FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 3 to
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1992
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7234
NATIONAL PATENT DEVELOPMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-1926739
(State of Incorporation) (I.R.S. Employer
Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(212) 826-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, $.01 Par Value American Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 15, 1993, the aggregate market value of the
outstanding shares of the Registrant's Common Stock, par value
$.01 per share, held by non- affiliates was approximately
$55,777,770 based on the closing price of the Common Stock on the
American Stock Exchange on March 15, 1993. None of the Class B
Capital Stock, par value $.01 per share, was held by non-
affiliates.
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the most recent
practicable date.
Class Outstanding at March 15, 1993
Common Stock, par value $.01 per share 16,250,955 shares
Class B Capital Stock, par value $.01 per share 250,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its
1993 Annual Meeting of Stockholders is incorporated by reference
into Part III hereof.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations is hereby amended and
restated in its entirety as follows:
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Overview
During 1992, the loss before income taxes and extraordinary items
was $13,178,000 compared to income of $1,157,000 in 1991 and a
loss of $39,265,000 in 1990. The change from a profit in 1991 to
a loss in 1992 was primarily the result of the public offering by
General Physics Corporation (GP) in October 1991, through which
the Company sold 68% of its GP common stock and recognized a gain
on the transaction of $18,844,000. The Company currently owns
approximately 28% of GP. The effect of the gain on GP was
partially offset by improved operating results achieved in 1992
by the remaining companies within the Physical Science Group, GPS
Technologies, Inc. (GPS) (formerly General Physics Services
Corp.), a 92% owned subsidiary, and GTS Duratek, Inc. (Duratek),
an approximately 80% owned subsidiary. At the corporate level,
improved operating results were partially the result of gains
recognized on the sale of certain investments and the continuing
reduction in interest expense as a result of reduced short-term
borrowings, lower rates of interest on the Company's variable
rate obligations and reduced interest on the Company's Swiss Debt
obligation due to the Company's continuing practice of
repurchasing its Swiss Debt from time to time. The improved
operating results within the Physical Science Group were due to
both GPS and Duratek achieving operating profits in 1992 as
opposed to operating losses in 1991. GPS achieved a significant
turnaround as a result of reduced losses at its subsidiary, GP
International Engineering & Simulation, Inc. (GPI), an operating
profit generated for the first time by its subsidiary GP
Environmental Services, Inc. (GPE) and an overall improvement
within the core businesses of GPS. Duratek showed an improvement
in operations during 1992 as a result of increased sales and
gross profit in both its Environmental Technology and Consulting
and Temporary Technical Staff businesses, as well as the impact
of the effort in the latter half of 1991 to consolidate and
streamline its administrative structure. The improvements in
operations achieved by the current members of the Physical
Science Group and at the corporate level were partially offset by
an increased operating loss at the Electronics Group and reduced
operating profits at the Optical Plastics Group. The Electronics
Group, which is Eastern Electronics Manufacturing Corporation
(Eastern), the Company's electronic assembly and manufacturing
subsidiary, incurred increased operating losses due to reduced
3
sales, increased operating costs and the effect of reserves taken
for obsolete inventory. The Optical Plastics Group, which is MXL
Industries, Inc. (MXL), the Company's injection molding and
coating subsidiary, had a small decrease in operating profit as a
result of weakness in the precision tooling part of its business,
as well as reduced orders from a number of MXL's established
customers in the beginning of 1992. The Health Care Group's
operating loss and the Distribution Group's operating profit
remained virtually unchanged.
During 1991, income before income taxes and extraordinary items
was $1,157,000 compared to a loss of $39,265,000 for 1990. The
improved performance in 1991 was the result of the $18,844,000
gain recognized on the sale of GP common stock, reduced operating
losses within the Health Care Group and increased operating
profits in the Physical Science Group. At the corporate level,
the improved results were partially the result of reduced
interest expense, primarily due to repayments of short-term
borrowings, lower rates of interest on the Company's variable
rate obligations, and reduced interest on the Company's Swiss
Debt obligations due to repurchases of the Swiss Debt during 1990
and 1991. In addition, in 1991 the Company realized a net
foreign currency transaction gain of $3,042,000 as compared to a
net currency transaction loss of $4,356,000 incurred in 1990, as
a result of the Company's decision not to hedge its Swiss Franc
denominated debt. The Health Care Group incurred reduced
operating losses in 1991 due to improved results at Interferon
Sciences, Inc. (ISI), the Company's 53% owned subsidiary, and
lower losses recognized at National Patent Medical (NPM). The
reduced operating loss at ISI was the result of reduced research
and development costs, due to ISI focusing its resources on the
production of commercial quantities of ALFERONR N Injection,
ISI's FDA approved product for the treatment of recurring and
refractory external genital warts. The Company realized reduced
operating losses at NPM in 1991 due to the transfer in April 1991
of substantially all the assets and business of the Company's NPM
division to a partnership in which the Company had a 49%
interest. In 1992, as a result of an initial public offering,
the partnership was disolved, and the Company currently owns 14%
of NPM Healthcare Products, Inc. (NPMH) (see Note 11(d) of the
Notes to Consolidated Financial Statements). The Physical
Science Group achieved improved operating profits since 1990's
results were impacted by a $4,954,000 writeoff of an investment
by GP (see Note 11(a) of the Notes to Consolidated Financial
Statements). In connection with the public offering in 1991, GP
transferred certain assets and businesses to GPS (see Note 2 of
the Notes to Consolidated Financial Statements). The Company
currently owns approximately 28% of GP, and since October 3, 1991
accounts for its investment in GP on the equity basis. The
improved operating results of GP and GPS within the Physical
Science Group were partially offset by an operating loss incurred
by Duratek due to the net effect of reduced gross margin achieved
4
in 1991 and the costs incurred during the year to invest in
environmental remediation technology, as well as a $1,202,000
net gain recognized on the sale of two lines of business in 1990
(see Note 11(b) and (c) of the Notes to Consolidated Financial
Statements). The improvements in operations achieved by the
Health Care Group, the Physical Science Group and at the
corporate level were partially offset by reduced operating
profits at the Distribution Group in 1991. The Distribution
Group incurred a small decrease in operating profits due to
reduced sales and gross margin as a result of the continuing
weakness in the northeast economy. The Optical Plastics and the
Electronics Groups' operating profits remained virtually
unchanged.
Sales
Consolidated sales from continuing operations decreased by
$63,168,000 in 1992, to $195,765,000, as a result of the transfer
in April 1991 of a majority interest in NPMH, in which the
Company currently has a 14% interest, and the public offering by
GP in October 1991. The decrease was partially offset by
increased sales within the Distribution Group and by the
remaining companies in the Physical Science Group. Sales
decreased by $34,158,000 in 1991 to $258,933,000, primarily
within the Health Care Group as a result of the transfer in April
1991 of a majority interest in NPM.
The Physical Science Group sales decreased from $164,135,000 in
1990 to $162,727,000 in 1991 and to $109,303,000 in 1992. During
1992, sales decreased by $53,424,000, due to the public offering
by GP on October 3, 1991, from which time the results of GP were
accounted for on the equity basis, since the Company's percentage
of ownership was reduced to approximately 28%. In 1991, the
Physical Science Group included sales of $62,325,000 for GP. The
loss of GP's sales in 1992 was partially offset by increased
sales at both GPS and Duratek. Duratek generated increased sales
in 1992 as a result of work performed on two new environmental
technology projects, as well as an increase in services provided
by the consulting and temporary technical staff support business.
GPS generated increased revenues in new business areas such as
environmental analytical services and full scope simulation.
These increases at GPS were partially offset by a reduction in
revenue for certain subcontracts, which terminated in 1991, for
construction management services provided to the Department of
the Army. In 1991, the decrease was due to the public offering
by GP in October 1991, partially offset by an increase in work
performed by GP for the Department of Energy during the first
nine months of 1991.
The Distribution Group sales decreased from $66,511,000 in 1990,
to $64,788,000 in 1991, and increased to $68,450,000 in 1992.
The increase of $3,662,000, or 6%, in 1992 was attributable to
the introduction during the year of a new line of hardware
5
supplies. The 1991 decrease of $1,723,000, or 3%, was primarily
due to the continuing overall weakness of the northeast economy.
The Health Care Group sales decreased from $45,907,000 in 1990,
to $14,607,000 in 1991, and to $4,042,000 in 1992. The
$10,565,000 reduction in sales in 1992 was due to the transfer on
April 8, 1991 of a majority interest in NPM, partially offset by
increased sales by ISI of ALFERONR N Injection to its marketing
partner, the Purdue Frederick Company (Purdue). In December
1991, Purdue agreed to purchase an aggregate of 45,000 vials of
ALFERONR N Injection from the Company over approximately a six
month period which commenced in March 1992 and was completed in
September 1992. During the twelve month period ended December
31, 1992, Purdue sold (including samples) approximately 2,400
vials of ALFERONR N Injection per month. The Company is
currently discussing future requirements of ALFERONR N Injection
with Purdue. Pending resolution of this issue with Purdue, the
Company has temporarily suspended its production of ALFERONR N
Injection. In 1991, the decrease of $31,300,000 was due to the
transfer of a majority interest in NPM, as discussed above. The
loss of NPM's sales was partially offset by ISI which commenced
sales of ALFERONR N Injection in July 1991 from its expanded
manufacturing facility, which was concurrent with the national
introduction of the product by Purdue.
The Optical Plastics Group sales decreased from $9,486,000 in
1990, to $9,454,000 in 1991, and to $7,862,000 in 1992. The
decreased sales in 1992 was due to weakness at MXL's precision
tooling division, as well as reduced orders from a number of
MXL's established customers in the beginning of 1992.
The Electronics Group sales increased from $6,872,000 in 1990, to
$7,151,000 in 1991, and decreased to $5,968,000 in 1992. The
decreased sales in 1992 was the result of the weakness in the
electronics industry, particularly among some of the major
computer and electronics companies which comprise Eastern's
customer base.
Gross margin
Consolidated gross margin was $42,711,000, or 15% of net sales in
1990, $36,013,000 or 14% of net sales in 1991 and $29,772,000 or
15% of net sales in 1992. In 1992, the decrease in gross margin
of $6,241,000 occurred primarily in the Physical Science Group as
a result of the public offering by GP in October 1991, and to a
lesser extent, in the Health Care Group due to the transfer in
April 1991 of a majority interest in NPM in which the Company
currently has a 14% interest. The reduced gross margin in 1992
was partially offset by increased gross margin achieved by the
Distribution Group as a result of increased sales. In 1991, the
decrease in gross margin of $6,698,000 occurred primarily in the
Health Care Group due to the transfer in April 1991 of a majority
6
interest in NPM, as discussed above.
