152)
Issuance and sale of
common stock 3 769 772
Net unrealized loss on
available-for-sales securities (2,940) (2,940)
Net loss (13,971) (13,971)
Balance at December 31, 1994 $ 241 $ 2 $119,856 $(53,151) $(1,783) $65,165
See accompanying notes to consolidated financial statements.
42
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1994 1993 1992
Cash flows from operations:
Net loss $ (13,971) $ (5,977) $(11,943)
Adjustments to reconcile net
loss to net cash used
in operating activities:
Provision for discontinued
operation 1,570
Depreciation and amortization 6,063 5,296 6,107
Income tax benefit allocated to
continuing operations (1,043)
Gain from early extinguishment
of debt, net of income
tax in 1993 (1,819) (1,662)
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 (3,887) 4,817 1,641
Inventories 1,163 (381) (2,223)
Costs and estimated earnings in
excess of billings on
uncompleted contracts 1,349 (2,379) (2,012)
Prepaid expenses and other
current assets (817) (44) 279
Accounts payable and accrued
expenses 4,626 2,680 (341)
Billings in excess of costs and
estimated earnings on
uncompleted contracts (1,014) 1,491 (1,861)
Income taxes payable (25)
Net cash used in operations $ (4,918) $ (2,507) $(12,040)
43
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1994 1993 1992
Cash flows from investing activities:
Sales of certain net assets and
businesses of a subsidiary $ 4,470 $ $
Proceeds from sale of an investment 4,500
Marketable securities 651 2,419
Additions to property, plant and
equipment (4,006) (2,077) (3,399)
Additions to intangible assets (5,824) (303) (1,339)
Reduction of (additions to)
investments and other assets 664 (864) 3,096
Net cash provided by (used in)
investing activities (4,696) (2,593) 5,277
Cash flows from financing activities:
Repayments of short-term
borrowings (5,650) (28,011) (6,150)
Proceeds from short-term borrowing 15,320 20,424 8,810
Decrease in restricted cash 1,200 3,800
Proceeds from issuance of
long-term debt 3,638 10,973 203
Reduction of long-term debt (4,882) (8,515) (6,244)
Repayments of notes payable for
financed assets (28)
Proceeds from issuance of
common stock 188 198
Proceeds from issuance of stock
by a subsidiary 1,473
Exercise of common stock options
and warrants 99 413 282
Issuance of treasury stock 15
Net cash provided by (used in)
financing activities 8,713 (1,845) 688
Net decrease in cash
and cash equivalents (901) (6,945) (6,075)
Cash and cash equivalents at
beginning of year 10,976 17,921 23,996
Cash and cash equivalents
at end of year $ 10,075 $ 10,976 $ 17,921
44
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Years ended December 31, 1994 1993 1992
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 4,147 $ 5,344 $ 8,324
Income taxes $ 607 $ 692 $ 703
Supplemental schedule of
noncash transactions:
Reduction of debt $ 9,167 $21,900 $ 1,819
Issuances of treasury stock (1,468)
Additions to other assets
and prepaid expenses 100 179 130
Reduction of accounts payable 267 597
Reduction of accrued interest payable 1,045 607
Issuances of common stock (10,579) (8,981) (1,078)
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.
45
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. All significant intercompany balances
and transactions have been eliminated in consolidation.
Statements of cash flows. For purposes of the statements of cash
flows, the Company considers all highly liquid instruments with
original maturities of three months or less from purchase date to
be cash equivalents.
Marketable investment securities. Marketable investment
securities at December 31, 1994 consist of U.S. corporate equity
securities. The Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (Statement 115) at
January 1, 1994. Under Statement 115, the Company classifies its
marketable equity securities as available-for-sale.
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 10) are subject to currency fluctuations and the Company has
hedged portions of such debt from time to time. During the years
ended December 31, 1994, 1993, and 1992, the Company realized
foreign currency transaction gains (losses) of $(2,124,000),
$901,000 and $3,362,000, respectively. These amounts are
included in Investment and other income (expense), net. At
December 31, 1994, 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
46
incurred and estimated fees on a monthly basis and do not provide
for retainage. Retainages, amounts subject to future
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.
47
Sales of stock by a subsidiary. The Company records in the
Consolidated Statements of Operations any gain or loss realized
when a subsidiary sells its shares at an offering price which
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 January 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,
1994, 1993 and 1992 was 21,724,665, 17,125,900 and 15,771,301,
respectively.
2. General Physics Corporation
On August 31, 1994, General Physics Corporation, a formerly
28% owned affiliate, (GP) acquired substantially all of the
operations and assets of SGLG, Inc. (SGLG) (formerly GPS
Technologies, Inc.), a 92% owned subsidiary, and assumed certain
liabilities of SGLG, related to its business of providing
management and technical training services, and specialized
engineering consulting services, to various commercial industries
and to the United States government. However, for accounting and
financial reporting purposes, the transaction has been treated as
a reverse acquisition of GP by SGLG since, among other factors,
the Company became the beneficial owner of approximately 54% of
the outstanding shares of GP's common stock as a result of the
transaction. The assets acquired by GP also included all of the
outstanding common stock of four wholly-owned subsidiaries of
SGLG: GPS Technologies, Inc. Federal Systems Group (GPSTFSG),
which provides technical services to the U.S. Department of the
Navy and other federal government agencies; GP Environmental
Services, Inc. (GPES), which provides environmental laboratory
analytical services; and General Physics Asia Pte. Ltd., located
in Singapore, and General Physics (Malaysia) Sdn. Bhd., located
in Malaysia, which provide operations support, engineering and
technical services to power and process industries in Southeast
Asia.
