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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, 1996
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 require
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 3, 1997, the aggregate market value of the outstanding shares of the
Registrant's Common Stock, par value $.01 per share, held by non-affiliates
(assuming for this calculation only that all officers and directors are
affiliates) was approximately $74,721,587 based on the closing price of the
Common Stock on the American Stock Exchange on March 3, 1997. 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 3, 1997
Common Stock, par value $.01 per share 10,613,342 shares
Class B Capital Stock, par value $.01 per share 62,500 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1997 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 ...... 1
(c) Narrative Description of Business ...... 1
(d) Financial Information About Foreign
and Domestic Operations and Export
Sales ...... 18
Item 2. Properties ...... 18
Item 3. Legal Proceedings ...... 19
Item 4. Submission of Matters to a Vote of
Security Holders ...... 20
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters ...... 20
Item 6. Selected Financial Data ...... 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 22
Item 8. Financial Statements and Supplementary Data...... 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...... 79
PART III
Item 10. Directors and Executive Officers
of the Registrant ...... 79
Item 11. Executive Compensation ...... 79
Item 12. Security Ownership of Certain
Beneficial Owners and Management ...... 79
Item 13. Certain Relationships and Related
Transactions ...... 79
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 80
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The Company is primarily a holding company, which is a legal entity
separate and distinct from its various operating subsidiaries. The Company and
its operating subsidiaries (i) provide engineering, environmental, training,
analytical and technical support services to Fortune 500 companies, commercial
nuclear and fossil power utilities, the United States Departments of Defense and
Energy and other commercial and governmental customers, (ii) are engaged in the
wholesale distribution of home decorating, hardware and finishing products,
(iii) manufacture molded and coated optical products (such as shields and face
masks and non-optical plastic products) and (iv) manufacture medical devices,
drugs and cosmetic polymer products. The Company also has investments in (i) an
environmental technology and services firm, (ii) a biopharmaceutical company and
(iii) a global provider of software. In addition, the Company owns approximately
54% of the common stock of a company that provides consulting services to
Western companies doing business in Russia and Eastern Europe.
(b) Financial Information About Industry Segments
Certain financial information about business segments (classes of
similar products or services) is included in Note 16 of Notes to Consolidated
Financial Statements.
(c) Narrative Description of Business
PHYSICAL SCIENCE GROUP
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics was incorporated in 1966 to provide technical
consulting services in the field of nuclear science and engineering to nuclear
power companies and government agencies. General Physics expanded its operations
in the late 1960's to provide, among other things, training and technical
support services to the commercial nuclear power industry. General Physics
expanded its markets even further in the late 1980's to provide training and
technical support services to United States Government nuclear weapons
production and waste processing facilities, and environmental services to
governmental and commercial clients.
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. The acquired businesses provide design
engineering, seismic engineering, systems engineering, materials management and
safety analysis services to the commercial nuclear power industry and to the
DOE.
On August 31, 1994, General Physics acquired substantially all of the
assets and operations of GPS Technologies, Inc. ("GPST") and certain of its
subsidiaries (together, the "GPST Businesses") for approximately $32.5 million,
consisting of $10 million cash, 3,500,000 shares of GPC Common Stock, warrants
to acquire up to 1,000,000 shares of GPC Common Stock at $6.00 per share,
warrants to acquire up to 475,664 shares of GPC Common Stock at $7.00 per share,
and 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 $4.5
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 GPST
Businesses provide a wide range of management and technical training, as well as
specialized engineering consulting services, to various commercial industries
and the United States Government.
The Company, which owned approximately 92% of GPST and 28% of General
Physics prior to the transaction, owned approximately 54% of the outstanding
shares of General Physics after the acquisition. Accordingly, the acquisition
was accounted for as a reverse acquisition, whereby the GPST Businesses were
deemed to have acquired General Physics in a transaction accounted for as a
purchase.
On January 23, 1997 stockholders of each of the Company and General
Physics voted to approve the merger of a wholly-owned subsidiary of the Company
with General Physics pursuant to which General Physics became a wholly-owned
subsidiary of the Company (the "Merger"). The Merger was completed on January
24, 1997. Under the terms of the Merger Agreement, holders of General Physics
Common Stock received .60 shares of the Company's Common Stock for each share of
General Physics common stock.
General Physics and its subsidiaries provide training, engineering,
environmental, analytical and technical support services to Fortune 500
companies, the commercial nuclear and fossil power industries, the DOD and DOE,
and other commercial and governmental customers. General Physics is organized
into three groups: Commercial Training and Technical Services, Engineering and
Applied Sciences, and Government Training and Technical Services. 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.
The following table sets forth the approximate revenue attributable to
the categories of services provided by General Physics for the year ended
December 31, 1996:
Year Ended December 31, 1996
in thousands
Commercial Training and Technical Services........
$ 55,101
Engineering and Applied Sciences.................. 29,162
Government Training and Technical Services ....... 32,920
------
Total Revenues $117,183
========
In 1996, General Physics had increased sales of $9,634,000 which was
primarily attributable to increases within the Commercial Training and Technical
Services Group. However, the increase was partially offset by the net effect of
marginally reduced sales within the Government Training and Technical Services
Group and marginally increased sales within its Engineering and Applied Sciences
Group.
In March 1996, the DOD awarded Westinghouse Electric Corporation
("Westinghouse") a nine-year, $575 million contract to destroy chemical weapons
at the Anniston Army Depot. General Physics is a subcontractor to Westinghouse,
responsible for training and operations engineering. The anticipated revenues of
the subcontract to General Physics is estimated to be approximately $16 million.
In September 1996, General Physics was awarded a renewal of its
contract to operate the U.S. Army's Chemical Demilitarization Training Facility
and provide training services to the Army's chemical weapon demilitarization
program nationwide. The anticipated revenues of the contract over its initial
five-year term and three-year option period, if the option is exercised, are
estimated to be approximately $45,000,000.
In December 1996, General Physics received a repeat award of its
contract to provide environmental engineering support services at Aberdeen
Proving Ground. The contract is one of two awarded to successful contractors who
will competitively bid for work to be awarded in the future under separate
delivery orders. Although the maximum award value of the contract over its five
year term is approximately $100,000,000, the actual sales value of the contract
will depend upon the value of the individual delivery orders awarded to General
Physics.
In March 1997, General Physics was awarded a contract by the U.S.
Navy's Fleet and Industrial Supply Center Norfolk, Detachment Washington, to
provide naval aviation training development and support services for Naval Air
Systems Command. The anticipated revenues of the contract over its initial
one-year term and four option years, if all option years are exercised, are
estimated to be approximately $32,000,000.
While General Physics continues to provide services to the DOE and the
commercial nuclear power industry, it is unsure what effect continued cutbacks
will have on its future results. In response to these factors, General Physics
has focused its marketing resources on expanding management and technical
training services to manufacturing and process industries, and specialized
engineering services to federal agencies and process industries. In 1995 and in
1996, General Physics experienced growth in these areas and anticipates future
growth to come from these areas.
Customers
General Physics currently provides services to more than 475 customers.
Significant customers include major automotive manufacturers, commercial nuclear
utilities, the Department of the Navy, the Department of the Air Force, the
Department of the Army, major defense and DOE contractors, and other United
States Government agencies. Revenue from the United States Government accounted
for approximately 48% of the revenue for the year ended December 31, 1996.
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 1996, except for General Motors
Corporation, which accounted for approximately 12% of General Physics revenue,
no other customer accounted for more than 10% of General Physics' revenue.
Commercial Training and Technical Services Group
The Commercial Training and Technical Services Group focuses on
training and human performance improvement needs of Fortune 500 and other
commercial companies. The Group provides workforce training and other related
services to customers in the industrial and manufacturing market sectors. This
Group analyzes the human, organizational and technical issues confronting its
customers and recommends programs to improve performance.
Fortune 500 and Other Commercial Customers
Fortune 500 and other commercial customers represent a wide range of
industries with diverse technical and geographic needs. These industries include
automotive, utility, forest products, steel, food and beverage, pharmaceutical
and others.
General Physics anticipates that the need for its services with Fortune
500 and other commercial customers will continue to grow. However, there can be
no assurance that such need will continue to grow or that such companies will
select General Physics over its competitors to provide such services.
Automotive Services
General Physics is a full-service training provider for the automotive
industry. Since 1987, General Physics has participated in a strategic business
partnership with the General Motors ("GM") Corporate Organization and Employee
Development Staff. Each year several thousand GM employees attend courses
conducted by General Physics. Additionally, training and consulting services are
provided on a project basis to many divisions of GM, including GM Overseas
Corporation, Beijing office. General Physics also provides training and
consulting services to Chrysler Corporation and Ford Motor Company as well as
many of the automotive supplier companies.
Industrial Training Services
General Physics develops and provides customized training programs to
the forest products, food and beverage, and petrochemical industries. These
services focus on continuous improvement in the maintenance and operations
aspects of plants and facilities. General Physics supports several customers by
providing complete process line or facility start-up services. Process Safety
Management training and technical services are also provided by General Physics.
Customers include Georgia Pacific Corp., Anheuser-Busch, Inc., Mobil Oil Company
and Aramco Services Company.
Manufacturing Services
General Physics offers training and technical services to manufacturing
concerns. General Physics frequently supports the introduction of new work
practices associated with lean manufacturing, self-directed work teams and
engineering. General Physics' combination of technical skills and work practices
training helps meet the needs of a diverse customer base, including Ford
Electronics, USX Corporation, Inland Steel, and Bell and Howell - Postal
Systems, Inc.
Utility Services
General Physics furnishes a wide variety of training, engineering,
technical and management support services to the commercial nuclear power
industry, specializing in services which improve plant operation and maintenance
and ultimately increase plant availability. General Physics has provided
services at one time or another to virtually all of the 110 licensed commercial
nuclear power plants in the United States. Services provided include development
of training programs and materials; conduct of training, development and upgrade
of operations and maintenance procedures; development and implementation of
Reliability-Centered Maintenance programs; spare parts management and
procurement assistance; plant configuration management; control room human
factors engineering; training simulator maintenance and modification; staff
augmentation; and emergency preparedness program assistance. Major customers
include Public Service Electric & Gas Company, Entergy Operations, Inc. and
Nebraska Public Power District.
General Physics also provides services designed to improve the
operations of conventional utility power plants, gas turbine combined cycle and
cogeneration plants, waste-to-energy plants, and industrial facilities. These
services include plant operations and maintenance documentation, simulator
training programs, plant startup engineering, maintenance management systems,
and plant operations and maintenance training. Major customers include Baltimore
Gas and Electric Company ("BG&E"), Entergy Operations, Inc. and Alabama Electric
Coop.
General Physics provides training services to the power systems
operations centers of commercial utilities and related utility power pools,
including training system operators responsible for the buying, selling and
overall flow of bulk electric power throughout the United States. Major
customers include Consolidated Edison Company, Nevada Power, BG&E and the
Electric Power Research Institute.
International Operations
General Physics maintains international operations in Kuala Lumpur,
Beijing, Mexico City and London offering substantially the same services as are
offered in the United States. Customers include electric utilities, independent
power producers, automobile manufacturers and parts suppliers, pulp and paper
companies, steel manufacturers and major petroleum refiners.
Engineering and Applied Sciences Group
The Engineering and Applied Sciences Group provides engineering
services to the Government, utilities and the petrochemical industry.
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 and electric power generation.
The Group's engineering and technical services are designed to provide
regulatory compliance and to improve performance through increases in
efficiency, reliability and availability of plants and facilities. Services
provided specialize in establishing programs and techniques that 1) improve the
operational performance of components and systems, 2) reduce the probability of
component failure, and 3) address the consequences of component failure to the
system, personnel, and the environment. Components include pressure vessels,
above-ground and underground tanks, boilers, piping systems, rotating equipment
and associated instrumentation and controls. This Group also provides a full
service environmental analytical laboratory, with certified specialization in
soils, water, and military ordinance analysis and testing.
Engineering Design, Analysis and Inspection Services
General Physics provides mechanical, facility, civil/structural,
welding and electrical engineering design services for existing and new systems
and equipment with specialization in pressure systems technology. Customers
include the DOE, Phillips Laboratory at Edwards AFB, Arnold Engineering
Development Center, AeroJet General Corp., the NASA Lewis Research Center,
commercial research facilities and chemical and petroleum manufacturers. General
Physics has also implemented comprehensive Process Safety Management (PSM)
programs, including assessment of mechanical integrity of critical components,
maintenance management, procedures development and management of change.
Systems Engineering
General Physics provides expert and support personnel to The Johns
Hopkins University Applied Physics Laboratory in the areas of systems
engineering and computer science, focusing on the design, testing and evaluation
of new and modified Navy combat systems. These services include a wide range of
computer support capabilities, including computer analysts, programmers,
computer scientists, data reduction specialists, and computer operators.
Plant Performance Improvement Services
General Physics provides computer systems, engineering, chemistry and
technical training services to improve the efficiency, reliability and
availability of power plants for the utility and independent power generation
industry. Senior staff of this Group are routinely employed as expert witnesses
in the area of power plant engineering and operations.
Systems Engineering and Licensing
General Physics provides a variety of engineering services to
commercial nuclear plants, including design engineering, service engineering,
systems engineering, licensing and safety analysis.
Environmental Services
General Physics provides environmental engineering, training and
technical support services to United States Government agencies, including the
DOD, the DOE, and the United States Postal Service, state and local governments,
and commercial customers, including several of the largest domestic industrial
companies. A majority of the environmental services revenue is derived from
contracts to provide environmental engineering and other services to the DOD at
its Aberdeen Proving Ground.
General Physics provides environmental engineering services to support
client efforts to obtain air, water and waste permits and to determine if their
sites and facilities are in compliance with current federal, state and local
regulations; and to develop and manage site environmental remediation plans,
such as hazardous waste minimization programs, treatment plans for specific
contaminants, air emission control, erosion control, storm water management,
waste reduction and underground storage tank management. However, General
Physics subcontracts most remediation construction activities, and in all cases
subcontracts the removal and off-site disposal and treatment of hazardous
substances.
General Physics also furnishes various training and technical support
services to assist clients with environmental regulatory compliance and
voluntary initiatives including Environmental Management Systems programs
meeting the International Organization of Standards, ISO-14000. Support services
range from industrial hygiene services and risk assessment, to performance
improvement and training.
General Physics, through GP Environmental Services, Inc., a
wholly-owned subsidiary, operates an environmental laboratory serving industrial
and governmental customers primarily in the mid-Atlantic region. The laboratory
performs analytical laboratory services, focusing on soils, water and biological
tissue samples, using automated instrumentation and analytical facilities and a
network combining all computer automated equipment and reporting systems.
Government Training and Technical Services Group
The Government Training and Technical Services Group includes General
Physics Federal Systems, Inc., a wholly-owned subsidiary of General Physics. The
Group provides services in four defined market sectors: Navy, Army, Department
of Energy and Other Government. The Navy market sector represents nearly
two-thirds of the Group's operating revenues, while the Department of Energy,
Army and Other Government sectors are approximately equally represented in the
remaining one-third of operating revenues.