The Physical Science Group gross margin decreased from
$18,867,000, or 12% of net sales in 1990, to $18,370,000, or 11%
of net sales in 1991, and to $13,728,000 or 13% of net sales in
1992. In 1992, the decreased gross margin was due to the public
offering by GP in October 1991, partially offset by increased
gross margins at Duratek and GPS. The increased gross margin
dollars and percentage at GPS was due to increased sales,
significant profit improvements at GPI and GPE during 1992, as
well as an improved mix of services performed at higher margins
within the core businesses. Duratek achieved increased gross
margins in 1992 as a result of increased revenues generated by
its environmental technology projects. In 1991, the decrease in
gross margin was attributable to reduced sales and gross margin
percentage at Duratek. This decrease was partially offset by
increased gross margin at GPS as a result of steps taken to
reduce costs, which led to an increased gross margin percentage.
The Distribution Group gross margin decreased from $12,657,000 or
19% of net sales in 1990, to $11,679,000 or 18% in 1991, and
increased to $12,355,000 or 18% of sales in 1992. In 1992, the
increased gross margin was the result of increased sales due to
the introduction of a new line of hardware products. In 1991,
the decrease in gross margin was due to reduced sales and gross
margin percentage. The reduced sales volume was a result of the
continuing weakness in the northeast economy and the reduced
gross margin percentage was due to competitive pressures within
the industry.
The Health Care Group gross margin decreased from $7,788,000, or
17% of net sales in 1990, to $2,509,000 or 17% of net sales in
1991, and to $358,000 or 9% of net sales in 1992. The decrease
in gross margin in 1991 and 1992 was the result of the transfer
on April 8, 1991 of a majority interest in NPM, as discussed
above. The reduced gross margin percentage in 1992 is
attributable to the low gross margin percentages achieved by ISI
due to the writedown of inventory to its estimated net realizable
value, as a result of increased unit production costs caused by
limited production volumes.
The Optical Plastics Group gross margin increased from
$2,885,000, or 30% of net sales in 1990, to $3,231,000 or 34% of
net sales in 1991, and decreased to $2,740,000 or 35% of net
sales in 1992. In 1992, the reduced gross margin was the result
of reduced sales volume. In 1991, the increase in gross margin
dollars and percentage was attributable to an increased gross
margin percentage at MXL due to a favorable change in the product
mix.
The Electronics Group gross margin decreased from $389,000 or 6%
of net sales in 1990, to $221,000 or 3% of net sales in 1991, and
7
increased to $561,000 or 9% of net sales in 1992. The increased
gross margin in 1992, in spite of reduced sales at Eastern, was
attributable to improved gross margin percentages as a result of
a better product mix, a reduction in the fixed manufacturing
costs and improved operating efficiencies. In 1991, the reduced
gross margin percentage was the result of operating
inefficiencies, which led to unabsorbed overhead.
Investment and other income, net
Investment and other income was $413,000 in 1990, $2,790,000 in
1991 and $6,221,000 in 1992. In 1992, the increase in investment
and other income, net was primarily due to two factors. In 1992,
the Company realized increased gains on the sales of certain
investments, and recognized an expense for reserves taken and
losses realized on certain assets of $1,336,000 in 1992 as
compared to $4,774,000 in 1991. In 1992, the Company realized a
net foreign currency transaction gain of $3,362,000. In 1991,
the increase in investment and other income, net was primarily
due to two factors. In 1991, the Company realized a net foreign
currency transaction gain of $3,042,000, compared to a loss of
$4,356,000 in 1990. This net gain was partially offset by
$4,774,000 of reserves taken and losses realized on certain
assets and investments in 1991. The reserves were taken in 1992
and 1991 due primarily to reduced values and impairments relating
to long-term investments and related assets accounted for on the
cost basis.
At December 31, 1992, there was an aggregate of SFr. 60,769,000
of Swiss denominated indebtedness outstanding, of which SFr.
58,889,000 represents principal amount outstanding and SFr.
1,880,000 represents interest accrued thereon. Foreign currency
valuation fluctuations may adversely affect the results of
operations and financial condition of the Company. In order to
protect itself against currency valuation fluctuations, the
Company has at times swapped or hedged a portion of its obliga-
tions denominated in Swiss Francs. At December 31, 1992, the
Company had not hedged its Swiss Franc obligations. If the value
of the Swiss Franc to the U.S. dollar increases, the Company will
recognize transaction losses on the unhedged portion of its Swiss
Franc obligations. On December 31, 1992, the value of the Swiss
Franc to the U.S. dollar was 1.4657. There can be no assurance
that the Company will be able to swap or hedge obligations
denominated in foreign currencies at prices acceptable to the
Company or at all. The Company will continue to review this
policy on a continuing basis.
Selling, general, and administrative expenses
Selling, general and administrative expenses (SG&A) decreased
from $50,607,000 in 1990 to $38,356,000 in 1991 and to
$36,274,000 in 1992. In 1992, the decrease in SG&A expenses was
primarily due to decreases in the Health Care Group and the
Physical Science Group as a result of the transfer on April 8,
8
1991 of a majority interest in NPM and the public offering by
GP in October 1991, respectively. The decrease was partially
offset by increased SG&A within the Distribution Group as a
result of Five Star's expansion into the hardware supply
distribution business and increased SG&A within the Electronics
Group due to costs connected with Eastern's efforts to
restructure its business operations. In 1991, the decrease in
SG&A occurred within all operating groups of the Company. The
major decrease occurred within the Health Care Group due to the
transfer on April 8, 1991 of a majority interest in NPM, as
discussed above. In addition, the Distribution, Physical Science
and Electronics Groups were all successful in implementing steps
to control and reduce SG&A costs, as was the Company at the
corporate level.
Research and development costs
The Company's research and development activities are conducted
both internally and under various types of arrangements at
outside facilities. Research and development costs were
$7,892,000, $4,651,000 and $4,645,000 for 1990, 1991, and 1992,
respectively. In 1992, ISI experienced increased research and
development costs because of increased levels of research on
ALFERONR N Gel, ALFERONR LDO and other proprietary research. The
increased spending at ISI in 1992 was offset by reduced spending
on various corporate projects. In 1991, the decrease was due to
a reduced level of research and development at ISI, relating to
ALFERONR N Injection, as a result of ISI focusing its resources
on the production of commercial quantities of ALFERONR N
Injection.
Interest expense
Interest expense aggregated $20,447,000 in 1990, $15,579,000 in
1991 and $11,044,000 in 1992. In 1992, the Company continued to
reduce its interest expense at the corporate level as a result
of reduced short-term borrowings, lower rates of interest on the
Company's variable rate obligations and reduced interest on the
Company's Swiss Debt obligations due to the Company's practice of
repurchasing Swiss Debt from time to time. In 1991, the
decreased interest expense was the result of reduced short-term
borrowings incurred at lower interest rates, and reduced long-
term debt. In addition, in 1992 and 1991, the Company
experienced cost savings associated with the Company's decision
not to hedge its Swiss Franc obligations.
Income taxes and extraordinary item
Income tax benefit (expense) from operations for 1990, 1991, and
1992 was $1,272,000, $(549,000) and $(427,000), respectively.
The Company's income tax benefit in 1990 is primarily
attributable to the reversal of $1,289,000 of deferred taxes of
GP, a then 92% owned subsidiary, which taxes were offset by the
operating losses and tax credits of the Company. This income tax
benefit exceeded Duratek's separate company Federal income tax
9
expense and the Company's state and local tax expense by
$1,272,000 for 1990.
In 1992, the Company's loss before income taxes from operations
exceeded its gains from extraordinary items: therefore, no income
tax expense applicable to such extraordinary gains was
recognized. The income tax expense for 1992 of $427,000
represents state and local income taxes.
In 1991, despite the Company's $1,157,000 income before income
taxes from operations, no Federal income tax expense was
recognized. This is due principally to significant permanent
differences between financial and tax reporting of 1991
transactions, including the elimination for tax purposes of the
$18,844,000 gain on the sale of GP stock, net of a gain
recognized only for tax purposes upon ISI ceasing to be a member
of the Company's consolidated Federal income tax return group on
May 31, 1991. The income tax expense for 1991 of $549,000
represents state and local income taxes.
In 1990, the Company's loss before income taxes from operations
exceeded its gains from extraordinary items; therefore, no income
tax expense applicable to such extraordinary gains was
recognized.
As of December 31, 1992, the Company has approximately
$30,566,000 of consolidated net operating losses available for
financial statement reporting purposes. ISI, on a separate
company basis, has approximately $10,600,000 of net operating
loss carryforwards available to apply against its separate
company future taxable income. Such losses expire before or in
the year 2007.
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," will be adopted by the Company in 1993 on a
prospective basis. This standard requires that deferred income
taxes be recorded following the liability method of accounting
and adjusted periodically when income tax rates change. As of
December 31, 1992, the Company was not carrying any deferred tax
accounts. Adoption of the new Statement will not have a material
effect on the Company's financial condition or results of
operations.
Liquidity and capital resources
At December 31, 1992, the Company had cash, cash equivalents and
marketable securities totaling $22,474,000. ISI, GPS and Duratek
had cash, cash equivalents and marketable securities of
$9,082,000 at December 31, 1992. The minority interests of these
companies are owned by the general public, and therefore, the
assets of these subsidiaries have been dedicated to the
operations of these companies and may not be readily available
for the general corporate purpose of the parent.
10
The Company believes that it has sufficient cash, cash
equivalents and marketable securities and borrowing availability
under existing and potential lines of credit to satisfy its cash
requirements until the first scheduled maturity of its Swiss
Franc denominated indebtedness on March 1, 1995. However, in
order for the Company to meet its long-term cash needs, which
include the repayment of $34,244,000 of Swiss Franc denominated
indebtedness scheduled to mature in 1995 and $11,005,000 of Swiss
Franc denominated indebtedness which is scheduled to mature in
1996, the Company must obtain additional funds. The Company has
reduced and is continuing to reduce its long-term debt through
the issuance of equity securities in exchange for long-term debt
and is also exploring new credit arrangements on an ongoing
basis. However, there is no assurance that the Company will be
able to obtain any new credit arrangements.
At December 31, 1992, the Five Star Group was not in compliance
with various covenants. Management has advised the bank of such
violations and does not anticipate any problems in obtaining a
waiver of these violations and an extension of the current line.