48
The consideration paid by GP totaled approximately
$34,000,000 and consisted of (a) $10,000,000 in cash, (b)
3,500,000 shares of GP common stock, (c) GP's 6% Senior
Subordinated Debentures due 2004 in the aggregate principal
amount of $15,000,000 ($1,500,000 of which was paid into escrow),
(valued at $10,700,000 after a $4,300,000 discount), (d) warrants
to purchase an aggregate of 1,000,000 shares of GP common stock
at $6.00 per share, and (e) warrants to purchase an aggregate of
475,664 shares of GP common stock at $7.00 per share. In
addition, GP entered into a lease with SGLG of certain fixed
assets of SGLG for a period of 10 years for an aggregate rent of
$2,000,000, payable in equal quarterly installments of $50,000.
The Company did not recognize a gain or loss on this transaction.
The cash portion of the purchase price for the SGLG
operations and assets was derived from funds borrowed by GP under
a $20,000,000 revolving credit facility secured by liens on the
assets of GP, GPSTFSG, GPES and Inventory Management Corporation,
all wholly-owned subsidiaries of GP. The revolving credit
facility was established with a bank on August 31, 1994, and
permits GPC to borrow funds at a rate of interest equal to the
bank's prime rate or LIBOR, as determined by GP.
Prior to the transaction, the Company directly and
indirectly owned approximately 28% of the outstanding common
stock of GP, and approximately 92% of the outstanding common
stock of SGLG. The Company currently owns directly or indirectly
approximately 51% of the outstanding common stock of GP.
In December 1994, as part of the above transaction, SGLG
distributed its shares of GTS Duratek, Inc. (Duratek) common
stock, totaling 3,950,000 shares, on a pro rata basis to its
shareholders. Therefore, the Company received 3,630,538 shares
of Duratek, and the minority shareholders received the remaining
319,462 shares.
From October 3, 1991 through August 31, 1994, the Company's
investment in GP has been accounted for on the equity basis and
the Company's share of GP's income (loss) for the eight months
ended August 31, 1994 and the years ended December 31, 1993 and
1992 in the amount of $(719,000), $316,000 and $(144,000),
respectively, after the amortization of the underlying goodwill,
was included in the caption "Investment and other income
(expense), net" appearing in the consolidated statements of
operations. The financial position and results of operations of
SGLG were included in the consolidated accounts of the Company
for the years ended December 31, 1992, 1993 and 1994.
49
The following information shows on a pro forma basis, the
results of operations for the Company as if the above transaction
had occurred as of January 1, 1993 (in thousands):
Year ended December 31,
1994 1993
(unaudited)
Revenues $239,416 $251,187
Loss before discontinued
operation and extraordinary item (11,238) (6,132)
Net loss (13,812) (5,260)
Loss per share before discontinued
operation and extraordinary item (.52) (.36)
Loss per share (.64) (.31)
The above pro forma information is not necessarily indicative of
the actual financial position or results of operations that would
have been achieved if the transactions had occurred as of or for
the period indicated, or of future results that may be achieved.
3. GTS Duratek, Inc.
On January 24, 1995, the Company sold 1,666,667 shares of
common stock of its subsidiary, GTS Duratek,Inc. (Duratek) at a
price of $3.00 per share to The Carlyle Group (Carlyle) in
connection with a $16 million financing by Duratek with Carlyle,
a Washington, D.C. based private merchant bank. In addition, the
Company granted Carlyle an option to purchase up to an additional
500,000 shares of the Company's Duratek common stock over the
next year at $3.75 per share.
Duratek received $16 million from Carlyle in exchange for
160,000 shares of newly issued 8% cumulative convertible
preferred stock (convertible into 5,333,333 shares of Duratek
common stock at $3.00 per share). Duratek granted Carlyle an
option to purchase up to 1,250,000 shares of newly issued
Duratek common stock from Duratek over the next four years.
As a result of the above transaction, the Company owns
3,534,972 shares of Duratek's common stock (approximately 40% of
the outstanding shares of common stock). As a result of the
Company's ownership in Duratek falling below 50%, commencing on
January 24, 1995 the Company will account for its investment in
Duratek on the equity basis.
50
In connection with the transaction, Carlyle will have the right,
through its preferred stock, to elect a majority of Duratek's
Board of Directors. Upon conversion of the preferred stock,
Carlyle would own approximately 50% of Duratek's common stock if
all of its options are exercised.