General Physics provides a wide range of services to its government
clients. These services fall into four "core competencies": training material
development and delivery using the Instructional System Development (ISD) model,
configuration management and the full range of Integrated Logistics Support
(ILS) disciplines, Information Technology (IT) services, and multimedia
development. Within each of these four areas, the Group has met rigorous
qualification and certification requirements mandated by government agencies.
Major Naval command customers include NAVSEA, Naval Undersea Warfare
Center, and Naval Surface Warfare Center. Additionally, this Group provides
services to other agencies of the Federal Government, including the Department
of the Army, Department of Energy, Defense Finance Accounting Service ("DFAS"),
Department of Treasury, and Department of Justice.
Applied Technology and Undersea Warfare
General Physics provides engineering services to United States
Navy-related activities, particularly the Naval Undersea Warfare Center, which
is headquartered in Newport, Rhode Island, with detachments throughout the
United States. General Physics has considerable computerized Information Systems
Management expertise and is noted for its Bar Coded Inventory Management, Local
Area Network and Wide Area Network design and administration capabilities.
Systems Command Services
General Physics specializes in providing program and financial
management services for DOD commands in support of major weapon systems
acquisitions, including providing the United States Navy with training/trainer
products and services, including Submarine Operational Readiness Assessment and
Training. General Physics also maintains full-service broadcast quality video
production and computer-generated animation facilities and has developed more
than 500 instructional hours of computer-based training, linear videotape and
interactive videodisc/CDROM productions.
Government Services
General Physics provides financial, specialty software and office
automation training through contracts with EDS. The training is customer
tailored for specific end-users, including the Department of Defense-DFAS and
the Department of Justice-Immigration and Naturalization Service. General
Physics provides aviation anti-submarine warfare aircrew training. With
personnel located throughout the United States, General Physics developed the
Deployable Acoustic Readiness Training System ("DARTS"), consisting of a
multi-track tape reproducer and accompanying exercise manuals that can be used
in any aircraft location. In addition to DARTS, General Physics provides
specialized anti-submarine warfare technical services and training, including
development of computer-based training used at the Naval Aviation Warfare
Operator Training School.
U.S. Army Services
General Physics operates the training center in Edgewood, Maryland
supporting the United States Army's chemical weapons demilitarization program.
General Physics provides training for personnel who will operate and maintain
demilitarization plants at seven locations across the country. General Physics
has trained chemical demilitarization specialists from Russia as part of an
effort to introduce U.S. technology and approaches for Russian chemical
munitions demilitarization programs. In addition, General Physics is a
subcontractor to Westinghouse at the Anniston Army Depot, with responsibility
for training and operations engineering in support of Westinghouse's contract to
destroy chemical weapons.
DOE Services
At the DOE's Savannah River site, General Physics provides professional
services in such areas as training program design, development and accreditation
assistance, technical support and quality assurance and various other operations
support services. General Physics also has technical services contracts at many
of the DOE's research laboratories, including Princeton Plasma Physics
Laboratory and Brookhaven National Laboratory.
Contracts
General Physics is currently performing under approximately 900
contracts, providing charges on a time-and-materials, a fixed-price or a cost
reimbursable basis. General Physics' subcontracts with the United States
Government have predominantly been cost reimbursable contracts and fixed-price
contracts. General Physics is required to comply with the Federal Acquisition
Regulations and the Government Cost Accounting Standards with respect to
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. 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"). The DCAA has audited General Physics' contracts
through 1994 without any material disallowances.
The following table illustrates the percentage of total revenue
attributable to each type of contract for the year ended December 31, 1996:
Year ended December 31, 1996
Time and Materials............................. 36%
Fixed-Price................................... 44
Cost Reimbursable.............................. 20
Total Revenue............................ 100%
====
General Physics' time-and-materials contracts generally provide for
billing of services based upon the hourly labor rates of the employees
performing the services and the actual expenses incurred, each multiplied by a
specified mark-up factor, up to a certain aggregate dollar amount. General
Physics' time-and-materials contracts include certain contracts under which
General Physics has agreed to provide training, engineering and technical
services at fixed hourly rates (subject to adjustment for labor costs).
Time-and-materials contracts generally permit the client to control the amount,
type and timing of the services to be performed by General Physics and to
terminate the contract on written notice. If a contract is terminated, General
Physics typically is paid for the services provided by it through the date of
termination. While General Physics' clients often modify the nature and timing
of services to be performed, no significant terminations of General Physics'
time-and-materials contracts have occurred.
General Physics' fixed-price contracts provide for General Physics to
perform specified services for a fixed price. General Physics bears the risk
that increased or unexpected costs required to perform the specified services
may reduce General Physics' profit or cause General Physics to sustain a loss,
but General Physics has the opportunity to derive increased profit if the costs
required to perform the specified services are less than expected. Fixed-price
contracts generally permit the client to terminate the contract on written
notice; in the event of such termination, General Physics would typically, at a
minimum, be paid a proportionate amount of the fixed price. No significant
terminations of General Physics' fixed-price contracts have occurred over the
last three years.
General Physics' cost reimbursable contracts provide for General
Physics to be reimbursed for its actual costs plus a specified fee. These
contracts also are generally subject to termination at the convenience of the
client. If a contract is terminated, General Physics typically would be
reimbursed for its costs to the date of termination, plus the cost of an orderly
termination, and paid a proportionate amount of the fee. No significant
terminations of General Physics' cost reimbursable contracts have occurred.
Competition
The principal competitive factors in General Physics' markets are the
experience and capability of technical personnel, performance, reputation and
price. Services such as those provided by General Physics' Commercial Training
and Technical Services Group and by its Engineering and Applied Sciences Group
are performed by many of the customers themselves, architectural and engineering
firms that design and construct power plants, major suppliers of equipment and
independent service companies such as General Physics. 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. Competition has increased as architectural
and engineering firms have devoted additional efforts to these areas as their
work in other areas has diminished. Another factor affecting the competitive
environment is the existence of small, specialty companies located at or near
particular customer facilities and dedicated solely to servicing the technical
needs of those particular facilities.
Competition in the industries served by the Government Training and
Technical Services 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 from small and disadvantaged businesses, which
receive certain preferential treatment in the awarding of government contracts.
Competition in the environmental services industry is intense and comes
from large corporations, such as architect-engineering firms, that have expanded
their businesses to include environmental services, specialized service firms
that work exclusively in the environmental arena, other analytical laboratories
and professional service firms such as General Physics. The competition in the
analytical services business is very intense, and the principal determining
factor is price. Most of the competitors are larger companies with multiple
facilities which have greater flexibility in capacity and pricing.
Personnel
General Physics' principal resource is its technical personnel. General
Physics' future success will depend to a significant degree upon its continued
ability to hire, train, integrate into its operations and retain professionals.
General Physics competes for new professionals with clients, as well as with its
other competitors. As of March 1, 1997, General Physics employed approximately
1,350 persons. Many of General Physics' employees perform multiple functions
depending upon changes in the mix of demand for the services provided by General
Physics.
General Physics' personnel have backgrounds in mechanical, electrical,
chemical, civil, nuclear and human factors engineering; in technical education
and training; in power plant design, operation and maintenance; in United States
Navy weapons systems design, operation and maintenance; and in toxicology,
industrial hygiene, health physics, chemistry, microbiology, ecology and
mathematical modeling.
The United States Navy, the United States Army, the DOE and various
other United States Government agencies generally require that contractor
employees have appropriate security clearances. Thus, recruiting and retaining
employees having appropriate security clearance to work at government facilities
is important to the continued growth of 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 previously has entered into employment agreements with certain
officers and other employees. General Physics believes its relations with its
employees are good.
Marketing
General Physics markets its services to customers primarily through its
technical personnel, using senior management to aid in the planning of marketing
strategies and evaluating current and long-term marketing opportunities and
business directions. General Physics also has other employees dedicated solely
to marketing efforts. Corporate level marketing is directed at long-term
strategic business development with specific customers and with international
business. General Physics has 40 offices and 52 sites, located in 30 states and
offices in Kuala Lumpur, Beijing, Mexico City and London, from which it markets
its services. Courses and workshops given by General Physics personnel to the
public from time to time serve an important marketing function. General Physics
also sends a variety of sales literature to current and prospective clients
whose names are maintained in a computerized database which is updated
periodically.
The goal of General Physics' marketing process is to obtain awards of
new contracts and expansion of existing contracts. By staying in contact with
clients and looking for opportunities to provide further services, General
Physics sometimes obtains contract awards or extensions without having to
undergo competitive bidding. In other cases, clients request General Physics to
bid competitively. In both cases, General Physics submits formal proposals to
the client for evaluation. The period between submission of a proposal to final
award can range from 30 days or less (generally for non-competitive, short-term
contracts), to a year or more (generally for large, competitive multi-year
contracts with governmental clients).
Backlog
The following table sets forth the appropriate amounts of General
Physics' backlog for services under signed contracts and subcontracts as of
December 31, 1996, with information for each of General Physics' three business
groups:
Year ended December 31, 1996
(in thousands)
Commercial Training and Technical Services...... $27,632
Engineering and Applied Sciences...... 23,931
Government Training and Technical Services...... 15,728
--------
Total Backlog............................ $67,291
=======
General Physics anticipates that most of its backlog as of December 31, 1996
will be recognized as revenue during fiscal year 1997; 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.
Insurance
By providing services to the commercial electric power industry and to
the United States Armed Forces, General Physics is engaged in industries in
which there are substantial risks of potential liability. As of January 1, 1996,
General Physics' insurance was combined with National Patent's insurance in a
consolidated insurance program (including general liability coverage). However,
certain liabilities associated with General Physics' business are not covered by
these insurance policies. In addition, such liabilities may not be covered by
Federal legislation providing a liability protection system for licensees of the
NRC (typically utilities) for certain damages caused by nuclear incidents, since
General Physics is not such a licensee. Finally, few of General Physics'
contracts with clients contain a waiver or limitation of liability. Thus, to the
extent a risk is neither insured or indemnified against nor limited by an
enforceable waiver or limitation of liability, General Physics could be
materially adversely affected by a nuclear incident. Certain other environmental
risks, such as liability under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended (Superfund), also may not be covered
by General Physics' insurance.
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
offsite 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 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.
Properties
General Physics' principal executive offices are located at 6700
Alexander Bell Drive, Suite 400, Columbia, Maryland 21046, and its telephone
number is (410) 290-2300. General Physics leases approximately 31,650 square
feet of an office building at that address, approximately 208,350 square feet of
office space at various other locations throughout the United States, and in
China, Great Britain, Mexico and Malaysia. General Physics believes that its
facilities are adequate to carry on its business as currently conducted.
Legal Proceedings
On September 27, 1996, General Physics, all of the directors of General
Physics and the Company were named as defendants in a complaint filed in the
Court of Chancery of the State of Delaware in and for New Castle County, styled
Dunlop v. Pollak, et al., Civil Action No. 15237-NC. Certain directors of the
Company were also named as defendants in the complaint. The plaintiff and the
defendants have reached an agreement in principle to settle this litigation. See
"The Company - Legal Proceedings".
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 360,000 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 Cabot, 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
24 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 10% of Five Star's
sales in 1996 and its 10 largest customers accounted for approximately 18% of
such sales. No other customer accounted for in excess of 10% of Five Star's
sales in 1996. All such customers are unaffiliated companies and neither Five
Star nor the Company has a long-term contractual relationship with any of them.
Competition within the industry is intense. There are much larger
national companies commonly associated with national franchises such as
Servistar and True Value as well as smaller regional distributors, all of whom
offer similar products and services. Additionally, in some instances
manufacturers will bypass the distributor and choose to sell and ship their
products directly to the retail outlet. The principal means of competition for
Five Star are its strategically placed distribution centers and its extensive
inventory of quality name brand products. Five Star will continue to focus its
efforts on supplying its products to its customers at a competitive price and on
a timely, and consistent basis. In the future, Five Star will attempt to acquire
complementary distributors and to expand the distribution of its line of
private-label products sold under the "Five Star" name. OPTICAL PLASTICS GROUP
MXL INDUSTRIES, INC.
The Optical Plastics Group consisting of MXL Industries, Inc. ("MXL")
is engaged in the manufacture of molded and coated optical products, such as
shields and face masks and non-optical plastic products. 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 41%
of MXL's total sales and MXL's 10 largest customers accounted for approximately
81% of its total sales.
MXL's sales and marketing effort concentrates on industry trade shows.
In addition, the Company employs one marketing and sales executive and one sales
engineer. In the future, MXL will attempt to acquire complementary businesses.
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 beyond the soft contact lens area, where it was already
in use. These polymers, which absorb water without dissolving, have a number of
biomedical applications.
HMS is currently developing gel implants for slow, long-term delivery
applications under grants from the Population Council. These implants could be
combined with chronic disease drugs. HMS is now seeking collaborations with a
number of major pharmaceutical companies with drugs going off-patent, to explore
opportunities to create new patent positions through combining their drugs with
the gel implant delay system.
THE COMPANY'S INVESTMENTS
GTS Duratek, Inc.
GTS Duratek, Inc. ("Duratek") is an environmental technology and
services firm that uses its proprietary vitrification processes to convert
radioactive and hazardous waste into glass for long-term storage and disposal.
On April 23, 1996, Duratek completed a secondary public offering of 3.6 million
shares of common stock at $18.50 per share, one million shares of which were
sold by National Patent, reducing National Patent's ownership to approximately
15% of the currently outstanding shares of common stock of Duratek.
Interferon Sciences, Inc.
Interferon Sciences, Inc. ("ISI") is a biopharmaceutical company
engaged in the study, manufacture, and sale of pharmaceutical products based on
its highly purified, multispecies, natural source alpha interferon ("Natural
Alpha Interferon"). ISI's ALFERON(R) N injection (Interferon Alfa-n3) product
has been approved by the United States Food and Drug Administration for the
treatment of certain types of genital warts and is being studied for potential
use in the treatment of HIV, hepatitis C, and other indications. ISI also is
studying ALFERON N Gel and ALFERON LDO(R), its topical and oral formulations of
Natural Alpha Interferon, for the potential treatment of viral and immune system
diseases. National Patent currently owns approximately 15% of the outstanding
shares of common stock of ISI.
GSE Systems, Inc.
GSE Systems, Inc. ("GSE") was formed in 1994 through the consolidation
of a number of small, related businesses. GSE concluded an initial public
offering in August 1995. GSE is a global provider of integrated enterprise
software and information solutions to the energy, process and manufacturing
industries. The Company controls approximately 22% of the outstanding shares of
common stock of GSE.
American Drug Company
American Drug Company ("ADC") was organized in 1993 as a wholly-owned
subsidiary of National Patent to initiate marketing activities for American
generic pharmaceutical and medical products in Russia and the Commonwealth of
Independent States, from offices in Prague and Moscow. ADC's wholly-owned
subsidiary, NPD Trading (USA) Inc., provides consulting services to Western
companies doing business in Russia and Eastern Europe. ADC began distributing
products in 1995. For the year ended December 31, 1996, ADC had completed
registration for approximately 25 products, including toothpaste, sanitary
napkins, antibiotic ointments, bandages and vitamins. As of December 31, 1996
the Company owned 54% of the outstanding shares of ADC.