For the year ended December 31, 1992, the Company's working
capital decreased by $10,683,000 to $44,877,000, reflecting the
decrease in cash, cash equivalents, restricted cash and
marketable securities, which were used to fund the loss and the
reduction of long-term debt. During 1992, the Company reduced
its long-term debt by $6,244,000. Consolidated cash and cash
equivalents decreased by $6,075,000 to $17,921,000 at December
31, 1992.
The decrease in cash and cash equivalents of $6,075,000 in 1992
primarily resulted from cash used in operations of $12,040,000
offset by cash provided by investing and financing activities of
$5,277,000 and $688,000, respectively. Cash used in operations
was primarily required to fund the operating loss for the year.
The cash from investing activities was provided by the sales of
certain investments and marketable securities, partially offset
by investment in property, plant and equipment and intangible
assets. Financing activities consisted primarily of repayments
and reductions in short-term borrowings and repayments of long-
term debt, offset by proceeds from short-term borrowing as well
as the elimination of restrictions on a portion of the Company's
cash. At December 31, 1992, the Company at the parent company
level had substantially exhausted its ability to borrow funds
from its subsidiaries under their respective line of credit
arrangements.
The Company's principal manufacturing facilities were constructed
subsequent to 1976 and management does not anticipate having to
replace major facilities in the near term. As of December 31,
1992, the Company has not contractually committed itself for any
other new major capital expenditures.
11
Item 8. Financial Statements and Supplementary Data is hereby
amended and restated in its entirety as follows:
Item 8. Financial Statements and Supplementary Data
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 28
Financial Statements:
Consolidated Balance Sheets - December 31, 1992
and 1991 29
Consolidated Statements of Operations - Years ended
December 31, 1992, 1991, and 1990 31
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1992, 1991,
and 1990 32
Consolidated Statements of Cash Flows - Years ended
December 31, 1992, 1991, and 1990 34
Notes to Consolidated Financial Statements 37
SUPPLEMENTARY DATA
Selected Quarterly Financial Data 62
12
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, 1992 and 1991, and the results of
their operations and their cash flows for each of the years in
the three-year period ended December 31, 1992, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK
New York, New York
March 16, 1993
13
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1992 1991
Assets
Current assets
Cash and cash equivalents $ 17,921 $ 23,996
Restricted cash 1,200 5,000
Marketable securities, at lower of cost
or market 4,553 6,972
Accounts and other receivables (of which
$9,970 and $10,040 are from government contracts)
less allowance for doubtful accounts
of $1,581 and $1,795 41,171 42,812
Inventories 24,353 22,130
Costs and estimated earnings in excess of
billings on uncompleted contracts, of which
$5,073 and $3,150 relates to government
contracts 10,702 8,690
Prepaid expenses and other current assets 4,009 4,158
Total current assets 103,909 113,758
Investments and advances 23,168 30,317
Property, plant and equipment, at cost 43,583 40,227
Less accumulated depreciation and
amortization (22,043) (18,296)
21,540 21,931
Intangible assets, net of accumulated
amortization of $23,987 and $21,670
Goodwill 29,421 29,614
Patents, licenses and deferred charges 3,547 4,332
32,968 33,946
Investment in financed assets 5,507 8,003
Other assets 5,557 6,086
$192,649 $214,041
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NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share )
December 31, 1992 1991
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 7,067 $ 6,069
Short-term borrowings 28,977 26,317
Accounts payable and accrued expenses 18,992 19,930
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,996 5,857
Income taxes payable 25
Total current liabilities 59,032 58,198
Long-term debt less current maturities 57,085 67,222
Notes payable for financed assets 3,109 5,840
Minority interests 9,600 10,376
Commitments and contingencies
Stockholders' equity
Preferred stock, authorized 10,000,000
shares, par value $.01 per share, none
issued
Common stock, authorized 30,000,000
shares, par value $.01 per share,
issued 15,934,840 and 15,089,184
shares (of which 22,645 and 125,417
shares are held in the treasury) 159 151
Class B capital stock, authorized 2,800,000
shares, par value $.01 per share, issued
and outstanding 250,000 shares 2 2
Capital in excess of par value 96,713 94,828
Deficit (33,051) (21,108)
Treasury stock, at cost (1,468)
Total stockholders' equity 63,823 72,405
$192,649 $214,041
See accompanying notes to consolidated financial statements.
15
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 1992
1991 1990
Revenues
Sales $195,765 $258,933 $293,091
Investment and other income, net
(including interest income
of $1,275, $941 and $3,517) 6,221 2,790 413
201,986 261,723 293,504
Costs and expenses
Cost of goods sold 165,993 222,920 250,380
Selling, general and
administrative 36,274 38,356 50,607
Research and development 4,645 4,651 7,892
Interest 11,044 15,579 20,447
217,956 281,506 329,326
Gain on sale of stock of a subsidiary
18,844
Loss on disposal of businesses, net
(3,752)
Minority interests 2,792 2,096 309
Income (loss) before income taxes
and extraordinary items (13,178) 1,157 (39,265)
Income tax (expense) benefit (427) (549) 1,272
Income (loss) before
extraordinary items (13,605) 608 (37,993)
Extraordinary items
Early extinguishment of debt 1,662 2,037 5,215
Reduction of income taxes from
carryforward of net operating losses
40
1,662 2,037 5,255
Net income (loss) $(11,943) $ 2,645 $(32,738)
Income (loss) per share
Income (loss) before
extraordinary items $ (.86) $ .04 $ (3.32)
Extraordinary items .10 .13 .46
Net income (loss) per share $ (.76) $ .17 $ (2.86)
See accompanying notes to consolidated financial statements.
16
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1992 1991 1990
Cash flows from operations:
Net income (loss) $(11,943) $ 2,645 $(32,738)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 6,107 8,542 10,140
Deferred taxes (1,289)
Loss on investment 4,954
Gain on sale of stock of a subsidiary
(18,844)
Gain from early extinguishment
of debt (1,662) (2,037) (5,215)
Changes in other operating items,
net of effect of acquisitions
and disposals:
Accounts and other receivables 1,641 (1,243) (11,018)
Inventories (2,223) 4,574 1,497
Costs and estimated earnings in
excess of billings on uncompleted
contracts (2,012) 3,158 (1,169)
Prepaid expenses and other
current assets 279 529 4,099
Accounts payable and accrued
expenses (341) (3,040) 4,382
Billings in excess of costs and
estimated earnings on uncompleted
contracts (1,861) 2,719 2,080
Income taxes payable (25) (452) 381
Total adjustments (97) (6,094) 8,842
Net cash used in operations $(12,040) $ (3,449) $(23,896)
17
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1992 1991
1990
Cash flows from investing activities:
Proceeds from public sale of
a subsidiary's stock $ $ 43,997 $
Proceeds from disposal of business
7,192
Proceeds from sale of an investment
4,500
Marketable securities 2,419 (6,743) 6,749
Additions to property, plant and
equipment, net (3,399) (2,079) (9,791)
Additions to financed assets (328)
Additions to intangible assets (1,339) (705) (3,167)
Reduction of (additions to)
investments and other assets 3,096 1,018
(3,952)
Net cash provided by (used in)
investing activities 5,277 42,680 (10,489)
Cash flows from financing activities:
Repayments of short-term
borrowings (6,150) (31,827) (4,218)
Proceeds from short-term borrowings
8,810 23,436
Decrease in restricted cash 3,800 10,000
Proceeds from issuance of
long-term debt 203 7,561 5,383
Reduction of long-term debt (6,244) (15,675) (2,523)
Repayments of notes payable for
financed assets (28) (207) (3,426)
Proceeds from public sale of
common stock by a subsidiary 9,588
Proceeds from issuance of common stock
1,539
Proceeds from issuance of stock
by a subsidiary 750
Exercise of common stock options
and warrants 282 718 20
Issuance of treasury stock 15 825 284
Purchases of treasury stock (702)
Net cash provided by (used in)
financing activities 688 (16,728) 18,254
Net (decrease) increase in cash
and cash equivalents (6,075) 22,503 (16,131)
Cash and cash equivalents at
beginning of year 23,996 1,493 17,624
Cash and cash equivalents
at end of year $ 17,921 $ 23,996 $ 1,493
18
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Years ended December 31, 1992 1991 1990
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 8,324 $14,138 $ 17,638
Income taxes $ 703 $ 1,472 $ 1,335
Supplemental schedule of
noncash transactions:
Additions to (reduction of)
intangibles $ $ (532)$ 455
Reduction of debt 1,819 7,430 290
Issuances of treasury stock (1,468) (2,098) (745)
Additions to other assets
and prepaid expenses 130 275
Reduction of accounts payable 597
Reduction of accrued interest payable
1,744
Issuances of common stock (1,078) (6,819)
Swiss Bond Exchange Transaction:
Old Bonds retired 4,659
Accrued interest thereon 188
Deferred finance costs attributable
to Old Bonds retired (653)
Value of stock and warrants issued
(2,717)
Gain on exchange
(1,477)
See accompanying notes to consolidated financial statements.
19
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Principles of consolidation and investments. The consolidated
financial statements include the operations of National Patent
Development Corporation and its majority-owned subsidiaries (the
Company). Investments in 20% - 50% owned companies are accounted
for on the equity basis, and marketable equity securities of less
than 20% owned companies are accounted for at the lower of cost
or market. Other investments in less than 20% owned companies
are accounted for on the cost basis. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Statements of cash flows. For purposes of the statement of cash
flows, the Company considers all highly liquid instruments with
maturities of three months or less from purchase date to be cash
equivalents. Certain reclassifications have been made for 1991
and 1990 to conform with the current year's presentation.
Marketable securities. Marketable securities at December 31,
1992 and 1991 consisted of United States Government obligations,
carried on the balance sheet at cost by the Company. The market
value of marketable securities at December 31, 1992 and 1991 was
$4,606,000 and $7,042,000, respectively.
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 8) are subject to currency fluctuations and the Company has
hedged portions of such debt from time to time. During the years
ended December 31, 1992, 1991, and 1990, the Company realized
foreign currency transaction gains (losses) of $3,362,000,
$3,042,000 and $(4,356,000), respectively. These amounts are
included in investment and other income, net. At December 31,
1992, the Company had not hedged its Swiss Franc obligations.
Contract revenue and cost recognition. The Company provides
services under time-and-materials, cost-plus-fixed-fee, and
fixed-price contracts. Revenue from contracts is recognized on
the percentage-of-completion method as costs are incurred and
includes estimated fees at predetermined rates. Differences
between recorded costs, estimated fees, and final billings are
recognized in the period in which they become determinable.