On November 2, 1990, Duratek 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 GP
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 10(b)). In
December 1994, SGLG distributed all its Duratek shares to its
shareholders on a pro rata basis, (See Note 2), thereby, reducing
the Company's voting percentage. 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.
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.
At March 31, 1995, Interferon Sciences, Inc. (ISI) is a 31% owned
affiliate of the Company. It is engaged in the manufacture and
sale of ALFERONR N Injection, ISI's first product commercially
51
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. At December
31, 1994, the Company owned 36% of ISI.
On July 12, 1993, the Company commenced an Exchange Offer for its
Swiss Franc denominated Bonds and its Dual Currency Bonds. (See
Note 10(b)). 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 $2,224,000 as of December 31, 1994 is included in
"Investments and Advances" on the Consolidated Balance Sheet of
which $1,072,000 represents the Company's percentage of
underlying net assets and $1,152,000 represents goodwill. At
December 31, 1994, the Company owned 6,975,000 shares of ISI,
with a market value of $9,373,000. The Company's share of ISI's
loss included in Investment and other income (expense), net is
$4,409,000 in 1994.
Condensed financial information for ISI is as follows as of
December 31, 1994 and 1993 and for the years then ended (in
thousands):
1994 1993
Total assets $8,182 $20,301
Stockholders' equity 2,979 17,131
Revenues 1,166 51
Net loss (12,078) (8,460)
5. American Drug Company
The Company owns approximately 54% of the outstanding common
stock of American Drug Company (ADC), which was organized in
1993, as a wholly-owned subsidiary of the Company to initiate
marketing activities for American generic pharmaceutical and
medical pharmaceuticals in Russia and the Commonwealth of
Independent States (the "CIS"). ADC's subsidiary, NPD Trading
(USA), Inc. provides consulting services to Western businesses in
Russia and Eastern Europe. ADC intends to make sales of
American-made generic pharmaceutical and health care products for
sale under its own label in Russia and the CIS.
52
In August 1994, pursuant to a Transfer and Distribution
Agreement, the Company distributed 46% of its interest in ADC to
the Company's shareholders. In addition, ADC issued warrants to
the Company's shareholders to purchase its stock for a period of
two years, subject to cancellation under certain circumstances.
6. Inventories
Inventories, consisting of material, labor and overhead, are
classified as follows (in thousands):
December 31, 1994 1993
Raw materials $ 1,973 $ 2,836
Work in process 462 675
Finished goods 15,557 16,394
Land held for resale 2,650 2,700
$ 20,642 $ 22,605
7. Property, plant and equipment
Property, plant and equipment consists of the following
(in thousands):
December 31, 1994 1993
Land $ 173 $ 173
Buildings and improvements 1,367 1,365
Machinery and equipment 16,357 19,308
Furniture and fixtures 14,650 7,951
Leasehold improvements 4,876 5,076
37,423 33,873
Accumulated depreciation and
amortization (22,843) (20,035)
$ 14,580 $ 13,838
8. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1994 1993
Line of Credit Agreement (a) $ 12,409 $11,732
Revolving Credit and Term Loan
Agreement (b) 5,650
Revolving Loan and Line of Credit
Arrangements (c) 920 898
Revolving Line of Credit
Agreement (d) 7,631 3,110
Revolving Credit Agreement (e) 10,100
$ 31,060 $ 21,390
53
(a) In April 1993, Five Star Group, Inc. (Five Star) and MXL
Industries, Inc. (MXL) each entered into a revolving credit and
term loan agreement (the "Five Star Loan Agreement" and "MXL Loan
Agreement"). The Five Star Loan 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 50% 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, 1994, the interest rate was
9.5%. As of December 31, 1994, $12,409,000 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 1.375% in excess of the
prime rate, and was 9.875% at December 31, 1994. 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, 1994, $2,916,000 was
outstanding under the Five Star Term Loan.
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. As of December 31, 1994,
there were no borrowings under the MXL Revolving Credit Facility
and the balance of the MXL Term Loan was $2,625,000. 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 1.375% in excess of the prime rate, and was 9.875% at
December 31, 1994. 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. As additional collateral for the
above agreements, the Company has provided SFr. 6,582,000
54
principal amount of the Company's Swiss Bonds, which had been
reacquired by the Company from the bondholders, but not
cancelled. In April 1993, $4,196,000 of the proceeds were used
to repay the balance of a revolving credit and term loan
agreement entered into 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. As
of March 31, 1995 the Company was not in compliance with
certain provisions as a result of the non-payment of
approximately $3,000,000 of Swiss Bonds. Management has
advised the bank of such violations and has obtained a
waiver.
(b) On June 30, 1993, SGLG entered into a new three year
$10,000,000 credit facility, which replaced a previous agreement.
The credit facility was secured by the accounts receivable and
fixed assets of SGLG. The initial $5,000,000 of the credit
facility was fixed at an interest rate of 7.98% and the second
$5,000,000 of the credit facility bore 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 the credit facility. As a
result of the acquisition by GP on August 31,1994 of
substantially all the assets and operations of SGLG (see Note 2)
the balance of the credit facility was repaid.
