<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 1996
REGISTRATION NO. 333-16777
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
NATIONAL PATENT DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8980 13-1926739
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
9 WEST 57TH STREET
SUITE 4170
NEW YORK, NEW YORK 10019
(212) 826-8500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
LAWRENCE M. GORDON, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
NATIONAL PATENT DEVELOPMENT CORPORATION
9 WEST 57TH STREET
SUITE 4170
NEW YORK, NEW YORK 10019
(212) 230-9513
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID W. POLLAK, ESQ. JAMES J. HANKS, JR., ESQ.
MORGAN, LEWIS & BOCKIUS LLP BALLARD SPAHR ANDREWS & INGERSOLL
101 PARK AVENUE 300 EAST LOMBARD STREET, SUITE 1900
NEW YORK, NEW YORK 10178 BALTIMORE, MARYLAND 21202
(212) 309-6000 (410) 528-5600
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effectiveness of the Registration Statement.
---------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED(1) REGISTERED PER SHARE PRICE FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$
Common Stock, $.01 par value............... 3,850,000 not applicable not applicable (2)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This Registration Statement relates to securities of the Registrant issuable
to holders of Common Stock of General Physics Corporation in the proposed
merger of General Physics Corporation with a wholly-owned subsidiary of the
Registrant, including 33,333 shares registered in connection with the
settlement of certain litigation regarding the merger.
(2) A registration fee of $6,109 was paid on November 26, 1996 with respect to
2,671,137 shares. The registration fee for the remaining 1,178,863 shares,
$1,429, pursuant to Rule 457(f), was computed on the basis of the market
value of the Common Stock of General Physics Corporation to be exchanged in
the merger, computed in accordance with Rule 457(c) on the basis of the
average of the high and low prices per share of the General Physics
Corporation Common Stock ($4.00) as reported on the New York Stock Exchange
on December 16, 1996.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[NATIONAL PATENT DEVELOPMENT LOGO]
December 20, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
National Patent Development Corporation ("National Patent") to be held at The
Columbia Hilton, 5485 Twin Knolls Road, Columbia, Maryland on January 23, 1997
at 2:30 p.m., local time. A Notice of the Special Meeting, form of proxy and a
proxy statement containing information about the matters to be acted upon are
enclosed. All holders of shares of Common Stock of National Patent ("NPD Common
Stock") and of Class B Capital Stock of National Patent (the "NPD Class B
Stock") as of the close of business on December 17, 1996 (the "Record Date") are
entitled to notice of, and to vote at, the Special Meeting.
At the Special Meeting, holders of NPD Common Stock and the NPD Class B
Stock will be asked to consider and to vote upon two proposals as follows:
1. (A) to approve and adopt an Agreement and Plan of Merger, dated as
of November 19, 1996, among General Physics Corporation ("General
Physics"), National Patent and GPX Acquisition Inc., a wholly-owned
subsidiary of National Patent ("GPX"), as amended by Amendment No. 1, dated
as of December 18, 1996 (as so amended, the "Merger Agreement"), pursuant
to which, among other things, (x) GPX will be merged with and into General
Physics, which will be the surviving corporation (the "Merger"), and (y)
each share of General Physics' Common Stock (the "GPC Common Stock") will
be converted into 0.54 shares (subject to adjustment) of NPD Common Stock,
subject to the provisions of the Merger Agreement (approval of the Merger
Agreement is contingent upon approval of the Foreign Ownership Charter
Amendment, described below); and
(B) to approve and adopt an amendment to the Restated Certificate of
Incorporation of National Patent which would permit National Patent to
redeem or require the prompt disposition under certain circumstances of all
or any portion of the shares of NPD Common Stock owned by a foreign
stockholder (as defined) beneficially owning shares in excess of five
percent or more of the outstanding shares of NPD Common Stock (the "Foreign
Ownership Charter Amendment") (approval of the Foreign Ownership Charter
Amendment is contingent upon approval of the Merger Agreement); and
2. to approve and adopt an amendment to the Restated Certificate of
Incorporation of National Patent decreasing the total number of authorized
shares of NPD Common Stock from 40,000,000 shares to 25,000,000 shares (the
"Authorized Shares Charter Amendment"). Approval of the Authorized Shares
Charter Amendment is not a condition to approval of the first proposal set
forth above.
Details of the proposed Merger, the Foreign Ownership Charter Amendment and
the Authorized Shares Charter Amendment and other important information are set
forth in the accompanying Joint Proxy Statement/Prospectus, which you are urged
to read carefully.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the proposed Merger, the proposed Foreign Ownership Charter
Amendment and the proposed Authorized Shares Charter Amendment.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, NATIONAL PATENT AND ITS STOCKHOLDERS AND
HAS APPROVED (1)(A) THE MERGER AGREEMENT, THE MERGER AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED THEREBY AND (B) THE FOREIGN OWNERSHIP CHARTER
AMENDMENT AND (2) THE AUTHORIZED SHARES CHARTER AMENDMENT AND RECOMMENDS THAT
YOU VOTE
<PAGE> 3
FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT, THE MERGER AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY AND THE FOREIGN OWNERSHIP
CHARTER AMENDMENT AND THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE
AUTHORIZED SHARES CHARTER AMENDMENT.
Whether or not you plan to attend the Special Meeting, holders of NPD
Common Stock should complete, sign and date the accompanying Form(s) of Proxy
and return such Form(s) of Proxy in the enclosed prepaid envelope. If you attend
the Special Meeting, you may revoke your proxy and vote in person, if you wish,
even if you have previously returned your Form(s) of Proxy. Your prompt
cooperation will be greatly appreciated.
Sincerely,
[JEROME I. FELDMAN SIGNATURE]
--------------------------------------
Jerome I. Feldman
President and Chief Executive Officer
2
<PAGE> 4
NATIONAL PATENT DEVELOPMENT CORPORATION
9 WEST 57TH STREET
SUITE 4170
NEW YORK, NEW YORK 10019
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 23, 1997
---------------------
New York, New York
December 20, 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of National
Patent Development Corporation, a Delaware corporation ("National Patent"), will
be held at The Columbia Hilton, 5485 Twin Knolls Road, Columbia, Maryland on
January 23, 1997 at 2:30 p.m., local time, for the following purposes:
1. To consider and vote upon a proposal to: (A) approve and adopt an
Agreement and Plan of Merger, dated as of November 19, 1996, among General
Physics Corporation ("General Physics"), National Patent and GPX
Acquisition Inc., a Delaware corporation and a wholly-owned subsidiary of
National Patent ("GPX"), as amended by Amendment No. 1, dated as of
December 18, 1996 (as so amended, the "Merger Agreement"), providing for,
among other things, (i) the merger of GPX with and into General Physics,
which will be the surviving corporation (the "Merger"), and (ii) the
issuance of shares of National Patent's Common Stock (the "NPD Common
Stock") to the holders of General Physics' Common Stock ("GPC Common
Stock") at an exchange ratio of 0.54 shares (subject to adjustment) of NPD
Common Stock per share of GPC Common Stock, all as more fully described in
the accompanying Joint Proxy Statement/Prospectus and (B) approve and adopt
an amendment to the Restated Certificate of Incorporation of National
Patent which would require the prompt disposition under certain
circumstances of all or any portion of the shares of NPD Common Stock owned
by a foreign stockholder (as defined) beneficially owning shares in excess
of five percent or more of the outstanding shares of NPD Common Stock
(approval of the proposal described in clause (A) is contingent upon
approval of the proposal described in clause (B) and vice versa);
2. To consider and vote upon a proposal to approve and adopt an
amendment to the Restated Certificate of Incorporation of National Patent
decreasing the total number of authorized shares of NPD Common Stock from
40,000,000 shares to 25,000,000 shares; and
3. To transact such other business relating to the purposes for which
the Special Meeting was called, or ancillary to the conduct thereof, as may
properly be brought before the Special Meeting or any adjournment or
postponement thereof.
A copy of the Merger Agreement is attached as Annex A to, and is described
in, the accompanying Joint Proxy Statement/Prospectus. Holders of shares of NPD
Common Stock and the NPD Class B Stock will not be entitled to dissenters'
appraisal rights with respect to the Merger.
The Board of Directors has fixed the close of business on December 17,
1996, as the record date for the determination of those stockholders entitled to
notice of and to vote at the Special Meeting or any adjournment or postponement
thereof. Accordingly, only stockholders of record at the close of business on
that date will be entitled to vote.
By Order of the Board of Directors,
Lydia M. DeSantis
Secretary
PLEASE DATE, SIGN AND RETURN THE ENCLOSED FORM(S) OF PROXY PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL
MEETING. EXECUTION OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF
YOU ARE PRESENT AT THE SPECIAL MEETING.
<PAGE> 5
[GENERAL PHYSICS CORPORATION LOGO]
---------------------
December 20, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
General Physics Corporation ("General Physics") to be held at The Columbia
Hilton, 5485 Twin Knolls Road, Columbia, Maryland on January 23, 1997 at 11:00
a.m., local time. A Notice of the Special Meeting, form of proxy and a proxy
statement containing information about the matters to be acted upon are
enclosed. All holders of shares of common stock of General Physics ("GPC Common
Stock") as of the close of business on December 18, 1996 (the "Record Date") are
entitled to notice of, and to vote at, the Special Meeting.
At the Special Meeting, holders of GPC Common Stock will be asked to
consider and to vote upon a proposal to approve and adopt an Agreement and Plan
of Merger, dated as of November 19, 1996, among General Physics, National Patent
Development Corporation ("National Patent") and GPX Acquisition Inc., a
wholly-owned subsidiary of National Patent ("GPX"), as amended by Amendment No.
1, dated as of December 18, 1996 (as so amended, the "Merger Agreement"),
providing for, among other things, (x) the merger of GPX with and into General
Physics, which will be the surviving corporation (the "Merger"), and (y) the
issuance of shares of National Patent's Common Stock to the holders of GPC
Common Stock at an exchange ratio of 0.54 shares (subject to adjustment) of
National Patent's Common Stock per share of GPC Common Stock.
As of the Record Date, National Patent owned 5,523,274 shares of GPC Common
Stock, representing approximately 52% of the voting power of the shares of GPC
Common Stock. National Patent has agreed in the Merger Agreement to cause such
shares to be voted in favor of approval and adoption of the Merger Agreement,
the Merger and the consummation of the transactions contemplated thereby.
Accordingly, approval of the Merger by General Physics' stockholders is assured.
Details of the proposed Merger and other important information are set
forth in the accompanying Joint Proxy Statement/Prospectus, which you are urged
to read carefully.
Your Board of Directors, together with a special committee of independent
directors (the "Special Committee"), has carefully reviewed and considered the
terms and conditions of the proposed Merger. In addition, the Special Committee
has received the opinion of its financial adviser, Oppenheimer & Co., Inc., to
the effect that the consideration to be paid by National Patent in the Merger
was fair to the stockholders of General Physics from a financial point of view.
A copy of that opinion is attached to the enclosed Joint Proxy
Statement/Prospectus and should be read in its entirety.
YOUR BOARD OF DIRECTORS, HAVING RECEIVED AND CONSIDERED THE UNANIMOUS
RECOMMENDATION OF THE SPECIAL COMMITTEE, HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, THE MERGER AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE
MERGER AGREEMENT, THE MERGER AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
Whether or not you plan to attend the Special Meeting, holders of GPC
Common Stock should complete, sign and date the accompanying Form(s) of Proxy
and return such Form(s) of Proxy in the enclosed prepaid envelope. If you attend
the Special Meeting, you may revoke your proxy and vote in person, if you wish,
even if you have previously returned your Form(s) of Proxy. Your prompt
cooperation will be greatly appreciated.
Sincerely,
[JOHN C. MCAULIFFE SIGNATURE]
---------------------------------------
John C. McAuliffe
Executive Vice President and Chief
Operating Officer
<PAGE> 6
GENERAL PHYSICS CORPORATION
6700 ALEXANDER BELL DRIVE, SUITE 400
COLUMBIA, MARYLAND 21046
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 23, 1997
---------------------
Columbia, Maryland
December 20, 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of General
Physics Corporation, a Delaware corporation ("General Physics"), will be held at
The Columbia Hilton, 5485 Twin Knolls Road, Columbia, Maryland on January 23,
1997, at 11:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of November 19, 1996, among General
Physics, National Patent Development Corporation ("National Patent") and
GPX Acquisition Inc., a wholly-owned subsidiary of National Patent ("GPX"),
as amended by Amendment No. 1, dated as of December 18, 1996 (as so
amended, the "Merger Agreement"), providing for, among other things, (i)
the merger of GPX with and into General Physics, which will be the
surviving corporation (the "Merger"), and (ii) the issuance of shares of
National Patent's Common Stock to the holders of General Physics' Common
Stock (the "GPC Common Stock") at an exchange ratio of 0.54 shares (subject
to adjustment) of National Patent's Common Stock per share of GPC Common
Stock, all as more fully described in the accompanying Joint Proxy
Statement/Prospectus; and
2. To transact such other business relating to the purposes for which
the Special Meeting was called, or ancillary to the conduct thereof, as may
properly be brought before the Special Meeting or any adjournment or
postponement thereof.
A copy of the Merger Agreement is attached as Annex A to, and is described
in, the accompanying Joint Proxy Statement/Prospectus. Holders of shares of GPC
Common Stock will not be entitled to dissenters' appraisal rights with respect
to the Merger.
The Board of Directors has fixed the close of business on December 18,
1996, as the record date for the determination of those stockholders entitled to
notice of and to vote at the Special Meeting or any adjournment or postponement
thereof. Accordingly, only stockholders of record at the close of business on
that date will be entitled to vote.
By Order of the Board of Directors,
Kenneth L. Crawford
Secretary
PLEASE DATE, SIGN AND RETURN THE ENCLOSED FORM(S) OF PROXY PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL
MEETING. EXECUTION OF A PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF
YOU ARE PRESENT AT THE SPECIAL MEETING.
<PAGE> 7
JOINT PROXY STATEMENT
OF
NATIONAL PATENT DEVELOPMENT CORPORATION
AND
GENERAL PHYSICS CORPORATION
---------------------
PROSPECTUS OF NATIONAL PATENT DEVELOPMENT CORPORATION
---------------------
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
National Patent Development Corporation, a Delaware corporation ("National
Patent"), in connection with the solicitation of proxies by the Board of
Directors of National Patent from holders of its Common Stock, par value $.01
per share (the "NPD Common Stock"), for use at the special meeting of
stockholders of National Patent to be held on January 23, 1997, and at any
adjournment or postponement thereof (the "NPD Special Meeting").
This Joint Proxy Statement/Prospectus is also being furnished to
stockholders of General Physics Corporation, a Delaware corporation ("General
Physics"), in connection with the solicitation of proxies by the Board of
Directors of General Physics from holders of General Physics' Common Stock, par
value $.025 per share (the "GPC Common Stock"), for use at the special meeting
of stockholders of General Physics to be held on January 23, 1997, and at any
adjournment or postponement thereof (the "General Physics Special Meeting"; and,
together with the NPD Special Meeting, the "Special Meetings").
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
National Patent filed with respect to the shares of NPD Common Stock to be
issued in connection with the proposed merger of GPX Acquisition Inc., a
Delaware corporation and a wholly-owned subsidiary of National Patent ("GPX"),
with and into General Physics (the "Merger") pursuant to the Agreement and Plan
of Merger, dated as of November 19, 1996, among General Physics, GPX and
National Patent, as amended by Amendment No. 1, dated as of December 18, 1996
(as so amended, the "Merger Agreement"). See "SUMMARY -- The Merger" and "THE
MERGER." References to National Patent and General Physics in this Joint Proxy
Statement/Prospectus mean the respective corporations and their consolidated
subsidiaries, except as the context may otherwise indicate.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 OF THIS JOINT PROXY STATEMENT/
PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN NPD COMMON STOCK.
---------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/ PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of National Patent and General Physics on
or about December 20, 1996.
The date of this Joint Proxy Statement/Prospectus is December 19, 1996.
<PAGE> 8
AVAILABLE INFORMATION
National Patent and General Physics are each subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, file reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by National Patent and
General Physics can be inspected and copied at the public reference facilities
maintained at the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants, including National
Patent and General Physics, that file electronically with the Commission. The
address of such Web site is: http://www.sec.gov. Such materials and other
information concerning National Patent may also be inspected at the offices of
the American Stock Exchange, 86 Trinity Place, New York, New York 10006, on
which the NPD Common Stock is listed. Such materials and other information
concerning General Physics may also be inspected at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005, on which the GPC
Common Stock is listed.
National Patent has filed a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the Commission with respect to the shares of NPD Common
Stock to be issued by it in the Merger. This Joint Proxy Statement/Prospectus
constitutes the Prospectus of National Patent that is filed as part of such
Registration Statement. As permitted by the rules and regulations of the
Commission, this Joint Proxy Statement/Prospectus omits certain information
contained in the Registration Statement and reference is hereby made to the
Registration Statement for further information with respect to National Patent
and the NPD Common Stock. Such Registration Statement may be obtained from the
Commission's principal office in Washington, D.C.
---------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NATIONAL
PATENT, GENERAL PHYSICS OR ANY OTHER PERSON. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT
PROXY STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF NATIONAL PATENT OR GENERAL PHYSICS SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
---------------------
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE
AVAILABLE UPON REQUEST FROM NATIONAL PATENT DEVELOPMENT CORPORATION, 9 WEST 57TH
STREET, SUITE 4170, NEW YORK, NEW YORK 10019, ATTENTION: SECRETARY, TELEPHONE:
(212) 826-8500 OR FROM GENERAL PHYSICS CORPORATION, 6700 ALEXANDER BELL DRIVE,
SUITE 400, COLUMBIA, MARYLAND 21046, ATTENTION: SECRETARY, TELEPHONE: (410)
290-2305. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY JANUARY 10, 1997 IN THE CASE OF ANY REQUEST FOR DOCUMENTS FROM
NATIONAL PATENT, AND BY JANUARY 10, 1997 IN THE CASE OF ANY REQUEST FOR
DOCUMENTS FROM GENERAL PHYSICS.
ii
<PAGE> 9
INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE
The following documents filed with the Commission by National Patent are
incorporated in this Joint Proxy Statement/Prospectus by reference:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1995 filed by National Patent with the Commission on April 1, 1996,
pursuant to Section 13(a) or 15(d) of the Exchange Act.
2. Annual Report on Form 10-K/A No. 1 for the year ended December 31,
1995 filed by National Patent with the Commission on April 29, 1996.
3. Annual Report on Form 10-K/A No. 2 for the year ended December 31,
1995 filed by National Patent with the Commission on May 10, 1996.
4. Annual Report on Form 10-K/A No. 3 for the year ended December 31,
1995 filed by National Patent with the Commission on June 14, 1996.
5. Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 1996, June 30, 1996 and September 30, 1996 filed with the Commission on
May 15, 1996, August 13, 1996 and November 14, 1996, respectively, pursuant
to Section 13(a) or 15(d) of the Exchange Act.
6. Current Report on Form 8-K filed with the Commission on November
25, 1996.
7. All other reports filed by National Patent pursuant to Section
13(a) or 15(d) of the Exchange Act since the end of the fiscal year ended
December 31, 1995.
All reports and other documents filed by National Patent after the date of
this Joint Proxy Statement/ Prospectus pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act and prior to January 23, 1997 shall be deemed to be
incorporated by reference herein and to be a part hereof.
The following documents filed with the Commission by General Physics are
incorporated in this Joint Proxy Statement/Prospectus by reference:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1995 filed pursuant to Section 13(a) or 15(d) of the Exchange Act.
2. Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 1996, June 30, 1996 and September 30, 1996 filed pursuant to Section
13(a) or 15(d) of the Exchange Act.
3. Current Report on Form 8-K filed with the Commission on November
25, 1996.
4. All other reports filed by General Physics pursuant to Section
13(a) or 15(d) of the Exchange Act since the end of the fiscal year ended
December 31, 1995.
Statements contained in this Joint Proxy Statement/Prospectus as to the
contents of any contract or document are not necessarily complete and in each
instance such statements are qualified in their entirety by reference to the
copy of such contract or other document filed as an exhibit to the Registration
Statement or incorporated by reference therein. Any statement contained in a
document incorporated or deemed to be incorporated in this Joint Proxy
Statement/Prospectus by reference shall be deemed to be modified or superseded
for the purpose of this Joint Proxy Statement/Prospectus to the extent that a
statement contained in this Joint Proxy Statement/Prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated in
this Joint Proxy Statement/Prospectus by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
iii
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. ii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..................................... iii
SUMMARY............................................................................... 1
The Companies....................................................................... 1
The Special Meetings................................................................ 1
The Merger.......................................................................... 2
The Merger Agreement................................................................ 4
The Charter Amendments.............................................................. 6
Risk Factors........................................................................ 7
Selected Historical Consolidated Financial Information of National Patent........... 8
Selected Historical Consolidated Financial Information of General Physics........... 10
Comparative Market Price Data....................................................... 11
Selected Comparative Per Share Data................................................. 12
RISK FACTORS.......................................................................... 13
Risk Factors Applicable to National Patent.......................................... 13
Risk Factors Applicable to General Physics.......................................... 13
Risk Factors Applicable to the Merger............................................... 15
Risk Factors Applicable to the Charter Amendments................................... 18
Forward Looking Statements.......................................................... 19
COMPARATIVE MARKET PRICE DATA......................................................... 20
THE SPECIAL MEETINGS.................................................................. 21
General............................................................................. 21
Place, Date and Time................................................................ 21
Matters to be Considered at the Special Meetings.................................... 21
National Patent.................................................................. 21
General Physics.................................................................. 22
Record Dates; Quorum; Votes Required................................................ 22
National Patent.................................................................. 22
General Physics.................................................................. 23
Voting and Revocation of Proxies.................................................... 24
Solicitation of Proxies............................................................. 24
THE MERGER............................................................................ 25
Background.......................................................................... 25
Recommendation of the NPD Board; National Patent Reasons for the Merger............. 28
Recommendation of the Special Committee and the GPC Board; General Physics Reasons
for the Merger................................................................... 29
Opinion of Oppenheimer.............................................................. 30
THE MERGER AGREEMENT.................................................................. 36
General............................................................................. 36
Effective Time...................................................................... 36
Merger Consideration................................................................ 36
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares.... 38
Representations and Warranties...................................................... 38
Conduct of Business Prior to Merger................................................. 39
No Solicitation; Fiduciary Out...................................................... 41
Indemnification and Insurance....................................................... 41
Certain Additional Agreements....................................................... 42
Conditions to the Merger............................................................ 42
Amendment and Waiver................................................................ 43
</TABLE>
iv
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Termination......................................................................... 43
Certain Expenses.................................................................... 44
Litigation Challenging the Merger................................................... 45
Certain Federal Income Tax Consequences of the Merger............................... 46
Accounting Treatment................................................................ 46
Resale of NPD Common Stock.......................................................... 46
Appraisal Rights.................................................................... 47
Listing of Shares................................................................... 47
THE CHARTER AMENDMENTS................................................................ 47
Foreign Ownership Charter Amendment................................................. 47
Authorized Shares Charter Amendment................................................. 48
SELECTED HISTORICAL FINANCIAL INFORMATION............................................. 49
National Patent -- Selected Historical Consolidated Financial Information........... 49
National Patent's Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 51
General Physics -- Selected Historical Consolidated Financial Information........... 58
General Physics' Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 59
PRO FORMA FINANCIAL DATA.............................................................. 66
Pro Forma Consolidated Condensed Balance Sheet...................................... 66
Pro Forma Consolidated Condensed Statements of Operations (unaudited)............... 68
BUSINESS -- NATIONAL PATENT........................................................... 69
Physical Science Group.............................................................. 69
Distribution Group.................................................................. 69
Optical Plastics Group.............................................................. 70
Hydro Med Sciences.................................................................. 70
National Patent's Investments....................................................... 71
Properties.......................................................................... 71
Legal Proceedings................................................................... 72
BUSINESS -- GENERAL PHYSICS........................................................... 72
General............................................................................. 72
Organization and Operations......................................................... 72
Customers........................................................................... 74
Training and Technology Group....................................................... 74
Engineering and Applied Sciences Group.............................................. 76
Federal Systems Group............................................................... 78
Department of Energy Services Group................................................. 79
Contracts........................................................................... 79
Competition......................................................................... 80
Personnel........................................................................... 81
Marketing........................................................................... 81
Backlog............................................................................. 82
Insurance........................................................................... 82
Environmental Statutes and Regulations.............................................. 83
Properties.......................................................................... 83
Legal Proceedings................................................................... 83
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 84
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 85
</TABLE>
v
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS.......................................... 87
Description of National Patent's Capital Stock...................................... 87
Description of General Physics' Capital Stock....................................... 88
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 89
National Patent..................................................................... 89
General Physics..................................................................... 91
PROXY SOLICITATION.................................................................... 92
LEGAL MATTERS......................................................................... 93
EXPERTS............................................................................... 93
PROCEDURE FOR SUBMITTING STOCKHOLDER PROPOSALS........................................ 93
FINANCIAL STATEMENTS.................................................................. F-1
ANNEX A -- Merger Agreement and Amendment No. 1....................................... A-1
ANNEX B -- Opinion of Oppenheimer & Co., Inc.......................................... B-1
ANNEX C -- Charter Amendments......................................................... C-1
</TABLE>
vi
<PAGE> 13
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/ Prospectus. Reference is made to, and this summary
is qualified in its entirety by, the more detailed information contained in this
Joint Proxy Statement/Prospectus and the Annexes hereto. Stockholders are urged
to read this Joint Proxy Statement/Prospectus and the Annexes hereto in their
entirety.
THE COMPANIES
National Patent. National Patent is primarily a holding company, which is
a legal entity separate and distinct from its various operating subsidiaries.
National Patent's operating subsidiaries (including General Physics, an
approximately 52% owned subsidiary) (i) provide engineering, environmental,
training, analytical and technical support services to commercial nuclear and
fossil power utilities, the United States Departments of Defense and Energy,
Fortune 500 companies and other commercial and governmental customers, (ii) are
engaged in the wholesale distribution of home decorating, hardware and finishing
products, (iii) manufacture molded and coated optical products (such as shields
and face masks and non-optical plastic products) and (iv) manufacture medical
devices, drugs and cosmetic polymer products. National Patent also has an
investment in one company in the health care industry and an investment in one
company in the waste treatment solution area. In addition, National Patent owns
approximately 54% of the common stock of a company that distributes generic
pharmaceutical products in Russia.
The address of National Patent's principal executive offices is 9 West 57th
Street, Suite 4170, New York, New York 10019 and its telephone number is (212)
826-8500.
General Physics. General Physics provides a wide range of engineering,
environmental, training, analytical and technical support services to commercial
nuclear and fossil power utilities, the United States Departments of Defense and
Energy, Fortune 500 companies and other commercial and governmental customers.
General Physics believes it is a leader in the field of developing training
materials, conducting training programs and providing engineering and technical
support services to operators, technical staff and management personnel of
capital-intensive facilities.
The address of General Physics' principal executive offices is 6700
Alexander Bell Drive, Suite 400, Columbia, Maryland 21046 and its telephone
number is (410) 290-2300.
THE SPECIAL MEETINGS
Place, Date and Time. The NPD Special Meeting will be held at The Columbia
Hilton, 5485 Twin Knolls Road, Columbia, Maryland, at 2:30 p.m., local time, on
January 23, 1997. The GPC Special Meeting will be held at The Columbia Hilton,
5485 Twin Knolls Road, Columbia, Maryland, at 11:00 a.m., local time, on January
23, 1997.