Costs and estimated earnings in excess of billings on uncompleted
contracts are recorded as an asset. Billings in excess of costs
and estimated earnings on uncompleted contracts are recorded as a
liability. Generally, contracts provide for the billing of costs
20
incurred and estimated fees on a monthly basis and do not provide
for retainage. Retainages, amounts subject to future
negotiation, amounts expected to be collected after one year, and
amounts related to claims are not material.
Property, plant, and equipment. Property, plant, and equipment
are carried at cost. Major additions and improvements are
capitalized while maintenance and repairs which do not extend the
lives of the assets are expensed currently. Gain or loss on the
disposition of property, plant, and equipment is recognized in
operations when realized.
Depreciation. The Company provides for depreciation of property,
plant and equipment primarily on a straight-line basis over the
following estimated useful lives:
CLASS OF ASSETS USEFUL LIFE
Buildings and improvements 5 to 40 years
Machinery, equipment and furniture
and fixtures 3 to 20 years
Leasehold improvements Shorter of asset life
or term of lease
Intangible assets. The excess of cost over the fair value of net
assets of businesses acquired is recorded as goodwill and is
amortized on a straight-line basis generally over periods ranging
from 5 to 40 years. The Company capitalizes costs incurred to
obtain and maintain patents and licenses. Patent costs are
amortized over the lesser of 17 years or the remaining lives of
the patents, and license costs over the lives of the licenses.
The Company also capitalizes costs incurred to obtain long-term
debt financing. Such costs are amortized on an effective yield
basis over the terms of the related debt and such amortization is
classified as interest expense in the Consolidated Statements of
Operations.
The periods of amortization of goodwill are evaluated at least
annually to determine whether events and circumstances warrant
revised estimates of useful lives. This evaluation considers,
among other factors, expected cash flows and profits of the
businesses to which the goodwill relates. Goodwill is written
off when it becomes evident that it has become permanently
impaired.
Treasury stock. Treasury stock is recorded at cost. Reissuances
of treasury stock are valued at market value at the date of
reissuance. The cost of the treasury stock is relieved from the
treasury stock account and the difference between the cost and
market value is recorded as additional paid in capital
Pension plan. The Company had a defined benefit pension plan
21
(the Plan) for employees of certain divisions and subsidiaries.
Effective December 31, 1991, the Plan benefits were frozen (see
Note 12).
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. Investment tax credits
arising prior to 1986 are recognized as a reduction of the
provision for income taxes in the year in which they are
utilized. Deferred taxes, to the extent allowable, are provided
to give effect to timing differences between financial and tax
reporting, principally relating to depreciation and amortization
of property, plant, and equipment, and the effect of the
difference between the accrual basis and cash basis of accounting
for tax return reporting purposes, which method General Physics
Corporation (GP), a previously 92% owned subsidiary of the
Company (see Note 2), followed.
Earnings (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, 1992, 1991 and 1990 were 15,771,301, 15,393,781 and
11,457,519, respectively.
2. GPS Technologies, Inc.
On October 3, 1991, General Physics Corporation (GP) completed a
public offering of 4 million shares of common stock at a price of
$13 per share. The Company offered 3,846,540 shares of stock,
and the remainder was offered by certain non-affiliated
shareholders. The Company received net proceeds after expenses
of $43,997,000, and from the proceeds was required to make
several repayments of long-term debt and short-term borrowings.
The Company repaid $16,735,000 of short-term borrowings,
$5,163,000 of long-term debt and $2,039,000 of accrued interest
payable on its Swiss Convertible Bonds. Included in expenses
were legal, printing and accounting costs, bonuses paid to key
employees of the Company, as well as other costs. The Company
recognized a gain of $18,844,000 from this transaction.
In connection with the public offering, a reorganization was
effected on September 25, 1991 whereby GP transferred certain
operations and related assets and liabilities to a new
subsidiary, GPS Technologies, Inc. (GPS), formerly named General
Physics Services Corp. GP retained the business, assets and
liabilities of its Nuclear Services, Department of Energy
Services and Environmental Services Groups. Included among the
businesses and assets transferred to GPS were certain leases of
property and equipment, and two finance subsidiaries that own
22
power plant control room simulators. As a result of the public
offering and the reorganization, the Company owns approximately
28% of GP and 92% of GPS. The financial position and results of
operations of GP are included in the consolidated accounts of the
Company for all periods presented through September 30, 1991. On
October 3, 1991, the Company's ownership fell below 50%.
Thereafter, the Company's investment in GP has been accounted for
on the equity basis and the Company's share of GP's income (loss)
for the three months ended December 31, 1991 and year ended
December 31, 1992, in the amount of $432,000 and $(144,000),
respectively, after the amortization of the underlying goodwill,
is included in the caption "Investment and other income, net"
appearing in the consolidated statements of operations. The
financial position and results of operations of GPS are included
in the consolidated accounts of the Company. At December 31,
1992, the Company's investment in GP was $11,772,000, of which
$7,008,000 represents the difference between the carrying amount
of the investment and the amount of the underlying equity in the
net assets. Such amount is included in investments and advances
on the Company's consolidated balance sheet and is being
amortized on a straight-line basis over its estimated benefit
period, 30 years. For the year ended December 31, 1992, GP had
revenues of $73,314,000, net income of $139,000 and $17,052,000
of stockholders' equity.
The accompanying consolidated financial statements include the
following amounts for the newly organized GP, as if the transfer
of certain operations and related assets and liabilities to GPS
had occurred on January 1, 1990 (in thousands):
Nine Months Year ended
ended September 30, December 31,
1991
1990
Revenues $ 62,325
$ 61,505
Income from continuing
operations 4,979
5,394
3. Interferon Sciences, Inc.
Interferon Sciences, Inc. (ISI) is a 53% owned subsidiary of the
Company. It is engaged in the manufacture and sale of ALFERONR N
Injection, ISI's first product commercially approved by the FDA
for the treatment of recurring and refractory external genital
warts and the research and development of other alpha interferon
based products for the treatment of viral diseases, cancers and
diseases of the immune system.
On October 29, 1991, ISI completed a public offering of 2,300,000
shares of its common stock at $5.00 per share resulting in net
proceeds to ISI of approximately $9,588,000. In connection with
23
the public offering, the Company converted its outstanding
advance to ISI at September 30, 1991 of $4,985,000 into
$2,200,000 of common stock and contributed the remainder to
capital in excess of par value.
On May 30, 1991, the Company exchanged its ISI Class B common
stock for an equal number of shares of common stock. As a
result, on that date, ISI ceased to be included in the Company's
consolidated Federal income tax return.
On April 12, 1991, ISI, the Company, The Purdue Frederick Company
(Purdue Frederick) and certain other companies (The Purdue
Affiliates) entered into an agreement (the Funding Agreement).
Under the terms of the Funding Agreement, (i) The Purdue
Affiliates agreed to purchase $3,600,000 of ISI common stock at a
price of $4.10 per share (which occurred on June 14, 1991), (ii)
on June 3, 1991, the Company exchanged $3,800,000 of the
Company's common stock (with a guaranteed value of $3,800,000 of
proceeds for ISI from the sale of the Company's common stock) for
an equal value of ISI common stock and, (iii) Purdue Frederick
agreed to convert $1,975,000 of the prepayments for product made
by it, $850,000 in 1990, $425,000 in January 1991, and $700,000
in February 1991 into shares of ISI common stock at $4.10 per
share (which occurred on June 14, 1991). Between August and
October, 1991, ISI received $1,200,000 in net proceeds from the
sale of the Company's common stock and the Company paid ISI the
remaining $2,600,000 on October 31, 1991 (which represents the
difference between the guaranteed amount of $3,800,000 and the
amount realized from the sale of the ISI common stock which was
$1,200,000).
4. Inventories
Inventories, consisting of material, labor, and overhead, are
classified as follows (in thousands):
December 31, 1992 1991
Raw materials $ 2,536 $ 2,899
Work in process 1,713 1,573
Finished goods 17,316 14,754
Land held for resale 2,788 2,904
$ 24,353 $ 22,130
5. Property, plant, and equipment
Property, plant and equipment consists of the following
(in thousands):
December 31, 1992
1991
Land $ 314 $ 314
Buildings and improvements 8,754 8,247
24
Machinery and equipment 22,039 20,134
Furniture and fixtures 7,175 7,042
Leasehold improvements 4,829 4,471
Construction in progress 472 19
43,583 40,227
Accumulated depreciation and
amortization (22,043) (18,296)
$ 21,540 $ 21,931
6. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1992 1991
Revolving Credit and Term Loan
Agreement (a) $ 4,196 $ 10,346
Line of Credit Agreement (b) 13,506 9,384
Revolving Credit and Term Loan
Agreement (c) 3,700 1,750
Revolving Loan and Line of Credit
Arrangements (d) 1,153 1,088
Revolving Line of Credit Agreement (e)
6,239 3,749
Note Payable (f) 183
$ 28,977 $ 26,317
(a) On April 8 and October 3, 1991, the Company entered into two
amendments to its November 1, 1989, $15,000,000 Revolving Credit
and Term Loan Agreement (the Loan Agreement). Under the terms of
the amendments, the outstanding balance of $10,346,000 at October
3, 1991, was payable in nine equal quarterly installments of
$1,150,000 which commenced on March 31, 1992. The loan is
collateralized by (i) 1,768,000 shares of the common stock of GP
(approximately 28% of the outstanding common stock of GP), (ii)
100% of the capital stock of MXL Industries, Inc. and (iii)
$5,000,000 in cash. The 1,768,000 shares of GP common stock also
serve as collateral for the GPS Loan agreement (see Note 6(c)).
On September 9, 1992, the Company amended the Loan Agreement.
Under the terms of the amendment, the outstanding balance at
January 1, 1992 is payable in four quarterly installments of
$1,150,000, $2,308,000, $1,156,000 and $5,732,000, commencing
September 30, 1992. In October 1992, the bank released the
$5,000,000 in cash collateral, which was used to reduce the loan
balance and the last scheduled payment by $5,000,000. The bank
has agreed to defer the December 31, 1992 payment of $2,308,000
to April 1993. The entire loan balance of $4,196,000 at December
31, 1992 has been classified as a current liability. The loan
bears interest at a rate equal to 1/2% in excess of the bank's
prime rate.
(b) In April 1990, Five Star Group, Inc., (Five Star) entered
into a three year line of credit arrangement with a bank. Five
Star may borrow up to a maximum of $17,000,000, subject to the
25
level of its qualified accounts receivable and inventory, at an
interest rate of 3/4% in excess of the prime rate, subject to
reduction, based upon certain financial criteria. At December
31, 1992, the interest rate was 6.75%. The line of credit is
secured by substantially all the intangible and tangible property
of Five Star. As part of the agreement, the Company may borrow
up to a maximum of $7,000,000 from Five Star. The amount that
the Company can borrow from Five Star is reduced by $250,000 per
quarter in 1993. As of December 31, 1992, $13,506,000 was
borrowed by Five Star. The agreement, among other things, limits
the amount that Five Star may borrow from other sources, the
amount and nature of certain expenditures, acquisitions and sales
of assets, and the amount that Five Star can loan or dividend to
the Company.