(c) In August 1991, Eastern Electronics Manufacturing
Corporation (Eastern) assigned the outstanding 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 (14% at
December 31, 1994). At December 31, 1994, $920,000 was borrowed
under the Agreement.
(d) 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
1.5%. 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
55
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. At December 31, 1994,
borrowings were $7,631,000 under the Line and $425,000 is
outstanding under the Facility. In January 1995, Duratek used
proceeds from the Carlyle financing (See Note 3) to retire
amounts outstanding under the Line. On February 2, 1995, Duratek
had $7,000,000 available under the Line.
(e) On August 31, 1994, GP entered into a $20,000,000 secured
revolving credit agreement with a commercial bank. Borrowings
under this agreement bear interest at the prime rate, which was
8.5% at December 31, 1994. This agreement contained certain
covenants, which among other things, limit the amount and nature
of certain expenditures and requires GP to maintain certain
financial ratios. There were available borrowings of
approximately $7,900,000, based upon 80% of available accounts
receivable, under this agreement at December 31, 1994.
9. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the
following (in thousands):
December 31, 1994 1993
Accounts payable $ 15,371 $ 10,234
Payroll and related costs 4,098 4,202
Interest 1,882 1,369
Other 6,607 4,451
$ 27,958 $ 20,256
10. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1994 1993
5% Convertible Bonds due 1999 (b) $ 2,129 $ 2,300
8% Swiss Bonds due 1995 (a)(c) 2,999 4,572
6% Convertible Swiss Bonds
due 1995 (a)(d) 4,036 5,815
5.75% Convertible Swiss Bonds
due 1995 (d) 2,014 2,370
5.625% Convertible Swiss Bonds
due 1996 (e) 1,716 3,189
7% Dual Currency Convertible Bonds
due 1996 (e) 2,391 3,926
56
12% Subordinated Debentures
due 1997 (f) 6,783 6,829
Term loan with banks (Note 8(a)) 5,541 8,708
Senior Subordinated Debentures (g) 801
Notes payable in connection with
settlement of litigation (h) 745 951
Equipment lease obligations (*) 2,058 2,198
31,213 40,858
Less current maturities 13,700 4,220
$ 17,513 $ 36,638
(*) Secured by assets held under capital lease obligations.
(a) On June 10, 1994, the Company commenced an Exchange Offer
for up to 60% of its Swiss denominated 8% Bonds due March 1,
1995, 6% Convertible Bonds due March 7, 1995, 5.75% Convertible
Bonds due May 9, 1995, 5.625% Convertible Bonds due March 18,
1996 and 7% Dual Currency Bonds due March 18, 1996, ("the
Bonds"). The Company offered for exchange its Common Stock with
a value of $1,000 for each $1,000 principal amount of the Bonds.
In addition, the Company offered for exchange its Common Stock
with a value of SFr. 1,000 for each SFr. 1,000 principal amount
of the Bonds. Accrued interest on the Bonds accepted for
exchange by the Company was paid in Common Stock of the Company.
The purpose of the Exchange Offer was to reduce the Company's
long-term indebtedness and related interest expense.
In July, as a result of the Exchange Offer, the Company received
an aggregate of SFr. 2,569,000 principal amount of its Swiss
denominated bonds and $1,377,000 of its 7% Dual Currency
Convertible Bonds. In addition, the Company completed four
private transactions for SFr. 6,971,000 principal amount of its
Swiss denominated bonds and $159,000 of its 7% Dual Currency
Convertible Bonds.
As a result of the above transactions, the Company issued
approximately 3,406,000 shares of its common stock and reduced
its long-term debt by approximately $8,582,000.
In the first quarter of 1995, the Company repurchased SFr.
8,386,000 of its Swiss denominated bonds and $309,000 of its Dual
Currency Bonds, in exchange for a combination of cash, the
Company's common stock and notes. At March 24, 1995, the Company
had SFr. 4,434,000 and $2,082,000 due in 1995, and SFr. 1,415,000
due in 1996.
The Company did not pay the balance of approximately $3,000,000
due on its 8% and 6% Swiss Bonds in March 1995; however, the
Company is conducting discussions with the trustee for the Swiss
bond holders. The Company believes that it will be able to enter
57
into an agreement for the repayment of such Swiss Bonds. At
April 3, 1995, the Company has sufficient cash and cash
equivalents available to repay its Swiss Bonds due in 1995.
(b) The Company commenced an Exchange Offer on July 12, 1993,
for any and all of the 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 the 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 $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 the 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 5.75% Bonds due May 9,
1995, SFr. 2,765,000 of the 5.625% 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, 1994,
$2,309,000 of the New 5% Bonds were outstanding.
As a result of the Exchange Offer, in 1993 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.
(c) On December 20, 1989, in exchange for Swiss Francs (SFr.)
32,420,000 ($20,318,000) of its 6% Convertible Swiss Bonds due
58
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. 2,389,000 are outstanding at
December 31, 1994, (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,
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.