Matters To Be Considered at the Special Meetings. At the NPD Special
Meeting, holders of NPD Common Stock will be asked to consider and vote upon two
proposals: (i) a proposal to (A) approve and adopt the Merger Agreement attached
as Annex A to this Joint Proxy Statement/Prospectus providing for the Merger of
GPX Acquisition Inc., a wholly-owned subsidiary of National Patent ("GPX"), with
and into General Physics, which will be the surviving corporation, and the
issuance of shares of NPD Common Stock to the holders of GPC Common Stock and
(B) amend National Patent's Restated Certificate of Incorporation to provide for
the right to require the redemption or the prompt disposition under certain
limited circumstances of all or any portion of the shares of NPD Common Stock
owned by a foreign stockholder beneficially owning shares representing five
percent or more of the outstanding shares of NPD Common Stock (the "Foreign
Ownership Charter Amendment") and (ii) a proposal to approve and adopt an
amendment to the Restated Certificate of Incorporation of National Patent
decreasing the total number of authorized shares of NPD Common Stock which
National Patent will have the authority to issue from 40,000,000 shares to
25,000,000 shares (the "Authorized Shares Charter Amendment"). (The proposals
described in clause (i) and clause (ii) are referred to as the "Proposals".)
<PAGE> 14
The proposals to approve and adopt the Foreign Ownership Charter Amendment
and to approve and adopt the Merger Agreement, the Merger and the consummation
of the transactions contemplated thereby are contingent upon one another, and if
the Merger Agreement is not approved and adopted by the requisite vote of the
stockholders of National Patent, the proposal to approve and adopt the Foreign
Ownership Charter Amendment will be withdrawn from consideration. Likewise, if
the proposal to approve and adopt the Foreign Ownership Charter Amendment is not
approved and adopted by the requisite vote of the stockholders of National
Patent, the proposal to approve and adopt the Merger Agreement, the Merger and
the consummation of the transactions contemplated thereby will be withdrawn from
consideration.
Approval of the Authorized Shares Charter Amendment is not a condition to
the Merger and is not contingent upon approval of the Merger. Holders of NPD
Common Stock will also transact such other business relating to the purposes for
which the NPD Special Meeting was called, or ancillary to the conduct thereof,
as may properly be brought before the NPD Special Meeting.
At the GPC Special Meeting, holders of GPC Common Stock will be asked to
consider and vote upon a proposal to approve and adopt the Merger Agreement.
Holders of GPC Common Stock will also transact such other business relating to
the purposes for which the GPC Special Meeting was called, or ancillary to the
conduct thereof, as may properly be brought before the GPC Special Meeting.
The adoption and approval of the Merger Agreement, the Merger and the
consummation of the transactions contemplated thereby is sometimes referred to
herein as approval and adoption of the Merger or of the Merger Agreement.
See "THE SPECIAL MEETINGS -- Matters to be Considered at the Special
Meetings."
Record Date. The record date for determining stockholders entitled to
notice of and to vote at the NPD Special Meeting and the GPC Special Meeting is
the close of business in New York on December 17 and December 18, 1996,
respectively (the "Record Dates"). See "THE SPECIAL MEETINGS -- Record Dates;
Quorum; Votes Required."
Required Votes. The approval and adoption of (i) the Merger Agreement and
the Foreign Ownership Charter Amendment and (ii) the Authorized Shares Charter
Amendment will each require the affirmative vote of the holders of a majority of
the shares of NPD Common Stock outstanding on the Record Date. Holders of NPD
Common Stock as of the Record Date are entitled to one vote per share on each
matter to be voted on at the NPD Special Meeting. Holders of NPD Class B Stock
are entitled to ten votes per share. Directors and officers of National Patent
have indicated that they intend to vote their shares of NPD Common Stock and NPD
Class B Stock in favor of each of the Proposals. Such persons are entitled to
cast 824,993 votes out of the total 8,137,107 votes entitled to be cast at the
NPD Special Meeting, representing approximately 10.1% of such votes.
The approval and adoption of the Merger will require the affirmative vote
of the holders of a majority of the shares of GPC Common Stock outstanding on
the Record Date. Holders of GPC Common Stock as of the Record Date are entitled
to one vote per share on each matter to be voted on at the GPC Special Meeting.
National Patent owns shares of GPC Common Stock representing approximately 52%
of the total issued and outstanding shares of GPC Common Stock. National Patent
intends to vote for the proposed Merger and, accordingly, approval of the Merger
by the holders of GPC Common Stock is assured.
See "THE SPECIAL MEETINGS -- Record Dates; Quorum; Votes Required."
THE MERGER
Effect of Merger. On the date that is the second business day following
the date on which the conditions set forth in the Merger Agreement have been
satisfied or waived (the "Closing Date"), a certificate of merger will be filed
with the Secretary of State of the State of Delaware in accordance with the
Delaware General Corporation Law (the time of such filing or such later time as
is specified in such certificate of merger, the "Effective Time"). At the
Effective Time, GPX will merge with and into General Physics. General Physics
will be the surviving corporation in the Merger (the "Surviving Corporation")
and will continue its corporate
2
<PAGE> 15
existence under Delaware law. At the Effective Time, subject to the provisions
regarding the Collar described below and to certain exceptions with respect to
shares of GPC Common Stock owned by National Patent, each outstanding share of
GPC Common Stock will be automatically converted into 0.54 (the "Exchange
Ratio") validly issued, fully paid and non-assessable shares of NPD Common
Stock. (No fractional shares will be issued and each holder of shares of GPC
Common Stock who would otherwise have been entitled to receive fractional shares
will receive cash (without interest) in lieu thereof.)
Accordingly, the value of the consideration to be received by General
Physics stockholders in the Merger is subject to fluctuation based on the market
price of NPD Common Stock. General Physics stockholders are urged to obtain
current market quotations for NPD Common Stock and GPC Common Stock. For certain
recent stock price data, see "COMPARATIVE MARKET PRICE DATA."
The Exchange Ratio and the Collar. So long as the Market Price of the NPD
Common Stock as of January 16, 1997 (the "Test Date") is no less than $9.259 or
more than $10.00, the Exchange Ratio is fixed, and neither General Physics nor
National Patent has the right to terminate the Merger Agreement based on changes
in the market price of either party's stock. (The term "Collar" as used in this
Joint Proxy Statement/ Prospectus means the range of Market Prices of NPD Common
Stock from $9.259 to $10.00. The term "Market Price" means the amount which is
equal to the overall average of the high, low, opening and closing sales prices
(averaged on a daily basis) of NPD Common Stock on the American Stock Exchange
Composite Tape on each of the ten consecutive trading days preceding the Test
Date.) So long as the Market Price is within the Collar at the Test Date, the
Exchange Ratio will provide the holders of the GPC Common Stock with shares of
NPD Common Stock having a value equal to the market price of the NPD Common
Stock at the Effective Time times 0.54. The Exchange Ratio therefore reflects a
valuation of the GPC Common Stock at a range of prices between $5.00 and $5.40
per share by providing holders of GPC Common Stock with an amount in value of
NPD Common Stock in the range between $5.00 and $5.40, so long as the Market
Price of the NPD Common Stock is within the Collar at the Test Date. Between the
Test Date, which is five trading days prior to the date of the Special Meetings,
and the Effective Time, the trading price of the NPD Common Stock can also vary,
which will affect the value of the merger consideration received by the holders
of the GPC Common Stock. See "RISK FACTORS -- Risk Factors Applicable to the
Merger -- Risks Associated with the Exchange Ratio and Fluctuations in the
Market Price of the NPD Common Stock."
In the event that the Market Price of the NPD Common Stock on the Test Date
is outside of the Collar, the Exchange Ratio may be adjusted as follows: If the
Market Price on the Test Date is less than $9.259, National Patent may elect to
"gross-up" the Exchange Ratio by increasing the number of shares of NPD Common
Stock to be received by a holder of GPC Common Stock so that such holder will
receive shares of NPD Common Stock with the same value per share of GPC Common
Stock held by such holder, as such holder would have received in the event the
Market Price had been $9.259. If National Patent fails to exercise this option,
General Physics may terminate the Merger Agreement. If the Market Price on the
Test Date is greater than $10.00, then General Physics may elect to reduce the
Exchange Ratio by decreasing the number of shares of NPD Common Stock to be
received by a holder of GPC Common Stock so that such holder will receive shares
of NPD Common Stock with the same value per share of GPC Common Stock held by
such holder, as such holder would have received in the event the Market Price
had been $10.00. If General Physics fails to exercise this option, National
Patent may terminate the Merger Agreement. For further details on the Collar and
the Exchange Ratio, see "THE MERGER AGREEMENT -- Exchange Ratio and Collar."
If the Market Price of the NPD Common Stock is outside of the Collar and
National Patent or General Physics does not exercise the gross-up or reduction
option, as the case may be, General Physics or National Patent, as the case may
be, may elect not to terminate the Merger Agreement and proceed with the Merger,
without any adjustment to the Exchange Ratio. By approving the Merger Agreement,
stockholders of National Patent would be permitting the Board of Directors of
National Patent, in the exercise of its fiduciary duties, to proceed with the
Merger under such circumstances. If the Market Price of the NPD Common Stock is
above the Collar, there can be no assurance, therefore, that National Patent
will not issue shares of NPD Common Stock having a value which is more than
$5.40 per share of GPC Common Stock in the Merger. By approving the Merger
Agreement, stockholders of General Physics would be permitting the Board of
Directors of General Physics and the Special Committee (defined below), in the
exercise of their fiduciary duties, to
3
<PAGE> 16
proceed with the Merger under such circumstances. If the Market Price of the NPD
Common Stock is below the Collar, there can be no assurance, therefore, that
stockholders of General Physics will receive shares of NPD Common Stock which
represent at least $5.00 in value per share of GPC Common Stock held. See "RISK
FACTORS -- Risk Factors Applicable to the Merger -- Risks Associated with the
Exchange Ratio and Fluctuations in the Market Price of the NPD Common Stock."
Recommendation of the National Patent Board; Reasons for the Merger. The
National Patent Board of Directors (the "NPD Board") concluded that the terms of
the Merger are fair to and in the best interests of National Patent and its
stockholders and has unanimously approved the Merger Agreement, the Merger and
the consummation of the transactions contemplated therein. The NPD Board
recommends a vote FOR the proposal to approve and adopt the Merger Agreement,
the Merger and the consummation of the transactions contemplated therein. For a
discussion of the factors considered by the NPD Board in reaching its decision,
see "THE MERGER -- Recommendation of the NPD Board; Reasons for the Merger."
Recommendation of the Special Committee and the General Physics Board. The
General Physics Board of Directors (the "GPC Board"), together with a special
committee of independent directors of General Physics (the "Special Committee"),
concluded that the terms of the Merger are fair to and in the best interests of
General Physics and its stockholders (other than National Patent). Accordingly,
the GPC Board, having received and considered the unanimous recommendation of
the Special Committee, has unanimously approved the Merger Agreement, the Merger
and the consummation of the transactions contemplated therein and recommends a
vote FOR the proposal to approve and adopt the Merger Agreement, the Merger and
the consummation of the transactions contemplated therein. For a discussion of
the factors considered by the Special Committee and the GPC Board, see "THE
MERGER -- Recommendation of the Special Committee and the GPC Board; Reasons for
the Merger." National Patent owns shares of GPC Common Stock representing
approximately 52% of the total issued and outstanding shares of GPC Common
Stock. National Patent intends to vote for the proposed Merger and, accordingly,
approval of the Merger by the holders of GPC Common Stock is assured.
Opinion of Financial Advisor. The Special Committee has retained
Oppenheimer & Co., Inc. ("Oppenheimer") as its financial advisor in connection
with the Merger. Oppenheimer rendered a written opinion to the Special
Committee, dated as of December 19, 1996, to the effect that, as of the date of
such opinion, and based upon various considerations and assumptions set forth
therein, the right to receive shares of NPD Common Stock having a value of at
least $5.00 (the lowest price in the Collar) into which each share of GPC Common
Stock would be converted in the Merger was fair to the holders of GPC Common
Stock (other than National Patent) from a financial point of view. Oppenheimer's
opinion is directed only to the fairness from a financial point of view of the
consideration to be received in the Merger by the stockholders of General
Physics, other than National Patent, and does not constitute a recommendation to
any stockholder of General Physics as to how such stockholder should vote such
stockholder's shares. For information regarding the assumptions made, procedures
followed, other matters considered and limits of the review by Oppenheimer, see
"THE MERGER -- Opinion of Oppenheimer." Holders of GPC Common Stock are
encouraged to read Oppenheimer's opinion in its entirety, a copy of which is
attached as Annex B to this Joint Proxy Statement/ Prospectus.
THE MERGER AGREEMENT
Conditions to the Merger. The obligations of National Patent, GPX and
General Physics to effect the Merger are subject to the satisfaction or waiver
of various conditions, including (i) the approval of the Merger Agreement by the
requisite vote of the stockholders of National Patent and General Physics, (ii)
the receipt of required consents and approvals of governmental entities and
specified third parties except to the extent not material, (iii) the absence of
any temporary restraining order, preliminary or permanent injunction or other
order issued by a court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger, (iv) the effectiveness of
the Registration Statement and the absence of any stop order or proceeding
seeking a stop order, (v) receipt of legal opinions with respect to the Merger
and (vi) the truth and correctness of representations and warranties in all
material respects and the absence of certain material adverse changes. See "THE
MERGER AGREEMENT -- Conditions to the Merger."
4
<PAGE> 17
Termination of the Merger Agreement; Certain Expenses. The Merger
Agreement may be terminated and the Merger abandoned prior to the Effective Time
under certain circumstances, including, among others, (i) if the Merger has not
been consummated on or before April 30, 1997 (the "End Date"), unless the
failure to consummate the Merger is the result of a willful and material breach
of the Merger Agreement by the party seeking to terminate the Merger Agreement,
(ii) if any governmental entity has issued an order, decree or ruling or taken
any other action permanently enjoining, or restraining, or otherwise prohibiting
the Merger and such order, decree, ruling or other action has become final and
nonappealable, (iii) if the required vote of the stockholders of National Patent
or General Physics has not been obtained, (iv) if there has been a material
breach by the non-terminating party of any material representation, warranty,
covenant or agreement under the Merger Agreement which is not capable of being
cured using reasonable efforts by the End Date, (v) by a party if the other
party's Board of Directors (or Special Committee, in the case of General
Physics) withdraws or modifies in an adverse manner its recommendation of the
Merger, (vi) by General Physics, if another entity makes a proposal for an
acquisition transaction with General Physics which the Special Committee
believes is superior to the Merger from a financial point of view to the
stockholders of General Physics, (vii) unless General Physics has exercised an
election to reduce the Exchange Ratio, if the Market Price of the NPD Common
Stock is greater than $10.00 on the Test Date, or (ix) unless National Patent
has exercised an election to increase the Exchange Ratio, if the Market Price of
the NPD Common Stock is less than $9.259 on the Test Date. If the Closing of the
Merger has not occurred prior to February 15, 1997, National Patent must provide
the Special Committee with updated financial statements. If, in the opinion of
the Special Committee, such financial statements reflect a material
deterioration in the financial condition of National Patent on a consolidated
basis, General Physics has the right to terminate the Merger Agreement. See "THE
MERGER AGREEMENT -- Termination." The Merger Agreement provides for the
reimbursement by a party of certain expenses of the other party incurred in
connection with the Merger following the termination of the Merger Agreement
under certain circumstances. See "THE MERGER AGREEMENT -- Certain Expenses."
Options and Warrants. National Patent has agreed to use its reasonable
best efforts to repurchase, prior to the Effective Time, all stock options held
by each employee, officer and director of General Physics which will vest by
their terms prior to or at the Effective Time. Holders of vested stock options
will be entitled to receive cash in an amount equal to $5.20 per share less the
exercise price of the stock option as in effect immediately prior to the
repurchase. Each employee, officer and director of General Physics holding stock
options which are unvested as of the Effective Time will be entitled to receive
for each share of GPC Common Stock which would have been obtainable upon
exercise of the stock option a payment from National Patent in shares of NPD
Common Stock equal to $5.20 less the exercise price of the unvested stock option
as such exercise price is in effect immediately prior to the Merger (subject to
adjustment for stock dividends, stock splits and similar transactions). Such
payment in shares of NPD Common Stock will be made at the time such stock option
vests using the market price of the NPD Common Stock as of the end of the
business day immediately preceding such vesting date. The $5.20 price represents
the middle of the range of prices of the GPC Common Stock, from $5.00 to $5.40,
which will be paid in shares of NPD Common Stock in the Merger, so long as the
Market Price of the NPD Common Stock is within the Collar. The $5.20 price
remains fixed even if on the Test Date the Market Price of the NPD Common Stock
is outside of the Collar. See "RISK FACTORS -- Risk Factors Applicable to the
Merger -- Benefits Accruing to Directors and Officers of General Physics." To
the extent that any vested stock options are not repurchased by National Patent,
such vested stock options will be adjusted so that the holders of such options
will be entitled to receive, upon payment of the exercise price thereof, the
shares of NPD Common Stock which such holders would have been entitled to
receive after the Effective Time had such options been exercised immediately
prior to the Merger.
At the Effective Time, all outstanding Warrants to purchase shares of GPC
Common Stock will be adjusted so that the holders of the Warrants will be
entitled to receive, upon payment of the exercise price thereof, the shares of
NPD Common Stock which such holders would have owned or have been entitled to
receive after the Effective Time had such Warrants been exercised immediately
prior to the Effective Time. See "THE MERGER AGREEMENT -- Options and Warrants."
5
<PAGE> 18
Appraisal Rights. Holders of the GPC Common Stock will not be entitled to
appraisal rights under the Delaware General Corporation Law with respect to the
Merger. See "THE MERGER AGREEMENT -- Appraisal Rights."
Certain Federal Income Tax Consequences. The Merger is expected to qualify
as a tax-free reorganization under Section 368 of the Internal Revenue Code of
1986, as amended. Holders of GPC Common Stock are urged to consult their own tax
advisers as to the specific tax consequences to them of the Merger. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES."
Anticipated Accounting Treatment. The Merger will be treated as a
"purchase" for accounting and financial reporting purposes. See "THE MERGER
AGREEMENT -- Accounting Treatment."
Litigation Challenging the Merger. A holder of GPC Common Stock has filed
a lawsuit as a purported class action against National Patent, General Physics
and General Physics' directors alleging breach of fiduciary duties by the
directors of General Physics, including certain directors who are also directors
of National Patent, and by National Patent (as an alleged majority and
controlling stockholder) in connection with the Merger. The plaintiff and the
defendants have reached an agreement in principle to settle this lawsuit. See
"THE MERGER AGREEMENT -- Litigation Challenging the Merger."
Regulatory Approvals Required. Neither General Physics nor National Patent
is aware of any approvals of governmental authorities which would be required in
order to consummate the Merger and the transactions contemplated thereby.
Comparison of Stockholder Rights. See "COMPARISON OF CERTAIN RIGHTS OF
STOCKHOLDERS" for a summary of the material differences between the rights of
holders of GPC Common Stock and NPD Common Stock.
Security Ownership of Directors and Executive Officers. Directors and
executive officers of National Patent and their affiliates have advised National
Patent that they intend to vote or direct the vote of all outstanding shares of
NPD Common Stock over which they have voting control for the approval and
adoption of the Merger Agreement. Such persons are entitled to cast 824,993
votes out of a total of 8,137,107 votes entitled to be cast at the NPD Special
Meeting, representing approximately 10.1% of such votes. See "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Interests of Certain Persons in the Merger. Certain officers and directors
of National Patent hold vested and unvested stock options to purchase shares of
GPC Common Stock. As a result of the treatment of stock options in the Merger,
such persons will receive cash, aggregating approximately $296,450, in the
Merger in lieu of shares of NPD Common Stock. In particular, Jerome I. Feldman,
the President and Chief Executive Officer and a director of both General Physics
and National Patent, will receive a cash payment of $98,000, and Martin M.
Pollak, the Executive Vice President and Treasurer and a director of National
Patent and a director of General Physics, will receive a cash payment of
$98,000. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT",
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Interests of Certain Persons
in the Merger" and "THE MERGER AGREEMENT -- Options and Warrants." See also
"RISK FACTORS -- Risks Applicable to the Merger -- Benefits Accruing to
Directors and Officers of General Physics."
THE CHARTER AMENDMENTS
At the NPD Special Meeting, holders of NPD Common Stock will consider and
vote upon the Foreign Ownership Charter Amendment and the Authorized Shares
Charter Amendment (the "Charter Amendments"). If approved, the Charter
Amendments will be effected immediately prior to the Effective Time.
Foreign Ownership Charter Amendment. Approval of the Foreign Ownership
Charter Amendment is part of the same proposal to approve the Merger, and is
contingent upon approval of the Merger. The Foreign Ownership Charter Amendment
provides the right to require the redemption or the prompt disposition under
certain circumstances of all or any portion of the shares of NPD Common Stock
owned by a foreign stockholder beneficially owning shares representing five
percent or more of the outstanding shares of NPD
6
<PAGE> 19
Common Stock. The NPD Board recommends a vote FOR the proposal to approve and
adopt the Merger Agreement, the Merger and the consummation of the transactions
contemplated thereby and the Foreign Ownership Charter Amendment. See "THE
CHARTER AMENDMENTS -- Foreign Ownership Charter Amendment" and "RISK
FACTORS -- Risk Factors Applicable to the Charter Amendments -- Foreign
Ownership Charter Amendment."
Authorized Shares Charter Amendment. Approval of the Authorized Shares
Charter Amendment is a separate proposal from the proposal to approve the Merger
and the Foreign Ownership Charter Amendment. The Authorized Shares Charter
Amendment proposes to amend the Restated Certificate of Incorporation of
National Patent by amending Article IV thereof to decrease the total number of
authorized shares of NPD Common Stock which National Patent will have the
authority to issue from 40,000,000 shares to 25,000,000 shares. The NPD Board
recommends a vote FOR the proposal to approve and adopt the Authorized Shares
Charter Amendment. See "THE CHARTER AMENDMENTS -- Authorized Shares Charter
Amendment."
RISK FACTORS
In considering the matters set forth in this Joint Proxy
Statement/Prospectus, holders of shares of NPD Common Stock and GPC Common Stock
should carefully consider, among other things, the significant risks and various
factors described below that are associated with the Merger and the Charter
Amendments.
Risk Factors Applicable to National Patent. These risks include: (a) the
extent of National Patent's historical losses; and (b) National Patent's status
as a holding company.
Risk Factors Applicable to General Physics. These risks include: (a) the
reliance of General Physics on government contracts and the limitation on
profitability placed on such government contracts by law; (b) the dependence of
General Physics on large clients, the absence of which could have a material
adverse effect; (c) the dependence of General Physics on the continued operation
and government regulation of commercial nuclear power plants in the United
States; (d) the difficulty of obtaining insurance for potential liability of
General Physics relating to its provision of certain services; and (e) the
reliance by General Physics on technical personnel, the absence of whom could
adversely affect the prospects of General Physics.
Risk Factors Applicable to the Merger. These risks include: (a)
fluctuations in the price of the NPD Common Stock within the Collar and between
the Test Date and the Effective Time; (b) the ability of the NPD Board to
determine not to terminate the Merger Agreement even though the price of the NPD
Common Stock is above the Collar; (c) the ability of the GPC Board or the
Special Committee to determine not to terminate the Merger Agreement even though
the price of the NPD Common Stock is below the Collar; (d) the immediate
dilution resulting from the issuance of NPD Common Stock in the Merger; (e) the
historically low trading volume of NPD Common Stock; (f) the volatility of the
trading price of NPD Common Stock; (g) the fact that, unlike General Physics,
National Patent does not intend to pay regular quarterly cash dividends; (h) the
extent of benefits accruing to management of General Physics pursuant to the
terms of the Merger; (i) the non-survival of each party's representations and
warranties in the Merger Agreement and the resulting lack of indemnification
rights after the Effective Time for a breach of any such representations and
warranties; and (j) limitations on foreign ownership of NPD Common Stock which
would apply in the event of a Merger.
Risks Applicable to the Charter Amendments. These risks include the
limitation on foreign ownership of NPD Common Stock.
STOCKHOLDERS ARE URGED TO READ CAREFULLY THE SECTION ENTITLED "RISK
FACTORS" FOR A DISCUSSION OF CERTAIN RISKS AND OTHER FACTORS RELATING TO (A) THE
MERGER AND AN INVESTMENT IN NPD COMMON STOCK AND (B) THE CHARTER AMENDMENTS.
7
<PAGE> 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF NATIONAL PATENT
The following table sets forth selected historical consolidated financial
information of National Patent as of and for each of the years in the five-year
period ended December 31, 1995 and as of and for each of the nine-month periods
ended September 30, 1996 and 1995. The selected historical consolidated
financial information of National Patent for each of the years in the five-year
period ended December 31, 1995 is derived from National Patent's audited
consolidated financial statements. The financial data for the nine months ended
September 30, 1996 and 1995 are derived from National Patent's unaudited
consolidated financial statements and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for the periods. The results for the nine months ended
September 30, 1996 may not be indicative of the results for the full year. The
following data should be read in conjunction with the consolidated financial
statements of National Patent and other financial information appearing
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.............................. $185,025 $204,774 $185,846 $189,797 $251,782 $152,536 $142,519
Gross margin....................... 28,322 32,559 26,974 29,211 35,792 22,913 23,209
Research and development costs..... 388 431 2,847 4,645 4,651 347 292
Interest expense................... 5,019 6,458 8,199 10,866 15,438 3,142 3,636
Other income*...................... 12,863 -- 5,148 -- 18,844 11,980 8,479
Income (loss) before discontinued
operation and extraordinary
item............................. 4,032 (11,397) (6,849) (11,578) 1,456 11,638 3,117
Net income (loss).................. 1,012 (13,971) (5,977) (11,943) 2,645 11,638 884
Earnings (loss) per share:
Income (loss) before discontinued
operation and extraordinary
item............................. .60 (2.10) (1.60) (2.94) .38 1.58 .47
Net income (loss).................. .15 (2.57) (1.40) (3.03) .69 1.58 .13
Weighted average number of
shares........................... 6,638 5,431 4,281 3,943 3,848 7,377 6,579
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ SEPTEMBER 30,
1995 1994 1993 1992 1991 1996
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash and
marketable securities......................... $ 11,657 $ 10,075 $ 10,976 $ 23,674 $ 35,968 $ 26,651
Short-term borrowings........................... 18,043 31,060 21,390 28,977 26,317 21,540
Working capital................................. 32,949 25,823 33,224 44,877 55,560 42,760
Total assets.................................... 151,720 175,546 166,057 192,649 214,041 176,710
Long-term debt.................................. 23,932 31,213 40,858 61,441 70,787 20,763
Stockholders' equity............................ 70,998 65,165 67,438 63,823 72,405 91,284
</TABLE>
- ---------------
* Other income includes: Gains on dispositions of stock of subsidiaries and
affiliates, gains on issuance of stock by subsidiaries and affiliates, losses
on investments and unrealized gains on transfer from long-term investments to
trading securities.
NOTES
General Physics' results of operations were consolidated with the results
of National Patent from January 1, 1991 to October 2, 1991 and from September 1,
1994 through September 30, 1996. The balance sheets of General Physics have been
consolidated with National Patent at December 31, 1995 and 1994 and at September
30, 1996. For all other periods General Physics' financial data has been
accounted for on the equity basis.
(notes continued on next page)
8
<PAGE> 21
(notes from previous page)
The results of operations of Interferon Sciences, Inc. ("ISI") were
consolidated with the results of National Patent from January 1, 1991 through
September 1993. The balance sheets of ISI were consolidated with National Patent
at December 31, 1992 and 1991. For all other periods ISI's financial data has
been accounted for on the equity basis, until the third quarter of 1996 when
National Patent commenced accounting for its investment in ISI on the cost
basis.
The results of operations of GTS Duratek, Inc. ("Duratek") were
consolidated with the results of National Patent from January 1, 1991 through
December 31, 1994. The balance sheets of Duratek were consolidated with National
Patent at December 31, 1994, 1993, 1992 and 1991. At December 31, 1995 and for
the year then ended Duratek's financial data has been accounted for on the
equity basis. Since April 1996, National Patent has accounted for its investment
in Duratek as a combination of marketable securities, long-term investments and
as long-term available-for-sale equity securities.