Employees
At December 31, 1996, the Company and its subsidiaries employed 1,708
persons, including 19 in the Company's headquarters, 1,321 in the Physical
Science Group, 250 in the Distribution Group and 85 in the Optical Plastics
Group. Of these, 5 persons were engaged in research and development. The Company
considers its employee relations to be satisfactory.
Patents and Licenses
The operating businesses of the Company 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 the 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 Sciences Group
leases approximately 31,650 square feet of an office building in Columbia,
Maryland and approximately 208,350 square feet of office space at 39 branch
offices in various other locations in the United States and abroad.
The Distribution Group leases 250,000 square feet in New Jersey and
110,000 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 the Company 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
On September 27, 1996, General Physics, all of the directors of General
Physics and the Company were named as defendants in a complaint filed in the
Court of Chancery of the State of Delaware in and for New Castle County, styled
Dunlop v. Pollak, et al., Civil Action No. 15237-NC. The complaint was brought
by an alleged stockholder of General Physics, individually and purportedly as a
class action on behalf of all other stockholders of General Physics. The
complaint alleged purported breaches of fiduciary duty by the directors of
General Physics, including certain directors who are also directors of the
Company, and purported breaches of fiduciary duty by the Company, as an alleged
majority and controlling stockholder, arising primarily from the Merger. The
complaint alleges, among other things, that the Merger was timed to allow the
Company to take advantage of the current trading price of General Physics Common
Stock, which plaintiff alleged was depressed. The complaint sought, among other
things, injunctive relief prohibiting the Merger or, if the Merger was
consummated, an order rescinding the Merger or granting plaintiff and the other
members of the purported class damages. Plaintiff granted the defendants an
extension of the time to answer the complaint and to respond to plaintiff's
pending request to review documents relating to the Merger.
The plaintiff and the defendants reached an agreement in principle to
settle the above-referenced action. Pursuant to such agreement, the Company,
General Physics and GPX entered into Amendment No. 1 to the Agreement and Plan
of Merger, dated as of December 18, 1996, which provides for an increase in the
Exchange Ratio of each outstanding share of General Physics Common Stock for the
Company's Common Stock from .53 to .54. In addition, the Collar was changed from
a ratio of $9.336 to $9.914 to a range of $9.259 to $10.00; the effect of the
increase in the Exchange Ratio and the change in the Collar was that holders of
General Physics Common Stock received an amount in value of the Company's Common
Stock in the range of between $5.00 and $5.40 (rather than $4.95 and $5.25), as
long as the Market Price of the Company's Common Stock was within the Collar on
the Test Date.
As part of the agreement in principle, the parties agreed to use their
best efforts to enter into and execute a stipulation of settlement to release
any and all claims that have been or could have been asserted by or on behalf of
the plaintiff or any members of the purported class against any of the
defendants in the lawsuit which arise out of or relate to the Merger, the Merger
Agreement, the Joint Proxy Statement/Prospectus or events described in the
lawsuit. The settlement is subject to, among other things, completion of
discovery to confirm that the settlement is fair and reasonable and is in the
best interest of stockholders of General Physics.
In connection with the settlement, plaintiff's counsel will apply to
the court for an aggregate award of attorney's fees and expenses in an amount
not to exceed $200,000, such fees to be paid principally in shares of the
Company's Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 23, 1997, stockholders of each of the Company and General
Physics at a Special Meeting of Stockholders, voted to approve the merger of a
wholly-owned subsidiary of the Company and General Physics, pursuant to which
General Physics became a wholly-owned subsidiary of the Company.
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, taking
into account the reverse stock split which became effective on October 6, 1995.
During the periods presented below, the Company has not paid any dividends.
Quarter High Low
1996 First 9.875 8.125
Second 11.625 8.375
Third 10.125 8.125
Fourth 9.125 7.0625
1995 First 9.50 6.50
Second 9.75 6.75
Third 9.00 6.50
Fourth* 10.75 7.25
*On September 20, 1995, the Company's shareholders and Board of Directors
approved the proposal to amend the Company's Restated Certificate of
Incorporation to effect a one-for-four reverse stock split of its Common Stock.
The reverse stock split became effective on October 6, 1995.
The number of shareholders of record of the Common Stock as of March 3,
1997 was 3,277. On March 3, 1997, the closing price of the Common Stock on the
American Stock Exchange was $7.18.
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Item 6. Selected Financial Data
Operating Data ...................................................... (in thousands, except per share data)
Years ended December 31, ............................................ 1996 1995 1994 1993 1992
---------
Sales ............................................................... $ 203,800 $ 185,025 $ 204,774 $ 185,846 $ 189,797
Gross margin ........................................................ 30,242 28,322 32,559 26,974 29,211
Interest expense .................................................... 4,358 5,019 6,458 8,199 10,866
Income (loss) before discontinued operations and extraordinary items 11,380 4,032 (11,397) (6,849) (11,578)
Net income (loss) ................................................... 11,380 1,012 (13,971) (5,977) (11,943)
---------
Earnings (loss) per share ........................................... *
Income (loss) before discontinued operations and extraordinary items $ 1.54 $ .60 $ (2.10) $ (1.60) $ (2.94)
Net income (loss) ................................................... 1.54 .15 (2.57) (1.40) (3.03)
---------
Cash dividends declared per share
Balance Sheet Data
---------
Years ended December 31, ............................................ 1996 1995 1994 1993 1992
Cash, cash equivalents, restricted cash and marketable securities ... $ 25,927 $ 11,657 $ 10,075 $ 10,976 $ 23,674
Short-term borrowings ............................................... 20,281 18,043 31,060 21,390 28,977
Working capital ..................................................... 41,691 32,949 25,823 33,224 44,877
Total assets ........................................................ 176,027 151,720 175,546 166,057 192,649
Long-term debt ...................................................... 20,116 23,932 31,213 40,858 61,441
Stockholders' equity ................................................ 94,029 70,998 65,165 67,438 63,823
* All periods have been restated to reflect the effect of the one for four
reverse stock split (See Note 15 to the consolidated financial statements).
Notes: (a) General Physics Corporation's (GP) results of operations were
consolidated with the results of the Company from September 1, 1994 through
December 31, 1996. The balance sheets of GP have been consolidated with the
Company at December 31, 1996, 1995 and 1994. For all other periods GP's
financial data has been accounted for on the equity basis. (b) Interferon
Sciences, Inc.'s (ISI) results of operations were consolidated with the results
of the Company from January 1, 1992 through September 1993. The balance sheet of
ISI was consolidated with the Company at December 31, 1992. ISI's financial data
has been accounted for on the equity basis from October 1993 through June 1996.
From July 1996, ISI's financial data has been accounted for as a combination of
long-term investments and as long-term available-for-sale equity securities. (c)
GTS Duratek, Inc., (Duratek) results of operations were consolidated with the
results of the Company from January 1, 1992 through December 31, 1994. The
balance sheets of Duratek were consolidated with the Company at December 31,
1994, 1993, 1992 and 1991. At December 31, 1995, for the year then ended and
through March 31, 1996, Duratek's financial data has been accounted for on the
equity basis. At December 31, 1996, and since April 1996, the Company has
accounted for its investment as a combination of marketable securities,
long-term investments and as long-term available-for-sale equity securities.
See Management's' discussion and analysis of financial condition and results
operations for further details.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
RESULTS OF OPERATIONS
Overview
In 1996, the Company took several significant steps to position itself for the
future. During the first quarter of 1996, the Company repaid $1,998,000 of Swiss
denominated debt which was due. In addition, at December 31, 1996, the Company
had $20,116,000 of long-term debt, of which $7,319,000 will be repaid in 1997
and $1,990,000 will be refinanced under the terms of the Company's new bank
agreement, which was executed on March 26, 1997 (see Note 21 to the consolidated
financial statements). In April 1996, the Company sold 1,000,000 shares of GTS
Duratek, Inc. (Duratek) common stock, generating net proceeds of $17,700,000.
This transaction had a significant impact upon the Company's liquidity, and at
December 31, 1996, the Company had cash and cash equivalents of $22,677,000. In
September 1996, the Company announced its intention to acquire the remaining 48%
of General Physics Corporation (GP) that it did not already own in exchange for
shares of the Company's common stock (see Note 2 to the consolidated financial
statements). The transaction was completed on January 24, 1997.
In 1996, income before income taxes, discontinued operation and extraordinary
item was $11,244,000, as compared to income of $5,819,000 in 1995. The
improvement in the Company's results is due to several factors. In April 1996,
the Company sold 1,000,000 shares of Duratek common stock recognizing a gain of
$12,200,000. In addition, the Company recorded gains totaling $3,314,000 on the
transfer of 250,000 shares of Duratek common stock from long-term investments to
trading securities and from subsequent changes in the market value of these
shares. The Company currently owns 15% of Duratek and accounts for its
investment in Duratek as a combination of marketable securities, long-term
investments and as long-term available-for-sale securities. In 1996, the Company
also recognized a gain of $2,168,000 on the issuance of stock by affiliates,
primarily as a result of the issuance in April 1996 by Interferon Sciences, Inc.
(ISI) of additional shares of common stock. The Company currently owns
approximately 15% of ISI, and effective in the third quarter of 1996 the Company
commenced accounting for its investment in ISI as a combination of long-term
investments and as long-term available-for-sale equity securities. The above
gains were partially offset by a $4,000,000 loss recognized on the Company's
investments in American White Cross, Inc. (AWC), due to AWC filing for
protection under Chapter 11 of the United States Bankruptcy Code in July 1996.
In 1996 the Company generated increased operating profits due to improvements
within the Distribution and Physical Science Groups, partially offset by reduced
operating profits achieved by the Optical Plastics Group (see Note 16 to the
consolidated financial statements). The Physical Science Group, which is GP,
achieved increased operating profits of $1,650,000 as a result of increased
sales and gross margin. At December 31, 1996 the Company owned 52% of GP and in
January 1997 purchased the remaining 48% (see Note 2 to the consolidated
financial statements). GP provides a wide range of training, engineering,
environmental and technical support services to commercial nuclear and fossil
power utilities, the United States Departments of Defense and Energy, Fortune
500 companies and other commercial and governmental customers. The Distribution
Group, which is the Five Star Group, Inc. (Five Star), the Company's distributor
of home decorating, hardware and finishing products, increased operating profits
by $393,000 due to increased sales and the related gross margin, partially
offset by increased selling, general and administrative expenses. The Optical
Plastics Group, which is MXL Industries, Inc. (MXL), the Company's injection
molding and coating subsidiary, had a reduction in operating profits of
$1,176,000 due to both reduced sales and gross margin percentage. The Company
also had Investment and other income (expense), net totaling $3,756,000 in 1996
as compared to $1,129,000 in 1995. The increased Investment and other income
(expense), net was primarily the result of foreign currency transaction gains in
1996 as opposed to losses in 1995, reduced losses related to ISI, which since
the third quarter of 1996 was accounted for as a combination of long-term
investments and as long-term available-for-sale equity securities, and increased
investment income due to increased cash and cash equivalents. The Company also
reduced its interest expense by $661,000 in 1996 due to the continued reduction
of long-term debt at the Corporate level in 1995 and in the first quarter of
1996.
In 1995, income before income taxes, discontinued operation and extraordinary
item was $5,819,000 as compared to a loss of $10,648,000 in 1994. The
improvement in operations is due to several factors. In the first and fourth
quarters of 1995, the Company sold 1,667,000 and 500,000 shares, respectively of
Duratek common stock, resulting in the recognition of a $3,768,000 gain. As a
result of the first sale of the Duratek common stock, the Company's ownership in
Duratek fell below 50%, and commencing in January 1995, the Company accounted
for its investment in Duratek, which totaled $4,121,000 at December 31, 1995, on
the equity basis (see Note 3 to the consolidated financial statements). In
addition, the Company recorded an unrealized gain totaling $3,183,000 on the
transfer of 250,000 shares of Duratek common stock from long-term investments to
trading securities. During the third quarter of 1995, the Company realized a
$5,912,000 gain as a result of the issuance of common stock by ISI, a then 22%
owned affiliate, and the initial public offering by GSE Systems, Inc.(GSES), a
26% controlled affiliate at December 31,1995. The $5,912,000 gain was comprised
of a $3,137,000 gain realized primarily on the issuance of 1,725,000 shares of
common stock (including the over-allotment option) at $14.00 per share by GSES
in July 1995 and a $2,775,000 gain realized primarily as a result of the
issuance in August and September 1995 of 3,000,000 shares of common stock by ISI
at $4.80 per share, as adjusted for a one for four reverse stock split of ISI
(see Note 4 to the consolidated financial statements). The Company also realized
Investment and other income, net of $1,129,000 in 1995 compared to a net expense
of $1,808,000 in 1994. The improvement is due to several factors including a
foreign currency transaction loss of $1,066,000 in 1995 compared to a foreign
currency transaction loss of $2,124,000 realized in 1994, related to the
Company's decision not to hedge its Swiss denominated debt, and reduced losses
incurred on investments in 20% to 50% owned affiliates. These improvements were
partially offset by a $785,000 loss recognized due to the permanent impairment
of an available-for-sale security. In 1995, the Company also incurred reduced
interest expense as a result of reduced long-term debt at the corporate level.
Operating profits improved for the year ended December 31, 1995 within the
Optical Plastics and Physical Science Groups, and decreased marginally within
the Distribution Group and within American Drug Company, the Company's 54% owned
subsidiary, which is not part of an operating segment. The Optical Plastics
Group generated increased operating profits due to both increased sales and
gross margin percentage. The Physical Science Group experienced improved
operating results due to the results of GP being included in the consolidated
results of operations for the full year (see Note 2 to the consolidated
financial statements). The Distribution Group had marginally reduced operating
profits due to reduced sales and the related gross margin, offset by
significantly reduced operating costs.
Sales
Consolidated sales from continuing operations decreased by $19,749,000 from
$204,774,000 in 1994 to $185,025,000 in 1995 and increased by $18,775,000 to
$203,800,000 in 1996. In 1995, the Company had reduced sales within the Physical
Science and Distribution Groups, partially offset by increased sales achieved by
the Optical Plastics Group. In 1996, the Company had increased sales within the
Physical Science and Distribution Groups, partially offset by reduced sales
within the Optical Plastics Group.
The Physical Science Group's sales decreased from $118,421,000 in 1994 to
$107,549,000 in 1995 and increased to $117,183,000 in 1996. The reduced sales in
1995 were due to the results of Duratek being accounted for on the equity basis
since January 1995, partially offset by the consolidation of the results of GP
since September 1994 (see Note 2 to the consolidated financial statements). The
increased sales of $9,634,000 in 1996 were primarily the result of increased
sales within GP's Commercial Training and Technical Services Group. In addition,
GP experienced marginally increased sales within its Engineering and Applied
Sciences Group, offset by marginally reduced sales within the Government
Training and Technical Services Group. GP has focused its marketing resources on
expanding management and technical training services to manufacturing and
process industries and specialized engineering services to federal agencies and
process industries.