(d) 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. 5,280,000 are outstanding as of
December 31, 1994 (see (a) and (b) above). The outstanding bonds
are convertible into 90,816 shares of the Company's common stock
at any time prior to February 10, 1995 at a conversion price of
approximately $44.45 per share based on an exchange rate of SFr.
1.308 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.
2,635,000 are outstanding as of December 31, 1994 (see (a) and
(b) above). These outstanding bonds are convertible into 56,389
shares of the Company's common stock at a conversion price of
$35.73 per share based on an exchange rate of SFr. 1.308 per U.S.
$1.00 at any time prior to April 22, 1995.
(e) 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. 2,245,000 are currently
outstanding (see (a), (b) and (c) 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 120,862
59
shares of the Company's common stock at any time prior to March
8, 1996 at a conversion price of $39.41 per share based on an
exchange rate of SFr 1.308 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. 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, 1994 and 1993, based on year end exchange
rates, the effective rates of interest would be approximately 9%
and 8%, respectively. At December 31, 1994, the effective rate
of interest of approximately 9% would result in an additional
$55,000 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, the Company's 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), (b) and (c) above),
during 1994, 1993 and 1992 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
zero, $1,819,000 (net of income taxes) and $1,662,000, in 1994,
1993 and 1992, respectively.
(f) 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, 1994 and 1993,
the unamortized balances of such expenses were $308,000 and
$432,000. 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,
60
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 1994 and 1993, $35,000 and
$82,000, respectively, of Debentures were converted into 7,042
and 16,579 shares, respectively, of the Company's Common Stock.
At December 31, 1994, the Debentures are convertible into
approximately 1,365,000 shares of the Company's Common Stock.
(g) In August 1994, GP, as a result of the acquisition of
substantially all the assets of SGLG (See Note 2), issued $15
million of 6% Senior Subordinated Debentures, which have a
carrying value of $10,813,000, net of a debt discount of
$4,187,000. The debentures are unsecured and require payments of
interest only on a quarterly basis through June 30, 1999,
quarterly principal installments of $525,000 plus interest
through June 30, 2004 and the balance of $4.5 million on June 30,
2004. The debentures are subordinated to borrowings under the
line of credit agreement. At December 31, 1994, the carrying
value of the debentures held by the Company was $10,012,000,
which was eliminated in consolidation, and the remaining $801,000
of debentures were held by the minority shareholders of SGLG.
(h) 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 amongst
other things, $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.
Aggregate annual maturities of long-term debt outstanding at
December 31, 1994 for each of the next five years are as follows
(in thousands):
1995 $ 13,700
1996 7,351
1997 7,188
1998 44
1999 2,249
11. Investment in finance subsidiaries
SGLG, Inc. (formerly GPS Technologies, Inc., See Note 2) through
two subsidiaries, has entered into long-term agreements with two
domestic utilities to provide non-recourse long-term financing
from a bank to finance the purchase of two 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.
61
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 nuclear power
plant simulator training services are performed by GP personnel
and are billed at established hourly rates. Revenues for these
services are recognized by GP.
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, 1994 1993
Notes payable to bank $ 579 $ 3,109
Less current maturities 579 2,530
Long-term debt $ $ 579
The loans are secured by the equipment and all rights under the
agreements with the utilities. Under these agreements, SGLG has
agreed to guarantee the service performance with the utilities
but has not guaranteed the obligations of its subsidiaries under
the loan agreements. SGLG has also agreed to maintain a minimum
debt to equity ratio, a minimum tangible net worth and a minimum
working capital, as defined.
12. 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
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
62
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, 1994 aggregated $1,510,000. Shares
as to which the holders' rights of return to the Company expired
during 1994 were transferred to stockholders' equity.
13. 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 age 60 or later. The pension expense
amounted to $31,000, $377,000 and $23,000, for 1994, 1993 and
1992, 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, 1994 1993 1992
Actuarial present value of benefit
plan obligations:
Accumulated benefit obligation (including
vested benefits of $4,436,
$4,838 and $3,976) $ (4,469)$ (4,917) $(3,976)
Projected benefit obligation for
service rendered to date $ (4,469)$ (4,917) $(3,976)
Plan assets at fair value 3,405 3,528 3,120
63
Projected benefit obligation in
excess of plan assets (1,064) (1,389) (856)
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 $(1,064) $(1,050) $ (856)
The net periodic pension expense
is as follows:
Service cost-benefits earned $ $ $
Interest cost on projected benefit
obligations 360 341 340
Actual return on plan assets (350) (414) (317)
Net amortization and deferral
and other 21 450
Net periodic pension expense $ 31 $ 377 $ 23
The Company's assumptions used as of December 31, 1994, 1993, and
1992 in determining the pension cost and pension cost liability
shown above were as follows:
Percent
1994 1993 1992
Discount rate 8.25 7.5 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 available to 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
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
64
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 $285,000, $236,000 and $214,000 in 1994, 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.