For further details, see "SELECTED HISTORICAL FINANCIAL
INFORMATION -- National Patent's Management's Discussion and Analysis of
Financial Condition and Results of Operations."
9
<PAGE> 22
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF GENERAL PHYSICS
The following table sets forth selected historical consolidated financial
information of General Physics as of and for each of the years ended December
31, 1995, 1994, 1993, 1992 and 1991 and as of and for each of nine month periods
ended September 30, 1996 and 1995. The selected historical consolidated
financial information of General Physics for the years ended December 31, 1995,
1994, 1993, 1992, and 1991 is derived from General Physics' audited consolidated
financial statements. The financial data for the nine month periods ended
September 30, 1996 and 1995 are derived from General Physics' unaudited
consolidated financial statements and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for the periods. The results for the nine months ended
September 30, 1996 may not be indicative of the results for the full year. The
following information should be read in conjunction with the consolidated
financial statements of General Physics and other financial information
appearing elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -----------------
1995 1994 1993 1992 1991 1996 1995
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:*
Revenue.................................... $107,549 $78,880 $58,112 $60,139 $63,919 $85,954 $80,399
Cost of revenue............................ 95,181 69,779 51,331 52,833 59,461 75,385 71,420
-------- ------- ------- ------- ------- ------- -------
Gross profit............................... 12,368 9,101 6,781 7,306 4,458 10,569 8,979
General and administrative and other
expenses................................. 7,718 5,859 4,983 5,293 5,290 5,435 5,809
Interest expense........................... 2,208 1,366 735 700 1,456 1,361 1,732
Other income (expense), net................ 12 (22) 107 290 763 73 (14)
-------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
equity in net earnings of investee
company.................................. 2,454 1,854 1,170 1,603 (1,525) 3,846 1,424
Income taxes (benefit)..................... 982 785 487 772 (553) 1,647 529
-------- ------- ------- ------- ------- ------- -------
Income (loss) before equity in net earnings
of investee company...................... 1,472 1,069 683 831 (972) 2,199 895
Equity in net earnings of investee company
(including gain on issuance of stock in
1995), net of income taxes............... 786 69 -- -- -- 87 776
-------- ------- ------- ------- ------- ------- -------
Net income (loss).......................... $ 2,258 $ 1,138 $ 683 $ 831 $ (972) $ 2,286 $ 1,671
======== ======= ======= ======= ======= ======= =======
Net income (loss) per share................ $ 0.22 $ 0.15 $ 0.11 $ 0.13 $ (0.16) $ 0.22 $ 0.16
======== ======= ======= ======= ======= ======= =======
Weighted average number of shares.......... 10,231 7,672 6,272 6,256 6,208 10,430 10,247
======== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1995 1994 1993 1992 1991 1996
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:*
Working capital................................ $16,815 $17,690 $15,822 $15,942 $15,914 $15,593
Total assets................................... 51,293 57,851 31,135 32,016 33,394 57,940
Long-term obligations.......................... 12,379 12,089 7,610 7,610 7,634 12,585
Stockholders' equity........................... 19,597 19,038 13,297 13,899 14,326 20,696
</TABLE>
- ---------------
* On August 31, 1994, General Physics acquired substantially all of the assets
and operations of GPS Technologies, Inc. and certain of its subsidiaries
("GPST Businesses"). As discussed in Note 1 to the Consolidated Financial
Statements of General Physics, the acquisition has been accounted for as a
reverse acquisition, whereby the GPST Businesses were deemed to have acquired
General Physics. Accordingly, the historical financial statements and
disclosures prior to August 31, 1994 are those of the GPST Businesses. No
historical information for General Physics is included above except as of and
for the nine
(notes continued on next page)
10
<PAGE> 23
(notes from previous page)
months ended September 30, 1996 and 1995, as of and for the year ended December
31, 1995 and as of and for the four-month period ended December 31, 1994. Per
share information is based on the weighted average number of shares of GPC
Common Stock outstanding.
COMPARATIVE MARKET PRICE DATA
The NPD Common Stock has been traded under the symbol "NPD" on the American
Stock Exchange since 1975 and on the Pacific Stock Exchange since 1977. The GPC
Common Stock has been traded on the New York Stock Exchange under the symbol
"GPH" since 1991. The table below sets forth, for the calendar quarters
indicated, the high and low sales prices for the NPD Common Stock and the GPC
Common Stock as reported by the American Stock Exchange or the New York Stock
Exchange, respectively. During the periods presented below, National Patent has
not paid any dividends; General Physics has paid a regular quarterly dividend of
$.06 per share since 1991.
<TABLE>
<CAPTION>
PRICE PER SHARE OF COMMON STOCK
-----------------------------------------
NPD GPC
------------- ----------- GPC
HIGH* LOW* HIGH LOW DIVIDENDS
----- ---- ---- --- ---------
<S> <C> <C> <C> <C> <C>
Fiscal 1994
First Quarter.......................................... $191/2 $15 1/2 $5 $3 3/4 $ .06
Second Quarter......................................... 153/4 10 3/4 41/2 3 1/4 .06
Third Quarter.......................................... 131/2 10 1/2 31/2 2 3/4 .06
Fourth Quarter......................................... 111/4 6 3 2 3/8 .06
Fiscal 1995
First Quarter.......................................... 91/2 6 1/2 35/8 2 1/8 .06
Second Quarter......................................... 93/4 6 3/4 31/8 2 1/2 .06
Third Quarter.......................................... 9 6 1/2 35/8 2 1/2 .06
Fourth Quarter......................................... 103/4 7 7/16 31/8 2 7/8 .06
Fiscal 1996
First Quarter.......................................... 97/8 8 1/8 37/8 3 .06
Second Quarter......................................... 115/8 8 3/8 43/4 3 1/2 .06
Third Quarter.......................................... 101/8 7 5/8 41/2 3 3/8 .06
Fourth Quarter (through December 16)................... 91/8 7 1/16 41/4 3 3/4 .06
</TABLE>
- ---------------
* All prices have been restated to reflect the effect of the one-for-four
reverse stock split effective October 1995.
On September 24, 1996, the last full trading day prior to the announcement
of the proposed Merger, the reported American Stock Exchange Composite
Transactions closing price of the NPD Common Stock was $9 3/4 per share and the
reported New York Stock Exchange Composite Transactions closing price of the GPC
Common Stock was $4 3/8 per share. On November 20, 1996, the last full trading
day prior to the announcement of the execution of the Merger Agreement, the
reported American Stock Exchange Composite Transactions closing price of the NPD
Common Stock was $8 1/2 per share and the reported New York Stock Exchange
Composite Transactions closing price of the GPC Common Stock was $4 1/8 per
share. On December 16, 1996, the most recent available date prior to the date of
this Joint Proxy Statement/Prospectus, the reported American Stock Exchange
Composite Transactions closing price of the NPD Common Stock was $8 1/4 per
share and the reported New York Stock Exchange Composite Transactions closing
price of the GPC Common Stock was $4 per share.
Because the Exchange Ratio is fixed and because the market price of NPD
Common Stock is subject to fluctuation, the market value of the NPD Common Stock
that holders of GPC Common Stock will receive after giving effect to the Merger
may increase or decrease. Stockholders of General Physics are urged to obtain a
current market quotation for NPD Common Stock.
11
<PAGE> 24
SELECTED COMPARATIVE PER SHARE DATA
The following table sets forth certain historical information concerning
the NPD Common Stock and the GPC Common Stock. The table also includes certain
pro forma per share consolidated information which is based on the historical
data of National Patent and General Physics adjusted to give effect to the
Merger. No information is provided in the table with respect to dividends.
National Patent has not paid any cash dividends since March 22, 1989. National
Patent has no plans in the future to provide regular quarterly cash dividends on
the NPD Common Stock.
<TABLE>
<CAPTION>
INCOME PER SHARE
BEFORE
DISCONTINUED
INCOME PER SHARE OPERATION AND
BEFORE DISCONTINUED EXTRAORDINARY
OPERATION AND ITEM
NET TANGIBLE BOOK EXTRAORDINARY ITEM FOR FOR YEAR ENDED
VALUE PER SHARE AT BOOK VALUE PER SHARE AT NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, 1996(1) SEPTEMBER 30, 1996(2) SEPTEMBER 30, 1996 1995
--------------------- ----------------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
HISTORICAL
National Patent................ $7.68 $ 12.24 $ 1.58 $.60
General Physics................ .86 1.97 .22 .22
PRO FORMA
National Patent(3)
@ $8.66(a)................... 5.99 11.20 1.34 .64
@ $9.625(b).................. 6.10 11.51 1.37 .65
@ $10.59(c).................. 6.20 11.79 1.39 .66
General Physics(4)
@ $8.66(a)................... 3.46 6.50 .77 .37
@ $9.625(b).................. 3.29 6.22 .74 .35
@ $10.59(c).................. 3.16 6.00 .71 .34
</TABLE>
- ---------------
(1) The pro forma net tangible book value per share of NPD Common Stock is based
upon the pro forma consolidated total stockholders' equity less intangible
assets for the consolidated companies divided by the pro forma number of
shares of NPD Common Stock outstanding assuming conversion of the GPC
Common Stock at the Exchange Ratio (as may be adjusted).
(2) The pro forma book value per share of NPD Common Stock is based upon the pro
forma consolidated stockholders' equity for the consolidated companies
divided by the pro forma number of shares of NPD Common Stock outstanding
assuming conversion of the GPC Common Stock at the Exchange Ratio (as may
be adjusted).
(3) The pro forma income per share before discontinued operation and
extraordinary item of National Patent is based on the pro forma income from
continuing operations for the consolidated companies divided by the pro
forma weighted average shares outstanding of the consolidated companies.
See "PRO FORMA FINANCIAL DATA."
(4) The equivalent pro forma per share data for General Physics represent the
amounts applicable after the Merger to each share of GPC Common Stock held
prior to the Merger, and are computed by multiplying the pro forma per
share data of National Patent by the Exchange Ratio.
(a) These pro forma figures assume that the Market Price of the NPD Common Stock
at the Test Date is $8.66 per share, which is a price which is 10% below
the market price on September 24, 1996, the last day of trading prior to
the announcement of the proposed Merger. These figures assume that National
Patent has elected to "gross-up" the Exchange Ratio. Under such
circumstances, the Exchange Ratio would be 0.58. See "THE MERGER
AGREEMENT -- Exchange Ratio and the Collar."
(b) These pro forma figures assume that the Market Price of the NPD Common Stock
at the Test Date is $9.625 per share, which was the price on September 24,
1996.
(c) These pro forma figures assume that the Market Price of the NPD Common Stock
at the Test Date is $10.59 per share, which is a price which is 10% above
the market price on September 24, 1996. These figures assume that General
Physics has elected to reduce the Exchange Ratio. Under such circumstances,
the Exchange Ratio would be .51. See "THE MERGER AGREEMENT -- Exchange
Ratio and the Collar."
12
<PAGE> 25
RISK FACTORS
In evaluating the Merger, stockholders of National Patent and General
Physics should consider, among other factors, the significant risks and various
factors that are described below that are associated with the Merger:
RISK FACTORS APPLICABLE TO NATIONAL PATENT
Historical Losses.
For the year ended December 31, 1995, National Patent's income before
income taxes, discontinued operation and extraordinary item was $5,819,000, as
compared to a loss of $10,648,000 for the year ended December 31, 1994. However,
the improvement in results was due principally to gains recognized on sales and
reclassification of equity interests in affiliates, which aggregated $12,863,000
in the year ended December 31, 1995 and $0 in 1994. For the nine months ended
September 30, 1996, National Patent's income before income taxes, discontinued
operation and extraordinary item was $11,046,000, as compared to income of
$4,190,000 for the nine months ended September 30, 1995. The $11,046,000 of
income before income taxes, discontinued operation and extraordinary item for
the nine months ended September 30, 1996 includes $12,200,000 of gain realized
from the sale of 1,000,000 shares of common stock of GTS Duratek, Inc. in April
of 1996. There can be no assurance that National Patent will be profitable after
the Effective Time of the Merger.
Holding Company; Dependence on Subsidiaries.
As a holding company, National Patent is dependent upon management fees,
dividends, payments or advances from operating subsidiaries and its ability to
divest itself of certain of its marketable investments as its primary source of
cash to service outstanding debt and to fund its operations. The ability of
National Patent to obtain cash from an operating subsidiary depends upon, among
other factors, the operating results of the subsidiary, restrictions on payments
to National Patent imposed by other agreements governing the subsidiary and the
degree of dilution of dividend payments resulting from public ownership of
equity securities of the subsidiary. In addition, the ability of National Patent
to divest itself of its marketable long-term investments is subject to
prevailing market conditions, and the forced sale of a significant number of
shares of common stock of any such marketable investment may adversely affect
the total proceeds received by National Patent from any such sale. Since
National Patent is a holding company, an investment in securities of National
Patent is subject to the performance of National Patent's subsidiaries
(including General Physics) and investments.
After conversion of the GPC Common Stock into shares of NPD Common Stock at
the Effective Time, holders of GPC Common Stock will have direct equity
interests in National Patent instead of its subsidiary, General Physics.
Consequently, in the event of a bankruptcy, dissolution, liquidation or similar
proceeding with respect to National Patent, assets of General Physics (together
with other assets of National Patent) will be available to satisfy all claims of
creditors of National Patent before being available for distribution to National
Patent's stockholders.
RISK FACTORS APPLICABLE TO GENERAL PHYSICS
Government Contracting.
A significant portion of the revenue and profit of General Physics is
derived from contracts and subcontracts for the United States Government. The
United States Government places limitations on contractor profitability and thus
related contracts may have lower profit margins than the contracts General
Physics enters into with commercial customers. Furthermore, all United States
Government contracts and subcontracts are subject to audit by a designated
government agency. Although General Physics has not experienced any material
cost disallowances as a result of such audits, there can be no assurance that
material disallowances will not be experienced in the future. In addition, the
Department of Energy ("DOE") nuclear weapons production and waste processing
facilities specifically and government contractors generally have come under
increased scrutiny over the past few years. As a result of budgetary constraints
and other political pressures, the DOE and other government agencies have been
and may be forced to continue to modify, cut
13
<PAGE> 26
back or eliminate certain programs, which could in turn have a material adverse
effect upon the business of General Physics. See "BUSINESS -- GENERAL
PHYSICS -- Contracts."
Dependence on Large Clients.
For the year ended December 31, 1995, and the nine months ended September
30, 1996, revenue from the United States Government represented approximately
53% and 48% of revenue, respectively. However, such revenue was derived from a
number of separate contracts and subcontracts with a variety of Government
agencies and contractors that are regarded by the Company as separate customers.
Revenue from General Physics' ten largest clients (including individual agencies
and contractors of the United States Government) comprised 47% of revenue in
1995 and 54% for the nine months ending September 30, 1996. General Motors
Corporation is General Physics' largest non-governmental customer and
represented 8% of General Physics' revenues for 1995 and 11% of General Physics'
revenue for the nine months ended September 30, 1996. Contracts with the United
States Department of Defense (the "DoD") at the Aberdeen Proving Ground provided
environmental services revenue of $8.7 million in the year ended December 31,
1995 and $5.4 million for the nine months ended September 30, 1996. Of the
revenue of General Physics derived from environmental services for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
approximately 87% and 79%, respectively, thereof is predominantly attributable
to such contracts. The DoD recently notified General Physics that it has been
selected for a repeat award of its contract to provide environmental services at
Aberdeen Proving Ground. The contract is one of two awarded to successful
contractors who will competitively bid for work to be awarded in the future
under separate delivery orders. Although the maximum award value of the contract
over its five-year term is approximately $100,000,000, the actual value of the
contract will depend upon the value of individual delivery orders awarded to
General Physics. Most of General Physics' contracts and subcontracts are subject
to termination on written notice, and thus General Physics' operations are
dependent on its clients' continued satisfaction with General Physics' services
and their continued inability or unwillingness to perform those services
themselves. General Physics expects that a few clients will continue to account
for a substantial portion of its business, the loss of any of which could have a
material adverse effect on General Physics. See "SELECTED HISTORICAL FINANCIAL
INFORMATION -- General Physics' Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Commercial Nuclear Power Industry.
General Physics' operations are dependent to a significant degree on the
continued operation and government regulation of commercial nuclear power plants
in the United States. Various factors affect such continued operation and
government regulation, including public and governmental attitudes toward
nuclear power, the regulatory environment, the financial condition of nuclear
utilities, the availability and cost of alternative means of power generation,
the occurrence of future nuclear incidents and general economic conditions.
Since 1980, there have been no new orders for commercial nuclear power plants,
and work on the few plants that are still under construction has been suspended.
General Physics cannot predict when, if ever, construction is likely to resume.
Prospects for future growth in General Physics' Nuclear Services business unit
may be limited if the commercial nuclear power industry continues to experience
no or limited growth. See "BUSINESS -- GENERAL PHYSICS -- Nuclear Services."
Potential Liability and Uninsurable Risks.
General Physics provides services directed at increasing the efficiency and
improving the overall environmental, safety and health aspects of its customers'
operations. If any of General Physics or its subsidiaries were found to have
been negligent or to have breached its obligations to its clients, General
Physics or its subsidiaries, as the case may be, could be exposed to significant
fines and penalties and third-party liabilities and its reputation could be
adversely affected. In recent years, it has been difficult for some professional
service organizations to obtain professional liability insurance at reasonable
rates. General Physics has not experienced any difficulty obtaining such
coverage. Although General Physics believes that it currently
14
<PAGE> 27
has appropriate insurance coverage, there can be no assurance that General
Physics will be able to obtain such coverage at cost-effective rates in the
future.
Furthermore, liabilities associated with nuclear incidents are not covered
by General Physics' insurance policies, and may not be covered by
indemnification provisions contained in agreements with clients. In addition,
such liabilities may not be covered by federal legislation that includes a
liability protection system for licensees of the Nuclear Regulatory Commission
(typically utilities) for certain damages caused by nuclear incidents, since
General Physics is not such a licensee. Finally, few of General Physics'
contracts with clients contain a waiver or limitation of liability. Thus,
General Physics could be materially adversely affected by a nuclear incident.
General Physics also provides environmental engineering services to its
clients, including the development and management of site environmental
remediation plans. Although General Physics subcontracts most remediation
construction activities, and in all cases subcontracts the removal and off-site
disposal and treatment of hazardous substances, it could nonetheless be subject
to liability relating to the environmental services performed by it directly or
through subcontracts. Specifically, were General Physics deemed under federal
and state legislation, including "Superfund" legislation, to be an "operator" of
sites to which it provides environmental engineering and support services,
General Physics could be subject to liabilities. General Physics' insurance
policies may not provide coverage for these risks, which General Physics does
not consider to be significant. Various mechanisms exist whereby the United
States Government may limit liability for environmental claims and losses or
indemnify General Physics for such claims or losses under governmental
contracts. Nonetheless, incurrence of any substantial "Superfund" or other
environmental liability could have a material adverse effect upon General
Physics. General Physics does not know of any claim in which it has been named
as a responsible party under the "Superfund" laws. See "BUSINESS -- GENERAL
PHYSICS -- Insurance" and "BUSINESS -- GENERAL PHYSICS -- Environmental Statutes
and Regulations."
Reliance on Technical Personnel.
General Physics relies heavily on its technical personnel. Accordingly,
recruiting and retaining capable personnel (including personnel who have the
appropriate security clearance to work on government contracts) are critical to
the continued growth of General Physics. Competition for qualified technical
personnel can be intense. General Physics has not generally entered into
employment agreements with its employees, but previously has entered into
employment agreements with certain officers and other employees. See
"BUSINESS -- GENERAL PHYSICS -- Personnel."
RISK FACTORS APPLICABLE TO THE MERGER
Risks Associated with the Exchange Ratio and Fluctuations in the Market Price
of the NPD Common Stock.
As of December 16, 1996, the reported American Stock Exchange Composite
Transactions closing price of the NPD Common Stock was $8 1/4 per share. The
price of the NPD Common Stock may vary significantly from that price prior to
the Effective Time. Such variance may be due to changes in the business,
operations and prospects of National Patent, market assessment of the likelihood
that the Merger will be consummated, general market and economic conditions and
other factors. The Exchange Ratio is fixed at 0.54 shares of NPD Common Stock
per share of GPC Common Stock and will not be adjusted based on changes in the
price of the NPD Common Stock within the Collar. Thus, the dollar value of the
NPD Common Stock to be received by the holders of the GPC Common Stock will not
be determined until the Effective Time, and may be more or less than the value
of the NPD Common Stock as of the date of execution of the Merger Agreement, the
date of this Joint Proxy Statement/Prospectus or the date of the Special
Meetings.
Between the Test Date and the Effective Time, the trading price of the NPD
Common Stock can also vary, which will affect the value of the merger
consideration received by holders of the GPC Common Stock. At the time of the
Test Date, for example, the Market Price of the NPD Common Stock may be within
the Collar, and therefore neither party would have the right to terminate the
Merger Agreement and neither party will be required to exercise the options to
gross-up or reduce the Exchange Ratio, as the case may be.
15
<PAGE> 28
However, as of the Effective Time the actual trading price of the NPD Common
Stock may have decreased below the Collar or increased above the Collar.
In the event that the Market Price of the NPD Common Stock is outside of
the Collar on the Test Date, the Exchange Ratio may be adjusted (at the election
of General Physics if the Market Price is above the Collar and at the election
of National Patent if the Market Price is below the Collar) or in the event that
no adjustment is made, the Merger Agreement may be terminated. See "THE MERGER
AGREEMENT -- Merger Consolidation -- Exchange Ratio and Collar."
General Physics may elect not to terminate the Merger Agreement even though
(x) the Market Price of the NPD Common Stock is less than $9.259, the lowest
amount in the Collar, and (y) National Patent does not elect to increase the
Exchange Ratio. In determining whether to elect to terminate the Merger
Agreement in such circumstances, the GPC Board and the Special Committee will
take into account, consistent with fiduciary duties, all relevant facts and
circumstances existing at the time, including the market for comparable industry
stock in general, the value of the NPD Common Stock and the GPC Common Stock in
the market, and the advice of financial advisors and legal counsel. By approving
the Merger Agreement, the holders of GPC Common Stock would be permitting the
GPC Board and the Special Committee, in the exercise of fiduciary duties, to
proceed with the Merger under such circumstances. There can be no assurance that
the stockholders of General Physics in fact will receive shares of NPD Common
Stock which represent $5.20 in value per share of GPC Common Stock.
National Patent may elect not to terminate the Merger Agreement even though
(x) the Market Price of the NPD Common Stock is greater than $10.00, the highest
amount in the Collar, and (y) General Physics does not elect to reduce the
Exchange Ratio. In determining whether to elect to terminate the Merger
Agreement in such circumstances, the NPD Board will take into account,
consistent with fiduciary duties, all relevant facts and circumstances existing
at the time, including the market for comparable industry stock in general, the
value of the NPD Common Stock and the GPC Common Stock in the market, and the
advice of financial advisors and legal counsel. By approving the Merger
Agreement, the holders of NPD Common Stock would be permitting the NPD Board, in
the exercise of fiduciary duties, to proceed with the Merger under such
circumstances. There can be no assurance that National Patent will not issue
shares of NPD Common Stock having a value which is greater than $5.20 per share
of GPC Common Stock.
Immediate Dilution.
Upon consummation of the Merger, assuming the Market Price of the NPD
Common Stock is within the Collar on the Test Date, 2,721,537 shares of NPD
Common Stock will be issued to holders of GPC Common Stock, representing 26.74%
of the total of 10,178,550 shares of NPD Common Stock to be issued and
outstanding on a pro forma basis (such percentage is as of September 30, 1996).
Prior to the Merger, (i) shares of GPC Common Stock will have a net tangible
book value per share of $0.86 as of September 30, 1996, and income per share
before discontinued operation and extraordinary item of $0.22, for the nine
months ended September 30, 1996, and (ii) shares of NPD Common Stock will have a
net tangible book value per share of $7.68 as of September 30, 1996, and income
per share before discontinued operation and extraordinary item of $1.58, for the
nine months ended September 30, 1996. Pursuant to the Merger, shares of GPC
Common Stock will be converted into shares of NPD Common Stock at the Exchange
Ratio (subject to adjustment). Assuming that the Market Price of the NPD Common
Stock is within the Collar on the Test Date, (i) after giving effect to the
Merger the net tangible book value per share of GPC Common Stock will be $3.29
as of September 30, 1996 on a pro forma basis and the income per share before
discontinued operation and extraordinary item of GPC Common Stock for the nine
months ended September 30, 1996 will be $0.74 on a pro forma basis and (ii)
after giving effect to the Merger the net tangible book value per share of NPD
Common Stock will be $6.10 as of September 30, 1996 on a pro forma basis and the
income per share before discontinued operation and extraordinary item of NPD
Common Stock for the nine months ended September 30, 1996 will be $1.37 on a pro
forma basis. As a result of the Merger, holders of NPD Common Stock will
experience an immediate dilution in the book value and income per share before
discontinued operation and extraordinary item of their investment. See "PRO
FORMA FINANCIAL DATA" and "SUMMARY -- Selected Comparative per Share Data."
16
<PAGE> 29
In the event that the Market Price of the NPD Common Stock as of the Test
Date is below the Collar, greater dilution may result. For example, in the event
that the Market Price of the NPD Common Stock is $8.66 on the Test Date and
National Patent elects the Gross-Up Option, the net tangible book value per
share of NPD Common Stock would be $5.99 as of September 30, 1996 on a pro forma
basis. In addition, the stockholders of National Patent will experience
immediate and substantial voting dilution upon consummation of the Merger.
Illiquidity; Low Trading Volume.
Historically the shares of NPD Common Stock have had relatively low trading
volume on the American Stock Exchange and the Pacific Stock Exchange. During the
nine months ended September 30, 1996, for example, the average daily trading
volume on the American Stock Exchange was 15,087 shares. Low trading volume can
influence the trading price of the NPD Common Stock, hamper the liquidity of an
investment in NPD Common Stock and result in volatility of stock price. See
"RISK FACTORS -- Risk Factors Applicable to the Merger -- Volatility of Stock
Price." Upon consummation of the Merger, assuming the Market Price of the NPD
Common Stock is within the Collar on January 16, 1997, 2,721,537 shares of NPD
Common Stock will be issued to holders of GPC Common Stock, representing 26.74%
of the total of 10,178,550 shares of NPD Common Stock to be issued and
outstanding on a pro forma basis (such percentage is as of September 30, 1996).
Despite the issuance of such new shares in the Merger, trading volume may not
increase, which could have an impact on liquidity and could adversely affect the
proceeds received by stockholders from any sales of NPD Common Stock.
Stockholders of National Patent may realize a lower price on sales of shares of
NPD Common Stock because of this illiquidity.
Volatility of Stock Price.
From time to time after the Effective Date, there may be significant
volatility in the trading price for NPD Common Stock. The equity markets have,
on occasion, experienced significant price and volume fluctuation that have
affected the market prices for many companies' securities and that have been
often unrelated to the operating performance of these companies. Many factors,
including the performance of, and investor expectations for, National Patent,
the trading volume of the NPD Common Stock and general economic and market
conditions, may influence the trading price of the NPD Common Stock.
Accordingly, there can be no assurance as to the price at which the NPD Common
Stock will trade in the future.
No Regular Quarterly Dividends.
General Physics has paid regular quarterly dividends of $.06 per share of
GPC Common Stock for each of its fiscal quarters since General Physics became a
public company in 1991. National Patent has not paid any cash dividends on the
NPD Common Stock since March 22, 1989. Shares of GPC Common Stock will be
converted into shares of NPD Common Stock pursuant to the Merger. National
Patent intends to continue to retain its earnings for investment in its
businesses for the foreseeable future and therefore has no plans in the future
to provide regular quarterly cash dividends on the NPD Common Stock.