The agreement has several covenants, including provisions
regarding working capital, tangible net worth, leverage and cash
flow ratios. As of December 31, 1992, Five Star was not in
compliance with various covenants. Management has advised the
bank of such violations and does not anticipate any problems in
obtaining a waiver of these violations and an extension of the
current line.
(c) On October 3, 1991, GPS entered into an Amended and Restated
Revolving Credit and Term Loan and Security Agreement (the
Agreement) with two banks. The new Agreement provides for a Term
Loan of $5,000,000 and additional Revolving Credit borrowings of
up to $5,000,000. Borrowings under the Agreement are provided
equally by the participating banks, secured by accounts
receivable, and bear interest at rates set by such banks under
options provided for in the Agreement. The balances of the Term
Loan and Revolving Credit Loan at December 31, 1992 were
$2,917,000 (see Note 8) and $3,700,000, respectively. Borrowings
under the Revolving Credit Loan are subject to certain
limitations. At December 31, 1992, an additional $1,300,000 was
available based on these limitations. Such Agreement, among
other things, limits the amount that GPS may borrow from other
sources and the amount and nature of certain expenditures and
requires GPS to maintain tangible net worth, working capital,
cash flow, and debt ratios, as defined in the Agreement. In
addition, 1,768,000 shares of GP common stock held by the Company
serve as collateral for the Agreement (see Note 6(a)). Term Loan
borrowings are due in quarterly installments which commenced
December 31, 1991 and end on September 30, 1994.
(d) In August 1991, Eastern Electronics Manufacturing
Corporation (Eastern) assigned the remaining balance on its line
of credit with a bank to a finance company, with whom Eastern
entered into a Security Agreement. Under the terms of the
Agreement, Eastern can borrow up to 80% of the net amount of
eligible and outstanding accounts receivable, as defined, at an
interest rate of 5 1/2% over the prime rate of interest (11.5% at
26
December 31, 1992). At December 31, 1992, $1,153,000 was
borrowed under the Agreement.
(e) On November 2, 1990, GTS Duratek, Inc. (Duratek), a then 63%
owned subsidiary, purchased General Technical Services, Inc.
(GTS) from GP for a purchase price of $7,500,000 in cash,
3,500,000 shares of Duratek's common stock and a $1,250,000 note.
GTS, based in Columbia, Maryland, is a supplier of high-tech
temporary personnel to utilities, Government agencies, and
commercial businesses. GTS is a major national supplier of
several categories of technical specialists to utilities and a
leading regional supplier of high-tech computer and
communications specialists. On December 31, 1992, Duratek issued
450,000 original shares of Duratek common stock to GPS in
exchange for the $1,250,000 note and $150,000 of accrued
interest. After the acquisition of GTS and the retirement of the
note and accrued interest, approximately 50% of the outstanding
shares of Duratek's common stock is owned by GPS (after the
reorganization discussed in Note 2) and 30% of the shares are
owned by the Company. The Company, as a result of owning 92% of
GPS, now controls approximately 80% of Duratek.
On February 9, 1993, Duratek entered into a $7,000,000 Revolving
Line of Credit (the Line) and a $400,000 Loans to Facility (the
Facility) for fixed asset purchases with a commercial bank. Term
Loans under the Facility will be due over a 48 month period from
the date of issue. The Facility is secured by the specific fixed
assets financed under the Facility. The Line bears interest at
the bank's prime interest rate plus 1% and is secured by the
accounts receivable, inventory and property, plant and equipment
of Duratek. The Line requires Duratek to meet certain covenants
concerning, among other things, minimum tangible net worth, total
liabilities to tangible net worth, and profitability. It also
contains limitations with respect to dividends or other
distributions to stockholders, mergers, acquisitions, and
research and development expenses. Short-term borrowings during
1991 and 1992 were under an agreement similar to the current
agreement described above. At December 31, 1992, borrowings were
$6,239,000 and $198,000 was available under the Line.
(f) In December 1992, the Company repurchased SFr. 1,264,000 of
its outstanding Swiss Bonds for a $466,000 Note, which bears
interest at 1/2% per month, due February 24, 1993. The Note is
secured by 250,000 shares of the Company's common stock. The
principal amount of the Note may be reduced by the proceeds from
the sale of the common stock by the Company. At December 31,
1992, the balance of the Note, reduced for the proceeds from the
sale of the Company's common stock, was $183,000. The balance
was repaid in February 1993.
7. Accounts payable and accrued expenses
27
Accounts payable and accrued expenses are comprised of the
following (in thousands):
December 31, 1992 1991
Accounts payable $ 9,824 $ 10,357
Payroll and related costs 3,969 3,436
Interest 1,385 1,813
Other 3,814 4,324
$ 18,992 $ 19,930
8. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1992 1991
8% Swiss Bonds due 1995 (a) $ 20,075 $ 20,666
6% Convertible Swiss Bonds due 1995 (b) 9,733 11,570
5.75% Convertible Swiss Bonds
due 1995 (b) 4,436 6,277
5.625% Convertible Swiss Bonds
due 1996 (c) 5,887 6,819
7% Dual Currency Convertible Bonds
due 1996 (c) 5,118 5,459
12% Subordinated Debentures due 1997 (d)
6,932 7,191
Term loan with banks (Note 6 (c)) 2,917 4,583
Note payable for manufacturing facility
and equipment (h) 3,026 4,019
Notes payable in connection with
settlement of litigation (e) and (f) 951 1,137
Notes payable in connection with
the acquisition of subsidiaries 202
Equipment lease obligations (2) 1,582 1,832
9.6% Industrial Revenue Bond (3) (g) 195 390
Mortgage Notes maturing 1993 (1) 130 183
Note payable, due in 1993 (i) 459 459
61,441 70,787
Less current maturities 4,356 3,565
$ 57,085 $ 67,222
(1) Secured by manufacturing and other facilities.
(2) Secured by assets held under capital lease obligations.
(3) Secured by equipment of ISI.
(a) On December 20, 1989, in exchange for Swiss Francs (SFr.)
32,420,000 ($20,318,000) of its 6% Convertible Swiss Bonds due
March 7, 1995, SFr. 26,335,000 ($16,515,000) of its 5.75%
Convertible Swiss Bonds due May 9, 1995, and SFr. 26,685,000
($16,734,000) of its 5.625% Convertible Swiss Bonds due March 18,
1996, (collectively, the Old Bonds), each in the principal amount
of SFr. 5,000, plus all unpaid accrued interest thereon, the
Company issued: (a) SFr. 51,264,000 ($32,140,000) of its 8% Swiss
28
Bonds due March 1, 1995, each in the principal amount of SFr.
3,000, (the New Bonds) of which SFr. 35,433,000 are currently
outstanding, (b) 17,088 Reset Warrants, each of which entitles
the holder to purchase 75 shares of the Company's common stock,
at a price determined by formula, exercisable until March 1,
1995, (c) 17,088 Common Stock Warrants, each of which entitles
the holder to acquire without further consideration shares of the
Company's common stock with a market value of SFr. 250,
exercisable until March 1, 1995, and (d) SFr. 750 in cash.
The Company recorded an original issue discount on the New Bonds
of 40%, based upon exchange values estimated by the Swiss
exchange agent. Expenses of the exchange offer totaled
$2,116,000. The discount and the offering expenses, which have
been deferred, are being amortized over the term of the New
Bonds.
(b) On March 7, 1985, the Company issued, pursuant to a Swiss
Public Bond Issue Agreement, 6% Convertible Bonds due March 7,
1995 representing an aggregate principal amount of SFr.
60,000,000, of which SFr. 14,265,000 are currently outstanding
(see (a) above). The outstanding bonds are convertible into
245,358 shares of the Company's common stock at any time prior to
February 10, 1995 at a conversion price of approximately $39.67
per share based on an exchange rate of SFr 1.4657 per U.S. $1.00.
In addition, on May 9, 1985, the Company issued, pursuant to a
second Swiss Public Bond Issue Agreement, 5.75% Convertible Bonds
due May 9, 1995, representing an aggregate principal amount of
SFr. 50,000,000, of which SFr. 6,500,000 are currently
outstanding (see (a) above). These outstanding bonds are
convertible into 139,100 shares of the Company's common stock at
a conversion price of $31.88 per share based on an exchange rate
of SFr 1.4657 per U.S. $1.00 at any time prior to April 22, 1995.
Expenses of both Swiss Public Bond Issues totaled approximately
$1,793,000 and at December 31, 1992 and 1991, the unamortized
balances of such expenses were $91,000 and $153,000,
respectively.
(c) On March 18, 1986, the Company issued, pursuant to a third
Swiss Public Bond Issue Agreement, 5.625% Convertible Bonds
payable in 1996, representing an aggregate principal amount of
SFr. 50,000,000, of which SFr. 8,635,000 are currently
outstanding (see (a) above). Additionally, the Company issued 7%
Dual Currency Convertible Bonds, payable in 1996, representing an
aggregate principal amount of SFr. 25,000,000, but payable at
maturity at the fixed amount of $15,000,000. The outstanding
Bonds are convertible into 333,001 shares of the Company's common
stock at any time prior to March 8, 1996 at a conversion price of
$35.17 per share based on an exchange rate of SFr 1.4657 per U.S.
$1.00. Under certain circumstances, the Company may redeem all
of the Bonds (but not a part only) at a redemption price equal to
par value. Expenses related to the issuance of the Bonds totaled
29
approximately $1,660,000 and at December 31, 1992 and 1991, the
unamortized balances of such expenses were $65,000 and $179,000,
respectively. The Dual Currency Bonds were issued as part of the
Company's overall financing strategy, without any intent to
either speculate in foreign exchange or to hedge any existing
foreign currency exposure. It is the Company's policy to record
periodic interest expense on the Dual Currency Bonds at the then
current exchange rate. At December 31, 1992 and 1991, based on
year end exchange rates, the effective rates of interest would be
8% and 8.6%, respectively. At December 31, 1992, the effective
rate of interest of 8% would result in an additional $51,000 of
interest expense per year, through March 1996.