14. Income taxes
The components of pretax income (loss) are as follows (in
thousands):
Years ended December 31, 1994 1993 1992
Continuing operations $(10,648) $ (7,424) $(11,151)
Discontinued operation (2,574) (947) (2,027)
Extraordinary gain, net
of income tax effect in 1993 1,819 1,662
The components of income tax (benefit) expense from continuing
operations are as follows (in thousands):
Years ended December 31, 1994 1993 1992
Current
State and local $ 283 $ 398 $ 427
Federal tax (benefit) expense (973)
283 (575) 427
Deferred
State and local 11
Federal 455
466
$ 749 $ (575) $ 427
In 1992, the Company's loss before income taxes exceeded its
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
65
allocated to the extraordinary gain recognized on the early
extinguishment of debt under the provisions of FASB No. 109.
For U.S. Federal income tax purposes, a parent corporation with
an 80% or greater equity interest in its subsidiary may file a
consolidated tax return. Accordingly, the Company and its
greater than 80% owned subsidiaries will file a consolidated
Federal income tax return for the year ended December 31, 1994.
The subsidiaries, in which the Company has an equity ownership
between 50% and 80%, are consolidated for financial reporting
purposes, but file separate U.S. Federal income tax returns for
the year ended December 31, 1994. In 1994, the Company recorded
an income tax expense of $749,000. The current income tax
provision of $283,000 reflected above, represents the estimated
taxes payable by the Company for the year ended December 31,
1994. The deferred income tax provision of $466,000 represents
the deferred taxes of GP, the Company's 51% owned subsidiary.
As of December 31, 1994, the Company has approximately
$23,920,000 of net operating loss carryovers consisting of
$19,424,000 with respect to net operating losses generated from
the Company's consolidated tax return and $4,496,000 generated by
ADC and Duratek as separate tax filers for Federal income tax
return purposes. These carryovers expire in the years 2000
through 2008. In addition, the Company has approximately
$2,784,000 of available credit carryovers which expire in the
years 1998 through 2003.
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 statements or results of
operations since the Company did not carry any deferred tax
accounts on its balance sheet for the year ended December 31,
1993.
The tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities that are
included in the net deferred tax assets are summarized as
follows:
December 31, 1994 1993
Deferred tax assets
Accounts receivable, principally due
to allowance for doubtful accounts $ 854 $ 618
Investment in partially owned companies 3,151 6,492
Inventory 406 55
Lawsuit settlements 351 468
Accrued expenses 310 67
Litigation accrual 535
Other accrued liabilities 496
Net operating loss carryforwards 9,329 8,783
Investment tax credit carryforwards 2,784 2,784
Deferred tax assets 18,216 19,267
Deferred tax liabilities
Property and equipment, principally due to
differences in depreciation 1,650 1,885
Unamortized debt discount 65 1,224
Unrealized exchange gain 1,555 2,383
State taxes 115 417
Prepaid expenses 186
Deferred tax liabilities 3,571 5,909
Net deferred tax assets 14,645 13,358
Less valuation allowance (13,170) (13,358)
Net deferred tax asset $ 1,475 $
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers
income taxes paid in the past three years and future taxable
income in making this assessment. Based upon the level of
historical taxable income and projections for future taxable
income over the periods in which temporary differences are
deductible, management has determined that it is more likely than
not, that results of future operation will generate sufficient
taxable income to realize the deferred tax assets of GP, which is
not included in the Company's Federal income tax return.
However, a full valuation allowance is appropriate for the
Company and its greater than 80% owned subsidiaries included in
the Company's consolidated Federal income tax return, based on
the Company's recent history of annual net losses. As a result,
effective December 31, 1994, the Company has deferred tax assets
of approximately $18,216,000, deferred tax liabilities of
$3,571,000 and a valuation allowance of approximately
$13,170,000.
15. Discontinued operation
In December 1994, the Company decided to sell its Eastern
Electronics Manufacturing Corporation (Eastern) subsidiary, which
was the only company in the Electronics Group. As a result of
the decision to sell Eastern, the Company reflected Eastern as a
67
discontinued operation. In 1994, the Company wrote down various
assets to their estimated net realizable value and recorded a
$100,000 reserve for the cost of discontinuing Eastern, totaling
$1,570,000. The total loss for discontinued operation recognized
in 1994 was $2,574,000, of which $1,789,000 was from operations
and $785,000 was a loss on disposal, which included $100,000 for
expected losses through the date of disposal.
The consolidated statements of operations have been restated for
all years presented to report the results of discontinued
operations for Eastern separately from continuing operations and
where applicable, related notes to the consolidated financial
statements exclude the amounts for discontinued operations. The
balance sheets for 1993 have not been reclassified from those
previously presented.