Benefits Accruing to Directors and Officers of General Physics.
As a result of the Merger, certain officers and directors of General
Physics will receive shares of NPD Common Stock in exchange for shares of GPC
Common Stock on the same terms as are applicable to the other stockholders of
General Physics. In addition, National Patent has agreed to use its reasonable
best efforts to repurchase all of the vested stock options held at the Effective
Time by each officer and director of General Physics for a cash payment in an
amount equal to $5.20 less the exercise price of the stock option as in effect
immediately prior to the Merger. Each officer and director of General Physics
currently holding unvested stock options will be entitled to receive for each
share of GPC Common Stock which would have been obtainable upon exercise of the
stock option a payment from National Patent in shares of NPD Common Stock equal
to $5.20 less the exercise price of the unvested stock option as such exercise
price is in effect immediately prior to the Merger (subject to adjustment for
stock dividends, stock splits and the like). Such payment in shares of NPD
Common Stock will be made at the time such stock option vests using the market
price of the NPD Common Stock as of the end of the business day immediately
preceding such vesting date.
17
<PAGE> 30
To the extent that any vested stock options are not repurchased by National
Patent, such vested stock options will be adjusted so that the holders of such
options will be entitled to receive, upon payment of the exercise price thereof,
the shares of NPD Common Stock which such holders would have been entitled to
receive after the Effective Time had such options been exercised immediately
prior to the Merger. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and
"THE MERGER AGREEMENT -- Options and Warrants." The $5.20 price represents the
middle of the range of prices of the GPC Common Stock, from $5.00 to $5.40,
which will be paid in shares of NPD Common Stock in the Merger, so long as the
Market Price of the NPD Common Stock is within the Collar. The $5.20 price
remains fixed even if on the Test Date the Market Price of the NPD Common Stock
is outside of the Collar.
No Survival of Representations and Warranties.
The representations and warranties of National Patent, GPX and General
Physics provided in the Merger Agreement do not survive the Effective Time of
the Merger (except for certain representations and warranties regarding brokers
and finders). In the event there is a material breach of a representation or
warranty prior to the Effective Time, National Patent has the right to terminate
the Merger Agreement; however, after the Effective Time occurs, there is no
right on the part of National Patent or its stockholders to indemnification or
damages from General Physics with respect to the breached representation or
warranty. In the event that there is a material breach of a representation or
warranty prior to the Effective Time by National Patent or by GPX, General
Physics has the right to terminate the Merger Agreement; however, after the
Effective Time occurs, there is no right on the part of General Physics or the
holders of GPC Common Stock prior to the Merger to obtain indemnification or
money damages from National Patent or GPX with respect to the breached
representation or warranty.
Foreign Ownership Restrictions.
The proposal to the stockholders of National Patent to adopt and approve
the Merger Agreement, the Merger and the consummation of the transactions
contemplated thereby is contingent upon the proposal to adopt and approve the
Foreign Ownership Charter Amendment. See "THE CHARTER AMENDMENTS" and "THE
SPECIAL MEETINGS." If the Merger is approved, the Restated Certificate of
Incorporation of National Patent (the "NPD Charter") will be amended to provide
for the Foreign Ownership Charter Amendment. See "RISK FACTORS -- Risks
Applicable to the Charter Amendments." The Foreign Ownership Charter Amendment
may increase the illiquidity of shares of NPD Common Stock held by stockholders
of National Patent. See also "RISK FACTORS -- Risks Applicable to the
Merger -- Illiquidity; Low Trading Volume."
---------------------
In evaluating the Charter Amendment proposals, stockholders of National
Patent should consider, among other factors, the significant risk factors
described below:
RISK FACTORS APPLICABLE TO THE CHARTER AMENDMENTS
The Foreign Ownership Charter Amendment would amend the NPD Charter to
include a provision relating to foreign ownership presently found in the
Certificate of Incorporation of General Physics (the "GPC Charter"). The
proposal to adopt and approve the Foreign Ownership Charter Amendment is
contingent upon the proposal to the stockholders of National Patent to adopt and
approve the Merger Agreement, the Merger and the consummation of the
transactions contemplated thereby. See "THE CHARTER AMENDMENTS" and "THE SPECIAL
MEETINGS." General Physics presently has a provision in its Certificate of
Incorporation which is substantially similar to the Foreign Ownership Charter
Amendment. Upon consummation of the Merger, General Physics will be a wholly
owned subsidiary of National Patent, and as a result the NPD Board has
determined that it is advisable that National Patent adopt a similar provision.
The Foreign Ownership Charter Amendment permits National Patent to redeem
or require the prompt disposition under certain circumstances of all or any
portion of the shares of NPD Common Stock owned by a
18
<PAGE> 31
foreign stockholder beneficially owning shares representing five percent or more
of the outstanding shares of NPD Common Stock. The DOE and the DoD
(collectively, the "Departments") have policies regarding foreign ownership,
control or influence over government contractors who have access to classified
information. These policies are designed to protect against the risk to national
security that may result if classified information is made available to United
States Government contractors or subcontractors who are owned, controlled or
influenced by foreign governments, individuals or organizations. These policies
require General Physics, as well as the Departments' other contractors and
subcontractors, to submit information that will help the Departments determine
whether the award or continued performance of a contract may pose an undue risk
to the common defense and security of the United States. Specifically, the
Departments inquire whether any foreign interest has beneficial ownership of 5%
or more of a contractor's or subcontractor's voting securities. If either
Department determines that an undue risk to the common defense and security of
the United States exists, it may, among other things, terminate the contractor's
or subcontractor's existing contracts with it. Therefore, the NPD Charter, if
amended by the Foreign Ownership Charter Amendment, will permit National Patent
to redeem or require the prompt disposition under certain circumstances of all
or any portion of the shares of NPD Common Stock owned by a foreign stockholder
beneficially owning shares representing 5% or more of the outstanding NPD Common
Stock. There can be no assurance that this provision of the NPD Charter, or the
similar provision in the GPC Charter, is enforceable under applicable law.
The Foreign Ownership Charter Amendment may also have the effect of
impeding certain takeover attempts since it may discourage foreign ownership in
amounts greater than five percent of the issued and outstanding shares of
capital stock of National Patent. Furthermore, the Foreign Ownership Charter
Amendment may discourage foreign investment in NPD Common Stock and thereby
increase the illiquidity of shares of NPD Common Stock.
---------------------
FORWARD LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Joint Proxy
Statement/Prospectus, including without limitation statements including the
words "believes," "anticipates," "intends," "expects" and words of similar
import, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of National Patent or General
Physics to be materially different from any future results, performance or
achievements of National Patent or General Physics expressed or implied by such
forward-looking statements. Such factors include, among others, general economic
and business conditions, competition, changes in government regulation, changes
in business strategy or development plans and other factors referenced in this
Joint Proxy Statement/Prospectus, including without limitation under the
captions "Risk Factors," "Opinion of Oppenheimer," "General Physics'
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "National Patent's Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- National Patent"
and "Business -- General Physics." Given these uncertainties, stockholders of
National Patent and General Physics are cautioned not to place undue reliance on
such forward-looking statements. National Patent and General Physics disclaim
any obligation to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
19
<PAGE> 32
COMPARATIVE MARKET PRICE DATA
The NPD Common Stock has been traded under the symbol "NPD" on the American
Stock Exchange since 1975 and on the Pacific Stock Exchange since 1977. The GPC
Common Stock has been traded on the New York Stock Exchange under the symbol
"GPH" since 1991. The table below sets forth, for the calendar quarters
indicated, the high and low sales prices for the NPD Common Stock and the GPC
Common Stock as reported by the American Stock Exchange or the New York Stock
Exchange, respectively. During the periods presented below, National Patent has
not paid any dividends; General Physics has paid a regular quarterly dividend of
$.06 per share since 1991.
<TABLE>
<CAPTION>
PRICE PER SHARE OF COMMON STOCK
-----------------------------------------
NPD GPC
--------------- ----------- GPC
HIGH* LOW* HIGH LOW DIVIDENDS
---- ---- ---- --- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994
First Quarter......................................... $19 1/2 $15 1/2 $5 $3 3/4 $.06
Second Quarter........................................ 15 3/4 10 3/4 4 1/2 3 1/4 .06
Third Quarter......................................... 13 1/2 10 1/2 3 1/2 2 3/4 .06
Fourth Quarter........................................ 11 1/4 6 3 2 3/8 .06
Fiscal 1995
First Quarter......................................... 9 1/2 6 1/2 3 5/8 2 1/8 .06
Second Quarter........................................ 9 3/4 6 3/4 3 1/8 2 1/2 .06
Third Quarter......................................... 9 6 1/2 3 5/8 2 1/2 .06
Fourth Quarter........................................ 10 3/4 7 7/16 3 1/8 2 7/8 .06
Fiscal 1996
First Quarter......................................... 9 7/8 8 1/8 3 7/8 3 .06
Second Quarter........................................ 11 5/8 8 3/8 4 3/4 3 1/2 .06
Third Quarter......................................... 10 1/8 7 5/8 4 1/2 3 3/8 .06
Fourth Quarter (through December 16).................. 9 1/8 7 1/16 4 1/4 3 3/4 .06
</TABLE>
- ---------------
* All prices have been restated to reflect the effect of the one-for-four
reverse stock split effective October 1995.
On September 24, 1996, the last full trading day prior to the announcement
of the proposed Merger, the reported American Stock Exchange Composite
Transactions closing price of the NPD Common Stock was $9 3/4 per share and the
reported New York Stock Exchange Composite Transactions closing price of the GPC
Common Stock was $4 3/8 per share. On November 20, 1996, the last full trading
day prior to the announcement of the execution of the Merger Agreement, the
reported American Stock Exchange Composite Transactions closing price of the NPD
Common Stock was $8 1/2 per share and the reported New York Stock Exchange
Composite Transactions closing price of the GPC Common Stock was $4 1/8 per
share. On December 16, 1996, the most recent available date prior to the date of
this Joint Proxy Statement/Prospectus, the reported American Stock Exchange
Composite Transactions closing price of the NPD Common Stock was $8 1/4 per
share and the reported New York Stock Exchange Composite Transactions closing
price of the GPC Common Stock was $4 per share.
Following the Merger, the NPD Common Stock will continue to trade on the
American Stock Exchange and the Pacific Stock Exchange. Following the Merger,
the GPC Common Stock will cease to trade on the New York Stock Exchange, and
there will be no further market for the GPC Common Stock.
Because the Exchange Ratio is fixed and because the market price of NPD
Common Stock is subject to fluctuation, the market value of the NPD Common Stock
that holders of GPC Common Stock will receive after giving effect to the Merger
may increase or decrease. Stockholders of General Physics are urged to obtain a
current market quotation for NPD Common Stock.
20
<PAGE> 33
THE SPECIAL MEETINGS
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the
stockholders of General Physics and to the stockholders of National Patent in
connection with the solicitation of proxies by the GPC Board for use at the GPC
Special Meeting and by the NPD Board for use at the NPD Special Meeting.
This Joint Proxy Statement/Prospectus and accompanying forms of proxy are
first being mailed to stockholders of General Physics and National Patent on or
about December 20, 1996.
A representative of KPMG Peat Marwick LLP, National Patent's independent
auditors, will be present at the NPD Special Meeting and will have an
opportunity to make a statement, if such representative so desires, and to
respond to appropriate questions raised at the NPD Special Meeting.
A representative of KPMG Peat Marwick LLP, General Physics' independent
auditors, will be present at the GPC Special Meeting and will have an
opportunity to make a statement, if such representative so desires, and to
respond to appropriate questions raised at the GPC Special Meeting.
PLACE, DATE AND TIME
The NPD Special Meeting will be held on January 23, 1997 at 2:30 p.m.,
local time, at The Columbia Hilton, 5485 Twin Knolls Road, Columbia, Maryland.
The GPC Special Meeting will be held on January 23, 1997 at 11:00 a.m.,
local time, at The Columbia Hilton, 5485 Twin Knolls Road, Columbia, Maryland.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
National Patent. At the NPD Special Meeting, holders of NPD Common Stock
will be asked to consider and vote upon:
(i) (A) a proposal to approve and adopt the Merger Agreement attached
as Annex A to this Joint Proxy Statement/Prospectus providing for the
Merger of GPX Acquisition Inc., a wholly-owned subsidiary of National
Patent, with and into General Physics, which will be the surviving
corporation, and the issuance of shares of NPD Common Stock to the holders
of GPC Common Stock and (B) an amendment to National Patent's Restated
Certificate of Incorporation which would provide the right to require the
redemption or the prompt disposition under certain limited circumstances of
all or any portion of the shares of NPD Common Stock owned by a foreign
stockholder beneficially owning shares representing five percent or more of
the outstanding shares of NPD Common Stock (the "Foreign Ownership Charter
Amendment"); and
(ii) a proposal to approve and adopt an amendment to the Restated
Certificate of Incorporation of National Patent decreasing the total number
of authorized shares of NPD Common Stock which National Patent will have
the authority to issue from 40,000,000 shares to 25,000,000 shares (the
"Authorized Shares Charter Amendment").
(The proposals described in clause (i) and clause (ii) are referred to as the
"Proposals".) See "THE MERGER" and "THE CHARTER AMENDMENTS."
The proposal to approve and adopt the Foreign Ownership Charter Amendment
and the Merger Agreement, the Merger and the consummation of the transactions
contemplated thereby are contingent upon one another, and if the Merger
Agreement is not approved and adopted by the requisite vote of the stockholders
of National Patent, the proposal to approve and adopt the Foreign Ownership
Charter
21
<PAGE> 34
Amendment will be withdrawn from consideration. Likewise, if the proposal to
approve and adopt the Foreign Ownership Charter Amendment is not approved and
adopted by the requisite vote of the stockholders of National Patent, the
proposal to approve and adopt the Merger Agreement, the Merger and the
consummation of the transactions contemplated thereby will be withdrawn from
consideration.
Approval of the Authorized Shares Charter Amendment is not a condition to
the Merger. Holders of NPD Common Stock will also transact such other business
relating to the purposes for which the NPD Special Meeting was called, or
ancillary to the conduct thereof, as may properly be brought before the NPD
Special Meeting.
THE BOARD OF DIRECTORS OF NATIONAL PATENT HAS DETERMINED THAT THE TERMS OF
THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, NATIONAL PATENT AND ITS
STOCKHOLDERS AND HAS APPROVED (I) THE MERGER AGREEMENT, THE MERGER AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, (II) THE FOREIGN
OWNERSHIP CHARTER AMENDMENT AND (III) THE AUTHORIZED SHARES CHARTER AMENDMENT
AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT, THE MERGER AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY AND THE FOREIGN OWNERSHIP CHARTER AMENDMENT AND THAT YOU VOTE FOR THE
PROPOSAL TO APPROVE AND ADOPT THE AUTHORIZED SHARES CHARTER AMENDMENT.
General Physics. At the GPC Special Meeting, holders of shares of GPC
Common Stock will consider and vote upon the approval and adoption of the Merger
Agreement, the Merger and the consummation of the transactions contemplated
thereby. Holders of GPC Common Stock will also transact such other business
relating to the purposes for which the GPC Special Meeting was called, or
ancillary to the conduct thereof, as may properly be brought before the GPC
Special Meeting. National Patent owns shares of GPC Common Stock representing
approximately 52% of the total issued and outstanding shares of GPC Common
Stock. National Patent intends to vote for the proposed Merger and, accordingly,
approval of the Merger by the holders of GPC Common Stock is assured. See "THE
MERGER."
THE BOARD OF DIRECTORS OF GENERAL PHYSICS, HAVING RECEIVED AND CONSIDERED
THE UNANIMOUS RECOMMENDATION OF THE SPECIAL COMMITTEE, HAS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT, THE MERGER AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT, THE MERGER AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
RECORD DATES; QUORUM; VOTES REQUIRED
National Patent. The NPD Board has fixed the close of business on December
17, 1996 as the Record Date for the NPD Special Meeting. Accordingly, only
holders of record of NPD Common Stock and NPD Class B Stock on the Record Date
will be entitled to notice of and to vote at the NPD Special Meeting. Holders of
record of NPD Common Stock on the Record Date are each entitled to one vote per
share, and holders of record of NPD Class B Stock on the Record Date are each
entitled to ten votes per share, on each matter to be voted on at the NPD
Special Meeting. As of the Record Date, 7,512,107 shares of NPD Common Stock
were issued and outstanding and held by approximately 3,220 holders of record,
and 62,500 shares of NPD Class B Stock were issued and outstanding and held by
two (2) holders of record, Mr. Jerome I. Feldman, the President and Chief
Executive Officer and a director of National Patent, and Mr. Martin M. Pollak,
the Executive Vice President and Treasurer and a director of National Patent.
A majority of the votes represented by the issued and outstanding shares of
NPD Common Stock and the NPD Class B Stock on the Record Date must be
represented in person or by proxy at the NPD Special Meeting in order for a
quorum to be present for purposes of voting on approval of the Merger Agreement.
If an executed proxy is returned and the stockholder has abstained from voting
on approval and adoption of the Merger Agreement, or if any executed proxy is
returned by a broker holding shares of NPD Common Stock in street name which
indicates that the broker does not have or declines to exercise discretionary
authority to vote such shares (a so-called "broker non-vote"), the shares
represented by such proxy will be considered present at the NPD Special Meeting
for purposes of determining whether a quorum is present. In the event that a
quorum is not present at the NPD Special Meeting, it is expected that such
meeting will be adjourned or postponed to solicit additional proxies.
22
<PAGE> 35
The approval and adoption of each of the Proposals will require the
affirmative vote of the holders of record of a majority of the votes represented
by the issued and outstanding shares of NPD Common Stock and the NPD Class B
Stock on the Record Date. In determining whether a proposal has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as votes against the proposal.
As of the Record Date, directors and executive officers of National Patent
and their affiliates beneficially owned and were entitled to vote 824,993 shares
of NPD Common Stock, which represented approximately 2.7% of the shares of NPD
Common Stock outstanding on the Record Date. Each National Patent director and
executive officer has indicated his present intention to vote or direct the vote
of the NPD Common Stock so owned by him or over which he has voting control for
the approval and adoption of the Proposals. As of the Record Date, Messrs.
Jerome Feldman and Martin Pollak each beneficially own 31,250 shares of NPD
Class B Stock, together representing 100% of the issued and outstanding shares
of NPD Class B Stock. Holders of shares of NPD Class B Stock are entitled to
vote together with the holders of shares of NPD Common Stock with respect to the
Proposals and the terms of the NPD Class B Stock provide that the NPD Class B
Stock is entitled to ten votes per share. Messrs. Feldman and Pollak intend to
vote all shares of NPD Class B Stock held by them, representing 625,000 votes,
in favor of the Proposals. Such votes represent approximately 7.7% of the total
votes entitled to vote on the Proposals and together with the shares of NPD
Common Stock held by directors and executive officers represent approximately
10.1% of the votes entitled to be cast with respect to the Proposals.
General Physics. The GPC Board has fixed the close of business on December
18, 1996 as the Record Date for the GPC Special Meeting. Accordingly, only
holders of record of GPC Common Stock on the Record Date will be entitled to
notice of and to vote at the GPC Special Meeting. Holders of record of GPC
Common Stock on the Record Date are each entitled to one vote per share on each
matter to be voted on at the GPC Special Meeting. As of the Record Date,
10,570,897 shares of GPC Common Stock were issued and outstanding and held by
approximately 485 holders of record.
A majority of the shares of GPC Common Stock outstanding on the Record Date
must be represented in person or by proxy at the GPC Special Meeting in order
for a quorum to be present for purposes of voting on approval of the Merger
Agreement. If an executed proxy is returned and the stockholder has abstained
from voting on approval and adoption of the Merger Agreement, the shares
represented by such proxy will be considered present at the GPC Special Meeting
for purposes of determining whether a quorum is present. Broker non-votes will
also be considered present at the GPC Special Meeting for purposes of
determining whether a quorum is present. In the event that a quorum is not
present at the GPC Special Meeting, it is expected that such meeting will be
adjourned or postponed to solicit additional proxies.
The approval and adoption of the Merger Agreement will require the
affirmative vote of the holders of record of a majority of the shares of GPC
Common Stock outstanding on the Record Date. In determining whether a proposal
has received the requisite number of affirmative votes, abstentions and broker
non-votes will have the same effect as votes against the proposal.
As of the Record Date, directors and executive officers of General Physics
and their affiliates (other than affiliates which are National Patent or its
subsidiaries) beneficially owned and were entitled to vote 22,047 shares of GPC
Common Stock, which represented .2% of the shares of GPC Common Stock
outstanding on the Record Date. Each General Physics director and executive
officer has indicated his present intention to vote the GPC Common Stock so
owned by him for the approval and adoption of the Merger Agreement.
Additionally, as of the Record Date, National Patent beneficially owned and was
entitled to vote shares of GPC Common Stock representing approximately 52% of
the shares of GPC Common Stock outstanding on the Record Date. All such shares
of GPC Common Stock owned by National Patent will be voted for the approval and
adoption of the Merger Agreement. Accordingly, approval of the Merger Agreement
by the holders of GPC Common Stock is assured.
23
<PAGE> 36
VOTING AND REVOCATION OF PROXIES
Shares represented by all properly executed proxies received in time for
the Special Meetings will be voted at such Special Meetings in the manner
specified by the holders thereof. Shares represented by proxies for which no
voting instructions are given will be voted in favor of the Merger Agreement.
It is not expected that any matter other than those referred to herein will
be brought before either of the Special Meetings. If, however, other matters are
properly presented for a vote, it is the intention of the persons named in the
proxies to vote the shares to which said proxies relate in accordance with their
judgment with respect to such matters.
The persons named as proxies by a National Patent or General Physics
stockholder may propose and vote for one or more adjournments of the applicable
Special Meeting to permit further solicitations of proxies in favor of any
proposal; provided, however, that no proxy which is voted against the approval
of the Merger Agreement will be voted in favor of any such adjournment.
The grant of a proxy on the enclosed National Patent or General Physics
proxy card does not preclude a stockholder from voting in person. A stockholder
may revoke a proxy at any time prior to its exercise by filing with the
Secretary of National Patent (in the case of a National Patent stockholder) or
the Secretary of General Physics (in the case of a General Physics stockholder)
a duly executed revocation of proxy, by submitting a duly executed proxy bearing
a later date or by appearing at the applicable Special Meeting and voting in
person at such Special Meeting. Attendance at the relevant Special Meeting will
not, in and of itself, constitute revocation of a proxy.
The Test Date for determining the Market Price of the NPD Common Stock for
purposes of the Exchange Ratio and certain termination events will occur five
trading days prior to the date of the Special Meetings. Stockholders of General
Physics and National Patent should note that if a stockholder elects to attend
the Special Meetings and vote in person, such stockholder will be able to
determine the Market Price of the NPD Common Stock at the time he or she casts
his or her vote and therefore will be able to determine whether the Market Price
is within the Collar, whether National Patent has exercised the Gross-up Option,
whether General Physics had exercised the Reduction Option, and will be able to
determine the value of NPD Common Stock paid per share of GPC Common Stock in
the Merger. Certain risks associated with being unable to make such
determinations may thereby be avoided. See "THE MERGER AGREEMENT -- Merger
Consideration -- Exchange Ratio and the Collar" and "RISK FACTORS -- Risks
Applicable to the Merger -- Risks Associated with the Exchange Ratio and
Fluctuations in the Market Price of the NPD Common Stock."
SOLICITATION OF PROXIES
Each of National Patent and General Physics will bear the cost of the
solicitation of proxies from its own stockholders, except that National Patent
and General Physics will share equally the cost of printing this Joint Proxy
Statement/Prospectus, subject to the terms of the Merger Agreement which provide
that under certain circumstances one party will reimburse the other for certain
expenses. In addition to solicitation by mail, the directors, officers and
employees of each company and its subsidiaries may solicit proxies from
stockholders of such company by telephone or telegram or in person. Arrangements
will also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial owners
of stock held of record by such person, and National Patent and General Physics
will reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
GENERAL PHYSICS STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. GENERAL PHYSICS
STOCKHOLDERS SHOULD NOT RETURN ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED IS
SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS UNDER "THE MERGER
AGREEMENT -- CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES;
FRACTIONAL SHARES."
24
<PAGE> 37
THE MERGER
BACKGROUND
On June 18, 1996, at a meeting of the Board of Directors of General
Physics, Jerome I. Feldman, a director of, and the Chief Executive Officer of,
General Physics, stated that National Patent would be making an offer to acquire
all of the stock of General Physics that it did not already own. (Mr. Feldman is
also President and Chief Executive Officer of National Patent.) Accordingly, the
Special Committee, consisting of Sheldon L. Glashow, Bernard M. Kauderer and
Gordon Smale, was appointed to determine whether a transaction with National
Patent ought to be pursued by General Physics, and, if so, to negotiate the
terms and conditions of such transaction on behalf of General Physics, and to
recommend the transaction to the full Board of Directors of General Physics if
deemed by the Special Committee to be appropriate.
On July 2, 1996, the Special Committee met for the purpose of obtaining
information relating to the Special Committee's charge, determining the
appropriate process for proceeding with the work of the Special Committee and
interviewing and selecting independent counsel and an independent financial
advisor. The Special Committee discussed the background of the proposal by
National Patent to acquire by merger the shares of GPC Common Stock not already
held by National Patent. The members of the Special Committee discussed the
nature and possible terms of any proposal that might be made by National Patent
and questioned management concerning its knowledge of any potential business
combination. The Special Committee then interviewed Jesse Finkelstein of
Richards, Layton & Finger ("Richards Layton") as possible counsel to the Special
Committee, discussed the issue of counsel and determined to retain Richards
Layton as its counsel. The Special Committee then interviewed representatives of
four investment banking firms and, after discussion, determined to retain
Oppenheimer as its exclusive financial advisor.
On July 12, 1996, the Special Committee met by telephone and received a
presentation concerning certain historical and projected financial statements
prepared by management, which were distributed in advance of the meeting.
On July 18, 1996, the Special Committee met by telephone and was advised
that National Patent would be likely to submit a proposal to the Special
Committee within the next week to ten days. The Special Committee was also
informed concerning the due diligence process that Oppenheimer was preparing to
conduct on General Physics.
On July 26, 1996, the Special Committee received a letter from Jerome I.
Feldman, President and Chief Executive Officer of National Patent, confirming
National Patent's proposal to acquire all of the issued and outstanding shares
of GPC Common Stock not already owned by National Patent in exchange for
2,300,000 shares of the NPD Common Stock.
On August 1, 1996, the Special Committee met by telephone to review the
proposal received from National Patent dated July 26, 1996. J. T. Atkins and
Dhruv Narain of Oppenheimer updated the Special Committee with respect to the
due diligence conducted by Oppenheimer on General Physics and described the due
diligence on National Patent to be conducted by Oppenheimer. Mr. Atkins and Mr.
Narain also presented a preliminary analysis of the proposal by National Patent.
On August 13, 1996, at a meeting of the Board of Directors of General
Physics, Mr. Smale reported to the Board of Directors that the Special Committee
had met on several occasions, selected a financial advisor and was proceeding
with its business.
On August 15, 1996, the Special Committee met by telephone. Oppenheimer
updated the Special Committee with respect to the proposal by National Patent
and reported its due diligence of General Physics had been completed and updated
the Special Committee with respect to the due diligence on National Patent.
On September 11, 1996, the Special Committee met for over five hours in
Washington. The Special Committee received a comprehensive presentation from
Oppenheimer with respect to the proposal by National Patent, including an
overview of Oppenheimer's due diligence and relative valuations of General
Physics and National Patent. Oppenheimer presented a detailed overview of
General Physics and its four
25
<PAGE> 38
Business Groups and presented Oppenheimer's preliminary evaluation analysis of
General Physics, including a comparable company analysis, a comparable M&A
transaction analysis, a discounted cash flow analysis, a premium paid analysis
of parent/subsidiary transactions and an analysis of the impact on the value and
the liquidity of the General Physics shares proposed to be acquired by National
Patent. In addition, Dr. Glashow, a member of the Special Committee, offered his
own analysis of the proposal. Mr. Atkins explained the basis for Oppenheimer's
preliminary conclusion that the value of GPC Common Stock is between $3.64 and
$5.88 per share.