On August 10, 1990, the Company completed an Exchange Offer
pursuant to which it received $4,659,000 of its 7% Dual Currency
Convertible Bonds due March 18, 1996 (Bonds). In exchange, the
Company issued 540,444 shares of its Common Stock and warrants to
purchase 465,900 shares of the Common Stock, par value $.01 per
share, of ISI, the Company's 53% owned subsidiary, exercisable at
a price of $6.88 per share until August 16, 1992. The Exchange
Offer was completed on August 10, 1990 and the Company recorded
an extraordinary gain of $1,477,000 on the early extinguishment
of the Bonds. During February 1992, ISI called the warrants,
resulting in net proceeds to ISI of $2,956,000 from the issuance
of 432,600 shares of ISI common stock upon exercise of the
warrants.
In addition to the bonds exchanged (see (a) above), during 1992,
1991 and 1990 the Company repurchased a portion of each of the
Swiss Public Bond Issues as well as Dual Currency Convertible
Bonds and recorded extraordinary gains from the early
extinguishment of the Bonds of $1,662,000, $2,037,000 and
$3,738,000, respectively.
(d) During the third quarter of 1987, the Company issued
$12,500,000 of Subordinated Debentures (Debentures) which mature
in 1997. Each $100 principal amount Debenture was sold with
warrants to purchase four shares of the Company's common stock at
a price of $18.50 per share. Expenses of the offering amounted
to approximately $1,908,000 and as of December 31, 1992 and 1991,
the unamortized balances of such expenses were $550,000 and
$690,000. In connection with the terms of the Debentures, the
Company is subject to certain covenants which limit the amount
that may be used for the payment of dividends and for the
purchase of the Company's outstanding equity securities (common
or Class B). In September 1990, under the terms of an Indenture,
the Debentures became exchangeable for the Company's Common
Stock, for the remaining term of the Debentures, at a price of
approximately $5.00 per share. In 1992 and 1991, $179,000 and
$4,919,000, respectively, of Debentures were converted into
35,933 and 989,756 shares, respectively, of the Company's Common
Stock. At December 31, 1992, the Debentures are convertible into
30
approximately 1,395,000 shares of the Company's Common Stock.
(e) In March 1987, the Company and Ryder International
Corporation (Ryder) agreed to a settlement of litigation relating
to the Company's CaridexR system. Under the terms of the
settlement agreement, the Company agreed to pay Ryder (i)
$1,000,000 in cash; (ii) $2,000,000 in common stock of the
Company (133,333 shares, valued at $2,000,000 were issued from
treasury stock during 1987, and subsequently repurchased for
$2,000,000 during 1988); and (iii) $300,000 per year (in cash or
common stock of the Company) for a ten year period commencing
January 15, 1988, the present value of which is discounted at
10%, and included in long-term debt.
(f) In May 1987, the Company and George K. Burke, Sr. and
Concetta J. Burke (the Burkes) settled a lawsuit asserting
various claims for relief against the Company with respect to
several agreements concerning the marketing and development of
the EPICR system of intravenous devices, which the Company had
discontinued in December 1983. As a result of the settlement the
Burkes received $500,000 in cash upon execution of the settlement
agreement and are receiving $250,000 a year (in cash or common
stock of the Company) for a five year period commencing in May
1988. In 1987, the Company recorded an additional loss from this
discontinued operation totaling $1,500,000, representing the
present value of the amounts due the Burkes plus the costs
relating to the litigation and settlement. The final payment was
made in the common stock of the Company in 1992.
(g) During May 1983, ISI, a 53% controlled subsidiary of the
Company, completed the sale of a 9.6% $1,450,000 Industrial
Revenue Bond to the New Jersey Economic Development Authority.
The net proceeds were used to pay for laboratory construction and
equipment. The terms of the bond indenture call for annual
principal installments of $195,000 through 1993.
(h) In March 1990, ISI borrowed $4,200,000 from a subsidiary of
a bank at an effective interest rate of 12.4% principally for the
expansion of its manufacturing facility. The loan calls for
monthly payments of $41,500 for months 1 to 24, which is
comprised of interest only, and $139,500 (principal and interest)
for months 25 to 60. The loan is secured by certain equipment of
ISI and is guaranteed by the Company (see Note 10).
(i) In December 1991, ISI issued a $459,000 note to Purdue
Pharma L.P., an affiliate of The Purdue Frederick Company, its
marketing partner. The note bears interest at 7.5% per annum,
and requires payment of interest and principal on December 31,
1993.
(j) In connection with the 1986 purchase of 834,000 shares of GP
common stock, the Company issued four convertible notes totaling
31
$18,348,000 to the sellers of such shares. The notes were
payable as amended on January 2, 1990, 1991 and 1992 and bore
interest at an annual rate of 10%.
On December 31, 1990, the Company entered into a second note
modification agreement, amending the above terms. Under the
terms of this second note modification agreement, the Company
agreed to pay the holders $2,000,000 plus accrued interest on the
entire unpaid principal balance on January 2, 1991; $1,558,000,
plus accrued interest on the entire unpaid principal balance
which was due on June 1, 1991 and September 30, 1991 and the
total of $5,116,000 plus accrued interest on the entire unpaid
principal balance which was due on January 2, 1992. In
consideration for the above modification agreement, the Company
issued 125,000 shares of its treasury stock to the principal
holder of the convertible notes and pledged as additional
collateral its then approximately 80% controlling interest in
Duratek. The treasury stock issued was valued at $375,000, and
was recognized as interest expense during the debt modification
period in 1991. In June 1991, the Company issued 225,763 shares
of treasury stock in satisfaction of $846,000 of principal and
accrued interest due in June 1991.
In October 1991, as a result of the GP public offering and
reorganization (see Note 2), the remaining unpaid balance of
$5,116,000 plus accrued interest was repaid, and all related
collateral was released.
Aggregate annual maturities of long-term debt outstanding at
December 31, 1992 for each of the next five years are as follows
(in thousands):
1993 $ 4,356
1994 3,305
1995 35,057
1996 11,253
1997 7,197
9. Investment in finance subsidiaries
GPS Technologies, Inc. is a high technology service company that
assists industry and the Navy in maximizing the effectiveness of
their equipment and facilities through the rigorous training of
technical personnel and the development and implementation of
operational procedures and maintenance programs. GPS conducts
certain of its services using power plant training simulators,
the majority of which are owned by its clients. However, at
December 31, 1992, two simulators are owned by wholly owned
subsidiaries of GPS.
Through these subsidiaries, GPS has entered into long-term
agreements with two domestic utilities to provide nuclear power
32
plant simulator training services along with the attendant
nuclear power plant training simulators and related training
equipment. Under the provisions of the agreements, the
subsidiaries obtained non-recourse long-term financing from a
bank to finance the purchase of the simulators and training
equipment. The agreements provide that the subsidiaries are
compensated, in part, for use of the simulators on essentially a
lease financing basis.
The agreements provide that the payments by the utilities will
enable the subsidiaries to recover the cost of the simulators
plus interest at floating rates which range from prime to 115% of
prime, as well as the cost of simulator replacement parts, taxes,
and insurance. Such amounts will be sufficient to fully service
the related long-term debt discussed below. All training
services are performed by GPS personnel and are billed at
established hourly rates. Revenues for these services are
recognized by GPS.
Under the agreements, the utilities have options to purchase the
simulators and other training equipment at the end of the loan
terms.
Non-recourse long-term debt relating to the simulators consists
of the following (in thousands):
December 31, 1992 1991
Notes payable to bank (1) $ 5,820 $ 8,344
Less current maturities 2,711 2,504
Long-term debt $ 3,109 $ 5,840
(1) These loans bear interest at floating rates, which range
from the bank's prime rate to 115% of the bank's prime rate, and
are payable in monthly installments over periods of up to 15
years from the initial dates of each of the loans.
The loans are secured by the equipment and all rights under the
agreements with the utilities. Under these agreements, GPS has
agreed to guarantee the service performance with the utilities
but has not guaranteed the obligations of its subsidiaries under
the loan agreements. GPS has also agreed to maintain a minimum
debt to equity ratio, a minimum tangible net worth and a minimum
working capital, as defined. One of these notes was paid in
January 1991, as the related simulator was purchased by the
utility for a price equal to the remaining loan balance.
Aggregate annual maturities of the non-recourse notes payable at
December 31, 1992 for each of the succeeding years are as follows
(in thousands):
1993 $ 2,711
1994 2,529
33
1995 580
Summarized combined financial information of the finance
subsidiaries is as follows (in thousands):
December 31, 1992 1991
Balance Sheet Data
Assets
Investments in financed assets $ 5,507 $ 8,003
Other assets 439 531
Total assets $ 5,946 $ 8,534
Liabilities and stockholder's equity
Non-recourse notes payable $ 5,820 $ 8,344
Other liabilities 27 96
Stockholder's equity 99 94
Total liabilities and stockholder's
equity $ 5,946 $ 8,534
10. Treasury stock transactions
In 1990, the Company issued 250,000 shares of its treasury stock
as collateral to secure $4,200,000 borrowed by ISI from a
subsidiary of a bank (see Note 8(h)). In addition, in 1990, the
Company granted 48,200 shares of treasury stock to certain
employees.
In December 1990, as part of a second note modification
agreement, the Company issued 125,000 shares of its treasury
stock to the principal seller of the shares of GP common stock to
the Company (see Note 8(j)).
Treasury stock was issued as follows in 1992 and 1991:
Number of Shares
1992 1991
In settlement of litigation
(see Note 8(e) and (f)) 205,245
Investment banking fees 78,348
Interest due on note payable
(see Note 8(j)) 225,763
Note payable 93,788
Purchase stock of subsidiary 19,608
Employee bonuses 2,250
Repurchase 8% Swiss Bonds 97,772 69,142
ISI funding agreement 50,000
In payment of interest due
on 8% Swiss Bonds 200,000
Consulting fees 5,000 73,335
Other 136,142
102,772 1,153,621
11. Disposal of businesses
34
(a) On July 15, 1988, GP acquired a 13.3% interest in a joint
venture that was formed to develop, construct and operate a wood-
burning power plant and sawmill in Redding, California, for a
price of $3,500,000. GP had also provided advances, including
deferred interest, to the joint venture of $1,454,000. This
investment of $4,954,000 was written off in 1990 as the power
plant and sawmill have been closed and the joint venture has
relinquished its control in the project.
(b) In August 1990, Duratek sold certain of the assets used in
its domestic commercial low-level radioactive waste processing
business at nuclear power plants to Chem-Nuclear Systems, Inc.
(Chem-Nuclear). Duratek received $3,930,000 in cash at closing
and a $100,000 note. In addition, Duratek entered into a five
year agreement to supply Chem-Nuclear with DurasilR products,
which provides for minimum aggregate purchases of approximately
$900,000 through 1995, of which approximately $530,000 is
remaining at December 31, 1992. Duratek has recorded a
$2,619,000 gain on the disposal of this business.