The Distribution Group sales decreased from $75,551,000 in 1994 to $65,098,000
in 1995 and increased to $76,102,000 in 1996. The reduced sales in 1995 were the
result of the loss of a major retail chain as a customer, partially mitigated by
a general increase in business among numerous independent retail stores. The
increased sales of $11,004,000 in 1996 were the result of Five Star commencing
sales to the major retail chain lost in at the end of 1994, as well as a
significant growth in sales to independent retail stores. The growth in
independent retail store sales was primarily generated by a significant increase
in sales of hardware products due to an expansion of Five Star's product line.
The sales increase in 1996 was partially mitigated by the closing of two retail
chains in the northeast which had generated $5,866,000 of sales in 1995.
The Optical Plastics Group sales increased from $9,290,000 in 1994 to
$10,949,000 in 1995 and decreased to $8,781,000 in 1996. The improved sales in
1995 were the result of increased sales throughout MXL's entire customer base.
The reduced sales of $2,168,000 in 1996 was the result of reduced orders from
MXL's largest customer, due to changes in their product line.
Gross margin
Consolidated gross margin was $32,559,000 or 16% in 1994, $28,322,000 or 15% in
1995 and $30,242,000 or 15% of net sales in 1996. The reduced gross margin of
$4,237,000 in 1995 occurred primarily within the Physical Science Group, and to
a lesser extent within the Distribution Group, partially offset by increased
gross margins achieved by the Optical Plastics Group. The increased gross margin
of $1,920,000 in 1996 was the result of increased gross margin within the
Physical Science and Distribution Groups, partially offset by reduced gross
margin achieved by the Optical Plastics Group.
The Physical Science Group gross margin decreased from $16,670,000 or 14% in
1994 to $12,368,000 or 12% in 1995 and increased to $14,309,000 or 12% in 1996.
The decreased gross margin in 1995 was due to the Company's ownership in Duratek
falling below 50% in January 1995, and the Company accounting for Duratek on the
equity and later the cost basis from that time, partially offset by GP being
included in the consolidated results since September 1994. Duratek achieved a
gross margin of $7,111,000 in 1994 but zero was included in consolidated gross
margin for 1995 for Duratek. Since January 1995, Duratek was accounted for on
the equity method until April 1996 when the Company began accounting for its
investment as a combination of marketable securities, long-term investments and
as long-term available-for-sale equity securities. The reduced gross margin
percentage is the result of historically lower gross margins earned by GP due to
the nature of its business. In 1995 GP has increased its gross margin percentage
through its continuing efforts to reduce overhead costs as a percent of revenue,
as well as the achievement of higher direct labor utilization. In 1996, the
increased gross margin of $1,941,000 was the result of increased sales as well
as reduced overhead costs as a percentage of sales.
The Distribution Group gross margin decreased from $11,785,000 or 16% in 1994 to
$10,966,000 or 17% in 1995 and increased to $12,313,000 or 16% in 1996. In 1995,
the reduced gross margin was the result of reduced sales, partially mitigated by
an increased gross margin percentage. The increased gross margin percentage in
1995 was the result of reduced warehousing costs due to the successful
implementation of Five Star's advanced warehouse management system , as well as
the consolidation of Five Star's New York warehouse into the New Jersey
facility. The increased gross margin of $1,347,000 in 1996 was the result of
increased sales. The reduced gross margin percentage was the result of an
increase in drop- ship sales ,as well as lower margins generated on sales to a
major retail chain, partially offset by continued efficiencies achieved in Five
Star's warehouse operations.
The Optical Plastics Group gross margin increased from $3,635,000 or 39% of net
sales in 1994 and to $4,336,000 or 40% of net sales in 1995 and decreased to
$2,913,000 or 33% of net sales in 1996. In 1995, the increased gross margin was
primarily the result of increased sales. The reduced gross margin of $1,423,000,
as well as the reduced gross margin percentage in 1996 was the result of reduced
sales to MXL's major customer, who historically generated higher gross margin
percentages than the remainder of MXL's business on average.
Investment and other income (expense), net
Investment and other income (expense) was $(1,808,000) in 1994, $1,129,000 in
1995 and $3,756,000 in 1996. The improvement in 1996 is primarily due to three
factors. In 1996, the Company had a foreign currency transaction gain of
$340,000 compared to a loss of $1,066,000 in 1995, related to the Company's
decision not to hedge its Swiss denominated debt, increased investment income
and reduced losses incurred on investments in 20% to 50% owned affiliates.
Although the Company is exposed to foreign currency transaction losses as a
result of its Swiss denominated indebtedness, the Company considers its risk of
loss to be acceptable due in part to the reduced amount of such indebtedness at
December 31, 1996. Accordingly, the Company has not hedged such risk at December
31, 1996 and will review this policy on a continuing basis. The Company had
increased investment income in 1996 as a result of an increase in cash and cash
equivalents during 1996. In addition, the Company incurred reduced losses
related to ISI, in which the Company has an approximately 15% interest, which
effective in the third quarter of 1996 was accounted for as a combination of
long-term available-for-sale equity securities and long-term investments. The
improvement in 1995 was due to several factors including a foreign currency
transaction loss of $1,066,000 in 1995 compared to a foreign currency
transaction loss of $2,124,000 realized in 1994, related to the Company's
decision not to hedge its Swiss denominated debt, and reduced losses incurred on
investments in 20% to 50% owned affiliates. These improvements were partially
offset by a $785,000 loss recognized due to the permanent impairment of an
available for sale security. At December 31, 1996 and 1995, the Company's
Investments and advances of $25,108,000 and $21,452,000 were primarily its
investments in Duratek, ISI and GSES, which were $5,113,000, $6,360,000,
$9,868,000 in 1996 and $4,121,000, $3,761,000 and $8,944,000, in 1995,
respectively.
Selling, general, and administrative expenses
Selling, general and administrative expenses (SG&A) decreased from $34,732,000
in 1994 to $30,372,000 in 1995 and increased to $30,788,000 in 1996. In 1995,
the reduced SG&A was primarily the result of reduced SG&A of $3,985,000 within
the Physical Science Group primarily due to Duratek, which incurred SG&A of
$5,926,000 in 1994, being accounted for on the equity basis since January 1995,
partially offset by increased SG&A of $1,941,000 incurred by GP largely due to
the recording of an approximately $1,015,000 reserve related to potentially
uncollectible revenue recorded in years prior to 1993. In the process of
reviewing the results of a previous audit by the Defense Contract Audit Agency,
GP determined that, based upon the information then available, it was not
probable that the government would approve payment of a rate differential
related to overruns in certain cost-plus-fixed-fee contracts which were
completed prior to 1994. Since the rate differential had been recognized as
revenue over a series of prior years, GP set up a reserve in the third quarter
of 1995 against the estimated amount of the rate differential believed likely to
be noncollectible. In addition, the Distribution Group incurred reduced SG&A of
$773,000 in 1995 as a result of Five Star's reduced sales commissions paid due
to reduced sales, as well as the success of its continuing effort to consolidate
and streamline its organization. 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 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 and administrative costs at Five Star
and ADC were partially mitigated by reduced costs incurred at the corporate
level. The increase of $416,000 in SG&A in 1996 was the result of increased SG&A
incurred by the Distribution Group, partially offset by reduced SG&A achieved by
the Physical Science and Optical Plastics Groups and at the Corporate level. The
increased SG&A within the Distribution Group was primarily the result of
increased sales commissions paid due to increased sales, as well as increased
costs incurred by Five Star for equipment and computer rental due to the
continued upgrading and development of their facility management systems. The
reduced SG&A achieved by GP was the result of the $1,015,000 reserve taken in
1995 related to potentially uncollectible revenue recorded in years prior to
December 31, 1993, partially offset by a $259,000 reserve recorded in 1996 for
the settlement of a legal action brought against GP by a former employee. The
Optical Plastics Group achieved lower SG&A in 1996 due to efforts to reduce
their operating costs due to their reduced sales volume.
Interest expense
Interest expense aggregated $6,458,000 in 1994, $5,019,000 in 1995 and
$4,358,000 in 1996. The reduced interest expense in 1995 and the further
reduction in 1996, 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 1994 and 1995
and the repayment of various Swiss Debt obligation in 1996 (see Note 11 to the
consolidated financial statements).
Income taxes
Income tax expense (benefit) from operations for 1994, 1995 and 1996 was
$749,000, $1,787,000 and $(136,000), respectively.
In 1996, the Company recorded an income tax benefit of $136,000. The current
income tax provision of $1,724,000 represents the estimated taxes payable by GP,
the Company's 52% owned subsidiary. The deferred income tax benefit of
$1,860,000 results from utilization of net operating loss carryovers and a
reduction in the valuation allowance, among other factors. The decrease in the
valuation allowance in 1996 was attributable in part to the utilization of the
Company's net operating loss carryforwards, and to the Company's expectation of
generating sufficient taxable income that will allow for the realization of a
portion of its deferred tax assets.
In 1995, the Company recorded an income tax expense of $1,787,000. The current
income tax provision of $258,000 represents the estimated taxes payable by the
Company for the year ended December 31, 1995. The deferred income tax provision
of $1,529,000 represents the deferred taxes of GP, the Company's 51% owned
subsidiary.
In 1994, the Company recorded an income tax expense of $749,000. The current
income tax provision of $283,000 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, 1996, the Company has approximately $18,131,000 of
consolidated net operating losses available for Federal income tax purposes.
Accounting developments
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Statement 121 requires the Company to
estimate the future cash flows expected to result from the use and eventual
disposition of its property, plant and equipment and other long lived assets,
and if the sum of such cash flows is less than the carrying amount of these
assets, to recognize an impairment loss to the extent, if any, that the carrying
amount of the assets exceeds their fair values. The Company believes that
expected future cash flows derived from these assets will be at least equal to
their carrying values, and that no impairment loss will be indicated.
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost
has been recognized for its stock options in the financial statements.
Forward-Looking Statements. This report contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including, but not
limited to the Company's ability to reverse its history of operating losses; the
Company's dependence on its subsidiaries and its investments as its primary
source to service outstanding debt and to fund its operations; and the Company's
ability to comply with financial covenants in connection with various loan
agreements.
Liquidity and capital resources
At December 31, 1996, the Company had cash and cash equivalents totaling
$22,677,000. GP, SGLG, Inc. and ADC had cash and cash equivalents of $2,057,000
at December 31, 1996. 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. In January 1997, the Company
acquired the remaining 48% of the outstanding shares of GP that it did not
already own. (See Note 2 to the consolidated financial statements).
The Company has sufficient cash, cash equivalents and marketable securities and
borrowing availability under existing and potential lines of credit (See Note 9
to the consolidated financial statements) to satisfy its cash requirements for
its 12% Subordinated Debentures scheduled to mature in the third quarter of
1997, which totaled approximately $6,732,000 at December 31, 1996. On March 26,
1997, the Company's entered into a new Revolving Credit Agreement (see Note 21
to the consolidated financial statements).
At December 31, 1996, approximately $2,000,000 was available to the Company
under GP's credit agreements. 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 in order to fund its working capital
requirements. At December 31, 1996, the Company had classified 250,000 shares of
Duratek stock valued at $3,250,000 as marketable securities, as a result of the
transfer from long-term investments to trading securities due to the Company's
intention to sell these shares promptly in 1997.
For the year ended December 31, 1996, the Company's working capital increased by
$8,742,000 to $41,691,000, reflecting the effect of increased cash and cash
equivalents, partially offset by increased current maturities of long-term debt
and short-term borrowings. Consolidated cash and cash equivalents increased by
$14,583,000 to $22,677,000 at December 31, 1996.
The increase in cash and cash equivalents of $14,583,000 in 1996 resulted from
cash provided by financing of $1,971,000, investing activities of $9,849,000,
and cash provided by operations of $2,763,000. The cash provided by investing
activities was primarily from proceeds from the sale of stock of a subsidiary,
partially offset by additions to property, plant and equipment and intangible
assets. Financing activities consisted primarily of proceeds from short-term
borrowings and long-term debt, offset by repayments and reductions in short-term
borrowings and long-term debt.
The Company is required to meet certain financial covenants pursuant to its loan
agreements, and is currently in compliance with these covenants.
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, 1996, the Company has not contractually
committed itself for any other new major capital expenditures.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF NATIONAL PATENT DEVELOPMENT
CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report 31
Consolidated Balance Sheets - December 31, 1996 and 1995 32
Consolidated Statements of Operations - Years ended December 31,
1996, 1995, and 1994 34
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1996, 1995, and 1994 36
Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995, and 1994 38
Notes to Consolidated Financial Statements 41
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 78
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 26, 1997
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1996 1995
- -------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents ............................ $ 22,677 $ 8,094
Marketable securities ................................ 3,250 3,563
Accounts and other receivables (of which
$13,296 and $13,013 are from government
contracts) less allowance for doubtful
accounts of $2,155 and $3,066 ....................... 40,633 39,466
Inventories .......................................... 23,193 20,444
Costs and estimated earnings in excess of billings on
uncompleted contracts, of which $481 and $1,473
relates to government contracts ..................... 9,466 9,118
Prepaid expenses and other current assets ............ 3,462 3,640
---------
Total current assets ................................. 102,681 84,325
---------
Investments and advances ............................. 25,108 21,452
---------
Property, plant and equipment, at cost ............... 36,045 33,367
Less accumulated depreciation and amortization ....... (26,767) (24,374)
---------
9,278 8,993
---------
Intangible assets, net of accumulated
amortization of $29,577 and $27,901
Goodwill ............................................. 33,737 32,445
Patents, licenses and deferred charges ............... 739 608
---------
34,476 33,053
Deferred tax asset ................................... 843
Other assets ......................................... 3,641 3,897
---------
$ 176,027 $ 151,720
---------
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
December 31, 1996 1995
- --------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt ............. $ 9,309 $ 4,167
Short-term borrowings ............................ 20,281 18,043
Accounts payable and accrued expenses ............ 22,879 20,865
Billings in excess of costs and estimated
earnings on uncompleted contracts ............... 8,521 8,301
------ ---------
Total current liabilities ............... ........ 60,990 51,376
------ ---------
Long-term debt less current maturities ............. 10,807 19,765
Minority interests ................................ 10,201 9,581
Commitments and contingencies
Stockholders' equity *
Preferred stock, authorized 10,000,000
shares, par value $.01 per share, none issued
Common stock, authorized 25,000,000 shares, par
value $.01 per share, issued 7,518,725 and 6,825,723
shares (of which 1,497 shares are held in treasury) 75 68
Class B capital stock, authorized 2,800,000 shares, par
value $.01 per share, issued and outstanding
62,500 shares ................................... 1 1
Capital in excess of par value ................... 131,388 125,419
Deficit ..................................... .... (40,759) (52,139)
Net unrealized gain (loss) on available-for-sale
securities ...................................... 3,324 (1,440)
Minimum pension liability adjustment ............. (911)
--------- ---------
Total stockholders' equity ....................... 94,029 70,998
--------- ---------
$ 176,027 $ 151,720
--------- ---------
*Stockholders' equity has been restated to reflect the effect of the one for
four reverse stock split (See Note 15 to the consolidated financial statements).
See accompanying notes to consolidated financial statements.