Mr. Atkins and Mr. Narain of Oppenheimer then presented Oppenheimer's
preliminary evaluation analysis of National Patent, including a comparable
company analysis on a consolidated basis, a comparable company analysis on a
subsidiary basis, a discounted cash flow analysis and a liquidation analysis.
Messrs. Atkins and Narain explained the basis for Oppenheimer's preliminary
conclusion that the value of NPD Common Stock was between $7.76 and $11.39 per
share. The members of the Special Committee examined the relative values of each
company's stock and discussed the appropriate response to National Patent
concerning its proposal. Members of the Special Committee observed that a merger
with National Patent at an appropriate exchange ratio would benefit the
stockholders of General Physics other than National Patent and determined to
make a counter-offer to National Patent of an issuance of NPD Common Stock
equivalent to $5.25 per share of General Physics or, in the alternative, an
issuance of convertible preferred stock of National Patent (with appropriate
terms and paying a dividend) valued at approximately $5.25 per share of General
Physics.
On September 13, 1996, the Special Committee met by telephone and discussed
the valuation of the two alternatives considered by the Special Committee at its
September 11 meeting. The Special Committee confirmed that it would recommend to
the Board of Directors of General Physics acceptance of either one of two
transactions: (a) a merger in which stockholders of General Physics (other than
National Patent) would receive shares of NPD Common Stock with a value of $5.25
per share of General Physics, representing an aggregate issuance of
approximately 2,900,000 shares of National Patent based upon the then current
market price of NPD Common Stock of $9.125 per share, or (b) a merger in which
stockholders of General Physics would receive shares of a new class of National
Patent Convertible Preferred Stock with a face value of $4.48 per share, paying
a 5.25% dividend, convertible into NPD Common Stock at the market price of
National Patent immediately prior to closing, callable after three years when
the 30-day consecutive trading price is equivalent to or greater than 150% of
the conversion price, and subject to customary terms and protections for
preferred securities. The latter alternative would represent approximately
2,525,000 shares of NPD Common Stock issuable upon conversion. The Special
Committee determined that either of the two transactions should be subject to a
"collar" to prevent fluctuations in trading prices from diminishing the value of
the consideration to be received by stockholders of General Physics and would
also be subject to execution of a definitive merger agreement, necessary
approvals and receipt of a fairness opinion from Oppenheimer.
On September 20, 1996, the Special Committee met by telephone and received
a report on the results of negotiations by the Special Committee with
representatives of National Patent. It was reported that a basic agreement had
been reached providing for issuance by National Patent of shares of NPD Common
Stock providing an equivalent of $5.10 in value for each share of General
Physics not owned by National Patent, representing an exchange ratio of .5299
shares of National Patent for each share of General Physics, subject to a three
percent collar. (The Exchange Ratio was subsequently increased to 0.53 in order
to reduce the extent of fractional shares that would arise using the Exchange
Ratio of 0.5299 and therefore reduce the amount of cash payments required to be
made in lieu of issuing such fractional shares.) It was further reported that
confirmation of the transaction would be conditioned, among other things, on
negotiation of a definitive merger agreement, the approval of the boards of
directors and stockholders of both General Physics and National Patent and
reconfirmation of the fairness of the proposed transaction by Oppenheimer. The
Special Committee unanimously endorsed the proposed transaction.
On September 24, 1996, at a meeting of the Board of Directors of General
Physics, Mr. Smale reported on the agreement in principle negotiated by the
Special Committee. Mr. Finkelstein summarized the terms of the agreement but
added that a definitive merger agreement had not been negotiated. Messrs. Atkins
and Narain confirmed that Oppenheimer had performed due diligence investigations
of both General Physics and
26
<PAGE> 39
National Patent. Mr. Feldman reported that National Patent's Board of Directors
had approved the terms of the agreement in principle. After discussion, the
report of the Special Committee and the terms of the proposed transaction were
unanimously approved.
On November 6, 1996, GPX was incorporated in the State of Delaware as a
wholly-owned subsidiary of National Patent.
On November 18, 1996, the Special Committee met in person (with one member
present by telephone) to consider and discuss approval of the Merger Agreement
and the terms of the transaction. Drafts of the Merger Agreement had been
distributed to, and reviewed by, the members of the Special Committee in advance
of such meeting. The Special Committee discussed the terms of the Merger as set
forth in a draft of the Merger Agreement, asked questions of its legal and
financial advisors to assure itself that the terms of the draft Merger Agreement
accurately and completely reflected the terms that it had negotiated and
considered the perceived benefits of the proposed transaction to the
stockholders of General Physics (other than National Patent). The Special
Committee received an oral opinion from Mr. Atkins on behalf of Oppenheimer
that, as of November 18, 1996, the Exchange Ratio and Collar were fair from a
financial viewpoint to the stockholders of General Physics (other than National
Patent). The Special Committee then unanimously recommended that the GPC Board
approve the draft of the Merger Agreement, with the addition of a provision that
permitted the Special Committee to terminate the Merger Agreement in the event
that the Market Price of the NPD Common Stock is less than $9.336 on the Test
Date and National Patent does not elect to "gross-up" the Exchange Ratio.
National Patent agreed to the addition of this provision, which was incorporated
into the final Merger Agreement.
The GPC Board met in person on November 18, 1996 (with one member present
by telephone), after having reviewed previously distributed drafts of the Merger
Agreement, to consider and discuss the recommendation of the Special Committee
to approve the Merger Agreement (including the one change described above) and
the Merger. After discussion of the terms of the Merger and after receiving the
same oral opinion from Mr. Atkins that he had given the Special Committee, the
Board of Directors voted unanimously to approve the terms and authorize the
execution and delivery of the Merger Agreement in substantially the form
presented to the GPC Board (including the one change described above) and to
proceed with the Merger.
On November 19, 1996, National Patent held a special meeting of its Board
of Directors to discuss and consider the proposed Merger Agreement and the terms
of the transaction. Drafts of the Merger Agreement had been distributed to, and
reviewed by, the members of the NPD Board. The NPD Board discussed the addition
of the provision to the Merger Agreement that permited the Special Committee to
terminate the Merger Agreement in the event that the Market Price of the NPD
Common Stock is less than $9.336 on the Test Date and National Patent does not
elect to "gross-up" the Exchange Ratio. After discussion of the terms of the
Merger and the terms and provisions of the Merger Agreement and consideration of
the perceived benefits of the transaction, the NPD Board voted to approve the
terms of and authorize the execution and delivery of the Merger Agreement in
substantially the form presented to the NPD Board (including the one change
described above) and to proceed with the Merger. After discussion of the
proposed Charter Amendments and consideration of the perceived benefits of
adopting the Charter Amendments, the NPD Board voted to approve the submission
of the proposed Charter Amendments to the stockholders of National Patent for
approval and adoption.
On November 19, 1996, National Patent, General Physics and GPX entered into
the Merger Agreement.
On November 20, 1996, Oppenheimer delivered a written opinion, dated as of
November 18, 1996, that confirmed in writing the oral opinion of Oppenheimer
delivered to the Special Committee at the November 18, 1996 meeting. The opinion
dated November 18, 1996 did not differ materially in its conclusions from the
opinion dated December 19, 1997 which is included herein as Annex B.
On November 21, 1996, National Patent and General Physics issued a press
release announcing execution of the Merger Agreement.
27
<PAGE> 40
On November 27, 1996, the Special Committee held a meeting by telephone to
review the Dunlop v. Pollak litigation and a settlement initiative proposed by
counsel for the plaintiff. (For a description of this litigation, see "THE
MERGER AGREEMENT -- Litigation Challenging the Merger.")
On December 13, 1996, an agreement in principle was reached regarding
settlement of the Dunlop v. Pollak litigation. Under the terms of that
agreement, the terms of the Merger Agreement would be amended to provide for,
among other things, an increase in the Exchange Ratio from .53 to .54 to reflect
a valuation of GPC Common Stock at a range of prices between $5.00 and $5.40
with a mid-range of $5.20. The Collar would change from a range of stock prices
of NPD Common Stock of $9.336 to $9.914 to a range of $9.259 to $10.00. (For a
description of the settlement terms, see "THE MERGER AGREEMENT -- Litigation
Challenging the Merger.")
On December 16, 1996, the Special Committee held a meeting by telephone to
discuss and consider the proposed settlement of the Dunlop v. Pollak litigation.
At the meeting, the Special Committee considered the terms and effect of the
proposed settlement and asked questions of its legal and financial advisors to
assure itself of the perceived benefits of the settlement to the stockholders of
General Physics (other than National Patent). The Special Committee then
unanimously recommended that the GPC Board approve the terms of the settlement
and of Amendment No. 1 to the Merger Agreement (the "Amendment").
On December 17, 1996, National Patent held a special meeting by telephone
of its Board of Directors to discuss and consider the proposed settlement of the
Dunlop v. Pollak litigation. At the meeting, the NPD Board considered the terms
and effect of the proposed settlement and asked questions of its legal advisors
to assure itself of the perceived benefits of the settlement to the stockholders
of National Patent. After discussion of the terms and the perceived benefits of
the proposed settlement, the NPD Board voted to approve the terms and authorize
the execution and delivery of the Amendment.
On December 18, 1996, General Physics held a special meeting by telephone
of its Board of Directors to discuss and consider the proposed settlement of the
Dunlop v. Pollak litigation. At the meeting, the GPC Board considered the terms
and effect of the proposed settlement and the recommendation of the Special
Committee and asked questions of its legal advisors to assure itself of the
perceived benefits of the settlement to the stockholders of General Physics
(other than National Patent). The GPC Board then approved the Amendment.
On December 18, 1996, National Patent, General Physics and GPX entered into
the Amendment. Under the terms of the Amendment, among other things, the parties
agreed to increase the Exchange Ratio from .53 to .54, and to make changes to
the Collar and other sections of the Merger Agreement. For further description
of the terms of the settlement, see "THE MERGER AGREEMENT -- Litigation
Challenging the Merger."
RECOMMENDATION OF THE NPD BOARD; NATIONAL PATENT REASONS FOR THE MERGER
The NPD Board concluded that the terms of the Merger are fair to and in the
best interests of National Patent and its stockholders. Accordingly, the NPD
Board approved the Merger Agreement and recommends that stockholders of National
Patent vote FOR the approval and adoption of the Merger Agreement, including the
issuance of shares of NPD Common Stock provided for therein.
The NPD Board believes that the businesses of both General Physics and
National Patent will be enhanced by the Merger. The following benefits, among
others, were taken into account in reaching this conclusion:
Strength of General Physics Business -- The NPD Board considered the
quality and strength of the business of General Physics and determined that
it would be to National Patent's advantage to own 100% of General Physics'
capital stock.
Cash Generated by General Physics -- The NPD Board considered the fact
that National Patent would have enhanced access to cash generated by
General Physics as a result of General Physics becoming a wholly-owned
subsidiary.
Capital Access and Strategic Acquisitions -- The NPD Board considered
the greater financial resources and enhanced access to debt and equity
capital markets that the Merger would provide to both companies. National
Patent's financing agreements currently preclude the use by National Patent
of
28
<PAGE> 41
General Physics' capital stock in financings and corporate transactions in
order to assure that National Patent continues to control General Physics.
After giving effect to the Merger, National Patent may be able to use its
equity to facilitate future strategic acquisitions by General Physics, to
provide equity financing and to serve other corporate needs and purposes.
In addition, National Patent would have the ability to borrow funds against
a larger borrowing base.
Consolidation of General Physics and National Patent for Federal
Income Tax Purposes -- After giving effect to the Merger, General Physics
will be wholly owned by National Patent, which will permit General Physics
to be consolidated with National Patent for federal income tax purposes. In
evaluating the desirability of the Merger, the NPD Board considered the
benefits of consolidation to National Patent and General Physics. One
advantage of consolidation for tax purposes is that income taxes payable as
a result of taxable income generated by General Physics may be offset
through consolidation by operating losses incurred by National Patent, to
the extent such operating losses arise. National Patent has had operating
losses in 1992, 1993 and 1994, and in 1991 and 1995 National Patent's
income was the result of non-operating and non-recurring gains.
Management Efficiencies and Synergies -- The NPD Board considered the
savings that the combined companies may achieve after the Merger relating
to the fact that the combined companies would be a single reporting entity
for Exchange Act purposes; such savings would include savings in
professional fees and printing costs associated with the reporting
obligations under the federal securities laws.
In reaching its conclusion, the NPD Board considered the following
material factors:
1. Information concerning the financial performance, condition,
business operations and prospects of each of National Patent and General
Physics.
2. The effects of the Merger on National Patent's existing
stockholders, as well as the effect of the Merger on employees of
National Patent's subsidiaries and General Physics.
3. The current book values per share of National Patent and General
Physics and current and historical market prices of NPD Common Stock and
GPC Common Stock.
4. The proposed terms and structure of the transaction and terms
and conditions of the Merger Agreement, including the Exchange Ratio and
the right of the NPD Board to terminate the Merger Agreement if the
Market Price of the NPD Common Stock is above the Collar and General
Physics does not reduce the Exchange Ratio.
In view of the variety of factors considered in connection with the
evaluation of the Merger, the NPD Board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its decision.
For information concerning certain interests of members of the NPD Board,
see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Interests of Certain
Persons in the Merger."
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE GPC BOARD; GENERAL PHYSICS
REASONS FOR THE MERGER
The Special Committee concluded that the terms of the Merger are fair to
and in the best interests of stockholders of General Physics (other than
National Patent) and unanimously voted to recommend that the GPC Board approve
the Merger Agreement. The GPC Board, acting through the independent directors
who constitute the Special Committee, having received and reviewed the unanimous
recommendation of the Special Committee, determined that the terms of the Merger
are fair to and in the best interests of the stockholders of General Physics
(other than National Patent). Accordingly, the GPC Board unanimously approved
the Merger Agreement and recommends that the stockholders of General Physics
vote FOR the proposal to approve and adopt the Merger Agreement. In determining
to recommend approval of the Merger Agreement by the GPC Board, the Special
Committee considered the following material factors:
1. The assistance, advice and opinion of Oppenheimer, including its
opinion as to the fairness of the right of holders of GPC Common Stock to
receive shares of NPD Common Stock having a value of at least $5.00 (the
lowest price in the Collar) per share of GPC Common Stock from a financial
point of view. See "Opinion of Oppenheimer."
29
<PAGE> 42
2. Information concerning the business, assets, financial condition,
operating results and prospects of National Patent and General Physics, as
well as information concerning the state of the industry generally.
3. The current book values per share of National Patent and General
Physics and current and historical market prices of NPD Common Stock and
GPC Common Stock.
4. The relative market value of the shares of NPD Common Stock and GPC
Common Stock historically and on the date of the Special Committee's
action.
5. The proposed terms and structure of the transaction and the terms
and conditions of the Merger Agreement, including the Exchange Ratio, and
the ability of General Physics to terminate the Merger Agreement, (i)
(subject to certain conditions) if a third party makes a bona fide proposal
for an Acquisition Transaction (as described below) that the Special
Committee believes, and has advised the GPC Board, is superior to the
Merger from a financial point of view to the General Physics stockholders,
or (ii) if the Market Price of the NPD Common Stock is below the Collar and
National Patent does not gross-up the Exchange Ratio.
6. The opportunity, through the Merger, for General Physics'
stockholders to have an ongoing equity interest in a larger, more diverse
company of which General Physics would be a significant part, and in the
combined company with a larger capital base, and the possible benefits that
might flow to the stockholders of General Physics from the Merger,
including the expected financial economies and cost reductions for the
combined company.
In view of the variety of factors considered in connection with the
evaluation of the Merger, the Special Committee did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its decision.
For information concerning certain interests of members of the GPC Board,
see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -- General
Physics."
OPINION OF OPPENHEIMER
Oppenheimer & Co., Inc. ("Oppenheimer") delivered a written opinion dated
as of December 19, 1996 (the "Oppenheimer Opinion") to the Special Committee to
the effect that, as of the date of such opinion, the right to receive shares of
NPD Common Stock having a value of at least $5.00 (the lowest price in the
Collar) into which each share of GPC Common Stock is to be converted pursuant to
the Merger Agreement is fair to the holders of GPC Common Stock (other than
National Patent) from a financial point of view. The Oppenheimer Opinion did not
differ materially in its conclusions from the oral and written opinions of
Oppenheimer delivered on or as of November 18, 1996.
A COPY OF THE OPPENHEIMER OPINION, WHICH SETS FORTH OPPENHEIMER'S
UNDERSTANDINGS AS TO THE MERGER, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS JOINT PROXY STATEMENT/ PROSPECTUS AND
IS INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE OPPENHEIMER OPINION SET
FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPPENHEIMER OPINION. GENERAL PHYSICS'
STOCKHOLDERS ARE URGED TO READ THE OPPENHEIMER OPINION IN ITS ENTIRETY.
The Oppenheimer Opinion is directed only to the fairness from a financial
point of view of the consideration to be received by the holders of the GPC
Common Stock (other than National Patent) in the Merger and does not constitute
a recommendation to any stockholder as to how such stockholder should vote at
the GPC Special Meeting. Furthermore, the Oppenheimer Opinion does not address
the underlying business decision to effect the Merger. The consideration to be
received by General Physics' stockholders (other than National Patent) in the
Merger was determined through negotiations between the Special Committee and
representatives of National Patent in which the Special Committee was advised by
representatives of Oppenheimer and was approved by the Special Committee and the
Board of Directors of General Physics. See "THE MERGER - Background."
Oppenheimer did not solicit third-party indications of
30
<PAGE> 43
interest for the acquisition of all or any part of the GPC Common Stock or any
independent evaluations or appraisals of the assets or liabilities of General
Physics or National Patent.
In arriving at its opinion, Oppenheimer, among other things, (i) reviewed
General Physics' and National Patent's audited financial statements for each of
the fiscal years ended December 31, 1990 through December 31, 1995 and General
Physics' and National Patent's unaudited financial statements for the nine
months ended September 30, 1996, (ii) reviewed certain internal information,
including internally generated business plans and projected financial statements
prepared by General Physics' and National Patent's management for the fiscal
years 1996 through 2000, (iii) conducted discussions with members of senior
management and key operating executives of General Physics, National Patent and
their divisions, subsidiaries and investee companies concerning their
operations, financial condition, future prospects and projected operations and
performance, (iv) reviewed the historical market prices and trading volumes of
General Physics' and National Patent's and their respective investee companies'
publicly traded securities, (v) reviewed the original proposal from National
Patent dated July 26, 1996 and a draft of the Merger Agreement in the form
attached hereto as Annex A, (vi) reviewed certain publicly available financial
data for certain companies and from certain transactions which were viewed as
comparable by Oppenheimer, (vii) reviewed certain management letters from
auditors and other non-public information related to General Physics and the
divisions and subsidiaries of National Patent, (viii) reviewed certain
information relating to operations, marketing, the competitive environment and
accounting for General Physics and the various National Patent businesses, (ix)
evaluated the financial impact on National Patent's financial statements of a
combination of General Physics and National Patent and (x) conducted such other
studies and analyses and performed such other investigations and took into
account such other matters as Oppenheimer deemed necessary and appropriate for
the purposes of its opinion. Copies of the written analysis delivered by
Oppenheimer in connection with the rendering of the Oppenheimer Opinion to the
Special Committee will be made available for inspection and copying at the
principal executive offices of General Physics during regular business hours by
any interested stockholder of General Physics, or his representative who has
been so designated in writing, and will be transmitted to any such person by
General Physics to the Secretary of General Physics at the address set forth on
page 1 of this Joint Proxy Statement/Prospectus upon written request and at the
expense of such stockholder. The summary of the analysis contained herein does
not purport to be complete and is qualified in its entirety by reference to such
written analysis.
In preparing its opinion, Oppenheimer relied on the accuracy and
completeness of all information supplied or otherwise made available to it by
General Physics and National Patent, and Oppenheimer did not independently
verify such information or any underlying assumption or undertake an independent
appraisal or physical inspection of the assets or liabilities of General Physics
or National Patent. With respect to the financial forecasts and projections,
Oppenheimer assumed that they have been reasonably prepared and reflect the best
currently available estimates and judgment of the management of General Physics
and National Patent as to the expected future financial performance of General
Physics and National Patent. Oppenheimer's opinions are based upon general
economic, market, monetary and other conditions as they existed and could be
evaluated, and the information made available to Oppenheimer as of the date of
the opinion.
The matters considered by Oppenheimer in arriving at its opinion are based
upon numerous macroeconomic, operating and financial assumptions and involve the
application of complex methodologies and educated judgment. Any estimates
incorporated in the analyses performed by Oppenheimer are not necessarily
indicative of actual past or future values or results, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future. Because such estimates are
inherently subject to uncertainty, none of General Physics, Oppenheimer or any
other person assumes responsibility for the accuracy thereof.
The Oppenheimer Opinion does not constitute an opinion as to the price at
which NPD Common Stock will actually trade at any time. The Exchange Ratio was
determined in negotiations between National Patent and the Special Committee on
behalf of General Physics in which negotiations Oppenheimer advised the Special
Committee. No restrictions or limitations were imposed by the Special Committee
upon Oppenheimer
31
<PAGE> 44
with respect to the investigations made or the procedures followed by
Oppenheimer in rendering its opinion.
The following is a summary of certain financial and comparative analyses
performed by Oppenheimer in connection with the Oppenheimer Opinion, which it
discussed with the Special Committee. The summary of the financial and
comparative analyses set forth below does not purport to be a complete
description of the analyses employed by Oppenheimer in reaching its opinion.
Oppenheimer believes that its analysis must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all such factors and analyses, could create a misleading view of the
conclusions and of the processes underlying its opinion. Arriving at a fairness
opinion is a complex process not necessarily susceptible to partial or summary
description.
Financial Analyses (General Physics). Oppenheimer performed the following
financial analyses in connection with General Physics to determine a range of
fairness for the GPC Common Stock:
Comparable Company Analysis (General Physics). Using publicly available
information, Oppenheimer analyzed, among other things, the market values and
trading multiples of selected companies comparable to the operating businesses
of General Physics. The companies selected were eight defense contractors, four
training and technology companies, four defense conglomerates and three
engineering and environmental companies, all as more fully described in the
written analyses done by Oppenheimer and presented to the Special Committee. The
companies were selected based on economic and operational similarities with the
operating businesses of General Physics. Oppenheimer compared the market values
of such comparable companies to earnings before interest, taxes, depreciation
and amortization ("EBITDA"), earnings before interest and taxes ("EBIT"),
earnings and sales for each principal business group of General Physics. The
multiples of sales selected ranged from .50x to .60x for the Engineering and
Applied Sciences Group, .50x to .60x for the DOE Services Group, .70x to .85x
for the Federal Systems Group and .35x to .50x for the Training and Technology
Group. The multiples of earnings selected ranged from 12.70x to 15.20x for 1995
actual earnings, 10.70x to 13.20x for 1996 estimated earnings and 8.70x to
10.70x for 1997 estimated earnings for the DOE Services Group, 12.50x to 15.00x
for 1995 actual earnings, 10.50x to 13.00x for 1996 estimated earning, and 8.50x
to 10.50x for 1997 estimated earnings for the Engineering and Applied Sciences
Group, 13.50x to 16.50x for 1995 actual earnings, 11.75x to 13.65x for 1996
estimated earnings and 10.00x to 12.60x for 1997 estimated earnings for the
Federal Systems Group and 12.00x to 14.00x for 1995 actual earnings, 10.50x to
12.30x for 1996 estimated earnings and 8.50x to 10.20x for 1997 estimated
earnings for the Training and Technology Group. The multiples of EBITDA selected
ranged from 5.25x to 5.50x for the DOE Services Group, 5.00x to 6.00x for the
Engineering and Applied Sciences Group, 7.00x to 8.00x for the Federal Systems
Group and 5.00x to 6.00x for the Training and Technology Group. The multiples of
EBIT selected ranged from 8.00x to 9.00x for the DOE Services Group, 8.00x to
9.00x for the Engineering and Applied Sciences Group, 11.00x to 12.00x for the
Federal Systems Group and 6.00x to 8.00x for the Training and Technology Group.
In selecting the multiple range, the comparable companies were weighted to
reflect their similarities with specific business groups of General Physics.
In analyzing the results of the comparable company analysis, Oppenheimer
placed more weight on the EBITDA multiples because it is difficult to compare
companies without taking out the effects of amortization and depreciation and
without taking into account the varying capital structures of the comparables.
Oppenheimer also placed weight on the multiples of earnings because such
multiples are also given weight by the equity markets. Sales and EBIT multiples,
while examined, were given relatively less weight. The comparable company
analysis resulted in an implied equity valuation of the GPC Common Stock of
$3.49 to $4.44 per share. No company used in the comparable company analysis
described above is identical to General Physics. Accordingly, an analysis of the
result of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect public trading
values of the companies to which General Physics is being compared.
Comparable Transaction Analysis (General Physics). Oppenheimer analyzed
the implied transaction multiples in the following selected mergers and
acquisition transactions which it deemed comparable to the Merger: AEL
Industries/Tracor Inc., Greiner Engineering Inc./URS Group, Earth Technology
Corp./Tyco
32
<PAGE> 45
International Ltd. and Vectra Technologies/Duke Engineering & Services
(collectively, the "Selected Transactions"). Oppenheimer used the transaction
multiples of the last 12 months of EBITDA, EBIT and sales to develop a range of
multiples that would be fair for the Merger. The difference between the
comparable company analysis and the comparable transaction analysis is that the
multiples developed using the latter methodology include control premiums to the
extent the acquiror is acquiring a controlling interest in the target. The
multiples for the Selected Transactions for which public information was
available ranged from (i) 5.28x to 13.43x EBITDA with a mean of 7.72x and a
median of 6.09x, (ii) .26x to .76x sales for the twelve months ended June 30,
1996 with a mean of .51x and a median of .55x, (iii) 7.41x to 53.99x EBIT with a
mean of 25.06x and a median of 13.76x. The multiple for General Physics selected
by Oppenheimer and used in this analysis were 7.00x to 9.00x EBITDA with a
median of 6.09x for all comparable transactions, .50x to .70x of sales and
12.00x to 14.00x of EBIT with a median of 13.76x for all comparable
transactions, in each case for the nine-month period ended September 30, 1996.
In analyzing the results of the comparable transaction analysis,
Oppenheimer placed weight on the multiples of EBITDA and sales because of their
greater comparability. In addition, Oppenheimer placed the most weight on the
AEL Industries/Tracor Inc. transaction because the target was the most
comparable to General Physics. Oppenheimer placed weight on the multiples of
sales since a potential buyer would look at sales to determine what a target
company would be worth to the potential buyer after pro forma cost savings
estimated by such a buyer, thus making multiples of EBIT less important relative
to EBITDA and sales multiples. The comparable transaction analysis resulted in
an implied equity valuation of the GPC Common Stock of $3.92 to $5.72 per share.
Discounted Cash Flow Analysis (General Physics). Oppenheimer performed a
discounted cash flow analysis of the projected free cash flows of General
Physics for the fiscal years ending September 1997 through September 2000,
assuming, among other things, discount rates of 12%, 13%, 14%, 15% and 16% and
terminal multiples of EBITDA of 4.00x, 4.50x, 5.00x, 5.50x and 6.00x. Free cash
flow represents the after-tax operating cash flow available to General Physics
before debt service (EBITDA less taxes, capital expenditures and changes in
working capital). It is utilized in a discounted cash flow analysis because it
represents the cash flow from operations available for distribution to debt and
equity holders after required investments in working capital and capital
expenditures. The range of discount rates chosen in the discounted cash flow
analysis was based upon rates of return on alternate investment opportunities or
investments in companies with comparable risk profiles. The range of terminal
values were chosen around EBITDA multiples for General Physics using the
comparable company analysis and comparable transactions analysis and taking into
account the historical operating performance of General Physics. As part of the
analysis, debt is subtracted from aggregate value to arrive at equity value.