Assets and liabilities of Eastern included in the consolidated
balance sheet at December 31, 1994 were as follows (in
thousands):
Current assets $ 3,284
Current liabilities (1,247)
2,037
Property and equipment 1,155
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 1992, 1993, and 1994, options and warrants exercisable and
shares reserved for issuance at December 31, 1992, 1993, and 1994
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, 1991 $2.25 -18.50 5,218,884 $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
68
Granted
Exercised 2.25 (43,100)
Terminated 2.25 - 4.50 (26,280)
December 31, 1994 2.25 - 6.00 4,308,059 2.25 1,550,000
Options and warrants
exercisable
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
December 31, 1994 2.25 - 6.00 4,288,909 2.25 1,550,000
Shares reserved for
issuance
December 31, 1992 10,583,723 1,550,000
December 31, 1993 11,387,458 1,550,000
December 31, 1994 13,357,471 1,550,000
At December 31, 1994, 1993, and 1992, 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, 1994, 1993, and 1992 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, 1994, 1993, and 1992
include 1,800,000 shares in connection with Class B shares.
At December 31, 1994, 1993, and 1992, 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
69
products.
As a result of the Exchange Offer, (See Note 10(b)), 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 in 1993 (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, discontinued operation and
extraordinary item for the periods presented.
Years ended December 31, 1994 1993 1992
Revenues
Physical Science $119,341 $103,152 $109,966
Distribution 76,746 74,974 69,121
Optical Plastics 9,426 7,952 8,015
Health Care 1,533 4,762
Other 2,649 989 851
208,162 188,600 192,715
Investment and other
income (expense), net (5,196) 625 3,791
Total revenues $202,966 $189,225 $196,506
Operating results
Physical Science $ 5,053 $ 500 $ 2,410
Distribution 1,484 1,948 2,877
Optical Plastics 2,227 1,378 1,565
Health Care (4,431) (6,583)
Other (1,854) (587) (99)
Total operating profit (loss) 6,910 (1,192) 170
Interest expense (6,458) (8,199) (10,866)
Indirect administrative expenses,
net of gains or losses from
dispositions of investments,
minority interests, foreign
currency exchange gains
or losses, and other revenue (11,100) 1,967 (455)
Loss from operations
before income taxes,
discontinued operation
and extraordinary item $ (10,648) $ (7,424) $ (11,151)
70
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, 1994, 1993 and 1992, sales to
the United States government and its agencies represented
approximately 23%, 17% and 18%, respectively, of sales.
Additional information relating to the Company's business
segments is as follows (in thousands):
December 31, 1994 1993 1992
Identifiable assets
Physical Science $104 572 $ 74,551 $ 79,271
Distribution 42,879 34,255 32,584
Optical Plastics 11,552 7,129 7,051
Health Care 21,486
Corporate and other 12,104 44,121 45,399
Assets relating to
discontinued operation 4,439 6,001 6,858
$175,546 $166,057 $192,649
Years ended December 31, 1994 1993 1992
Additions to property,
plant, and equipment, net
Physical Science $ 2,599 $ 1,360 $ 1,490
Distribution 1,336 557 723
Optical Plastics 189 41 887
Health Care 241
Corporate and other 62 89 38
Discontinued operation, net (180) 30 20
$ 4,006 $ 2,077 $ 3,399
Years ended December 31, 1994 1993 1992
Depreciation and amortization
Physical Science $ 3,523 $ 2,193 $ 2,299
Distribution 1,000 710 718
Optical Plastics 839 876 578
Health Care 552 1,048
Corporate and other 503 800 1,299
Discontinued operation 198 165 165
$ 6,063 $ 5,296 $ 6,107
Identifiable assets by industry segment are those assets that are
used in the Company's operations in each segment. Corporate and
71
other assets are principally cash and cash equivalents,
marketable securities and unallocated intangibles.
18. Fair value of financial instruments
The carrying value of financial instruments including cash,
short-term investments, accounts receivable, 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, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
amount fair value amount fair value
Swiss Bonds $10,765 $ 9,537 $15,946 $12,429
5% Convertible Bonds 2,129 1,980 2,300 2,231
7% Dual Currency
Convertible Bonds 2,391 1,769 3,926 1,743
12% Subordinated
Debentures 6,783 3,052 6,829 5,805
Other long-term debt 9,145 9,145 11,857 11,857
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. Adoption of new Accounting Principle - Accounting for
Certain Investments in Debt and Equity Securities
As of January 1, 1994 the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115). The
Company's marketable securities consist of corporate equity
securities which are included in Investments and Advances on the
Consolidated Balance Sheet. Under SFAS No. 115, the Company
classifies these equity securities as available-for-sale and
records the securities at their fair value. Unrealized holding
gains and losses on available-for-sale securities are excluded
72
from earnings and are reported as a separate component of
stockholders' equity until realized. The effect of the change in
accounting principle did not have a material effect on the
Company's financial condition or results of operations.
A decline in the market value of any available-for-sale
security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost
basis for the security.
Realized gains and losses for securities classified as
available-for-sale are included in earnings and are derived using
the specific identification method for determining the cost of
securities sold.
Marketable investment securities at December 31, 1994
consist of common stocks.