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
Sales 203,800 $185,025 $204,774
Cost of goods sold 173,558 156,703 172,215
- --------------------------------------------------------------------------
Gross margin 30,242 28,322 32,559
- --------------------------------------------------------------------------
Selling, general and administrative (30,788) (30,372) (34,732)
Interest (4,358) (5,019) (6,458)
Investment and other income (expense),
net (including interest income of $906,
$555 and $360) 3,756 1,129 (1,808)
Loss on investments (4,000)
Gain on disposition of stock of
a subsidiary and an affiliate 12,200 3,768
Gain on issuance of stock by a
subsidiary and affiliates 2,168 5,912
Gains on trading securities 3,314 3,183
Minority interests (1,290) (1,104) (209)
- --------------------------------------------------------------------------
Income (loss) before income taxes,
discontinued operation and
extraordinary item 11,244 5,819 (10,648)
Income tax benefit (expense) 136 (1,787) (749)
- ---------------------------------------------------------------------------
Income (loss) before discontinued
operation and extraordinary item 11,380 4,032 (11,397)
- --------------------------------------------------------------------------
Discontinued operation
Loss from operations (331) (1,789)
Loss on disposal including provision of
$100 in 1994 during phase-out period (2,610) (785)
- --------------------------------------------------------------------------
Loss from discontinued operation (2,941) (2,574)
- --------------------------------------------------------------------------
Income (loss) before extraordinary item 11,380 1,091 (13,971)
Extraordinary item
Extinguishment of debt,(net of income tax) (79)
- ---------------------------------------------------------------------------
Net income (loss) $11,380 $ 1,012 $ (13,971)
- --------------------------------------------------------------------------
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(in thousands, except shares and par value per share)
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Income (loss) per share *
Income (loss) before discontinued
operation and extraordinary item $ 1.54 $ .60 $ (2.10)
Discontinued operation (.44) (.47)
Extraordinary item (.01)
- --------------------------------------------------------------------------------
Net income (loss) per share $ 1.54 $ .15 $ (2.57)
- --------------------------------------------------------------------------------
*All periods have been restated to reflect the effect of the one for four
reverse stock split (See Note 15 to the consolidated financial statements).
See accompanying notes to consolidated financial statements.
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
(in thousands, except shares, par value per share and per share amounts)
Net
unrealized
Class B Capital in gain (loss) on Minimum Total
Common capital excess available- pension stock-
stock stock of par for-sale liability holders'
($.01 Par) ($.01 Par) value Deficit securities adjustment equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $ 48 * $ 1 * $106,417 * $(39,028) $ $ $67,438
- -----------------------------------------------------------------------------------------------------------------------------------
Implementation of SFAS 115 1,157 1,157
Exercise of stock options and warrants 99 99
Issuance of stock in connection with
Swiss Bonds 10 9,985 9,995
Transfer from common stock issued
subject to repurchase obligation 1 2,731 2,732
Conversion of 12% Debentures 35 35
Distribution of shares in a subsidiary (152) (152)
Issuance and sale of common stock 1 771 772
Net unrealized loss on
available-for-sale securities (2,940) (2,940)
Net loss (13,971) (13,971)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 60 1 120,038 (53,151) (1,783) 65,165
- -----------------------------------------------------------------------------------------------------------------------------------
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Years ended December 31, 1996, 1995, and 1994
(in thousands, except shares, par value per share and per share amounts)
Net
unrealized
Class B Capital in gain (loss) on Minimum Total
Common capital excess available- pension stock-
stock stock of par for-sale liability holders'
($.01 Par) ($.01 Par) value Deficit securities adjustment equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 60 * $ 1 * $120,038 * $(53,151) $(1,783) $ $65,165
- ------------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment (911) (911)
Net unrealized gain on available-
for-sale securities 343 343
Net income 1,012 1,012
Issuance of stock in connection with
Swiss Bonds 6 3,725 3,731
Issuance and sale of common stock 2 1,046 1,048
Transfer from common stock issued
subject to repurchase obligation 610 610
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 68 1 125,419 (52,139) (1,440) (911) 70,998
- ------------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment 911 911
Net unrealized gain on available-
for-sale securities 4,764 4,764
Net income 11,380 11,380
Issuance and sale of common stock
and common stock warrants 7 5,969 5,976
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 75 $ 1 $131,388 $(40,759) $3,324 $ $94,029
- ------------------------------------------------------------------------------------------------------------------------------------
* All periods prior to October 5, 1995 have been restated to reflect the effect
of the one-for-four reverse stock split (See Note 15 to the consolidated
financial statements.)
See accompanying notes to consolidated financial statements.
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Cash flows from operations:
Net income (loss) 11,380 $ 1,012 $ (13,971)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Provision for discontinued operation 2,460 1,570
Depreciation and amortization 4,069 4,316 6,063
Loss from extinguishment
of debt, net of income tax 79
Gain on disposition of stock of a
subsidiary and an affiliate (12,200) (3,768)
Gain on issuance of stock by
a subsidiary and affiliates (2,168) (5,912)
Gains on trading securities (3,314) (3,183)
Loss on investments 4,000
Deferred income taxes (1,860)
Proceeds from sale of trading securities 4,425
Changes in other operating items,
net of effect of acquisitions and disposals:
Accounts and other receivables (2,167) 1,228 (3,887)
Inventories (2,749) (1,687) 1,163
Costs and estimated earnings in excess of
billings on uncompleted contracts (348) 6,119 1,349
Prepaid expenses and other current assets 178 2,993 (817)
Accounts payable and accrued expenses 3,297 (4,768) 4,626
Billings in excess of costs and estimated
earnings on uncompleted contracts 220 2,210 (1,014)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operations $ 2,763 $ 1,099 $ (4,918)
- -------------------------------------------------------------------------------
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of stock of a subsidiary $ 13,275 $ 7,051 $
Sales of certain net assets and businesses
of a subsidiary 4,470
Additions to property, plant and
equipment, net (2,678) (2,006) (4,006)
Additions to intangible assets (2,446) (388) (5,824)
Reduction of investments and other assets 1,698 388 664
- ----------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 9,849 5,045 (4,696)
- ----------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of short-term borrowings (11,020) (5,650)
Proceeds from short-term borrowings 2,238 5,634 15,320
Proceeds from issuance of long-term debt 1,400 5,162 3,638
Reduction of long-term debt (4,213) (8,145) (4,882)
Proceeds from issuance of common stock 2,546 244 287
- ----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,971 (8,125) 8,713
- ----------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 14,583 (1,981) (901)
Cash and cash equivalents at
beginning of year 8,094 10,075 10,976
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,677 $ 8,094 $ 10,075
- ----------------------------------------------------------------------------
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 4,200 $ 4,577 $ 4,147
Income taxes $ 1,301 $ 655 $ 607
Supplemental schedule of
non-cash transactions:
Reduction of debt $ 1,003 $ 6,250 $ 9,167
Additions to investments, intangibles,
other assets and prepaid expenses 5,379 625 100
Reduction of accounts payable 267
Reduction of accrued
interest payable 372 1,045
Reduction (increase) in accrued pension liability 911 (911)
Net unrealized gain on available-for-sale
securities (3,324)
Issuances of common stock (3,430) (4,535) (10,579)
Issuance of long-term debt (2,340)
Minimum pension liability adjustment (911) 911
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
Description of business. National Patent Development Corporation (the
"Company"), 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. In addition, the Company owns approximately 54% of the
outstanding shares of common stock of the American Drug Company (See Note 5).
The Company also has an approximately 15% investment in Interferon Sciences,
Inc. (See Note 4), an approximately 15% investment in GTS Duratek, Inc. (See
Note 3) and controls approximately 22% of GSE Systems, Inc. (See Note 6), a
company in the business of software simulation and controls. The Company's
Physical Science Group, through its approximately 52% owned subsidiary (at
December 31, 1996), General Physics Corporation (GP), provides a wide range of
services in 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. On January 24, 1997, a merger of a
wholly-owned subsidiary of the Company and GP was completed, pursuant to which
GP became a wholly-owned subsidiary of the Company. (See Note 2). 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.
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 securities. Marketable securities at December 31, 1996 and 1995
consist of U.S. corporate equity securities. The Company classifies its
marketable equity securities as trading and available-for-sale.
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
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 11) are
subject to currency fluctuations and the Company has hedged portions of such
debt from time to time, but not within the three year period ended December 31,
1996. During the years ended December 31, 1996, 1995, and 1994, the Company
realized foreign currency transaction gains (losses) of $340,000, $(1,066,000)
and $(2,124,000), respectively. These amounts are included in Investment and
other income (expense), net. At December 31, 1996, the Company had not hedged
its Swiss Franc obligations. The Company's 54% owned subsidiary, the American
Drug Company (See Note 5) conducts its business primarily in U.S. dollars.
Contract revenue and cost recognition. The Company provides services under
time-and-materials, cost-plus-fixed-fee and fixed-price contracts. Revenue is
recognized as costs are incurred and includes estimated fees at predetermined
rates. Differences between recorded costs and estimated earnings 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 a current asset. Billings in excess of costs and estimated earnings
on uncompleted contracts are recorded as a current liability. Generally,
contracts provide for the billing of costs incurred and estimated earnings on a
monthly basis. Retainages, amounts subject to future negotiation and amounts
which are expected to be collected after one year are not material for any
period.
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
1. Description of business and summary of significant accounting policies
(Continued)
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. Based upon the periodic
analysis, goodwill is written down or written off if it appears that future
profits or cash flows will be insufficient to recover such goodwill.
Reverse stock split. As a result of a one-for-four reverse stock split effective
on October 6, 1995, all shares and per share information prior to that date have
been restated.
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.
Stock option plan. Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
1. Description of business and summary of significant accounting policies
(Continued)
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.
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, 1996, 1995
and 1994, was 7,388,925, 6,637,639 and 5,431,166, respectively.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments and accounts receivable. The Company places its cash
investments with high quality financial institutions and limits the amount of
credit exposure to any one institution. With respect to accounts receivable,
approximately 33% are related to United States government contracts, and the
remainder are dispersed among various industries, customers and geographic
regions.
2. General Physics Corporation
On August 31, 1994, General Physics Corporation (GP), a formerly 28% owned
affiliate, 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.
Commencing September 1, 1994, GP's accounts have been consolidated with those of
the Company. 2. General Physics Corporation (Continued)
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 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 (See Note 9(b)).
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 had
been accounted for on the equity basis and the Company's share of GP's loss for
the eight months ended August 31, 1994 in the amount of $(719,000) 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, 1996, 1995 and 1994.
2. General Physics Corporation (Continued)
On January 24, 1997, the Company acquired the remaining 5,047,623 shares (48% of
the outstanding shares) of GP that it did not already own, in exchange for .60
shares of National Patent common stock for each share of GP. The transaction has
been accounted for as a purchase of a minority interest. The Company issued an
aggregate of 3,028,574 shares of its common stock, valued at $25,228,000 in the
transaction. This transaction has not been reflected in the 1996 consolidated
financial statements.
The following information shows on a pro-forma basis, the results of operations
for the Company for the year ended December 31, 1996, as if the above
transaction had occurred as of January 1, 1996 (in thousands):
(unaudited)
Sales $203,800
Income before discontinued operation and extraordinary item 13,751
Net income 13,751
Income per share before discontinued operation
and extraordinary item 1.32
Income per share 1.32
The following selected balance sheet information shows on a pro-forma basis, the
financial position of the Company as if the above transaction had occurred on
December 31, 1996 (in thousands):
(unaudited)
Cash, cash equivalents and marketable securities $ 24,334
Working capital 36,836
Intangible assets, net 54,200
Total assets 194,158
Stockholders' equity 118,972
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
transaction had occurred as of or for the period indicated, or of future results
that may be achieved.
2. General Physics Corporation (Continued)
GP provides engineering, environmental, training, analytical, and technical
support services to commercial nuclear and fossil power utilities, the U.S.
Departments of Defense and Energy, Fortune 500 companies, and other commercial
and governmental customers.
3. GTS Duratek, Inc.
On January 24, 1995, the Company sold 1,666,667 shares of common stock of 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, which was exercised in December 1995, 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 Company realized a gain of $3,768,000 during 1995
on sales of Duratek common stock, primarily in these two transactions.
As part of the aforementioned financing by Carlyle, 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.
In connection with the transaction, Carlyle has 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.
In April 1996, the Company sold 1,000,000 shares of its Duratek common stock,
realized proceeds of $17,700,000 and recognized a gain of $12,200,000.
As a result of the above transactions, at December 31, 1996 the Company owns
approximately 1,820,000 shares of Duratek's common stock (approximately 15% of
the outstanding shares of common stock). The Company accounted for its
investment in Duratek on the equity basis from January 24, 1995 through the
first quarter of 1996. Commencing in April 1996, the Company accounts for its
investment in Duratek as a combination of marketable securities, long-term
investments and as long-term available-for-sale securities.
Duratek is an integrated environmental services and technology firm with
proprietary waste processing systems applicable to radioactive, hazardous, mixed
and other wastes.
3. GTS Duratek, Inc. (Continued)
The Company's investment in Duratek of approximately $4,121,000 as of December
31, 1995 is included in Investments and advances on the consolidated balance
sheet of which $2,447,000 represents the Company's percentage of underlying net
assets and $1,674,000 represents goodwill. The Company's share of Duratek's
income included in Investment and other income (expense), net is $31,000 in
1995. At December 31, 1996, the Company owned 1,820,000 shares of Duratek, of
which 250,000 shares have been classified as Marketable securities with a market
value of $3,250,000 (See Note 18). The Company's remaining investment of
approximately $5,113,000 as of December 31, 1996 is included in Investments and
advances on the consolidated balance sheet of which $2,925,000 or 225,000 shares
of Duratek common stock represents available-for-sale securities at market and
$2,188,000 or 1,345,000 shares of Duratek common stock represents long-term
investments at cost. The total market value of all Duratek shares owned by the
Company at December 31, 1996 was $23,660,000.
Condensed financial information for Duratek is as follows as of December 31,
1996 and 1995 and for the years then ended (in thousands):
1996 1995
---- ----
Current assets $66,196 $28,780
Non current assets 19,003 9,880
Current liabilities 4,035 4,665
Non current liabilities 11,188 10,123
Redeemable convertible preferred stock 14,829 14,609
Stockholders' equity 55,147 9,257
Revenues 44,285 40,418
Gross profit 9,087 8,197
Net income 557 60
4. Interferon Sciences, Inc.
Interferon Sciences, Inc. (ISI) is approximately 15% owned by the Company. It is
engaged in the manufacture and sale of ALFERON N Injection, ISI's first product
commercially approved by the FDA for the treatment of recurring and refractory
external genital warts, and the research and development of other alpha
interferon based products for the treatment of viral diseases, cancers and
diseases of the immune system.
4. Interferon Sciences, Inc. (Continued)
In May 1996, the Company realized a $1,938,000 gain on issuance of stock by this
affiliate as a result of the issuance of 2,000,000 shares of common stock by ISI
at $8.00 per share. Effective in the third quarter of 1996, the Company
accounted for its investment in ISI as a combination of long-term investments
carried at cost and as long-term available-for-sale equity securities carried at
market value.
In 1995, the Company realized a $2,775,000 gain on issuance of stock by this
affiliate, primarily as the result of the issuance of 3,000,000 shares of Common
Stock by ISI at $4.80 per share in August and September 1995.