In analyzing the discounted cash flow analysis, Oppenheimer placed the most
weight on the discount rates of 13% to 15% and terminal multiples of 4.50x to
5.50x because such rates and multiples take into account General Physics'
prospects adjusted for the inconsistency of General Physics' historical
operating performance. This analysis resulted in an implied valuation range per
share of GPC Common Stock of between $4.91 to $6.52.
Modified Premiums Paid Analysis (General Physics). Oppenheimer analyzed
the premiums paid in approximately six (6) selected transactions for the period
from June 6, 1994 to February 5, 1996 involving the acquisition of interests in
the equity at publicly traded companies by a parent already holding a
controlling interest in the company being acquired, based on the closing stock
price for certain points in the period from four weeks to one day prior to the
announcement of such transactions. Premiums in the six selected transactions
ranged from 0% to 42.60% (with a mean of 18.20% and a median of 15.20% one day
prior, 20.00% to 58.70% (with a mean of 38.70% and a median of 35.40%) one week
prior and 24.20% to 65.40% (with a mean of 44% and a median of 43.10%) four
weeks prior. Using the low and high closing prices of GPC Common Stock for the
four weeks prior to September 17, 1996 and a premiums paid range of 25.00% to
45.00%, the modified premiums paid analysis resulted in an implied equity
valuation per share of GPC Common Stock of $4.13 to $5.48.
Conclusion. Based on the analyses described above, Oppenheimer concluded
the fair value of the GPC Common Stock per share, as of the date of its opinion,
was between $3.92 and $5.67. In determining such
33
<PAGE> 46
value range, Oppenheimer relied most heavily on the comparable transactions and
modified premiums paid analyses because those analyses take into account the
change of control aspects of the Merger. Oppenheimer placed less weight on the
discounted cash flow analysis because of the wide range of implied equity values
and because future projections are inherently less reliable for a company like
General Physics with its inconsistent historical results. Oppenheimer also
placed less weight on the comparable company analysis since it is a trading
analysis rather than a change of control analysis.
Financial Analyses (National Patent). Oppenheimer also performed the
following financial analyses in connection with National Patent (assuming, in
each case, the existing ownership level of General Physics) in order to
determine whether the NPD Common Stock being provided as consideration in the
Merger was appropriately valued by the markets:
Comparable Company Analysis (National Patent). Using publicly available
information, Oppenheimer analyzed, among other things, the market value and
trading multiples of selected companies similar to National Patent both on a
consolidated basis and as to each of its subsidiaries. Oppenheimer selected five
companies similar to National Patent on an economic and operational basis. The
selected multiples of (i) sales ranged from .80 to 1.20x (with a median of 1.68x
for all comparable transactions), (ii) earnings ranged from 21.00x to 25.00x
1995 actual earnings, 16.00x to 21.00x 1996 estimated earnings and 13.00x to
18.00x 1997 estimated earnings, (iii) EBITDA ranged from 11.00x to 14.00x (with
a median of 16.74x for all comparable transactions) and (iv) EBIT ranged from
13.00x to 17.00x (with a median of 18.54x for all comparable transactions). In
analyzing the results of the comparable company analysis, Oppenheimer placed
more weight on the multiples of EBITDA because it is difficult to compare
companies without taking out the effects of differing capital structures and
amortization and depreciation. Oppenheimer also placed weight on the multiples
of earnings because such multiples are taken into account by the equity markets
in valuing companies. The multiples of EBIT and sales were given less weight.
The comparable company analysis for National Patent on a consolidated basis
resulted in an implied equity valuation per share of NPD Common Stock of $7.41
to $10.05 per share. However, in general, Oppenheimer did not place significant
weight on this analysis because the diverse nature of National Patent's business
makes it difficult to find appropriate comparables.
Comparable Company Analysis -- Subsidiaries (National Patent). Oppenheimer
also performed a comparable company analysis on each subsidiary of National
Patent using a variety of multiples and comparable companies and aggregated the
value of the subsidiaries after subtracting a capitalized value for corporate
overhead to arrive at a valuation for National Patent as more fully set forth in
the written analysis prepared by Oppenheimer in connection with rendering the
Oppenheimer Opinion to the Special Committee. Oppenheimer compared three
companies to Five Star Group, Inc., three companies to MXL Industries, Inc.,
four companies to Hydro-Med Sciences, four companies to American Drug Company,
four companies to GTS Duratek, Inc., two companies to Interferon Sciences, Inc.
and four companies to GSE Systems, Inc. The valuation of National Patent on the
subsidiary basis resulted in an implied equity valuation per share of NPD Common
Stock of $9.67 to $13.87 per share. Oppenheimer placed more weight on this
analysis than on the consolidated comparable company analysis because it was
easier to identify companies comparable to each of National Patent's
subsidiaries than to National Patent as a whole.
No company used in the comparable company analysis described above is
identical to National Patent or any of its subsidiaries. Accordingly, the
analysis of the results of the foregoing is not entirely mathematical; rather,
it involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect
public trading values of the comparable companies to which National Patent and
its subsidiaries are being compared.
Discounted Cash Flow Analysis (National Patent). Oppenheimer performed a
discounted cash flow analysis of the projected free cash flows of National
Patent for the fiscal years ending December 1997 through December 2000,
assuming, among other things, discount rates of 13%, 14%, 15%, 16% and 17% and
terminal multiples of EBITDA of 3.50x, 4.00x, 4.50x, 5.00x and 5.50x. Free cash
flow represents the after-tax operating cash flow available to National Patent
before debt service (EBITDA less taxes, capital expenditures and changes in
working capital). It is utilized in a discounted cash flow analysis because it
represents the cash flow from operations available for distribution to debt and
equity holders after required investments in working
34
<PAGE> 47
capital and capital expenditures. The range of discount rates chosen in the
discounted cash flow analysis was with comparable risk profiles based upon rates
of return on alternate investment opportunities or investments in companies with
comparable risk profiles. The range of terminal values was chosen around EBITDA
multiple range for National Patent using the comparable company analysis and
comparable transactions analysis.
In analyzing the discounted cash flow analysis, Oppenheimer placed the most
weight on the discount rates 14% to 16% and terminal multiples of 4.00x to 5.00x
in part because the varied nature of National Patent's business makes it
difficult to predict results and because of National Patent's inconsistent
historical results. Utilizing these assumptions, this analysis resulted in an
implied equity valuation range per share of NPD Common Stock of $9.67 to $13.86.
Liquidation Analysis. Oppenheimer performed a liquidation analysis of
National Patent assuming that each subsidiary and division is sold separately to
interested buyers and also assuming that National Patent's ownership interests
in publicly traded companies are sold as a block either through a stockholder as
a "block trade" or directly to interested parties. Oppenheimer has assigned
premiums or discounts to these sales/trades depending on a number of factors,
including but not limited to, National Patent's ownership interest, the nature
of the business and its position in its life cycle, and the price of, the stock
in the case of publicly traded companies. The aggregate sales/trades values were
reduced for taxes and estimated severance costs provided by National Patent
management to arrive at a liquidation value of National Patent. The valuation of
National Patent by means of the liquidation analysis would be an implied equity
valuation per share of NPD Common Stock of between $11.51 to $13.72.
Conclusion. Based on the analyses described above, Oppenheimer concluded
the fair value per share of NPD Common Stock, assuming the current ownership
level of General Physics, as of the date of its opinion, was between $8.80 and
$12.43. In determining such value range, Oppenheimer relied more heavily on the
comparable company (subsidiary) analysis because it took into account the sum of
the estimated trading values of each of National Patent's subsidiaries.
Oppenheimer also relied on the liquidation analysis because this analysis is
used by equity research and trading professionals in valuing National Patent.
Based on the Exchange Ratio and the valuations for the GPC Common Stock and
the NPD Common Stock set forth above, Oppenheimer concluded that the
consideration to be received by stockholders of General Physics (other than
National Patent) is fair from a financial point of view.
Pursuant to a letter agreement dated July 18, 1996 between General Physics
and the Special Committee, on the one hand, and Oppenheimer, on the other hand
(the "Engagement Letter"), General Physics retained Oppenheimer to act as
financial advisor to the Special Committee in connection with its evaluation of
the Merger. Pursuant to the Engagement Letter, General Physics agreed to pay
Oppenheimer an initial fee of $50,000, which is nonrefundable. General Physics
also agreed to pay Oppenheimer an additional fee of $150,000 upon delivery of a
written or oral opinion on the fairness from a financial point of view of the
consideration to be received by the holders of the GPC Common Stock and an
additional fee of $200,000 upon closing of the Merger. In addition to the
foregoing compensation, General Physics has agreed to reimburse Oppenheimer for
its reasonable out-of-pocket expenses, including reasonable fees and expenses of
counsel. General Physics has also agreed to indemnify and hold harmless
Oppenheimer against certain liabilities, including liabilities under the federal
securities laws, arising out of or in connection with the matters contemplated
by the Engagement Letter.
The Special Committee selected Oppenheimer to act as its financial advisor
because of its commitment of senior personnel to the task, its extensive
experience with the investor community and its national reputation in valuation
and mergers and acquisitions. In the ordinary course of business, Oppenheimer
may actively trade the securities of both General Physics and National Patent
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities. Oppenheimer, as
part of its investment banking services, is regularly engaged in the valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements.
35
<PAGE> 48
THE MERGER AGREEMENT
The following is a brief summary of the principal terms of the Merger
Agreement, a copy of which is attached to this Joint Proxy Statement/Prospectus
as Annex A (including Amendment No. 1 thereto). (All references to the Merger
Agreement in this section refer to the Merger Agreement, as amended.)
Capitalized terms which are not otherwise defined in this summary have the
meanings set forth in the Merger Agreement. The description set forth below of
the terms of the Merger Agreement is qualified in its entirety by reference to
the complete text of the Merger Agreement, which is incorporated by reference
herein. All of the stockholders of National Patent and General Physics are urged
to read the Merger Agreement in its entirety.
General. The Boards of Directors of National Patent and General Physics
have approved the Merger Agreement, which provides for the Merger of General
Physics and GPX Acquisition Inc., a newly-formed direct wholly-owned subsidiary
of National Patent, at the Effective Time, with General Physics as the Surviving
Corporation. As a result of the Merger, by operation of Delaware law, all of the
properties, rights, privileges, powers and franchises of GPX will vest in
General Physics as the Surviving Corporation, and all debts, liabilities and
duties of GPX will become the debts, liabilities and duties of General Physics.
The directors and officers of General Physics immediately prior to the
Merger will be the directors and officers of the Surviving Corporation. The
Certificate of Incorporation of General Physics, as in effect immediately prior
to the Effective Time, will be the certificate of incorporation of the Surviving
Corporation, and the By-laws of General Physics, as in effect immediately prior
to the Effective Time, will be the by-laws of the Surviving Corporation.
Effective Time. The Effective Time will be the time of the filing of a
certificate of merger with the Secretary of State of the State of Delaware or
such later time as is specified in such certificate of merger. The filing of the
certificate of merger will occur on the Closing Date (or such other later date
as National Patent and General Physics may agree). The Merger Agreement may be
terminated by either party if, among other reasons, the Merger shall not have
been consummated on or before April 30, 1997 (the "End Date"). See "THE MERGER
AGREEMENT -- Conditions to the Merger" and "THE MERGER AGREEMENT --
Termination."
MERGER CONSIDERATION
Upon consummation of the Merger, except as described below, each
outstanding share of GPC Common Stock, other than shares held in General
Physics' treasury or held by National Patent or General Physics will be
automatically converted (except that cash will be paid in lieu of fractional
shares) into the right to receive 0.54 validly issued, fully paid and
non-assessable shares of NPD Common Stock.
Any shares of GPC Common Stock owned immediately prior to the Effective
Time by National Patent, General Physics or General Physics' subsidiaries will
be canceled and retired and will cease to exist. National Patent has agreed to
cause its subsidiaries (other than General Physics and its subsidiaries) to
distribute any and all shares of GPC Common Stock to National Patent prior to
the Effective Time.
The Exchange Ratio and the Collar. So long as the Market Price (defined
below) of the NPD Common Stock as of January 16, 1997 (the "Test Date") is no
more than $10.00 or less than $9.259 (such range, the "Collar"), the Exchange
Ratio is fixed, and neither General Physics nor National Patent has the right to
terminate the Merger Agreement based on changes in the Market Price of the NPD
Common Stock.
In the event the Market Price of the NPD Common Stock is outside of the
Collar on the Test Date, the Exchange Ratio may be adjusted by the parties as
follows:
1. If the Market Price of the NPD Common Stock on the Test Date is
less than $9.259, National Patent may elect to "gross-up" the Exchange
Ratio by increasing the number of shares of NPD Common Stock to be received
by a holder of GPC Common Stock so that such holder will receive shares of
NPD Common Stock with the same value per share of GPC Common Stock held by
such holder, as such holder would have received in the event the Market
Price had been $9.259 (such election, the "Gross-Up Option"). If National
Patent fails to exercise the Gross-Up Option no later than the close of
business on the second trading day after the Test Date, (i) General Physics
may terminate the Merger Agreement or
36
<PAGE> 49
(ii) if the Special Committee withdraws its approval of the Merger prior to
the close of business on the fourth trading day after the Test Date, the
Merger Agreement will terminate without any action by any party.
2. If the Market Price of the NPD Common Stock on the Test Date is
greater than $10.00, General Physics may elect to reduce the Exchange Ratio
by decreasing the number of shares of NPD Common Stock to be received by a
holder of GPC Common Stock so that such holder will receive shares of NPD
Common Stock with the same value per share of GPC Common Stock held by such
holder, as such holder would have received in the event the Market Price
had been $10.00 (such election, the "Reduction Option"). If General Physics
fails to exercise the Reduction Option no later than the close of business
on the second trading day after the Test Date, National Patent may
terminate the Merger Agreement.
The term "Market Price" means the amount which is equal to the overall
average of the high, low, opening and closing sales prices (averaged on a daily
basis) of NPD Common Stock on the American Stock Exchange Composite Tape on each
of the ten consecutive trading days immediately preceding the trading day which
is five trading days prior to the date of the Special Meetings.
If the Market Price of the NPD Common Stock is outside of the Collar and
National Patent or General Physics does not exercise the Gross-Up or Reduction
Option, as the case may be, General Physics or National Patent, as the case may
be, may elect not to terminate the Merger Agreement and proceed with the Merger.
By approving the Merger Agreement, stockholders of National Patent would be
permitting the NPD Board, in the exercise of its fiduciary duties, to proceed
with the Merger under such circumstances. By approving the Merger Agreement,
stockholders of General Physics would be permitting the GPC Board and the
Special Committee, in the exercise of their fiduciary duties, to proceed with
the Merger under such circumstances. See "RISK FACTORS -- Risk Factors
Applicable to the Merger -- Risks Associated with the Exchange Ratio and
Fluctuations in the Market Price of the NPD Common Stock."
Options and Warrants. National Patent has agreed to use its reasonable
best efforts to repurchase all vested stock options held at the Effective Time
by each employee, officer and director of General Physics for a payment in cash
in an amount equal to $5.20 less the exercise price of the stock option as in
effect immediately prior to the Merger. Upon repurchase, any such vested option
will be cancelled. Each officer, employee, and director of General Physics
currently holding unvested stock options will be entitled to receive for each
share of GPC Common Stock which would have been obtainable upon exercise of the
stock option a payment from National Patent in shares of NPD Common Stock equal
to $5.20 less the exercise price of the unvested stock option as such exercise
price is in effect immediately prior to the Merger (subject to adjustment for
stock dividends, stock splits and similar transactions). Such payment in shares
of NPD Common Stock will be made at the time such stock option vests using the
market price of the NPD Common Stock as of the end of the business day
immediately preceding such vesting date. The $5.20 price represents the middle
of the range of prices of the GPC Common Stock, from $5.00 to $5.40, which will
be paid in shares of NPD Common Stock in the Merger, so long as the Market Price
of the NPD Common Stock is within the Collar. The $5.20 price remains fixed even
if on the Test Date the Market Price of the NPD Common Stock is outside of the
Collar. See "RISK FACTORS -- Risk Factors Applicable to the Merger -- Benefits
Accruing to Directors and Officers of General Physics." To the extent that any
vested stock options are not repurchased by National Patent, such vested stock
options will be adjusted so that the holders of such options will be entitled to
receive, upon payment of the exercise price thereof, the shares of NPD Common
Stock which such holders would have been entitled to receive after the Effective
Time had such options been exercised immediately prior to the Merger.
At the Effective Time, all outstanding Warrants to purchase shares of GPC
Common Stock will be adjusted so that the holders of the Warrants will be
entitled to receive, upon payment of the exercise price thereof, the shares of
NPD Common Stock which such holders would have owned or have been entitled to
receive after the Effective Time had such Warrants been exercised immediately
prior to the Effective Time. This treatment of outstanding Warrants is in
accordance with the terms set forth in such Warrants.
37
<PAGE> 50
Certain officers and directors of National Patent and General Physics hold
vested and unvested stock options to purchase shares of GPC Common Stock. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Interests of Certain Persons
in the Merger."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
The conversion of GPC Common Stock into NPD Common Stock will occur
automatically at the Effective Time.
Promptly after the Effective Time, Harris Trust Company of New York, in its
capacity as Exchange Agent (the "Exchange Agent"), will send a transmittal form
to each former holder of GPC Common Stock. The transmittal form will contain
instructions with respect to the surrender of certificates previously
representing GPC Common Stock to be exchanged for NPD Common Stock.
GENERAL PHYSICS STOCKHOLDERS SHOULD NOT FORWARD GENERAL PHYSICS STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
GENERAL PHYSICS STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY.
After the Effective Time, each certificate that previously represented
shares of GPC Common Stock will represent only the right to receive the NPD
Common Stock into which such shares were converted in the Merger and the right
to receive cash in lieu of fractional shares of NPD Common Stock as described
below.
Holders of certificates previously representing GPC Common Stock will not
be paid dividends or other distributions declared or made following the
Effective Time on the NPD Common Stock into which such shares have been
converted, and will not be paid cash in lieu of fractional shares of NPD Common
Stock, until such certificates are surrendered to the Exchange Agent for
exchange. When such certificates are surrendered, any unpaid dividends and other
distributions and any cash in lieu of fractional shares of NPD Common Stock
payable as described below will be paid without interest.
Former holders of record immediately prior to the Effective Time of shares
of GPC Common Stock will be entitled, at and after the Effective Time, to vote
the number of shares of NPD Common Stock which they are entitled to receive in
respect of their shares of GPC Common Stock in the Merger, regardless of whether
the certificates formerly representing such shares of GPC Common Stock shall
have been surrendered in exchange for certificates evidencing NPD Common Stock.
All shares of NPD Common Stock issued upon conversion of shares of GPC
Common Stock (including any cash issued in lieu of any fractional shares of NPD
Common Stock), shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of GPC Common Stock, subject, however, to the
Surviving Corporation's obligation (which shall be satisfied exclusively from
the assets of the Surviving Corporation, and not, directly or indirectly, from
the assets of National Patent) to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by General Physics on such shares of GPC Common Stock in
accordance with the Merger Agreement or prior to the date of the Merger
Agreement and which remain unpaid at the Effective Time.
No fractional shares of NPD Common Stock will be issued to any General
Physics stockholder upon surrender of certificates previously representing GPC
Common Stock. For each fractional share that would otherwise be issued, National
Patent will pay by check an amount equal to (x) such fractional part of a share
of NPD Common Stock multiplied by (y) the amount which is equal to the average
of the closing sales prices of NPD Common Stock on the American Stock Exchange
Composite Tape on each of the twenty consecutive days immediately preceding the
trading day which is five trading days prior to the date of the Special
Meetings.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
National Patent, GPX and General Physics. Those made by National Patent include
representations and warranties as to, among other
38
<PAGE> 51
things: (i) the corporate organization, good standing and power of National
Patent and each of its subsidiaries; (ii) National Patent's capital structure;
(iii) the authorization, execution, delivery, performance and enforceability of
the Merger Agreement and related matters, the Merger Agreement's
noncontravention of any applicable agreement or law (subject to certain
materiality exceptions), or any charter or by-law provision of National Patent
or its subsidiaries, and the governmental filings, consents, approvals or
actions needed with respect to any transaction contemplated by the Merger
Agreement; (iv) documents filed by National Patent with the Commission and the
accuracy of information contained therein; (v) the financial statements included
in the foregoing documents filed with the Commission, and the absence of
material undisclosed liabilities; (vi) the accuracy of information supplied by
National Patent in connection with this Joint Proxy Statement/ Prospectus; (vii)
the absence of certain material changes or events since the date of the most
recent financial statements filed with the Commission, including, among other
things, any NPD Material Adverse Effect (as defined in "Conditions to the
Merger" below), or any event or condition that individually or in the aggregate
could reasonably be expected to result in a NPD Material Adverse Effect; (viii)
the filing of tax returns and payment of taxes; (ix) compliance with applicable
laws; (x) the voting requirements for the approval of the Merger; (xi) certain
advisory fees and expenses; (xii) the absence of certain material litigation;
(xiii) material contracts of National Patent and its subsidiaries; and (xiv)
certain matters relating to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). No representations and warranties are made by National
Patent or GPX with respect to General Physics or its subsidiaries.
The Merger Agreement also includes substantially similar representations
and warranties of General Physics. The representations and warranties made by
General Physics include representations and warranties as to, among other
things: (i) the corporate organization, good standing and power of General
Physics and each of its subsidiaries; (ii) General Physics' capital structure;
(iii) the authorization, execution, delivery, performance and enforceability of
the Merger Agreement and related matters, the Merger Agreement's
noncontravention of any applicable agreement or law (subject to certain
materiality exceptions), or any charter or by-law provision of General Physics
or its subsidiaries, and the governmental filings, consents, approvals or
actions needed with respect to any transaction contemplated by the Merger
Agreement; (iv) documents filed by General Physics with the Commission and the
accuracy of information contained therein; (v) the financial statements included
in the foregoing documents filed with the Commission, and the absence of
material undisclosed liabilities; (vi) the accuracy of information supplied by
General Physics in connection with this Joint Proxy Statement/Prospectus; (vii)
the absence of certain material changes or events since the date of the most
recent financial statements filed with the Commission, including, among other
things, any GPC Material Adverse Effect (as defined in "Conditions to the
Merger" below), or any event or condition that individually or in the aggregate
could reasonably be expected to result in a GPC Material Adverse Effect; (viii)
the filing of tax returns and payment of taxes; (ix) compliance with applicable
laws; (x) the voting requirements for the approval of the Merger; (xi) certain
advisory fees and expenses; (xii) the absence of certain material litigation;
(xiii) material contracts of General Physics and its subsidiaries; and (xiv)
certain matters relating to ERISA.
Except as to certain representations and warranties concerning brokers and
finders, the representations and warranties in the Merger Agreement do not
survive the Effective Time. The parties have no recourse for breach of any
non-surviving representation or warranty in the Merger Agreement after the
Effective Time. See "RISK FACTORS -- Risk Factors Applicable to the Merger -- No
Survival of Representations and Warranties."
CONDUCT OF BUSINESS PRIOR TO MERGER
In the Merger Agreement, National Patent has agreed that during the period
up to the Effective Time, National Patent will, and will cause its subsidiaries
to, carry on their respective businesses only in the ordinary course of business
substantially consistent with past practice and, to the extent consistent
therewith, use all reasonable best efforts to preserve intact their current
business organizations, keep available the services of their current officers
and employees and preserve their relationships with agents and others having
business dealings with them to the end that their goodwill and ongoing
businesses will be unimpaired at the Effective Time.
39
<PAGE> 52
Without limiting the generality of the foregoing, during the period up to
the Effective Time, except as expressly contemplated by the Merger Agreement,
National Patent will not, and will not permit any of its subsidiaries to,
without the prior written consent of General Physics (by action of the Special
Committee): (i) amend its certificate of incorporation, by-laws or other
comparable charter or organizational documents; (ii) (x) declare, set aside or
pay any cash dividends on, or make any other cash distributions in respect of,
any of National Patent's outstanding capital stock or (y) split, combine or
reclassify any of its outstanding capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its outstanding capital stock; (iii) merge or consolidate with any
other person (other than a merger or consolidation of a subsidiary of National
Patent with a wholly-owned subsidiary of National Patent); (iv) sell, lease,
license, mortgage or otherwise encumber or subject to any Lien or otherwise
dispose (or agree to any of the foregoing) of any of its properties or assets
that are material, individually or in the aggregate, to National Patent and its
subsidiaries, except in the ordinary course of business substantially consistent
with past practice and sales of investment assets in the ordinary course of
business; (v) incur any indebtedness for borrowed money or guarantee or
otherwise become responsible for any such indebtedness of another person other
than (x) pursuant to existing line of credit arrangements of National Patent or
its subsidiaries and letters of credit and related agreements of National Patent
or its subsidiaries in each case in the ordinary course of business
substantially consistent with past practice, or (y) indebtedness in principal
amounts of less than $10,000,000 in the aggregate; (vi) settle or compromise any
derivative suit or other litigation or claim arising out of the transactions
contemplated hereby, or any other litigation or claim involving National Patent
or GPX if the settlement thereof involves payment of in excess of $100,000;
provided, that General Physics has agreed to not unreasonably withhold its
consent to any such settlement or compromise; (vii) take any action that
requires the approval of its stockholders; (viii) take any action that would, or
would be reasonably likely to, result in any of National Patent's, GPX's or
General Physics' representations and warranties set forth in the Merger
Agreement not being true in all material respects as of or at any time prior to
the Effective Time or in any of the conditions to the Merger set forth in the
Merger Agreement not being satisfied; or (ix) agree to take any of the foregoing
actions.
The Merger Agreement further provides that, without limiting the generality
of the foregoing, during the period up to the Effective Time, General Physics
and its subsidiaries will not, and the Special Committee will not take any
affirmative action that would cause General Physics or its subsidiaries to,
except as expressly contemplated by the Merger Agreement: (i) (x) declare, set
aside or pay any dividends on, or make any other distributions (whether in cash,
stock or property) in respect of, any of the outstanding capital stock of
General Physics, except for General Physics' regular quarterly dividends of up
to $.06 per fiscal quarter per share, (y) split, combine or reclassify any of
General Physics' outstanding capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for shares of
General Physics' outstanding capital stock or (z) purchase, redeem or otherwise
acquire any shares of its outstanding capital stock or other securities or any
rights, warrants or options to acquire any such shares or securities; (ii)
issue, sell, grant, pledge or otherwise encumber any shares of its capital
stock, any other voting securities or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, voting securities or
convertible securities other than upon the exercise of stock options outstanding
on the date of the Merger Agreement or certain other specified issuances; (iii)
amend its certificate of incorporation, by-laws or other comparable charter or
organizational documents; (iv) merge or consolidate with any other person or
acquire (x) any corporation, partnership, joint venture, association or other
business organization or division thereof, or (y) any assets that are material,
individually or in the aggregate, to General Physics and its subsidiaries taken
as a whole; (v) sell, lease, license, mortgage or otherwise encumber or subject
to any Lien or otherwise dispose of (or agree to any of the foregoing) any of
its properties or assets that are material, individually or in the aggregate, to
General Physics and its subsidiaries, except in the ordinary course of business
substantially consistent with past practice and sales of investment assets in
the ordinary course of business; (vi) (x) incur any indebtedness for borrowed
money or guarantee or otherwise become responsible for any such indebtedness of
another person, other than pursuant to line of credit arrangements existing as
of the date of the Merger Agreement and letters of credit and related agreements
of General Physics or its subsidiaries in each case in the ordinary course of
business substantially consistent with past practice or (y) make any loans,
advances or capital contributions to, or investments in, any other person, other
than to General Physics or to any direct or
40
<PAGE> 53
indirect wholly-owned subsidiary of General Physics; (vii) (x) enter into,
adopt, amend (except as may be required by law) or terminate any employee
benefit plan or any agreement, arrangement, plan or policy between General
Physics and one or more of its directors, officers or employees or (y) increase
in any manner the compensation or fringe benefits (including severance benefits)
of any director, officer or employee or pay any benefit not required by any plan
or arrangement in effect as of the date of the Merger Agreement; (viii) settle
or compromise any derivative suit or other litigation or claim arising out of
the transactions contemplated hereby, or any other litigation or claim involving
General Physics if the settlement thereof involves payment of in excess of
$100,000; provided, that National Patent has agreed to not unreasonably withhold
its consent to any such settlement or compromise; (ix) make any material change
in accounting methods, principles or practices used by General Physics or any of
its subsidiaries except for any such change required by reason of a concurrent
change in GAAP; (x) take any action that requires the approval of its
stockholders; (xi) take any action that would, or would be reasonably likely to,
result in any of General Physics' representations and warranties set forth in
the Merger Agreement not being true in all material respects as of or at any
time prior to the Effective Time or in any of the conditions to the Merger set
forth in the Merger Agreement not being satisfied; or (xii) agree to take any of
the foregoing actions.