The amortized cost, gross unrealized holding losses and fair
value for available-for-sale securities at December 31, 1994,
were as follows (in thousands):
Gross
Amortized Unrealized
Cost Holding Losses Fair Value
Available-for-sale:
Equity Securities $9,186 $(1,783) $7,403
The gains and losses realized on available-for-sale
securities sold in 1994 were as follows (in thousands):
Unamortized Sales Realized
Cost Proceeds gain (loss)
Cost
Realized loss $1,850 $1,514 $ (336)
Realized gain 461 1,260 799
Net realized
gain (loss) $2,311 $2,774 $ 463
20. 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.
73
Minimum rentals under long-term operating leases are as follows
(in thousands):
Real Machinery &
property equipment Total
1995 $ 4,899 $ 1,115 $ 6,014
1996 2,795 851 3,646
1997 2,308 707 3,015
1998 1,874 715 2,589
1999 1,756 711 2,467
After 1999 3,973 101 4,074
Total $17,605 $ 4,200 $21,805
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 $8,114,735, $7,792,000 and $7,806,000
for 1994, 1993 and 1992, 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, 1994, 28,600 options under
the plan were exercised, 57,500 were cancelled, and at December
31, 1994, 423,750 options are currently exercisable. At December
31, 1994, the Company owned approximately 61% of Duratek and
currently owns approximately 40% (See Note 3).
In 1990, ISI entered into a 5 year loan, principally for the
expansion of its manufacturing facility. The loan is secured by
certain equipment of ISI and is guaranteed by the Company. At
December 31, 1994, the balance of the loan was $409,000.
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.
74
National Patent Supplementary Data
Development Corporation
and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, exce
Three Months Ende
March 31,June 30, Sept. 30,Dec. 31,March 31,June 30, Sept. 30,Dec. 31,
1994 1994 1994 1994 1993 1993 1993 1993
Sales $44,530 $51,430 $51,653 $57,161 $43,996 $54,129 $46,392 $41,329
Gross margin 8,012 9,514 7,911 7,122 6,005 8,834 7,524 4,611
Income (loss) before
discontinued operation
and extraordinary
item * (2,217) (2,059) (2,174) (4,947) (2,777) (1,809) (292) (1,971)
Net income (loss) (2,460) (2,343) (2,424) (6,744) (2,778) (1,887) 348 (1,660)
Earnings (loss) per share:
Before discontinued
operation and
extraordinary item * (.11) (.10) (.10) (.20) (.17) (.11
Net income (loss) (.13) (.12) (.11) (.28) (.17) (.11) .02 (.09)
* Prior quarters have been restated to reflect the discontinued operation.
75
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.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
76
(a)(1) The following financial statements are
included in Part II, Item 8. Financial Statements and
Supplementary Data:
Page
Independent Auditors' Report 37
Financial Statements:
Consolidated Balance Sheets -
December 31, 1994 and 1993 38
Consolidated Statements of
Operations - Years ended
December 31, 1994, 1993 and 1992 40
Consolidated Statements of Changes in
Stockholders' Equity - Years ended
December 31, 1994, 1993 and 1992 41
Consolidated Statements of Cash
Flows - Years ended December 31,
1994, 1993 and 1992 43
Notes to Consolidated Financial
Statements 46
(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.
77
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: Jerome I. Feldman,
President and Chief
Executive Officer
Dated: April 14, 1995
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
Jerome I. Feldman President and Chief Executive Officer
and Director (Principal Executive
Officer)
Martin M. Pollak Executive Vice President, Treasurer
and Director
Scott N. Greenberg Vice President, Chief Financial
Officer, and Director (Principal
Financial and Accounting Officer)
Ogden R. Reid Director
Roald Hoffmann, Ph.D. Director
Paul A. Gould Director
Herbert Silverman Director
Dated: April 14, 1995
78
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 dated June 3, 1994 and
filed on June 13, 1994.*
3.2 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.
i
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 Stock Purchase Agreement dated as of
January 24, 1995 among Carlyle Partners
II, L.P., Carlyle International
Partners III, L.P., C/S International
Partners, Carlyle-GTSD Partners, L.P.,
Carlyle-GTSD Partners II, L.P. and GTS
Duratek, Inc. and the Registrant.
Incorporated herein by reference to
Exhibit 4.1 to the Registrants Form
8-K dated January 24, 1995.
10.9 Stockholders Agreement dated as of
January 24, 1995 by and among GTS
Duratek, Inc., Carlyle Partners II,
L.P., Carlyle International Partners
III, L.P., C/S International Partners,
Carlyle-GTS Partners, L.P., and the
Registrant. Incorporated herein by
reference to Exhibit 4.2 to the
Registrants Form 8-K dated January
24, 1995.
ii
10.10 Registration Rights Agreement dated
as of January 24, 1995 by and among
GTS Duratek, Inc., Carlyle Partners
II, L.P., Carlyle International
Partners III, L.P., C/S International
Partners, Carlyle-GTS Partners, L.P.,
and the Registrant. Incorporated
herein by reference to Exhibit 4.3 to
the Registrants Form 8-K dated January
24, 1995.
13 Not Applicable
18 Not Applicable
19 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of Independent Auditors*
27 Not Applicable
28 Not Applicable
* Filed herewith.
iii