All shares and per share information of ISI have been restated to reflect the
one for four reverse stock split of ISI effective on March 21, 1997.
Information relating to the Company's investment in ISI is as follows (in
thousands):
1996 1995
- -------------------------------------------------------------------------------
Included in Investments and advances:
Available-for-sale equity securities, at market $ 3,251 $
Securities at cost 2,375 2,837
Goodwill related to securities at cost 734 924
Total carrying amount 6,360 3,761
Number of shares owned 7,417 7,475
Market value of shares 12,285 14,016
Share of loss included in
Investment and other income (expenses), net (1,464) (1,953)
- -------------------------------------------------------------------------------
Condensed financial information for ISI is as follows as of December 31, 1996
and 1995 and for the years then ended (in thousands):
1996 1995
Current assets $22,299 $8,188
Non current assets 5,444 5,765
Current liabilities 2,369 1,126
Stockholders' equity 25,374 12,827
Revenues 2,092 1,296
Gross margin 692 (1,780)
Net loss (11,986) (7,372)
- -------------------------------------------------------------------------------
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 sells
American-made generic pharmaceutical and health care products under its own
label in Russia and the CIS.
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, which were extended for an additional two
years, subject to cancellation under certain circumstances.
In July 1996, ADC issued convertible notes in the principal amount of $1,000,000
in a private offering. In connection with these notes, the Company issued
warrants to purchase 82,306 shares of its common stock provided that the
warrants may only be exercised utilizing the Notes (See Note 11(i)).
6. GSE Systems, Inc.
In March 1994, GP and SGLG contributed assets to a newly formed, multi party
joint venture, GSE Systems, Inc. (GSES), for 10% and 35% ownership interests in
the joint venture, respectively. GSES designs, develops and delivers business
and technology solutions by applying process control, data acquisition,
simulation, and business software, systems and services to the energy, process
and manufacturing industries worldwide. On August 1, 1995, GSES completed an
initial public offering of 1,725,000 shares (including an over-allotment option)
of its common stock at $14 per share. As a result of the offering, the Company
recognized a gain on issuance of stock by an affiliate of approximately
$3,137,000 and at December 31, 1996, controls 22% of GSES. The Company accounts
for its investment in GSES on the equity basis.
6. GSE Systems, Inc. (Continued)
Information relating to the Company's investment in GSES is as follows (in
thousands):
1996 1995
- --------------------------------------------------------------------------------
Included in Investments and advances:
Underlying assets $ 5,484 $ 5,476
Goodwill 4,384 3,468
Total carrying amount 9,868 8,944
Number of shares controlled 1,125 1,125
Market value of shares 10,406 16,172
Equity in income included in Investment
and other income (expenses), net 924 1,237
- --------------------------------------------------------------------------------
In May 1996, GSES completed a transaction that was accounted for as a pooling of
interests. As a result the condensed financial information as of December 31,
1995 and for the period then ended has been restated to reflect the transaction.
Condensed financial information for GSES is as follows as of December 31, 1996
and 1995 and for the years then ended (in thousands):
1996 1995
- -------------------------------------------------------------------------------
Current assets $37,876 $44,178
Non current assets 13,130 10,510
Current liabilities 23,733 28,101
Non current liabilities 2,580 6,055
Stockholders' equity 24,693 20,532
Revenue 96,033 96,060
Gross profit 32,354 30,468
Net income 4,143 3,676
- --------------------------------------------------------------------------------
7. Inventories
Inventories, consisting of material, labor and overhead, are classified as
follows (in thousands):
December 31, 1996 1995
- -------------------------------------------------------------------------------
Raw materials $ 793 $ 580
Work in process 210 219
Finished goods 22,190 19,645
- -------------------------------------------------------------------------------
$ 23,193 $ 20,444
- -------------------------------------------------------------------------------
8. Property, plant and equipment
Property, plant and equipment consists of the following (in thousands):
December 31, 1996 1995
- -------------------------------------------------------------------------------
Land $ 173 $ 173
Buildings and improvements 1,374 1,374
Machinery and equipment 11,656 11,072
Furniture and fixtures 15,745 13,878
Leasehold improvements 7,097 6,870
- -------------------------------------------------------------------------------
36,045 33,367
Accumulated depreciation and amortization (26,767) (24,374)
- -------------------------------------------------------------------------------
$ 9,278 $ 8,993
- -------------------------------------------------------------------------------
9. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1996 1995
- -------------------------------------------------------------------------------
Line of Credit Agreement (a) $ 15,581 $14,593
Revolving Credit Agreement (b) 4,700 3,450
- -------------------------------------------------------------------------------
$ 20,281 $ 18,043
- -------------------------------------------------------------------------------
(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"), which was amended on October 23,
1995 and September 30, 1996. The September 30, 1996 amendment extends the
Agreements to September 30, 1997. 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 loan (the "Five Star Term Loan"). The Five Star
Revolving Credit Facility is a committed facility which allows Five Star to
borrow amounts up to 50% of Eligible Inventory (as defined) and 80% of Eligible
Receivables (as defined) at an interest rate of 1% in excess of the prime rate.
At December 31, 1996, the interest rate was 9.25%. As of December 31, 1996,
$15,581,000 was borrowed under the Five Star Revolving Credit Facility and Five
Star had $210,000 available.
As of November 1, 1995, the Five Star Term Loan, which was $1,667,000 on October
30, 1995, was repaid in its entirety. The Five Star Revolving Credit Agreement
is 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. 9. Short-term
borrowings (Continued)
The amended MXL Loan Agreement provides for a $4,500,000 term loan, which was
adjusted to a balance of $3,960,000 at November 1, 1995 (the "MXL Term Loan").
The MXL Revolving Credit Facility was terminated by the September 30, 1996
amendment. As of December 31, 1996, the balance of the MXL Term Loan was
$2,722,000. The amended MXL Term Loan is repayable in 16 quarterly payments of
approximately $247,500, which commenced on October 31, 1995. The MXL Term Loan
bears interest at 1.375% in excess of the prime rate, and was 9.625% at December
31, 1996. 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. On March 26, 1997, MXL entered into a new Revolving
Credit Agreement, replacing the above Term Loan (see Note 21).
The Five Star Revolving Credit Facility and Five Star Term Loan and the MXL Term
Loan are guaranteed by the Company. The amended 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. Under the
terms of the amended agreements, MXL is allowed to lend Five Star and the
Company up to an additional $750,000 and $500,000, respectively. The agreements
have several covenants, including provisions regarding working capital, tangible
net worth, leverage and cash flow ratios. At December 31, 1996, Five Star was
not in compliance with their covenant relating to fixed asset additions. The
Company has received a waiver for this violation.
(b) On August 31, 1994, GP entered into a $20,000,000 secured revolving credit
agreement with a commercial bank. Borrowings under this agreement bore interest
at the prime rate. This agreement contained certain covenants, which among other
things, limited the amount and nature of certain expenditures and required GP to
maintain certain financial ratios.
9. Short-term borrowings (Continued)
On April 7, 1995, the Company and GP entered into a new three year $20,000,000
secured revolving credit agreement with a commercial bank, and terminated the
above credit agreement. Borrowings under the new credit agreement bear interest
at the prime rate (8.25% at December 31, 1996) or 1.75% over LIBOR (5.5% at
December 31, 1996), whichever rate is elected by GP. The new credit agreement is
secured by the accounts receivable of GP and certain of its subsidiaries, and
contains certain covenants which, among other things, limit the amount and
nature of certain expenditures by GP, and requires GP to maintain certain
financial ratios. At December 31, 1996, under the terms of the new credit
agreement, approximately $2,000,000 was available to the Company. At December
31, 1996, $4,700,000 was borrowed under the new credit agreement and there were
available borrowings of $15,151,000 under the agreement. On March 26, 1997, GP
entered into a new Revolving Credit Agreement, replacing the above agreement
(see Note 21).
10. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following (in
thousands):
December 31, 1996 1995
- -------------------------------------------------------------------------------
Accounts payable $ 12,893 $ 12,833
Payroll and related costs 5,012 4,130
Interest 211 425
Other 4,763 3,477
- -------------------------------------------------------------------------------
$ 22,879 $ 20,865
- -------------------------------------------------------------------------------
11. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1996 1995
- -------------------------------------------------------------------------
8% Swiss Bonds, due 2000 (b) $ 2,189 $ 2,365
5% Convertible Bonds due 1999 (d) 1,755 2,249
8% Swiss Bonds due 1995 (a) 247
6% Convertible Swiss Bonds due 1995 (a) 494
5.75% Convertible Swiss Bonds due 1995 (a) 104
5.625% Convertible Swiss Bonds due 1996 (a) 538
7% Dual Currency Convertible Bonds due 1996 (a) 615
12% Subordinated Debentures due 1997 (e) 6,732 6,749
Term loan with banks (Note 9(a)) 2,722 3,713
Senior Subordinated Debentures (f) 811 827
Notes payable in connection with settlement
of litigation (g) 273 521
Term loan with bank (h) 4,000 5,000
7% Convertible Notes (i) 1,000
Equipment lease obligations (*) 634 510
- -------------------------------------------------------------------------
20,116 23,932
Less current maturities 9,309 4,167
- -------------------------------------------------------------------------
$ 10,807 $ 19,765
- -------------------------------------------------------------------------
(*) Secured by assets held under capital lease obligations.
(a) During the first quarter of 1996, the Company fully redeemed for cash, the
Company's common stock, or a combination of both cash and common stock the
following debt issues:
8% Swiss Bonds due 1995 6% Convertible Swiss Bonds due 1995
5.75% Convertible Swiss Bonds due 1995 5.625% Convertible
Swiss Bonds due 1996 7% Dual Currency Convertible Bonds due
1996
11. Long-term debt (Continued)
(b) On June 28, 1995, the Company's Exchange Offer for certain issues of its
outstanding indebtedness expired. The Company accepted for exchange Swiss Francs
("SFr") 1,299,000 of its 8% Swiss Bonds due March 1, 1995, SFr. 1,120,000 of its
Convertible Swiss Bonds due March 7, 1995, SFr. 945,000 of its 5.75% Convertible
Bonds due May 9, 1995, SFr. 795,000 of its 5.625% Convertible Bonds due March
18, 1996, and $1,212,000 of its 7% Dual Currency Bonds due March 18, 1996. In
exchange for the forgoing bonds, the Company issued an aggregate of SFr.
3,604,000 of new 8% Swiss Bonds, due June 28, 2000 (the "New 8% Bonds") and paid
$2,873,000 in cash. The New 8% Bonds were valued at $2,340,000 (after an
original issue discount of 25%). The principal and interest on the New 8% Bonds
are payable either in cash or in shares of common stock of the Company, at the
option of the Company.
As a result of the Exchange Offer, the Company reduced its long-term debt due in
1995 and 1996 by $4,824,000 and realized a loss of $393,000 on the Exchange
Offer.
(c) In July 1994, as a result of an 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 852,000
shares of its common stock and reduced its long-term debt by approximately
$8,582,000.
(d) As a result of an exchange offer on July 12, 1993, the Company issued
$3,340,080 principal amount of New 5% Bonds which are convertible into 191,959
shares of the Common Stock. The Company recorded an original issue discount on
the New 5% Bonds of 10%. At December 31, 1996, $1,832,000 of the New 5% Bonds
were outstanding.
(e) During the third quarter of 1987, the Company issued $12,500,000 of
Subordinated Debentures (Debentures) which mature in 1997. Each $100 principal
amount Debenture was sold with warrants to purchase one share of the Company's
common stock at a price of $74.00 per share. In connection with the terms of the
Debentures, the Company is subject to certain covenants which limit the amount
that may be used for the payment of dividends and for the purchase of the
Company's outstanding equity securities (common or Class B). In September 1990,
under the terms of an Indenture, the Debentures became exchangeable for the
Company's Common Stock, for the remaining term of the Debentures, at a price of
approximately $20.00 per share. In 1996 and 1995 no Debentures were converted
into the Company's Common Stock. At December 31, 1996, the Debentures are
convertible into approximately 338,000 shares of the Company's Common Stock. 11.
Long-term debt (Continued)
(f) 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 $11,578,000, net of a debt discount
of $3,422,000. 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, 1996, the carrying value of
the debentures held by the Company was $10,767,000, which was eliminated in
consolidation, and the remaining $811,000 of debentures were held by the public.
(g) 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,
among 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.
(h) On April 7, 1995, the Company entered into a $5,000,000 Term Loan Agreement
with a bank, of which the Company received approximately $4,910,000 after
closing fees. The interest rate is at the bank's prime rate of interest plus 2%.
At December 31, 1996, the interest rate was 10.25%. The Term Loan is payable in
sixteen consecutive quarterly installments, commencing on June 30, 1996. The
first fifteen installments will be $250,000 and the last installment shall be
$1,250,000. The Company has used a portion of the proceeds in July 1995 to repay
and refinance certain of its Swiss denominated long-term debt due in 1995 and
1996. The Term Loan is secured by certain assets of the Company and requires the
Company to meet certain financial covenants. On March 26, 1997, the Company
entered into a new Revolving Credit Agreement, replacing the above Term Loan
Agreement (see Note 21).
(i) In July 1996, ADC issued convertible notes (the "Notes") in the principal
amount of $1,000,000 in a private offering (the "Offering"). ADC received net
proceeds of $950,000 from the Offering. The Notes mature on June 30, 2001, bear
interest at the rate of 7% per annum, and are convertible into shares of common
stock of ADC at a conversion price of $.25 per share. In connection with the
Offering, the Company issued warrants to purchase an aggregate of 82,306 shares
of the Company's common stock, exercisable at a price of $12.15 per share,
provided that the warrants may only be exercised utilizing the Notes. In the
event that the closing price of the common stock of ADC is at least $1.00 per
share for at least 20 consecutive trading days, the Notes shall be subject to
redemption at the election of ADC, at a redemption price of 100% of the
principal amount called for redemption, together with accrued interest.
11. Long-term debt (Continued)
The Company and ADC have agreed that (i) if the Notes are used to exercise the
warrants prior to a default on the Notes, the Company will receive from ADC, in
exchange for the Notes shares of ADC's common stock at a price equal to 60% of
its then current market value, and (ii) if the Notes are used to exercise the
warrants after a default on the Notes, the Company will receive from ADC, in
exchange for the Notes shares of ADC's common stock at a price equal to 25% of
its then current market value.
Aggregate annual maturities of long-term debt outstanding at December 31, 1996
for each of the next five years are as follows (in thousands):
1997 $9,309
1998 2,248
1999 3,652
2000 3,386
2001 1,181
12. Employee benefit plans
The Company has a Defined Benefit Pension Plan (the Plan) for employees of
certain divisions and subsidiaries. Benefits are based primarily on years of
service and a fixed rate of benefits per year of service. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
Benefits under the Plan were frozen as of December 31, 1991. As of January 1,
1992, no new enrollments were permitted under the Plan and no further benefits
were accrued. 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.