NO SOLICITATION; FIDUCIARY OUT
The Merger Agreement provides that General Physics will not (nor will it
permit any of its officers, directors, agents or affiliates to) directly or
indirectly solicit, encourage (including by way of providing any non-public
information concerning General Physics or its subsidiaries to any person),
initiate or participate in any negotiations or discussions, or enter into (or
authorize) any agreement or agreement in principle, or announce any intention to
do any of the foregoing, with respect to any Acquisition Transaction. An
"Acquisition Transaction" is defined in the Merger Agreement as any offer or
proposal to acquire all, or a substantial part, of General Physics' or its
subsidiaries' business and properties or any of its or its subsidiaries' capital
stock whether by merger, purchase of assets, tender offer or otherwise. The
Merger Agreement does not prohibit the Special Committee, to the extent required
by its fiduciary duties under applicable law as advised by counsel, from
providing information to, participating in negotiations or discussions with,
entering into any agreement or transaction with, or announcing any intention to
do any of the foregoing with, any party that makes an unsolicited inquiry or
proposal relating to an Acquisition Transaction. The Merger Agreement further
provides that General Physics will promptly notify National Patent of the
receipt of any inquiry or proposal which it may receive in respect of any
Acquisition Transaction, including the identity of the person making such
inquiry or proposal and, unless advised by counsel that there is a significant
risk that such action would constitute a breach of the Special Committee's
fiduciary duties, the material terms and conditions thereof and any changes
therein. National Patent has agreed that the Special Committee may provide to
any such party that makes an unsolicited inquiry or proposal respecting an
Acquisition Transaction any change in the terms in the Merger Agreement proposed
by National Patent in response to such unsolicited inquiry or proposal, provided
that the Special Committee has disclosed to National Patent the identity of the
person making such inquiry or proposal and the material terms and conditions of
such proposed Acquisition Transaction and any changes therein.
INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, National Patent or the Surviving
Corporation has generally agreed to indemnify the present officers and directors
of General Physics and its subsidiaries against all damages and liabilities
arising out of acts or omissions occurring prior to the Effective Time
(including but not limited to the transactions contemplated by the Merger
Agreement) to the fullest extent permitted by Delaware law. National Patent has
also agreed that all limitations or exculpation of liabilities existing in favor
of such persons provided for in the GPC Charter and the GPC By-laws, in each
case as in effect on the date of the Merger Agreement, shall continue in full
force and effect with respect to Merger Matters, without any amendment thereto,
to the extent such rights are consistent with the DGCL. In addition, National
Patent has agreed that it or the Surviving Corporation will maintain General
Physics' existing directors' and officers' liability insurance coverage for six
years from the Effective Time in respect of events occurring prior to the
Effective Time, subject to certain limitations.
41
<PAGE> 54
CERTAIN ADDITIONAL AGREEMENTS
The Merger Agreement contains additional covenants of each party,
including, among others, the following: (i) to call the NPD Stockholders Meeting
or GPC Stockholders Meeting, as the case may be; (ii) to take, or cause to be
taken, all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger; (iii) to
allow the other party reasonable access to its properties, books, contracts,
commitments and records; (iv) to use its best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other party in doing, all things necessary, proper and advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger; (v) to consult with the other party regarding any public announcement
regarding the transactions contemplated by the Merger Agreement; and (vi) to
make and cause their respective subsidiaries to make all necessary filings in
order to consummate the Merger and the other transactions contemplated by the
Merger Agreement, to use best efforts to comply with all governmental
requirements applicable to the Merger and to obtain as promptly as practicable
all necessary permits, orders or other consents of governmental entities and
consents of all third parties necessary for the consummation of the Merger and
the other transactions contemplated by the Merger Agreement.
CONDITIONS TO THE MERGER
Subject to satisfaction or waiver of all conditions to the Merger set forth
in the Merger Agreement or the earlier termination of the Merger Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m. on the
Closing Date.
The obligations of each of National Patent and General Physics to
consummate the Merger are subject to the satisfaction or waiver of several
conditions, including: (i) the obtaining of all necessary stockholder approvals;
(ii) the receipt of required consents and approvals of governmental entities and
specified third parties except to the extent not material; (iii) the absence of
any injunction, order or other legal restraint or prohibition preventing the
Merger or any of the other transactions contemplated by the Merger Agreement;
provided that any party invoking this condition shall have used reasonable
efforts to have any such order or injunction vacated; (iv) the Registration
Statement having become effective under the Securities Act and not being subject
to any stop order or related proceedings; and (vi) the shares of NPD Common
Stock to be issued in the Merger having been approved for trading on the AMEX
subject to official notice of issuance.
The obligations of General Physics to effect the Merger are further subject
to certain additional conditions, including, among others, the following: (i)
the truth and correctness, or truth and correctness in all material respects, as
applicable, of the representations and warranties of National Patent as of
specified dates; (ii) the performance by National Patent in all material
respects of all obligations required to be performed by it under the Merger
Agreement prior to the Closing Date; (iii) since September 30, 1996, there
having been no NPD Material Adverse Effect, and no event or condition which
individually or in the aggregate could reasonably be expected to result in a NPD
Material Adverse Effect, other than any such NPD Material Adverse Effect deemed
waived as described under "Amendment and Waiver"; and (iv) the opinion of
Oppenheimer to the effect that the consideration to be received by holders of
GPC Common Stock in the Merger is fair to such holders, shall have been
delivered as of the Test Date and as of the Closing Date.
The obligations of National Patent to effect the Merger are further subject
to certain additional conditions, including, among others, the following: (i)
the truth and correctness, or truth and correctness in all material respects, as
applicable, of the representations and warranties of General Physics as of
specified dates; (ii) the performance by General Physics in all material
respects of all obligations required to be performed by it under the Merger
Agreement prior to the Closing Date; (iii) since September 30, 1996, there
having been no GPC Material Adverse Effect, and no event or condition which
individually or in the aggregate could reasonably be expected to result in a GPC
Material Adverse Effect, other than any such GPC Material Adverse Effect deemed
waived as described under "Amendment and Waiver"; and (iv) the opinion of
Oppenheimer to the effect that the consideration to be paid by National Patent
in the Merger is fair to the stockholders of General Physics, from a financial
point of view, shall have been delivered as of the Closing Date.
42
<PAGE> 55
As used in the Merger Agreement, (x) a "GPC Material Adverse Effect" means
any circumstance relating to, change in, or effect on General Physics and its
Subsidiaries taken as a whole that, individually or in the aggregate with any
other circumstances relating to, changes in, or effects on, any of General
Physics or its Subsidiaries is materially adverse to the business, assets,
liabilities, financial condition, or results of operations of General Physics
and its Subsidiaries taken as a whole and (y) a "NPD Material Adverse Effect"
means any circumstance relating to, change in, or effect on National Patent and
its Subsidiaries taken as a whole that, individually or in the aggregate with
any other circumstances relating to, changes in, or effects on, any of National
Patent or its Subsidiaries is materially adverse to the business, assets,
liabilities, financial condition, or results of operations of National Patent
and its Subsidiaries taken as a whole.
AMENDMENT AND WAIVER
Subject to applicable law, at any time prior to the Effective Time, the
parties may (i) amend the Merger Agreement; provided, however, that after
approval of the Merger by the stockholders of General Physics and/or National
Patent, no amendment shall be made that by law requires the approval of General
Physics' stockholders or National Patent's stockholders, as the case may be,
without the approval of such stockholders; (ii) extend the time for the
performance of any of the obligations or other acts of the other party; (iii)
waive any inaccuracies in the representations and warranties of the other party
contained in the Merger Agreement or in any document delivered pursuant to the
Merger Agreement; or (iv) subject to clause (i) above, waive compliance with any
of the agreements or conditions of the other party contained in the Merger
Agreement. Any agreement on the part of a party to any such amendment, extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time:
(a) by mutual written consent of General Physics and National Patent;
(b) by written notice by either General Physics or National Patent:
(i) if the Merger has not been consummated on or before the End Date unless
the failure to consummate the Merger is the result of a willful and
material breach of the Merger Agreement by the party seeking to terminate
the Merger Agreement; or (ii) if any governmental entity has issued an
order, decree or ruling or taken any other action permanently enjoining,
restraining or otherwise prohibiting the Merger and such order, decree,
ruling or other action has become final and nonappealable;
(c) by National Patent, if there has been a material breach of any
material representation, warranty, covenant or agreement on the part of
General Physics such that certain conditions are incapable of being
satisfied by the End Date (or as otherwise extended); provided, however,
that if any such breach is curable by General Physics through the exercise
of its reasonable best efforts and for so long as General Physics is using
its reasonable best efforts to cure such breach, National Patent may not
terminate the Merger Agreement pursuant to such provision;
(d) by General Physics, if there has been any material breach of any
material representation, warranty, covenant or agreement on the part of
National Patent such that certain conditions are incapable of being
satisfied by the End Date (or as otherwise extended); provided, however,
that if any such breach is curable by National Patent through the exercise
of its reasonable best efforts and for so long as National Patent is using
its reasonable best efforts to cure such breach, General Physics may not
terminate the Merger Agreement pursuant to such provision;
(e) by National Patent, if the approval of the stockholders of
National Patent has not been obtained by reason of the failure to obtain
the required vote at the NPD Stockholders Meeting or any adjournment
thereof;
(f) by General Physics, (i) if the approval of the stockholders of
National Patent has not been obtained by reason of the failure to obtain
the required vote at the NPD Stockholders Meeting or any adjournment
thereof or (ii) if the approval of the stockholders of General Physics has
not been obtained
43
<PAGE> 56
by reason of the failure to obtain the required vote at the GPC
Stockholders Meeting or any adjournment thereof (other than by reason of
termination of the Merger Agreement by General Physics or by reason of a
failure to hold a GPC Special Meeting);
(g) by National Patent, if, prior to the GPC Stockholders Meeting, the
Special Committee or the GPC Board has withdrawn, or modified or changed in
any matter adverse to National Patent, its approval or recommendation of
the Merger Agreement or the Merger or if such GPC Board will not convene a
GPC Special Meeting;
(h) by General Physics, if, prior to the NPD Stockholders Meeting, the
NPD Board has withdrawn, or modified or changed in any matter adverse to
General Physics its approval or recommendation of the Merger Agreement or
the Merger;
(i) by General Physics, if General Physics has received a bona fide
proposal for an Acquisition Transaction which the Special Committee
believes, and advises the GPC Board, is superior to the Merger from a
financial point of view to the stockholders of General Physics (provided
that the provisions described under "No Solicitation; Fiduciary Out" have
not been breached);
(j) unless General Physics has exercised the GPC Reduction Option, by
National Patent on a date no earlier than the close of business on the
second trading day after January 16, 1997 and no later than the close of
business on the fourth trading day after January 16, 1997, if as of January
16, 1997 the Market Price of the NPD Common Stock is greater than $10.00;
or
(k) unless National Patent has exercised the Parent Gross-Up Option,
by General Physics on a date no earlier than the close of business on the
second trading day after January 16, 1997 and no later than the close of
business on the fourth trading day after January 16, 1997, if as of January
16, 1997 the Market Price of the NPD Common Stock is less than $9.259.
The Merger Agreement will terminate without action taken by any party if
(i) on January 16, 1997 the Market Price of the NPD Common Stock is less than
$9.259, (ii) National Patent has not exercised the Parent Gross-Up Option, and
(iii) if, on a date no earlier than the close of business on the second trading
day after January 16, 1997 and no later than the close of business on the fourth
trading day after January 16, 1977, the Special Committee has withdrawn its
approval or recommendation of the Merger Agreement or the Merger, such
termination to be effective as of the date such approval is withdrawn.
If the Closing of the Merger has not occurred prior to February 15, 1997,
National Patent must provide the Special Committee with updated financial
statements. If, in the opinion of the Special Committee, such financial
statements reflect a material deterioration in the financial condition of
National Patent on a consolidated basis, General Physics has the right to
terminate the Merger Agreement.
In the event of termination of the Merger Agreement by either National
Patent or General Physics, written notice thereof must be promptly given to the
other party and the Merger Agreement will become void and have no effect,
without any liability or obligation on the part of General Physics or National
Patent, other than under certain specified provisions of the Merger Agreement
relating to amendment of the Management Agreement, certain fees and expenses and
certain other miscellaneous provisions, provided, however, that no party will be
relieved from any liability resulting from any willful and material breach of
any of its representations, warranties, covenants or agreements set forth in the
Merger Agreement.
CERTAIN EXPENSES
The Merger Agreement provides that National Patent will reimburse General
Physics for all documented, reasonable out-of-pocket expenses incurred by
General Physics in connection with the Merger Agreement and the Merger in the
event that the Merger Agreement is terminated by General Physics because of a
material breach of a material representation, warranty, covenant or agreement on
the part of National Patent such that certain conditions are incapable of being
satisfied by the End Date or because the approval of the stockholders of
National Patent has not been obtained (as described in paragraph (d) or clause
(i) of paragraph (f) of "Termination").
44
<PAGE> 57
Similarly, the Merger Agreement provides that General Physics will
reimburse National Patent for all documented, reasonable out-of-pocket expenses
incurred by National Patent in connection with the Merger Agreement and the
Merger in the event that:
(i) if a person or group shall have made a bona fide proposal for an
Acquisition Transaction, General Physics has failed to terminate this
Agreement because the approval of the stockholders of General Physics has
not been obtained and National Patent has terminated the Merger Agreement
because, prior to the GPC Special Meeting, the Special Committee or the GPC
Board has withdrawn, or modified or changed in any manner adverse to
National Patent, its approval or recommendation of the Merger Agreement or
the Merger or if the GPC Board will not convene a meeting; and
(ii) prior to November 19, 1997, General Physics or any of its
Subsidiaries enters into or authorizes any agreement or agreement in
principle with any person other than National Patent or its stockholders as
a group to sell, lease or otherwise transfer all or a substantial part of
its or its subsidiaries' business and properties or any of its or its
subsidiaries' capital stock (excluding capital stock held by National
Patent) whether by merger, purchase of assets, tender offer or otherwise.
The Merger Agreement provides that the above-described payments will be as
liquidated damages and will be in lieu of any other remedies (other than any
liability resulting from any willful and material breach of the representations,
warranties, covenants or agreements set forth in the Merger Agreement).
Except as provided above and except for printing expenses and filing fees,
which will be shared equally, each of National Patent and General Physics will
pay its own fees and expenses incident to preparing for, entering into and
carrying out the Merger Agreement and the transactions contemplated thereby,
whether or not the Merger is consummated.
LITIGATION CHALLENGING THE MERGER
On September 27, 1996, General Physics, all of the directors of General
Physics and National Patent were named as defendants in a complaint filed in the
Court of Chancery of the State of Delaware in and for New Castle County, styled
Dunlop v. Pollak, et al., Civil Action No. 15237-NC. The complaint was brought
by an alleged stockholder of General Physics, individually and purportedly as a
class action on behalf of all other stockholders of General Physics. The
complaint alleges purported breaches of fiduciary duty by the directors of
General Physics, including certain directors who are also directors of National
Patent, and purported breaches of fiduciary duty by National Patent, as an
alleged majority and controlling stockholder, arising primarily from the Merger.
The complaint alleges, among other things, that the Merger has been timed to
allow National Patent to take advantage of the current trading price of GPC
Common Stock, which plaintiff alleges is depressed. The complaint seeks, among
other things, injunctive relief prohibiting the Merger or, if the Merger is
consummated, an order rescinding the Merger or granting plaintiff and the other
members of the purported class damages. Plaintiff has granted the defendants an
extension of the time to answer the complaint and to respond to plaintiff's
pending request to review documents relating to the Merger. The defendants
believe that the claims set forth in the complaint are without merit, and intend
vigorously to defend the litigation.
The plaintiff and the defendants have reached an agreement in principle to
settle the above-referenced action. Pursuant to such agreement, National Patent,
General Physics and GPX have entered into Amendment No. 1 to the Agreement and
Plan of Merger, dated as of December 18, 1996, which provides for an increase in
the Exchange Ratio of each outstanding share of GPC Common Stock for NPD Common
Stock from .53 to .54. In addition, the Collar was changed from a range of
$9.336 to $9.914 to a range of $9.259 to $10.00; the effect of the increase in
the Exchange Ratio and the change in the Collar is that holders of GPC Common
Stock will receive an amount in value of NPD Common Stock in the range of
between $5.00 and $5.40 (rather than $4.95 and $5.25), as long as the Market
Price of NPD Common Stock is within the Collar on the Test Date.
The agreement entered into with the plaintiff also provides that if the
Closing of the Merger has not occurred prior to February 15, 1997, National
Patent must provide the Special Committee with updated
45
<PAGE> 58
financial statements. If, in the opinion of the Special Committee and its
financial advisor, such financial statements reflect a material deterioration in
the financial condition of National Patent on a consolidated basis, General
Physics has the right to terminate the Merger Agreement. Further, in the event
that the Closing has not occurred prior to March 31, 1997, General Physics has
stated its intention to make its regular quarterly dividend payment with respect
to the quarter ended March 31, 1997, provided that funds are legally available
therefor and subject to the fiduciary obligations of the Board of Directors of
General Physics. Finally, the opinion of Oppenheimer to the effect that the
consideration to be received by holders of GPC Common Stock (other than National
Patent) in the Merger is fair to such holders from a financial point of view,
shall have been delivered as of the Test Date, as well as on the Closing Date.
As part of the agreement in principle, the parties agreed to use their best
efforts to enter into and execute a stipulation of settlement to release any and
all claims that have been or could have been asserted by or on behalf of the
plaintiff or any members of the purported class against any of the defendants in
the lawsuit which arise out of or relate to the Merger, the Merger Agreement,
this Joint Proxy Statement/Prospectus or events described in the lawsuit. The
settlement is subject to, among other things, completion of discovery to confirm
that the settlement is fair and reasonable and is in the best interest of
stockholders of General Physics.
In connection with the settlement, plaintiff's counsel will apply to the
court for an aggregate award of attorneys' fees and expenses in an amount not to
exceed $200,000, such fees to be paid principally in shares of NPD Common Stock.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of National
Patent with respect to such shares of NPD Common Stock to be issued to such
counsel.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
A summary of material federal income tax consequences of the Merger,
without reference to the particular facts and circumstances of any particular
stockholder, is set forth in "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Stockholders of General Physics are urged to consult their own tax advisors as
to the specific federal, state, local, foreign or other tax consequences to them
of the Merger.
ACCOUNTING TREATMENT
National Patent and General Physics expect that the Merger will be
accounted for as the purchase of a minority interest under United States
generally accepted accounting principles and that, pursuant to such accounting
treatment, National Patent will value the shares of NPD Common Stock to be
issued in the Merger in accordance with Accounting Principles Board Opinion No.
16 and the FASB's EITF Issue No. 95-19 (Determination of Measurement Date for
the Market Price of Securities Issued in a Business Combination) consensus that
the value of equity securities issued to effect a purchase combination should be
based on the market price for a reasonable period before and after the date the
purchase price and other terms of the acquisition are finally agreed and
announced. The acquisition price will be allocated to the assets acquired and
liabilities assumed. To the extent an excess of the acquisition price over the
fair value of the General Physics net identifiable assets exists after the
allocation, such excess will be allocated to goodwill.
RESALE OF NPD COMMON STOCK
The shares of NPD Common Stock received by holders of shares of GPC Common
Stock in the Merger will be freely transferable, except that shares received by
persons who are deemed "affiliates" (as such term is defined in Rule 144 under
the Securities Act) of General Physics prior to the Merger may be resold by them
only in transactions permitted by the resale provisions of Rule 145 under the
Securities Act (or, in the case of any such persons who become affiliates of
National Patent, Rule 144 under the Securities Act) or as otherwise may be
permitted under the Securities Act. This Joint Proxy Statement/Prospectus does
not cover any resales of NPD Common Stock received by any person who may be
deemed to be such an affiliate.
In the Merger Agreement, General Physics has agreed to use its best efforts
to cause each affiliate of General Physics to agree in writing with National
Patent that such person will not sell or otherwise transfer NPD Common Stock
received in the Merger except in accordance with Securities Act requirements.
46
<PAGE> 59
APPRAISAL RIGHTS
Holders of shares of GPC Common Stock are not entitled to appraisal rights
under the DGCL in connection with the Merger.
LISTING OF SHARES
It is a condition to each party's obligation to effect the Merger that the
shares of NPD Common Stock to be issued to holders of GPC Common Stock in
connection with the Merger be approved for trading on the AMEX subject to
official notice of issuance. National Patent has agreed to use its best efforts
to cause such shares of NPD Common Stock to be so approved for trading or so
listed, subject to official notice of issuance, prior to the Effective Time.
Following the Merger, the NPD Common Stock will continue to trade on the
American Stock Exchange and the Pacific Stock Exchange. Following the Merger,
the GPC Common Stock will cease to trade on the New York Stock Exchange, and
there will be no further market for the GPC Common Stock.
THE CHARTER AMENDMENTS
FOREIGN OWNERSHIP CHARTER AMENDMENT
At the NPD Special Meeting the stockholders of National Patent will be
asked to consider and vote upon the Foreign Ownership Charter Amendment which
would provide the right to require the redemption or the prompt disposition
under certain limited circumstances of all or any portion of the shares of NPD
Common Stock owned by a foreign stockholder beneficially owning shares
representing five percent or more of the outstanding shares of NPD Common Stock.
The proposal to approve and adopt the Foreign Ownership Charter Amendment
is part of the same proposal to approve the Merger Agreement, the Merger and the
consummation of the transactions contemplated thereby and is contingent upon
approval thereof. If the Merger Agreement is not approved and adopted by the
requisite vote of the stockholders of National Patent, the proposal to approve
and adopt the Foreign Ownership Charter Amendment will be withdrawn from
consideration. Likewise, if the proposal to approve and adopt the Foreign
Ownership Charter Amendment is not approved and adopted by the requisite vote of
the stockholders of National Patent, the proposal to approve and adopt the
Merger Agreement, the Merger and the consummation of the transactions
contemplated thereby will be withdrawn from consideration.
The text of the proposed Foreign Ownership Charter Amendment is set forth
on Annex C to this Joint Proxy Statement/Prospectus.
The Foreign Ownership Charter Amendment would amend the Restated
Certificate of Incorporation of National Patent (the "NPD Charter") to include a
provision relating to foreign ownership presently found in the Certificate of
Incorporation of General Physics (the "GPC Charter"). The Foreign Ownership
Charter Amendment permits National Patent to redeem or require the prompt
disposition under certain circumstances of all or any portion of the shares of
NPD Common Stock owned by a foreign stockholder beneficially owning shares
representing five percent or more of the outstanding shares of NPD Common Stock.
The DOE and the DoD (the "Departments") have policies regarding foreign
ownership, control or influence over government contractors who have access to
classified information. These policies are designed to protect against the risk
to national security that may result if classified information is made available
to United States Government contractors or subcontractors who are owned,
controlled or influenced by foreign governments, individuals or organizations.
These policies require General Physics, as well as the Departments' other
contractors and subcontractors, to submit information that will help the
Departments determine whether the award or continued performance of a contract
may pose an undue risk to the common defense and security of the United States.
Specifically, the Departments inquire whether any foreign interest has
beneficial ownership of 5% or more of a contractor's or subcontractor's voting
securities. If either Department determines that an undue risk to the common
defense and security of the United States exists, it may, among other things,
47
<PAGE> 60
terminate the contractor's or subcontractor's existing contracts with it.
Therefore, the NPD Charter, if amended by the Foreign Ownership Charter
Amendment, will permit National Patent to redeem or require the prompt
disposition under certain circumstances of all or any portion of the shares of
NPD Common Stock owned by a foreign stockholder beneficially owning shares
representing 5% or more of the outstanding NPD Common Stock. There can be no
assurance that this provision of the NPD Charter or the similar provision in the
GPC Charter is enforceable under applicable law.
THE NPD BOARD HAS DETERMINED THAT THE FOREIGN OWNERSHIP CHARTER AMENDMENT
IS ADVISABLE AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF NATIONAL PATENT.
THE NPD BOARD RECOMMENDS THAT THE STOCKHOLDERS OF NATIONAL PATENT VOTE FOR THE
FOREIGN OWNERSHIP CHARTER AMENDMENT.
AUTHORIZED SHARES CHARTER AMENDMENT
At the NPD Special Meeting the stockholders of National Patent will be
asked to consider and vote upon the Authorized Shares Charter Amendment which
would decrease the authorized shares of NPD Common Stock from 40,000,000 shares
to 25,000,000 shares. No amendment will be effected with respect to the NPD
Class B Stock or the Preferred Stock.
The NPD Board has adopted the proposal to amend the first sentence of
Article Fourth of National Patent's Restated Certificate of Incorporation as
follows:
"4. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Thirty Seven Million Eight
Hundred Thousand (37,800,000) shares; of which Twenty-Five Million
(25,000,000) shares are to be Common Stock with a par value of One Cent
($.01) per share (hereinafter called the "Common Stock"), of which Two
Million Eight Hundred Thousand (2,800,000) shares are to be Class B Capital
Stock with a par value of One Cent ($.01) per share (hereinafter called the
"Class B Capital Stock"); and of which Ten Million (10,000,000) shares are
to be Preferred Stock with a par value of One Cent ($.01) per share
(hereinafter called the "Preferred Stock") to be issued in such series and
with such terms as the Board of Directors may determine."
The State of Delaware calculates its franchise tax based upon the number of
authorized shares. As a result of National Patent's One-for-Four Reverse Stock
Split in 1995, as of December 17, 1996, the number of issued shares of NPD
Common Stock is 7,512,107, the number of authorized shares of common stock is
40,000,000 and the number of issued shares of NPD Class B Stock is 62,500 and
the number of authorized shares of NPD Class B Stock is 2,800,000. There are no
issued shares of Preferred Stock. The NPD Board believes that the number of
authorized shares must be decreased in order to reduce the Delaware franchise
tax payable by National Patent. If the Authorized Shares Charter Amendment is
adopted, National Patent expects to save approximately $20,000 per year in
Delaware franchise taxes.
THE NPD BOARD HAS DETERMINED THAT THE AUTHORIZED SHARES CHARTER AMENDMENT
IS ADVISABLE AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF NATIONAL PATENT.
THE NPD BOARD RECOMMENDS THAT THE STOCKHOLDERS OF NATIONAL PATENT VOTE FOR THE
AUTHORIZED SHARES CHARTER AMENDMENT.