(c) On December 31, 1990, Duratek sold the outstanding stock of
Matrix Recovery Systems, Inc. (Matrix) to the former principal
owner of Matrix. Matrix, based in Gainsville, Florida, uses a
proprietary passive solar still technology to recycle acetone and
other solvents. In consideration for the above, Duratek paid the
former owner $50,000 and also agreed to assume additional
obligations up to $60,000. In consideration therefor, Duratek
has received various releases and indemnifications from the
former shareholders as well as the new owner. In 1990, the cost
of selling Matrix, as well as its operating loss totaled
$1,417,000. Matrix was acquired by Duratek in April 1989.
(d) On April 8, 1991, the Company transferred substantially all
the assets of its National Patent Medical Division to a new
partnership, National Patent Medical Partnership, L.P. (NPM). In
return, the Company received a 49% interest in the partnership,
$7,200,000 in cash and a $1,800,000 note at the prime rate of
interest plus 1/2%. The note is due in two equal installments in
1996 and 1997. In addition, the new partnership repaid
$4,000,000 of short-term borrowings attributable to the National
Patent Medical Division. The Company did not recognize any gain
or loss as a result of this transaction. NPM is involved in the
manufacturing and distribution of first-aid products, surgical
dressings and other disposable hospital products. The financial
position and results of operations of NPM are included in the
consolidated accounts of the Company for all periods presented
through April 8, 1991, the date that the Company's ownership of
NPM fell below 50%. Since then, the accounts of NPM have not
been consolidated with those of the Company. NPM's net sales
and operating loss through April 8, 1991 were $11,129,000 and
$(81,000), respectively. For the year ended December 31, 1990,
NPM had sales of $44,546,000 and an operating loss of
35
$(1,251,000). In November 1992, NPM Healthcare Products, Inc.
(NPMH), a successor to NPM, completed an initial public offering.
As a result of the public offering, the Company received
approximately $4,500,000 in net proceeds, which approximated the
carrying value of the shares sold, and currently owns 14% of
NPMH.
The Company has accounted for its investment in NPMH on equity
basis for the period from April 9, 1991, when its equity in NPMH
fell below 50%, to December 31, 1991, and for the period from
January 1, 1992 to October 1992, when its equity fell to
approximately 14% as a result of the public offering. The
Company's share in the net income (loss) of NPMH for the periods
ended December 31, 1991 and October 31, 1992, amounted to
$(805,000) and $35,000, respectively, after amortization of the
underlying goodwill. At December 31, 1992, the Company's
investment in NPMH was $3,914,000.
12. Pension and investment plans
The Company had a Defined Benefit Pension Plan (the Plan) for
employees of certain divisions and subsidiaries. Benefits were
based primarily on years of service and a fixed rate of benefits
per year of service. Contributions were intended to provide not
only for benefits attributed to service to date but also for
those expected to be earned in the future.
Effective December 31, 1991, the Plan benefits were frozen.
Accrued vested benefits will be paid to terminated participants
in the form of a lump sum distribution in cases where the accrued
vested benefit is less than $3,500. Terminated participants can
elect a lump sum distribution if the accrued vested benefit is
greater than $3,500 but less than $7,500.
In the event that the accrued vested benefit exceeds the $7,500
payable limit as outlined in the Plan, payment will be deferred
until a terminated vested participant reaches age 65 or elects
early retirement at an earlier date, at age 60 or later. The
pension expense amounted to $23,000, $552,000 and $528,000, for
1992, 1991 and 1990, respectively.
The following table sets forth the funded status of the plan and
the amount recognized in the Company's Consolidated Balance
Sheets (in thousands):
December 31, 1992 1991 1990
Actuarial present value of benefit
plan obligations:
Accumulated benefit obligation (including
vested benefits of $3,976,
$3,967 and $2,847) $ (3,976)$ (3,967) $(3,138)
Projected benefit obligation for service
36
rendered to date $ (3,976)$ (3,967) $(4,004)
Plan assets at fair value 3,120 2,659 1,998
Projected benefit obligation in excess of
plan assets (856) (1,308) (2,006)
Unrecognized net gain from past experience
different from that assumed 302
Unrecognized net obligation
being recognized over 18 years 556
Unrecognized prior service cost 230
Additional minimum liability (222)
Accrued pension cost included in accounts
payable and accrued expenses in the
consolidated balance sheets $ (856) $ 1,308) $(1,140)
The net periodic pension expense is as follows:
Service cost-benefits earned $
$ 346
$ 329
Interest cost on projected benefit
obligations 340 360 338
Actual return on plan assets (317) (209) 293
Net amortization and deferral 55 (432)
Net periodic pension expense $ 23 $ 552 $ 528
The Company's assumptions used as of December 31, 1992, 1991, and
1990 in determining the pension cost and pension cost liability
shown above were as follows:
Percent 1992 1991 1990
Discount rate 8.5
8.5
9
Rate of salary progression
6
Long-term rate of return on assets
10
10
10
Effective March 1, 1992, the Company adopted the 1992 401(K)
Savings Plan (the Savings Plan). Effective December 31, 1991,
the Plan participants would no longer accrue benefits under the
Defined Benefit Pension Plan, but became eligible to participate
in the Company's Savings Plan.
The Company's Savings Plan is for employees who have completed
one year of service; however, past vesting service credit was
recognized for employees who participated in the Savings Plan at
the date of initial enrollment, March 1, 1992.
The Savings Plan permits pre-tax contributions to the Savings
Plan by participants pursuant to Section 401(K) of the Internal
Revenue Code of 2% to 6% of base compensation. The Company
matches 40% of the participants' eligible contributions based on
a formula set forth in the Savings Plan. Participants are fully
vested in their contributions and may withdraw such contributions
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.
37
The Savings Plan is administered by a trustee appointed by the
Board of Directors of the Company and all contributions are held
by the trustee and invested at the participants' direction in
various mutual funds. The expense associated with the Savings
Plan was $214,000 in 1992.
The Company does not provide any post-retirement benefits other
than pensions to its employees.
13. Income taxes
The components of pretax income (loss) are as follows (in
thousands):
Years ended December 31, 1992 1991 1990
Operations $(13,178)$ 1,157 $(39,265)
Extraordinary gain 1,662
2,037 5,215
$(11,516)$ 3,194 $(34,050)
The components of income tax expense (benefit) are as follows (in
thousands):
Years ended December 31, 1992 1991 1990
Current
State $ 427 $ 549 $ 17
Deferred
Federal
(1,289)
$ 427
$ 549 $ (1,272)
In 1990, the Company's loss before income taxes and extraordinary
items exceeded its gains from extraordinary items; therefore, no
income tax expense applicable to such extraordinary gains was
recognized.
In 1991, despite the Company's $1,157,000 income before income
taxes, as well as its $2,037,000 gain from extraordinary item, no
Federal income tax expense was recognized. This is due
principally to significant permanent differences between
financial and tax reporting of 1991 transactions, including the
elimination for tax purposes of the $18,844,000 gain on the sale
of GP stock net of a gain recognized only for tax purposes upon
ISI ceasing to be a member of the Company's consolidated Federal
income tax return group on May 31, 1991. The income tax expense
for 1991 of $549,000 represents state and local income taxes.
In 1992, the Company's loss before income taxes exceeded its
gains from extraordinary items; therefore, no income tax expense
applicable to such extraordinary gains was recognized. The
income tax expense for 1992 of $427,000 represents state and
local income taxes.
The Company's deferred income tax benefit from operations for the
38
year ended December 31, 1990 is primarily attributable to the
reversal of approximately $1,289,000 of deferred taxes of GP
which were offset by the current operating losses of the Company.
This income tax benefit exceeded Duratek's separate company
Federal income tax expense and the Company's state and local
income tax expense for 1990. No additional benefit was
attributed to the Company's loss from operations in 1990; rather
such losses were utilized to offset most of the taxes that would
otherwise have been payable on the extraordinary gains.
As of December 31, 1992, the Company has approximately
$30,566,000 of consolidated Federal net operating loss carryovers
for financial reporting purposes and $20,484,000 of consolidated
net operating loss carryovers for Federal income tax return
purposes, which expire beginning in the years 2001 through 2007.
These losses do not include the $10,600,000 and $5,625,000 of net
operating losses, respectively, attributable to ISI under the
Federal consolidated return rules, which ISI retained upon
ceasing to be a member of the Company's consolidated income tax
return group. In addition, for Federal income tax purposes, the
Company has approximately $3,200,000 of available credit
carryovers which have been previously utilized for financial
reporting purposes.
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," will be adopted by the Company in 1993 on a
prospective basis. This standard requires that deferred income
taxes be recorded following the liability method of accounting
and adjusted periodically when income tax rates change. As of
December 31, 1992, the Company was not carrying any deferred tax
accounts. Adoption of the new standard will not have a material
effect on the Company's financial condition or results of
operations.
14. Stock options, warrants and other shares reserved
Under the Company's non-qualified stock option plan, employees
and certain other parties may be granted options to purchase
shares of common stock. The options may be granted at a price
not less than 85% of the fair market value of the common stock on
the date of grant and are exercisable over periods not exceeding
ten years from the date of grant. Shares of common stock are
also reserved for issuance pursuant to other agreements, as
described below. Changes in options and warrants outstanding
during 1990, 1991, and 1992, options and warrants exercisable and
shares reserved for issuance at December 31, 1990, 1991, and 1992
are as follows:
Common Stock
Class B Capital Stock
Options and warrants
Price Range Number
Price Range Number
outstanding
per share of shares
per share
of shares
December 31, 1989 $5.125-22.00
3,629,489 $5.125- 5.75
1,550,000
39
Granted 2.25 -
5.875
3,787,434 2.25
1,550,000
Exercised 5.125
(4,000)
Terminated 5.125-22.00
(3,085,189) 5.125- 5.75
(1,550,000)
December 31, 1990 2.25 -
18.50
4,327,734 2.25
1,550,000
Granted 3.75 -
5.625
90,000
Exercised 2.25 -
3.75
(247,700)
Terminated 2.25 -
15.00
(232,750)
December 31, 1991 2.25 -
18.50
3,937,284 2.25
1,550,000
Granted 2.25 - 2.75 32,500
Exercised 2.25 (128,930)
Terminated 2.25 -18.50 (540,850)
December 31, 1992 2.25 - 6.00 3,300,004 2.25 1,550,000
Options and warrants
exercisable
December 31, 1990 2.25 -
18.50
2,832,794 2.25
1,550,000
December 31, 1991 2.25 -
18.50
3,571,864 2.25
1,550,000
December 31, 1992 2.25 -
6.00
3,177,264 2.25
1,550,000
Shares reserved for
issuance
December 1990
10,289,814
1,550,000
December 1991
11,258,647
1,550,000
December 1992
10,583,723
1,550,000
At December 31, 1992, 1991, and 1990, options outstanding
included 2,017,334 shares for two officers who are principal
shareholders of the Company. In October 1990, previously issued
options to these officers were cancelled and reissued at a price
of $2.25 per share. In addition, in October 1990, each of the
two officers received options to purchase 325,000 shares, 50%
exercisable in 1990 and 50% exercisable in 1991, at a price of
$2.25 per share. In December 1992, the exercisable period of
200,000 options previously granted in December 1987, was extended
to December 1997.