During 1997, the Company has announced its intention to terminate the Plan. The
Plan will be terminated effective October 31, 1996, with settlement expected in
1997. It is intended that the termination will be a "standard termination" as
defined by the Pension Benefit Guaranty Corporation (the "PBGC"). In order to
terminate the Plan in a standard termination, Plan assets must be sufficient to
provide all benefit obligations under the Plan.
12. Employee benefit plans (Continued)
The Company will provide additional funding to the Plan such that Plan assets
will be sufficient to satisfy all benefit liabilities under the Plan, with
respect to each participant and each beneficiary of a deceased participant. This
will be accomplished by the purchase of irrevocable annuity contracts from an
insurer, or by an alternative form of distribution provided for under the Plan.
The Plan Sponsor has determined that approximately $1,067,000 will be required
to fully fund the Plan to satisfy its benefit obligations. This amount has been
accrued in the consolidated financial statements at December 31, 1996.
The pension expense amounted to $400,000, $26,000 and $31,000, for 1996, 1995
and 1994, respectively.
The following table sets forth the funded status of the plan and the amount
recognized in the Company's Consolidated Financial Statements (in thousands):
December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Actuarial present value of benefit plan obligations:
Accumulated benefit obligation (including
vested benefits of $5,549, $5,365 and $4,436) $ (5,549) $ (5,890) $(4,469)
- ----------------------------------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date $ (5,549) $ (5,890) $(4,469)
Plan assets at fair value 4,482 4,353 3,405
- ----------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets (1,067) (1,537) (1,064)
Unrecognized net loss from past experience
different from that assumed 911
Minimum pension liability (911)
Accrued pension cost included in
accounts payable and accrued expenses
in the consolidated balance sheets $(1,067) $(1,537) $(1,064)
- ----------------------------------------------------------------------------------------------------------
The net periodic pension expense is as follows:
Service cost-benefits earned $ $ $
Interest cost on projected benefit obligations 376 420 360
Actual return on plan assets (320) (424) (350)
Net amortization and deferral and other 344 30 21
- ----------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 400 $ 26 $ 31
- ----------------------------------------------------------------------------------------------------------
12. Employee benefit plans (Continued)
The Company's assumptions used as of December 31, 1996, 1995, and 1994 in
determining the pension cost and pension cost liability shown above were as
follows:
1996 1995 1994
Percent
Discount rate 7.25 7.25 8.25
Long-term rate of return on assets 10.00 10.00 10.00
Financial Accounting Standards Board Statement No. 87 (FASB No. 87) requires
that a company record an additional minimum pension liability to the extent that
a company's accumulated pension benefit obligation exceeds the fair value of
pension plan assets and accrued pension liabilities. This additional minimum
pension liability is offset by an intangible asset, not to exceed prior service
costs of the pension plan. Amounts in excess of prior service costs are
reflected as a reduction in stockholders' equity.
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.
12. Employee benefit plans (Continued)
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 1/2 or earlier in the event of financial
hardship. Amounts otherwise are paid at retirement or in the event of death or
disability. Employer contributions vest at a rate of 20% per year.
The Savings Plan is administered by a trustee appointed by the Board of
Directors of the Company and all contributions are held by the trustee and
invested at the participants' direction in various mutual funds. The Company's
expense associated with the Savings Plan was $246,000, $223,000 and $285,000 in
1996, 1995 and 1994, respectively.
13. Income taxes
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, 1996. 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, 1996.
13. Income taxes (Continued)
The components of pretax income (loss) are as follows (in thousands):
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
Continuing operations $ 11,244 $ 5,819 $ (10,648)
Discontinued operation (2,941) (2,574)
The components of income tax expense (benefit) from continuing operations are as
follows (in thousands):
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
Current
State and local $ 315 $ 221 $ 283
Federal tax expense 1,409 37
- ---------------------------------------------------------------------------
1,724 258 283
- ---------------------------------------------------------------------------
Deferred
State and local 39 206 11
Federal tax expense (benefit) (1,899) 1,323 455
- ---------------------------------------------------------------------------
(1,860) 1,529 466
- ---------------------------------------------------------------------------
$ (136) $1,787 $ 749
- ---------------------------------------------------------------------------
The difference between the provision for income taxes computed at the statutory
rate and the reported amount of tax expense attributable to consolidated
earnings from continuing operations is as follows:
December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% (35.0)%
State and local taxes net of
Federal benefit 2.0 4.8 2.0
Items not deductible - primarily
amortization of goodwill 4.8 14.0 6.0
Net operating loss utilization (25.0)
Valuation allowance adjustment (19.0) (22.6)
GP acquisition of SGLG 33.0
Other 1.0 (.5) 1.0
- -----------------------------------------------------------------------------
Effective tax rate (1.2%) 30.7% 7.0%
- -------------------------------------------------------------------------------
13. Income taxes (Continued)
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
then 51% owned subsidiary.
In 1995, the Company recorded an income tax expense of $1,787,000. The current
income tax provision of $258,000 reflected above, represents the estimated taxes
payable by the Company for the year ended December 31, 1995. The deferred income
tax provision of $1,529,000 represents the deferred taxes of GP, the Company's
then 51% owned subsidiary.
In 1996, the Company recorded an income tax benefit of $136,000. The current
income tax provision of $1,724,000 reflected above, represents the estimated
taxes payable by GP, the Company's 52% owned subsidiary. The deferred income tax
benefit of $1,860,000 results from utilization of net operating loss carryovers
and a reduction in the valuation allowance, among other factors. The decrease of
$2,673,000 in the valuation allowance in 1996 was attributable in part to the
utilization of the Company's net operating loss carryforwards, and to the
Company's expectation of generating sufficient taxable income that will allow
for the realization of a portion of its deferred tax assets.
In 1996, $1,307,000 of deferred tax expense is reflected in stockholders' equity
as a result of the unrealized gain on available-for-sale securities.
As of December 31, 1996, the Company has approximately $18,131,000 of net
operating loss carryovers consisting of $14,744,000 with respect to net
operating losses generated from the Company's consolidated tax return and
$3,387,000 generated by ADC as a separate tax filer for Federal income tax
return purposes. These carryovers expire in the years 2001 through 2010. In
addition, the Company has approximately $3,600,000 of available credit
carryovers of which approximately $2,800,000 expire in the years 1998 through
2003, and approximately $800,000 of which may be carried over indefinitely.
The decrease in the valuation allowance in 1995 was attributable to various
adjustments that affect the 1995 income tax provision as well as the
deconsolidation of Duratek. The deconsolidation of Duratek resulted in a
decrease in deferred tax assets and a corresponding decrease in the valuation
allowance. Such adjustment had no effect on the 1995 income tax provision.
13. Income taxes (Continued)
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, 1996 1995
- -----------------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 663 $ 799
Inventory 165 57
Lawsuit settlements 117 234
Accrued expenses 495 929
Other accrued liabilities 66
Net operating loss carryforwards 7,037 9,028
Tax credit carryforwards 3,627 2,784
- -----------------------------------------------------------------------
Deferred tax assets 12,104 13,897
- -----------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 1,088 1,274
Unrealized exchange gain 1,272 1,139
Prepaid expenses 157 129
Unrealized marketable security gain 2,404 1,243
Investment in partially owned companies 1,109 1,918
- -----------------------------------------------------------------------
Deferred tax liabilities 6,030 5,703
- -----------------------------------------------------------------------
Net deferred tax assets 6,074 8,194
- -----------------------------------------------------------------------
Less valuation allowance (5,575) (8,248)
- -----------------------------------------------------------------------
Net deferred tax asset (liability) $ 499 $ (54)
- -----------------------------------------------------------------------
Included in the balance sheets as:
Current liabilities * $ (344) $ (54)
Deferred tax asset 843
- -----------------------------------------------------------------------
$ 499 $ (54)
- -----------------------------------------------------------------------
* Relates to GP, a 52% owned subsidiary, not included in the Company's
consolidated Federal income tax return.
13. Income taxes (Continued)
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 the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the Company's
projection of future taxable income, attributable in part to the merger with GP
(see Note 2) which will allow GP to be included in the consolidated tax return
of the Company, and to unrealized gains on the Company's investments, management
believes it is more likely than not that the Company will realize the benefits
of deferred tax assets of $843,000, and has recorded this amount as an asset as
of December 31, 1996.
14. 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 segment. As a result of the decision to sell Eastern, the
Company reflected Eastern as a 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. Net
realizable value of the segment's fixed assets was estimated based upon a prior
appraisal and net realizable value of the segment's inventories was estimated
based upon negotiations with a prospective purchaser in a bulk sale transaction.
Goodwill was written off as non-recoverable. The total loss for discontinued
operation recognized in 1994 was $2,574,000, of which $1,789,000, which included
an $800,000 write-down of inventories, was from operations and $785,000 was a
loss on disposal, which was comprised of: (a) a $200,000 write-down of property
and equipment; (b) a $485,000 write-off of goodwill relating to Eastern; (c)
$100,000 for expected losses through the date of disposal. In 1995, the Company
recognized a loss from discontinued operation of $2,941,000, of which a total of
$2,610,000 was a loss on disposal incurred on the sale of inventory
($1,550,000), write-offs of accounts receivable ($360,000) and sales of fixed
assets ($700,000). At the time the Company adopted a plan of disposal in
December 1994, the Company was in negotiations to sell a substantial portion of
its specific use inventory. These negotiations subsequently broke off and the
Company therefore fully reserved this inventory in 1995.
14. Discontinued operation (Continued)
The December 31, 1994 estimated net realizable value of Eastern's fixed assets
was based upon a prior appraisal, but the actual sale in 1995 resulted in less
proceeds than prior estimates. Receivable write-offs in 1995 were caused when
the Company liquidated its assets rather than selling its inventory as part of a
continuing business, therefore making it more difficult to collect the
outstanding receivables. In addition, $331,000 in operating expenses were
incurred during 1995. The Company sold or otherwise liquidated substantially all
of Eastern's assets during 1995 and 1996. At December 31, 1995, the segment's
current assets, consisting principally of trade receivables, were stated at
estimated net realizable value based upon a review of collectibility. The
carrying amount of property and equipment was determined based on discussions
with prospective buyers.
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.
Assets and liabilities of Eastern included in the consolidated balance sheet at
December 31, 1995 were as follows (in thousands):
Current assets $ 250
Current liabilities 120
Property and equipment 100
15. Common Stock, stock options, warrants and other shares reserved
(a) On September 20, 1995, the Company's stockholders and Board of Directors
approved the proposal to amend the Company's Restated Certificate of
Incorporation to effect a one-for-four reverse stock split of its common stock.
The reverse stock split was effective on October 6, 1995 (the "Effective Date").
As of September 20, 1995, there were 27,115,240 shares of common stock
outstanding and after the Effective Date there were approximately 6,778,810
shares of common stock outstanding.
On the Effective Date, the shares of common stock held by stockholders of record
were converted into the amount of whole shares of new common stock equal to the
number of their shares divided by four, with any fractional shares rounded up to
the next whole share.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
The balance sheet at December 31, 1995 and as well as the earnings (loss) per
share for the years ended December 31, 1995, and 1994 have been restated to
reflect the reverse split as if it had occurred on January 1, 1994.
(b) 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 1994, 1995, and 1996, options and
warrants exercisable and shares reserved for issuance at December 31, 1994,
1995, and 1996 are as follows:
Common Stock
Options and warrants Price Range Number Weighted-Average
outstanding per share of shares Exercise Price
- ------------------------------------------------------------------------------------------------------
December 31, 1993 $ 9.00 - 24.00 1,094,359
Granted
Exercised 9.00 (10,774)
Terminated 9.00 - 18.00 (6,570)
- ------------------------------------------------------------------------------------------------------
December 31, 1994 9.00 - 24.00 1,077,015
- ------------------------------------------------------------------------------------------------------
Granted 8.375- 8.50 451,239 $ 8.41
Exercised
Terminated 9.00 - 20.50 (651,182) 12.16
- --------------------------------------------------------------------------------------------------
December 31, 1995 8.375- 24.00 877,072 9.03
- --------------------------------------------------------------------------------------------------
Granted 7.69 - 10.00 551,657 9.31
Exercised 8.375 - 9.00 (800) 8.51
Terminated 8.375 - 22.50 (232,536) 9.55
- --------------------------------------------------------------------------------------------------
December 31, 1996 7.69 - 24.00 1,195,393 9.05
- --------------------------------------------------------------------------------------------------
Options and warrants exercisable
December 31, 1994 9.00 - 24.00 1,072,228
- --------------------------------------------------------------------------------------------------
December 31, 1995 8.375- 24.00 770,685 9.07
- --------------------------------------------------------------------------------------------------
December 31, 1996 8.375 - 22.50 1,023,158 8.85
- --------------------------------------------------------------------------------------------------
Shares reserved for issuance
December 31, 1994 3,339,368
- --------------------------------------------------------------------------------------------------
December 31, 1995 2,106,665
- --------------------------------------------------------------------------------------------------
December 31, 1996 3,523,960
- --------------------------------------------------------------------------------------------------
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Class B Capital Stock
Options and warrants Price Range Number Weighted-Average
outstanding per share of shares Exercise Price
- ------------------------------------------------------------------------------------------------------
December 31, 1993 $ 9.00 387,500
Granted
Exercised
Terminated
- ----------
December 31, 1994 9.00 387,500
- -----------------------------------------------------------------------------------------------------
Granted 8.50 125,000 $ 8.50
Exercised
Terminated
- ----------
December 31, 1995 8.50 - 9.00 512,500 8.88
- -----------------------------------------------------------------------------------------------------
Granted 8.69 375,000 8.69
Exercised
Terminated
- ----------
December 31, 1996 8.50 -9.00 887,500 8.80
- --------------------------------------------------------------------------------------------------
Options and warrants exercisable
December 31, 1994 9.00 387,500
- --------------------------------------------------------------------------------------------------
December 31, 1995 8.50 -9.00 512,500 8.91
- --------------------------------------------------------------------------------------------------
December 31, 1996 8.50 -9.00 595,625 8.87
- --------------------------------------------------------------------------------------------------
Shares reserved for issuance
December 31, 1994 387,500
- ------------------------------------------------------------------------------
December 31, 1995 512,500
- ------------------------------------------------------------------------------
December 31, 1996 950,000
- ------------------------------------------------------------------------------
At December 31, 1996, the weighted average remaining contractual life of all
outstanding options was 3.8 years.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
At December 31, 1996, 1995, and 1994, options outstanding included 629,334,
629,334 and 504,334 shares for two officers who are principal shareholders of
the Company.
Class B Capital stock aggregating 887,500, 512,500 and 387,500 shares at
December 31, 1996, 1995 and 1994, respectively, were reserved for issuance to
these same two officers in 1995 and 1994 and for three officers of the Company,
two of whom are principal shareholders of the Company, at December 31, 1996.
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,
1996, 1995, and 1994 include 950,000, 512,500 and 387,500 shares, respectively
in connection with Class B shares. At December 31, 1996, 1995, and 1994, shares
reserved for issuance were primarily related to shares reserved for options,
warrants and the conversion of long-term debt.
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost
has been recognized for its stock options in the financial statements.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below (in thousands):
1996 1995
---- ----
Net income (loss) As reported $11,380 $1,012
Pro forma 9,927 (416)
Earnings (loss) per share As reported 1.54 .15
Pro forma 1.34 (.06)
Pro forma net income reflects only options granted in 1996 and 1995. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting period of 5
years and compensation cost for options granted prior to January 1, 1995 is not
considered.
At December 31, 1996 and 1995, the per share weighted-average fair value of
stock options granted was $3.64 and $3.94, respectively on the date of grant
using the modified Black Scholes option-pricing model with the following
weighted-average assumptions: 1996 - expected dividend yield 0%, risk-free
interest rate of 6%, expected volatility of 39.1%, and an expected life of 4.5
years; 1995 - expected dividend yield 0%, risk-free interest rate of 5.9%,
expected volatility of 44.9%, and an expected life of 4.5 years.
16. Business segments
The operations of the Company consist of the following business segments:
Physical Science Group - engineering, environmental, training, analytical, and
technical support services to commercial nuclear and fossil power utilities, the
U.S. Department of Defense and Energy, Fortune 500 companies and other
commercial and governmental customers; Distribution Group - wholesale
distribution of home decorating, hardware and finishing products; Optical
Plastics Group - the manufacture and distribution of coated and molded plastic
products.
16. Business segments (Continued)
The following tables set forth the sales and operating results attributable to
each line of business and include a reconciliation of the groups' sales to
consolidated sales and operating results to consolidated income (loss) from
operations before income taxes, discontinued operation and extraordinary item
for the periods presented (in thousands):
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------
Sales
Physical Science $117,183 $107,549 $118,421
Distribution 76,102 65,098 75,551
Optical Plastics 8,781 10,949 9,290
Other 1,734 1,429 1,512
- ------------------------------------------------------------------------------------------
$203,800 $185,025 $204,774
- ------------------------------------------------------------------------------------------
Operating results
Physical Science $ 6,504 $ 4,854 $ 5,053
Distribution 1,767 1,374 1,484
Optical Plastics 1,485 2,661 2,227
Other (principally American
Drug Company) (1,287) (1,575) (1,854)
- ------------------------------------------------------------------------------------------
Total operating profit (loss) 8,469 7,314 6,910
Interest expense (4,358) (5,019) (6,458)
Indirect administrative expenses (at the
holding company level), net of gains
or losses from dispositions of
investments, minority interests,
foreign currency exchange gains or
losses, and other revenue 7,133 3,524 (11,100)
- ------------------------------------------------------------------------------------------
Income (loss) from operations before
income taxes, discontinued operation
and extraordinary item $ 11,244 $ 5,819 $ (10,648)
- ------------------------------------------------------------------------------------------
16. Business segments (Continued)
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 at the holding company level, foreign currency
transaction gains and losses, investment income and interest expense. General
corporate expenses at the holding company level, which are primarily salaries,
occupancy costs, professional fees and costs associated with being a publicly
traded company, totaled approximately $6,170,000, $6,173,000 and $6,177,000 for
the years ended December 31, 1996, 1995 and 1994 respectively. For the years
ended December 31, 1996, 1995 and 1994, sales to the United States government
and its agencies represented approximately 27%, 31% and 23%, respectively, of
sales.
Additional information relating to the Company's business segments is as follows
(in thousands):
December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
Identifiable assets
Physical Science $ 83,414 $ 82,022 $ 104,572
Distribution 47,243 44,400 42,879
Optical Plastics 12,453 12,267 11,552
Corporate and other 32,917 12,681 12,104
Assets relating to discontinued operation 350 4,439
- -----------------------------------------------------------------------------------------
$176,027 $151,720 $175,546
- -----------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
Additions to property,
plant, and equipment, net
Physical Science $ 1,976 $ 1,555 $ 2,599
Distribution 522 352 1,336
Optical Plastics 201 565 189
Corporate and other (21) 39 62
Discontinued operation, net (505) (180)
- -----------------------------------------------------------------------------------------
$ 2,678 $ 2,006 $ 4,006
- -----------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
Depreciation and amortization
Physical Science $ 2,404 $ 1,785 $ 3,523
Distribution 1,125 1,069 1,000
Optical Plastics 66 788 839
Corporate and other 474 674 503
Discontinued operation 198
- -----------------------------------------------------------------------------------------
$ 4,069 $ 4,316 $ 6,063
- -----------------------------------------------------------------------------------------
17. Fair value of financial instruments
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each segment. Corporate and other assets are principally
cash and cash equivalents, marketable securities and unallocated intangibles.
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, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
amount fair value amount fair value
8% Swiss Bonds due 2000 $ 2,189 $ 1,883 $ 2,365 $ 1,987
Other Swiss Bonds 1,383 1,176
5% Convertible Bonds 1,755 1,632 2,249 2,092
7% Dual Currency Convertible
Bonds 615 553
12% Subordinated Debentures 6,732 5,386 6,749 4,859
7% Convertible Note 1,000 1,000
Other long-term debt 8,440 8,440 10,571 10,571
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 judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
18. Accounting for certain investments in debt and equity securities
The Company's marketable securities consist of corporate equity securities which
are included in both Marketable securities, which are expected to be sold within
one year, and Investments and advances on the consolidated balance sheet. The
Company classifies these equity securities as either trading or
available-for-sale and records the securities at their fair value. Trading
securities are held principally for the purpose of selling them in the near
term. Unrealized holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and are reported as a separate component of
stockholders' equity until realized.
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. In 1995, the Company
recognized a permanent impairment in one of its available-for-sale securities as
a result of receipt of a tender offer at a price below the Company's carrying
cost, and recorded a loss of $785,000 to adjust the carrying amount to the
tender offer price, which loss is included in Investment and other income
(expense), net. In July 1996, the Company recognized a $4,000,000 loss on the
Company's investments in American White Cross, Inc. (AWC) due to AWC filing for
protection under Chapter 11 of the United States Bankruptcy Code.
Realized gains and losses for securities classified as available-for-sale are
included in earnings and are derived using the average cost method for
determining the cost of securities sold.
In April 1996, the Company sold 1,000,000 shares of Duratek common stock,
including 250,000 shares that were included in marketable securities at December
31, 1995. As a result, the Company realized proceeds of $17,700,000 and
recognized a gain of $12,200,000. In 1995, the Company recognized a $3,183,000
gain on the transfer of the 250,000 shares of Duratek common stock to marketable
securities, representing the excess of the quoted market value of such shares on
the date of transfer over the Company's cost. In the second half of 1996, the
Company transferred an additional 250,000 shares from long-term investments
available- for- sale, to trading securities, resulting in the recognition of a
$3,314,000 gain, representing the net excess of the quoted market price of such
shares at December 31, 1996, over the Company's cost at the time of transfer and
subsequent changes in market value of these shares. At December 31, 1996, the
Company was permitted to sell approximately 475,000 shares of Common Stock of
Duratek pursuant to various agreements. At December 31, 1996, the Company had
determined to sell promptly 250,000 shares of its Duratek Common Stock in 1997
pursuant to various agreements, and therefore, classified such securities in the
trading category.
18. Accounting for certain investments in debt and equity securities
(Continued)
The gross unrealized holding gains (losses) and fair value for
available-for-sale securities were as follows (in thousands):
Gross
unrealized holding
Cost Gains (losses) Fair Value
Available-for-sale equity securities:
December 31, 1996 $1,601 $4,722 $ (91) $6,232
December 31, 1995 $2,210 $(1,440) $ 770
- ------------------------------------------------------------------------------
Differences between cost and market of $3,324,000 (net of taxes of $1,307,000)
at December 31, 1996 were credited to a separate component of shareholders'
equity called Net unrealized investment gain on available-for-sale securities.
Proceeds from the sale of available-for-sale securities were $13,275,000 and
$2,774,000 in 1996 and 1994, respectively. Gross realized gains included in
income in 1996 and 1994 were $9,150,000 and $463,000, respectively.
The Company did not realize any gains or losses on available-for-sale securities
for the year ended December 31, 1995.
19. Impairment of long-lived assets and long-lived assets to be disposed of
The Company adopted the Provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
20. Commitments and contingencies
(a) The Company has several noncancellable leases which cover real property,
machinery and equipment and certain manufacturing facilities. Such leases expire
at various dates with, in some cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows(in thousands):
Real Machinery &
property equipment Total
1997 $ 4,206 $ 1,214 $ 5,420
1998 3,524 1,205 4,729
1999 2,712 1,075 3,787
2000 2,547 532 3,079
2001 2,116 213 2,329
After 2001 6,526 206 6,732
- ---------------------------------------------------------------------------
Total $21,631 $4,445 $26,076
- ---------------------------------------------------------------------------
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 $6,745,143, $5,598,000
and $8,115,000 for 1996, 1995 and 1994, respectively.
(b) 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. In 1994, an additional 20,000 options were granted at a price of $3.50
per share. Through December 31, 1996, 236,136 options under the plan were
exercised, 43,723 were canceled, and at December 31, 1996, 360,750 options are
currently exercisable and 368,750 options are currently outstanding. At December
31, 1996, the Company owned approximately 15% of Duratek (See Note 3).
20. Commitments and contingencies (Continued)
(c) 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.
21. Subsequent event
On March 26, 1997, the Company and its wholly-owned subsidiaries, GP and MXL,
entered into a three year secured $25,000,000 Revolving Credit Agreement, with a
syndicate of three banks. The Agreement replaces the MXL Loan Agreement (see
Note 9(a)), the GP Revolving Credit Agreement (see Note 9(b)) and the Company's
Term Loan Agreement (see Note 11(h)). The Agreement bears interest at the prime
rate or 1.75% over LIBOR. The borrowing formula is based upon eligible accounts
receivable of GP and MXL, as well as various corporate assets. Under the
Agreement, the full $25,000,000 of the Revolving Credit Agreement would be
available to the Company and/or GP and MXL. At March 26,1997, the amount
outstanding was approximately $13,200,000.
National Patent Supplementary Data
Development Corporation
and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share data)
three months ended
March 31, June 30, Sept. 30, Dec.31, March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1995 1995 1995 1995
- -------------------------------------------------------------------------------------------------------------------------
Sales ............................$ 48,156 $ 51,048 $ 53,332 $ 51,264 $ 46,552 $ 48,416 $ 47,551 $ 42,506
Gross margin ..................... 7,092 7,744 8,077 7,329 7,270 7,832 8,107 5,113
Income (loss) before
discontinued operation
and extraordinary item .......... 83 10,803 752 (258) 946 (910) 3,081 915
Net income (loss) ................ 83 10,803 752 (258) 447 (1,542) 1,979 128
Earnings (loss) per share: *
Before discontinued operation and
extraordinary item .............. .01 1.43 .10 (.03) .15 (.14) .45 .14
Net income (loss) ................ .01 1.43 .10 (.03) .07 (.23) .29 .02
- -------------------------------------------------------------------------------------------------------------------------
*All periods have been restated to reflect the effect of the one-for-four
reverse stock split.
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 the Company is
incorporated herein by reference to the Company'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 Executive Compensation is incorporated herein
by reference to the Company'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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Security Ownership of Certain Beneficial
Owners is incorporated herein by reference to the Company'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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Company'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 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)The following financial statements are included in Part II, Item 8.
Financial Statements and Supplementary Data:
FINANCIAL STATEMENTS OF
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES:
Page
Independent Auditors' Report 31
Financial Statements:
Consolidated Balance Sheets -
December 31, 1996 and 1995 32
Consolidated Statements of Operations -
Years ended December 31, 1996, 1995 and 1994 34
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 36
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994 38
Notes to Consolidated Financial Statements 41
(a)(3) Exhibits
Consent of KPMG Peat Marwick LLP, Independent Auditors
(b) The Registrant filed Reports on Form 8-K on November 19, 1996 and on
December 18, 1996 with respect to the merger of General Physics Corporation with
National Patent which reports contained Pro Forma Financial Information with
respect to such merger transaction
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
Jerome I. Feldman
President and Chief
Executive Officer
Dated: March 28, 1997
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.
Signatures Title
Jerome I. Feldman President, Chief Executive
Officer and Director
(Principal Executive Officer)
Martin M. Pollak Executive Vice President
and Treasurer and Director
Scott N. Greenberg Vice President and Chief
Financial Officer and Director
Ogden R. Reid Director
E-4
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 Amendment to the Registrant's Restated
Certificate of Incorporation filed on
January 24, 1997.*
3.2 Amended By-Laws of the Registrant.
Incorporated by reference to Exhibit 3(ii)
of the Registrants Form 10-Q for the first
quarter ended March 31, 1995. On Form 10-K
for the year ended December 31, 1986.
10.1 1973 Non-Qualified Stock Option Plan of the
Registrant, as amended on November 19, 1996.*
10.2 Swiss Public Bond Issue Agreement dated as
of February 8, 1985 between the Registrant
and a consortium of Swiss banks.
Incorporated by reference to the
Registrant'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. Incorporated
herein by reference to Exhibit 10.37 of the
Registrant's Form 10-K for the year ended
December 31, 1985.
10.4 Swiss Public Bond Issue Agreement dated as
of February 28, 1986, between the Registrant
and a consortium of Swiss Banks.
Incorporated herein by reference to Exhibit
10.38 of the Registrant's Form 10-K for the
year ended December 31, 1985.
10.5 Registrant's 401(k) Savings Plan, dated
January 29, 1992, effective March 1, 1992.
Incorporated herein by reference to Exhibit
10.12 of the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1991.
10.6 $25,000,000 Secured Revolving Credit and
Term Loan Agreement by and among Five Star
Group, Inc., National Westminster Bank, USA,
United Jersey Bank/Central, N.A., and
National Westminster Bank, N.J., as agent,
dated April 29, 1993. Incorporated herein
by reference to the Registrants Form 8-K
dated July 12, 1993.
10.7 $6,000,000 Secured Revolving Credit and Term
Loan Agreement by and among MXL Industries,
Inc., National Westminster Bank, USA, United
Jersey Bank/Central, N.A., and National
Westminster Bank, N.J., as agent, dated
April 29, 1993. Incorporated herein by
reference to the Registrants Form 8-K dated
July 12, 1993.
10.8 Amendment dated October 23, 1995 to the Loan
Agreement dated April 29, 1993 between Five
Star Group, Inc. and NatWest Bank N.A.
Incorporated herein by reference to Exhibit
10.1 of the Registrant's Form 10-Q for the
third quarter ended September 30, 1995.
10.9 Amendment and Supplement dated October 23,
1995 to the Loan Agreement dated April 29,
1993 between MXL Industries, Inc. and
NatWest Bank N.A. Incorporated herein by
reference to Exhibit 10.2 of the
Registrant's Form 10-Q for the third quarter
ended September 30, 1995.
10.10 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.
10.11 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.
10.12 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.
10.13 $25,000,000 Credit Agreement dated March 26,
1997 by and among National Patent
Development Corporation, General Physics
Corporation, GP Environmental Services,
Inc., General Physics Federal Systems, Inc.
and MXL Industries, Inc. the banks signatory
thereto and Fleet Bank, National Association
as Administrative Agent and Collateral Agent
for such banks.*
13 Not Applicable
18 Not Applicable
19 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG Peat Marwick LLP,
Independent Auditors*
27 Not Applicable
28 Not Applicable
* Filed herewith.