Class B capital stock aggregating 1,550,000 shares at December
31, 1992, 1991, and 1990 were reserved for issuance to these same
two officers. In October 1990, 1,550,000 shares were cancelled
and reissued at a price of $2.25 per share.
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, 1992, 1991, and 1990
include 1,800,000 shares in connection with Class B shares.
Options and warrants outstanding and shares reserved for issuance
at December 31, 1989 included 155,805 shares, which could have
been purchased for $22.00 per share under warrants issued to
purchasers of Units of Interferon Sciences Research Partners,
40
Ltd. These warrants expired in 1990. At December 31, 1992,
1991, and 1990, shares reserved for issuance also included
827,000, 827,000 and 3,557,000 shares, respectively, that could
be issuable upon the conversion of all of the originally issued
Old Swiss Bonds (see Notes 8(b) and (c)). At December 31, 1992,
the Old Swiss Bonds were convertible into 552,000 shares of
common stock. In addition, at December 31, 1991 and 1990 shares
reserved for issuance included 500,000 shares that could have
been purchased for $18.50 per share under warrants issued in
connection with the 12% Subordinated Debentures issued during
1987 (see Note 8(d)). The warrants expired in July 1992.
15. Business segments
The operations of the Company consist of the following business
segments:
Physical Science Group - products and services for the power
industry, as well as for governmental agencies and industry in
general; Distribution Group - wholesale distribution of paint,
stain, hardware and paint sundry items; Health Care Group -
interferon research and production; Optical Plastics Group - the
manufacture and distribution of coated and molded plastic
products; Electronics Group - electronic manufacturing and
assembly.
The segment information for 1991 and 1990 has been restated to
reflect the current classification which the Company believes
better reflects its current operations. The principal change is
the separation of the former Industrial Group into its two
components, Optical Plastics and Electronics. In addition, the
Consumer Products Group has been renamed the Distribution Group.
The following tables set forth the revenues and operating results
(in thousands) attributable to each line of business and include
a reconciliation of the groups' revenues to consolidated revenues
and operating results to consolidated income (loss) from
operations before income taxes and extraordinary items for the
periods presented.
Years ended December 31, 1992 1991 1990
Revenues
Physical Science $109,966 $163,922 $163,603
Distribution 69,121 65,624 67,143
Health Care 4,762 14,909 46,607
Optical Plastics 8,015 9,573 9,478
Electronics 5,481 7,271 6,865
Other 851 461 180
198,196 261,760 293,876
Investment and other
income, net 3,790 (37) (372)
Total revenues $201,986 $261,723 $293,504
41
Operating results
Physical Science $ 2,410 $ 5,346 $ 2,284
Distribution 2,877 2,852 3,227
Health Care (6,583) (5,690) (9,787)
Optical Plastics 1,565 1,855 1,491
Electronics (1,849) (707) (750)
Other (99) (463) 57
Total operating profit (loss) (1,679) 3,193 (3,478)
Interest expense (11,044) (15,579) (20,447)
Indirect administrative expenses,
net of gains or losses from
dispositions of investments,
minority interests, foreign currency
exchange gains
or losses, and other revenue (455) 13,543 (15,340)
Income (loss) from operations before
income taxes and extraordinary
items $(13,178) $ 1,157 $ (39,265)
Operating profits represent gross revenues less operating
expenses. In computing operating profits, none of the following
items have been added or deducted; general corporate expenses,
foreign currency transaction gains and losses, investment income
and interest expense.
For the years ended December 31, 1992, 1991 and 1990, sales to
the United States government and its agencies represented
approximately 18%, 9% and 13%, respectively, of sales.
Additional information relating to the Company's business
segments is as follows (in thousands):
December 31, 1992 1991 1990
Identifiable assets
Physical Science $ 79,271 $ 92,959 $134,966
Distribution 32,584 29,306 33,038
Health Care 21,486 37,407 47,732
Optical Plastics 7,051 6,714 6,388
Electronics 6,858 7,364 8,835
Corporate and other 45,399 40,291 38,605
$192,649 $214,041 $269,564
Years ended December 31, 1992 1991 1990
Additions to property, plant,
and equipment, net
Physical Science $ 1,490 $ 705 $ (86)
Distribution 723 338 237
Health Care 241 441 7,542
Optical Plastics 887 588 478
Electronics 20 (22) 1,277
Corporate and other 38 29 343
$ 3,399 $ 2,079 $ 9,791
42
Years ended December 31, 1992 1991 1990
Depreciation and amortization
Physical Science $ 2,299 $ 2,940 $ 3,661
Distribution 718 688 742
Health Care 1,048 1,248 2,627
Optical Plastics 578 660 501
Electronics 165 357 848
Corporate and other 1,299 2,649 1,761
$ 6,107 $ 8,542 $ 10,140
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.
Accounts receivable and costs and estimated earnings of billings
on uncompleted contracts related to government agencies amounted
to $9,970,000 and $5,073,000 at December 31, 1992 and $10,040,000
and $3,150,000 at December 31, 1991.
16. Fair value of financial instruments
The carrying value of financial instruments including cash,
short-term investments, accounts receivable,restricted cash,
accounts payable and short-term borrowings approximate estimated
market values because of short maturities and interest rates that
approximate current rates.
The carrying values of investments 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, 1992
Carrying
Estimated
amount fair value
Swiss Bonds $40,131 $15,048
7% Dual Currency Convertible Bonds 5,118 1,459
12% Subordinated Debentures 6,932 4,159
Other long-term debt 9,260 9,260
Limitations. Fair value estimates are made at a specific point
in time, based on relevant market information and information
about the financial instrument. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgement and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
17. Commitments and contingencies
43
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
1993 $ 5,362 $ 1,693 $ 7,055
1994 4,881 1,361 6,242
1995 3,983 548 4,531
1996 1,825 176 2,001
1997 1,513 35 1,548
After 1997 5,899 2 5,901
Total $23,463 $ 3,815 $27,278
Several of the leases contain provisions for rent escalation
based primarily on increases in real estate taxes and operating
costs incurred by the lessor. Rent expense for real and personal
property was approximately $7,806,000, $4,691,000 and $9,710,000
for 1992, 1991, and 1990, respectively.
In February 1986, Duratek completed its initial public offering
of common stock. In connection with Duratek's public offering,
the Company issued to certain officers of Duratek and the Company
358,609 options for the purchase of Duratek common stock owned by
the Company at a price equal to the greater of (a) $1.75 per
share or (b) the net book value per share of Duratek's common
stock as of the end of the most recently completed fiscal quarter
which ends not less than 60 days before the date of exercise of
such option. In 1991, an additional 270,000 options for the
purchase of Duratek common stock owned by the Company at a price
of $1.90 per share were issued to certain employees and officers
of the Company. Through December 31, 1992, 21,350 options under
the plan were exercised, 57,500 were cancelled, and at December
31, 1992, 239,100 options are currently exercisable. At December
31, 1992, the Company owned approximately 80% of Duratek.
Duratek has issued a letter of credit relating to a project to
provide three mobile radioactive wastewater systems to a foreign
utility. The letter of credit expires on the earlier of the
completion of the project or May 31, 1993, and is secured by a
$929,000 deposit classified as restricted cash on the Company's
balance sheet at December 31, 1992.
The Company is party to several lawsuits incidental to its
business. It is not possible at the present time to estimate the
ultimate legal and financial liability, if any, of the Company in
respect to such litigation; however, management believes that the
ultimate liability, if any, will not have a material adverse
effect on the Company's Consolidated Financial Statements.
44
National Patent Supplementary Data
Development Corporation
and Subsidiaries
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share da
Three Months Ended
March 31, June 30, Sept. 30,Dec. 31, March
1992 1992 1992 1992 1991 1991 1991 1991
<S> <C> <C> <C> <C> <C> <C> <C> <C> <S>
Sales $45,759 $51,594 $52,554 $45,858 $77,148 $69,201 $67,617 $44,967
Gross margin 6,562 9,297 8,664 5,249 10,472 10,625 9,796 5,120
Income (loss) before
extraordinary items 384 (5,674) (7,284) (1,031) 356 (2,190) (6,193) 9,184
Net income (loss) 1,321 (5,228) (7,284) (752) 356 (2,190) (5,887) 10,366
Earnings (loss) per share:
Before extraordinary items .02 (.36) (.46)
Net income (loss) .07 (.33) (.46) (.05) .03 (.17) (.42) .60
Since the Company reported net losses for the quarters ended June 30, 1991 and
September 30, 1991, common stock equivalents had an antidilutive effect and were not
considered when computing the loss per share for such quarters. However, because the
Company was profitable in the first and fourth quarters of 1991 and for the full year
of 1991, common stock equivalents were considered when computing the income per share
for such periods. As a result, the sum of the per share data for each of the quarters
in 1991 is different from the per share data for the full year.
</TABLE>
45
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL PATENT DEVELOPMENT
CORPORATION
By: /s/ Jerome I. Feldman
Jerome I. Feldman, President
and Chief Executive Officer
Dated: January 3, 1994
46
EXHIBIT 24
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
NATIONAL PATENT DEVELOPMENT CORPORATION
We consent to incorporation by reference in the
Registration
Statement (No. 33-71698, No. 33-66634 and No.
33-63670) on Form
S-3 and the Registration Statement (No. 33-26261) on
Form S-8 of
National Patent Development Corporation and
subsidiaries of our
report dated March 16, 1993, relating to the
consolidated balance
sheets of National Patent Development Corporation as
of December
31, 1992 and 1991 and the related consolidated
statements of
operations, changes in stockholders' equity, and cash
flows for
each of the years in the three-year period ended
December 31,
1992, which report appears in Form 10-K/A for the
year ended
December 31, 1992 of National Patent Development
Corporation.
KPMG PEAT MARWICK
New York, New York
December 23, 1993