48
<PAGE> 61
SELECTED HISTORICAL FINANCIAL INFORMATION
NATIONAL PATENT -- SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information of National Patent as of and for each of the years in the five-year
period ended December 31, 1995 and as of and for each of the nine-month periods
ended September 30, 1996 and 1995. The selected historical consolidated
financial information of National Patent for each of the years in the five-year
period ended December 31, 1995 is derived from National Patent's audited
consolidated financial statements. The financial data for the nine months ended
September 30, 1996 and 1995 are derived from National Patent's unaudited
consolidated financial statements and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for the periods. The results for the nine months ended
September 30, 1996 may not be indicative of the results for the full year. The
following data should be read in conjunction with the consolidated financial
statements of National Patent and other financial information appearing
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ------------------------
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- ------------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales........................... $185,025 $204,774 $185,846 $189,797 $251,782 $ 152,536 $142,519
Gross margin.................... 28,322 32,559 26,974 29,211 35,792 22,913 23,209
Research and development
costs......................... 388 431 2,847 4,645 4,651 347 292
Interest expense................ 5,019 6,458 8,199 10,866 15,438 3,142 3,636
Other income*................... 12,863 5,148 18,844 11,980 8,479
Income (loss) before
discontinued operation and
extraordinary item............ 4,032 (11,397) (6,849) (11,578) 1,456 11,638 3,117
Net income (loss)............... 1,012 (13,971) (5,977) (11,943) 2,645 11,638 884
Earnings (loss) per share:
Income (loss) before
discontinued operation and
extraordinary item............ .60 (2.10) (1.60) (2.94) .38 1.58 .47
Net income (loss)............... .15 (2.57) (1.40) (3.03) .69 1.58 .13
Weighted average number of
shares........................ 6,638 5,431 4,281 3,943 3,848 7,377 6,579
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1995 1994 1993 1992 1991 1996
-------- -------- -------- -------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents,
restricted cash and marketable
securities.................... $ 11,657 $ 10,075 $ 10,976 $ 23,674 $ 35,968 $ 26,651
Short-term borrowings........... 18,043 31,060 21,390 28,977 26,317 21,540
Working capital................. 32,949 25,823 33,224 44,877 55,560 42,760
Total assets.................... 151,720 175,546 166,057 192,649 214,041 176,710
Long-term debt.................. 23,932 31,213 40,858 61,441 70,787 20,763
Stockholders' equity............ 70,998 65,165 67,438 63,823 72,405 91,284
</TABLE>
- ---------------
* Other income includes: Gains on dispositions of stock of subsidiaries and
affiliates, gains on issuance of stock by subsidiaries and affiliates, losses
on investments and unrealized gains on transfer from long-term investments to
trading securities.
(notes appear on next page)
49
<PAGE> 62
(notes from previous page)
General Physics' results of operations were consolidated with the results
of National Patent from January 1, 1991 to October 2, 1991 and from September 1,
1994 through September 30, 1996. The balance sheets of General Physics have been
consolidated with National Patent at December 31, 1995 and 1994 and at September
30, 1996. For all other periods General Physics' financial data has been
accounted for on the equity basis.
The results of operations of Interferon Sciences, Inc. ("ISI") were consolidated
with the results of National Patent from January 1, 1991 through September 1993.
The balance sheets of ISI were consolidated with National Patent at December 31,
1992 and 1991. For all other periods ISI's financial data has been accounted for
on the equity basis, until the third quarter of 1996 when National Patent
commenced accounting for its investment in ISI on the cost basis.
The results of operations of GTS Duratek, Inc. ("Duratek") were consolidated
with the results of National Patent from January 1, 1991 through December 31,
1994. The balance sheets of Duratek were consolidated with National Patent at
December 31, 1994, 1993, 1992 and 1991. At December 31, 1995 and for the year
then ended Duratek's financial data has been accounted for on the equity basis.
Since April 1996, National Patent has accounted for its investment in Duratek as
a combination of marketable securities, long-term investments and as long-term
available-for-sale equity securities.
For further details, see "SELECTED HISTORICAL FINANCIAL
INFORMATION -- National Patent's Management's Discussion and Analysis of
Financial Condition and Results of Operations."
50
<PAGE> 63
NATIONAL PATENT'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
National Patent realized income before income taxes, discontinued operation
and extraordinary item of $11,046,000 for the nine months ended September 30,
1996, as compared with income of $4,190,000 for the corresponding period of
1995. The improvement in National Patent's results before discontinued operation
and extraordinary item for the nine months is due to several factors. In April
1996, National Patent sold 1,000,000 shares of GTS Duratek, Inc. ("Duratek")
common stock held by National Patent, realized proceeds of $17,700,000 and
recognized a gain of $12,200,000. In the third quarter of 1996, National Patent
recorded an unrealized gain totaling $1,842,000 on the transfer of 200,000
shares of Duratek common stock from long-term investments to trading securities.
These gains were partially offset by a $4,000,000 loss recognized on National
Patent's investments in American White Cross, Inc. ("AWC"), due to AWC filing
for protection under Chapter 11 of the United States Bankruptcy Code in July
1996. In addition, in April 1996, Interferon Sciences, Inc. ("ISI"), National
Patent's approximately 17%-owned affiliate, issued additional shares of common
stock, which resulted in National Patent recognizing a gain of $1,938,000. For
the nine months ended September 30, 1996 National Patent's share of loss of an
affiliate (ISI) due to the buy back of certain marketing rights was $563,000. In
January 1995, National Patent realized a $2,567,000 gain on the sale of
1,666,667 shares of National Patent's Duratek common stock. As a result of such
transaction, National Patent's ownership fell below 50% and commencing in
January 1995, National Patent accounted for its investment in Duratek on the
equity basis. At September 30, 1996, National Patent owns approximately 15% of
the outstanding common stock of Duratek and currently accounts for its
investment as a combination of marketable securities, long-term investments and
as long-term available-for-sale equity securities. Included in investment and
other income, net for the nine months ended September 30, 1996, is $80,000 of
foreign currency transaction gain, compared to a loss of $(1,061,000) for the
nine months ended September 30, 1995.
National Patent also achieved improved operating results within the
Physical Science and Distribution Groups in 1996 partially offset by reduced
operating profits within the Optical Plastics Group and at National Patent's
Hydro Med Sciences (HMS) division. In addition, for the nine months ended
September 30, 1996, National Patent also achieved reduced interest expenses at
the corporate level, as a result of reduced long-term debt.
At December 31, 1994 National Patent owed $13,156,000 in Swiss Bonds, Swiss
Convertible Bonds and Dual Currency Bonds (the "Bonds") which were due in 1995
and 1996. In 1995, National Patent exchanged (see Note 11(a) to National
Patent's consolidated financial statements) or repurchased the majority of the
Bonds. At December 31, 1995 there was a total of $1,998,000 of such Bonds
outstanding, which were fully redeemed during the first quarter of 1996. In
1995, total long-term debt and short-term borrowings decreased by a total of
$11,457,000 from December 31, 1994, net of the effect of the deconsolidation of
Duratek in January 1995 (see Note 3 to National Patent's consolidated financial
statements). The reduction in National Patent's long-term debt and short-term
borrowings has led to a corresponding decrease in interest expense at the
corporate level. In addition, National Patent has improved its liquidity in
1996, as a result of the sale of 1,000,000 shares of Duratek common stock by
National Patent in April 1996 (see Liquidity and capital resources).
In 1995, income before income taxes, discontinued operation and
extraordinary item was $5,819,000 as compared to a loss of $10,648,000 in 1994.
The improvement in operations is due to several factors. In the first and fourth
quarters of 1995, National Patent sold 1,667,000 and 500,000 shares,
respectively of Duratek common stock, resulting in the recognition of a
$3,768,000 gain. As a result of the first sale of the Duratek common stock,
National Patent's ownership in Duratek fell below 50%, and commencing in January
1995, National Patent accounted for its investment in Duratek, which totaled
$4,121,000 at December 31, 1995, on the equity basis (see Note 3 to National
Patent's consolidated financial statements). In addition, National Patent
recorded an unrealized gain totaling $3,183,000 on the transfer of 250,000
shares of Duratek common stock from long-term investments to trading securities.
During the third quarter of 1995, National Patent realized a $5,912,000 gain as
a result of the issuance of common stock by ISI, a 22% owned affiliate, and the
51
<PAGE> 64
initial public offering by GSE Systems, Inc. ("GSES"), a 26% controlled
affiliate at December 31, 1995, National Patent also realized Investment and
other income, net of $1,129,000 in 1995 compared to a net expense of $1,808,000
in 1994. The improvement is due to several factors including a foreign currency
transaction loss of $1,066,000 in 1995 compared to a foreign currency
transaction loss of $2,124,000 realized in 1994, related to National Patent's
decision not to hedge its Swiss denominated debt, and reduced losses incurred on
investments in 20% to 50% owned affiliates. These improvements were partially
offset by a $785,000 loss recognized due to the permanent impairment of an
available-for-sale security. In 1995, National Patent also incurred reduced
interest expense as a result of reduced long-term debt at the corporate level.
Operating profits improved for the year ended December 31, 1995 within the
Optical Plastics and Physical Science Groups, and decreased marginally within
the Distribution Group. The Optical Plastics Group, which is MXL Industries,
Inc. ("MXL"), National Patent's injection molding and coating subsidiary,
generated increased operating profits due to both increased sales and gross
margin percentage. The Physical Science Group, which is primarily General
Physics, a 52%-owned subsidiary, experienced improved operating results due to
the results of General Physics being included in the consolidated results of
operations for the full year (see Note 2 to the consolidated financial
statements). General Physics provides a wide range of training, engineering,
environmental and technical support services to commercial nuclear and fossil
power utilities, the United States Departments of Defense and Energy, Fortune
500 companies and other commercial and governmental customers. The Distribution
Group, which is the Five Star Group, Inc. ("Five Star"), National Patent's
distributor of home decorating, hardware and finishing products, had marginally
reduced operating profits due to reduced sales and the related gross margin,
offset by significantly reduced operating costs.
In 1994, the loss before income taxes, discontinued operation and
extraordinary item was $10,648,000, as compared to a loss of $7,424,000 in 1993.
The increase in the loss was due to several factors. Investment and other income
(expense), net, decreased from $3,379,000 in 1993 to a loss of $1,808,000 in
1994. The $5,187,000 reduction is due to a foreign currency transaction loss of
$2,124,000 realized in 1994 as compared to a net foreign currency transaction
gain of $901,000 realized in 1993, related to National Patent's decision not to
hedge its Swiss denominated debt, as well as increased losses incurred on
investments in 20% to 50% owned affiliates due to increased losses attributable
to National Patent's 36% investment in ISI.
The loss recognized on the equity basis in 1994 relating to ISI was
$4,409,000, compared to $1,599,000 in 1993. In 1993, an additional $2,074,000 of
ISI's loss was included in National Patent's consolidated results of operations
through September 1993, when National Patent's investment in ISI fell below 50%.
The increased loss incurred in 1994 on investments in 20% to 50% affiliates was
partially offset by gains realized on the sale of certain investments. In
addition, in 1993 National Patent realized a $3,795,000 gain from the transfer
in an exchange offer of a portion of National Patent's holdings of shares of ISI
and Duratek common stock and an additional $1,353,000 on the issuance of common
stock and common stock warrants by Duratek, relating to Duratek's acquisition of
an option to acquire certain technologies relating to the vitrification of
certain medical wastes. The aforementioned losses in 1994 were partially offset
by increased operating profits at the Optical Plastics and Physical Science
Groups due to increased sales and gross margin percentage and dollars within
both groups. The Optical Plastics Group experienced increased operating profits
due to both increased sales and gross margin percentage. The Physical Science
Group was comprised of General Physics, from September 1994, and Duratek. The
Distribution Group had reduced operating profits as a result of costs incurred
to close its Long Island, New York warehouse and consolidate its sales volume
into Five Star's New Jersey facility.
Sales.
For the nine months ended September 30, 1996, consolidated sales increased
by $10,017,000 to $152,536,000 from $142,519,000 recorded for the nine months
ended September 30, 1995. The increased sales for the nine months ended
September 30, 1996, was the result of increased sales within the Distribution
Group and Physical Science Group, partially offset by reduced sales within the
Optical Plastics Group and by National Patent's Hydro Med Sciences division
("HMS") for the nine months ended September 30, 1996. The increased sales within
the Physical Science Group was the result of General Physics' expansion of
managerial and technical training services in manufacturing and process
industries, partially offset by reduced
52
<PAGE> 65
activity at United States Department of Energy facilities. The increased sales
within the Distribution group, which is comprised of the Five Star Group, Inc.
("Five Star"), was the result of sales generated by a major retail chain, which
was not a customer of Five Star during the first nine months of 1995, as well as
an overall increase in sales of hardware products. The reduced sales within the
Optical Plastics Group was due to a slowdown by MXL Industries, Inc.'s ("MXL")
major customer as a result of the customer's decision to reduce its inventory
level. The reduced sales within HMS was due to the timing of sales to two
customers. Consolidated sales from continuing operations increased from
$185,846,000 in 1993 to $204,774,000 in 1994 and decreased by $19,749,000 to
$185,025,000 in 1995. In 1995, National Patent had reduced sales within the
Physical Science and Distribution Groups, partially offset by increased sales
achieved by the Optical Plastics Group. In 1994, National Patent achieved
increased sales in the Physical Science, Distribution and Optical Plastics
Groups.
The Physical Science Group's sales increased from $102,977,000 in 1993 to
$118,421,000 in 1994 and decreased to $107,549,000 in 1995. The reduced sales in
1995 were due to the results of Duratek being accounted for on the equity basis
since January 1995, partially offset by the consolidation of the results of
General Physics since September 1994 (see Note 2 to National Patent's
consolidated financial statements). The increased sales of $15,444,000 in 1994
were the result of consolidating the sales of General Physics since September 1,
1994. Changes in sales of the Physical Science Group as a result of changes in
prices or volume of services provided were not significant. In addition, Duratek
also achieved increased sales in 1994 as a result of work performed under a
three year contract to construct a vitrification facility for the conversion of
mixed waste into stable glass.
The Distribution Group sales increased from $74,109,000 in 1993, to
$75,551,000 in 1994 and decreased to $65,098,000 in 1995. The reduced sales in
1995 were the result of the loss of a major retail chain as a customer,
partially mitigated by a general increase in business among numerous independent
retail stores. In 1996, Five Star commenced selling to the major retail chain
again, but is unable at this time to predict what the sales volume will be in
the future. The increase in 1994 was due to the continued growth of the hardware
business.
The Optical Plastics Group sales increased from $7,817,000 in 1993, to
$9,290,000 in 1994 and to $10,949,000 in 1995. The improved sales in 1995 were
the result of increased sales throughout MXL's entire customer base. The
increased sales in 1994 was the result of increased orders from MXL's largest
customer, due to increased worldwide demand for its product.
Gross margin.
For the nine months ended September 30, 1996, consolidated gross margin of
$22,913,000, or 15% of consolidated sales, decreased by $296,000 when compared
to $23,209,000, or 16% of consolidated sales, earned in the nine months ended
September 30, 1995. The decrease was principally the result of decreased gross
margin achieved by MXL and HMS as a result of reduced sales levels, partially
offset by increased gross margin generated by Five Star and General Physics as a
result of increased sales. In addition, Five Star and MXL achieved lower gross
margin percentages due to a change in their customer mix. Consolidated gross
margin was $26,974,000 or 14% of sales in 1993, $32,559,000 or 16% of sales in
1994 and $28,322,000 or 15% of sales in 1995. The reduced gross margin of
$4,237,000 in 1995 occurred primarily within the Physical Science Group, and to
a lesser extent within the Distribution Group, partially offset by increased
gross margins achieved by the Optical Plastics Group. The increased gross margin
of $5,585,000 in 1994 occurred primarily within the Optical Plastics and
Physical Science Groups.
The Physical Science Group gross margin increased from $12,941,000, or 13%
in 1993, to $16,670,000 or 14% in 1994 and decreased to $12,368,000 or 12% in
1995. The decreased gross margin in 1995 was due to National Patent's ownership
in Duratek falling below 50% in January 1995, and National Patent accounting for
Duratek on the equity basis from that time, partially offset by General Physics
being included in the consolidated results since September 1994. The reduced
gross margin percentage is the result of historically lower gross margins earned
by General Physics due to the nature of its business.
53
<PAGE> 66
In both 1995 and 1994, General Physics has increased its gross margin
percentage through its continuing efforts to reduce overhead costs as a percent
of revenue, as well as the achievement of higher direct labor utilization. In
1994, the increased gross margin was attributable to both General Physics and
Duratek. General Physics realized increased gross margin due to higher revenues,
reduced overhead and higher direct labor utilization. Duratek realized increased
gross margin in 1994 as a result of increased sales as well as higher margins
achieved on both technology and services contracts.
The Distribution Group gross margin increased from $11,718,000 or 16% in
1993 to $11,785,000 or 16% in 1994 and decreased to $10,966,000 or 17% in 1995.
In 1995, the reduced gross margin was the result of reduced sales, partially
mitigated by an increased gross margin percentage. The increased gross margin
percentage in 1995 was the result of reduced warehousing costs due to the
successful implementation of Five Star's advanced warehouse management system,
as well as the consolidation of Five Star's New York warehouse into the New
Jersey facility. In 1994, the increased gross margin was due to increased sales.
The gross margin in 1994 was affected by increased warehousing costs incurred as
a result of the decision to close Five Star's New York facility and to
consolidate its operations into the New Jersey facility. The increased
warehousing costs in 1994 were partially offset by increased margins achieved
due to changes in merchandising practices.
The Optical Plastics Group gross margin increased from $2,642,000 or 34% of
net sales in 1993 to $3,635,000 or 39% of net sales in 1994 and to $4,336,000 or
40% of net sales in 1995. In 1995, the increased gross margin was primarily the
result of increased sales. In 1994, the increased gross margin was the result of
increased sales as well as an improved mix of products.
The Health Care Group gross margin was $(699,000) in 1993. The negative
gross margin in 1993 was the result of excess/idle facility costs incurred by
ISI, notwithstanding the suspension of production, and lack of sales of
ALFERON(@) N Injection during 1993. As a result of the exchange offer in 1993,
through which National Patent's interest in ISI fell below 50%, ISI is being
accounted for on the equity basis at December 31, 1995.
Investment and other income (expense), net.
Investment and other income, net of $2,658,000 for the nine months ended
September 30, 1996 increased by $1,734,000 as compared to $924,000 for the
corresponding period of 1995. The change for the period was principally due to
an $80,000 foreign currency transaction gain recognized during the nine months
ended September 30, 1996, compared to a loss of $(1,061,000) for nine months
ended September 30, 1995. In addition, for the nine months ended September 30,
1996 National Patent had increased investment income due to increased cash and
cash equivalents, reduced losses related to ISI, National Patent's 17%-owned
affiliate which effective in the third quarter of 1996 was accounted for on the
cost basis, and increased consulting revenues earned by National Patent's
54%-owned American Drug Company subsidiary. Investment and other income
(expense) was $3,379,000 in 1993, $(1,808,000) in 1994, and $1,129,000 in 1995.
The improvement in 1995 is due to several factors including a foreign currency
transaction loss of $1,066,000 in 1995 compared to a foreign currency
transaction loss of $2,124,000 realized in 1994, related to National Patent's
decision not to hedge its Swiss denominated debt, and reduced losses incurred on
investments in 20% to 50% owned affiliates. These improvements were partially
offset by a $785,000 loss recognized due to the permanent impairment of an
available-for-sale security. In 1994, the $5,187,000 reduction in Investment and
other income (expense), net from 1993 was due to two factors. National Patent
realized a currency transaction loss of $2,124,000 in 1994, as compared to a net
foreign currency transaction gain of $901,000 realized in 1993, related to
National Patent's decision not to hedge its Swiss denominated debt. In addition,
National Patent recognized increased losses on investments in 20% to 50% owned
affiliates as a result of National Patent's share of ISI's loss, which was
$4,409,000, being included in Investment and other income (expense), net for the
year ended December 31, 1994. In 1993, the results of ISI were consolidated with
National Patent for the first nine months of the year, until National Patent's
ownership fell below 50%. The results of operations for ISI have been accounted
for on the equity method since the fourth quarter of 1993, and National Patent
recognized a $1,599,000 loss in 1993 related to its equity investment in ISI.
The above losses were partially offset by increased gains realized on the sale
of certain investments in 1994.
54
<PAGE> 67
Selling, general and administrative expenses.
For the nine months ended September 30, 1996, selling, general and
administrative expenses (SG&A) of $22,269,000 were $1,699,000 lower than the
$23,968,000 of SG&A expenses incurred during the nine months ended September 30,
1995. The decrease in SG&A for the nine months ended September 30, 1996 was
principally the result of efforts by General Physics during 1995 to consolidate
and streamline its organization, which savings has been realized in the current
period, partially offset by increased selling expenses incurred by Five Star as
a result of increased sales. Selling, general and administrative expenses
increased from $34,255,000 in 1993 to $34,301,000 in 1994 and decreased to
$29,984,000 in 1995. In 1995, the reduced SG&A was primarily the result of
reduced SG&A within the Physical Science Group primarily due to Duratek being
accounted for on the equity basis since January 1995, partially offset by
increased SG&A incurred by General Physics due to the recording of an
approximately $1,015,000 reserve related to potentially uncollectible revenue
recorded in years prior to 1993. In addition, the Distribution Group incurred
reduced SG&A in 1995 as a result of Five Star's reduced sales commissions paid
due to reduced sales, as well as the success of its continuing effort to
consolidate and streamline its organization. In 1994, the marginal increase was
primarily the result of increased general and administrative expenses incurred
by the Distribution Group, primarily as a result of costs associated with the
closing of Five Star's New York warehouse and the consolidation of the New York
sales and operations into the New Jersey facility, as well as increased
depreciation and amortization expense.
American Drug Company ("ADC") also incurred increased SG&A as a result of
increased consulting expenses and costs related to the opening and staffing of
the Moscow office. ADC is National Patent's 54%-owned subsidiary which exports
American made generic and prescription drugs and over-the-counter healthcare
products in both Russia and the Commonwealth of Independent States. The
increased general & administrative costs at Five Star and ADC were partially
mitigated by ISI being accounted for on the equity basis since the third quarter
of 1993 and reduced costs incurred at the corporate level.
Research and development costs.
National Patent's research and development activities are conducted both
internally and under various types of arrangements at outside facilities.
Research and development costs were $2,847,000, $431,000 and $388,000 for 1993,
1994 and 1995, respectively. In 1993, research and development costs were
primarily attributable to ISI. Due to the exchange offer in the third quarter of
1993 (see Note 11(b) to National Patent's consolidated financial statements),
National Patent's ownership in ISI fell below 50%, and National Patent began
accounting for ISI on the equity method from that time. In 1994 and 1995,
research and development costs were incurred at National Patent's Hydro Med
Sciences division relating to the Hydron polymer.
Interest expense.
For the nine months ended September 30, 1996, interest expense was
$3,142,000, compared to $3,636,000 for the nine months ended September 30, 1995.
The decreased interest expense for the nine months ended September 30, 1996 was
the result of reduced long-term debt. Interest expense aggregated $8,199,000 in
1993, $6,458,000 in 1994 and $5,019,000 in 1995. The reduced interest expense in
1994 and the further reduction in 1995 was the result of National Patent's
continuing successful effort to reduce its interest expense at the corporate
level due to reduced interest on National Patent's Swiss Debt obligations due to
the exchange offers in 1993, 1994 and 1995 (see Note 11(a)(b)(c) to National
Patent's consolidated financial statements), as well as National Patent's
practice of repurchasing Swiss Debt from time to time.
Income taxes.
For the nine months ended September 30, 1996, National Patent had an income
tax benefit of $592,000 compared to an expense of $1,073,000 for the
corresponding period of 1995. The benefit recognized in 1996 is the result of
the reduction of $2,386,000 in the valuation allowance for deferred tax assets
due to management's assessment that it is more likely than not that National
Patent will realize the benefits of this
55
<PAGE> 68
amount of deferred tax assets, based upon unrealized gains on National Patent's
investments and other factors, offset by state and local taxes, as well as
General Physics' federal income tax expense. General Physics is not included in
National Patent's federal income tax return. The expense in 1995 relates
primarily to state and local taxes and General Physics' federal income tax
expense. Income tax expense (benefit) from operations for 1993, 1994 and 1995
was $(575,000), $749,000 and $1,787,000, respectively.
In 1995, National Patent recorded an income tax expense of $1,787,000. The
current income tax provision of $258,000 represents the estimated taxes payable
by National Patent for the year ended December 31, 1995. The deferred income tax
provision of $1,529,000 represents the deferred taxes of General Physics.
In 1994, National Patent recorded an income tax expense of $749,000. The
current income tax provision of $283,000 represents the estimated taxes payable
by National Patent for the year ended December 31, 1994. The deferred income tax
provision of $466,000 represents the deferred taxes of General Physics.
In 1993, National Patent recorded an income tax benefit of $1,043,000, of
which $973,000 relates to Federal income taxes, in continuing operations as a
result of the income tax expense allocated to the extraordinary gain recognized
on the early extinguishment of debt under the provisions of FASB No. 109.
As of December 31, 1995, National Patent has approximately $23,204,000 of
consolidated net operating losses available for Federal income tax purposes.
Liquidity and capital resources.
At September 30, 1996, National Patent had cash and cash equivalents
totaling $23,371,000. General Physics, SGLG, Inc. and American Drug Company had
cash and cash equivalents of $1,028,000 at September 30, 1996. The minority
interests of these three companies are owned by the general public, and
therefore the assets of those subsidiaries have been dedicated to the operations
of these companies and may not be readily available for the general corporate
purposes of the parent.
In April 1996, National Patent sold 1,000,000 shares of Duratek common
stock and realized net proceeds of $17,700,000. National Patent currently owns
approximately 1,846,000 shares of Duratek common stock. During the first quarter
of 1996, National Patent completed a private placement of its common stock,
totaling approximately $2,300,000. National Patent used the proceeds from this
transaction to retire long-term debt, which was currently due. As a result of
the above transactions, National Patent has sufficient cash, cash equivalents
and marketable securities and borrowing availability under existing and
potential lines of credit to satisfy its cash requirements for the repayment of
approximately $6,732,000 of 12% Subordinated Debentures scheduled to mature in
July 1997. In addition to its ability to issue equity securities, National
Patent believes that it has sufficient marketable long-term investments, the
ability to obtain additional funds from its operating subsidiaries and the
potential to enter into new credit arrangements, in order to fund its working
capital requirements.
The increase in cash and cash equivalents of $15,277,000 through September
1996 primarily resulted from the effect of cash provided by investing activities
of $13,859,000 and financing activities of $3,912,000, partially offset by cash
used in operations of $2,494,000. The cash provided by investing activities was
primarily from proceeds from sale of stock of an affiliate, partially offset by
additions to property, plant and equipment and intangible assets. Financing
activities consisted primarily of repayments and reductions in short-term
borrowings and repayments of long-term debt, offset by proceeds from short-term
borrowings, long-term debt and proceeds from issuance of common stock.
National Patent'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, 1995, National Patent has not
contractually committed itself for any other new major capital expenditures.
56
<PAGE> 69
Accounting developments.
Effective January 1, 1996, National Patent adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Statement 121 requires
National Patent to estimate the future cash flows expected to result from the
use and eventual disposition of its property, plant and equipment and other long
lived assets, and if the sum of such cash flows is less than the carrying amount
of these assets, to recognize an impairment loss to the extent, if any, that the
carrying amount of the assets exceeds their fair values. National Patent
believes that expected future cash flows derived from these assets will be at
least equal to their carrying values, and that no impairment loss will be
indicated.
In December 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for
years beginning after December 15, 1995. Under SFAS 123, National Patent may
elect either a "fair value" based method or the current "intrinsic value" based
method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to
Employees," for its stock-based compensation arrangements. Under the "intrinsic
value" based method, National Patent will be required to disclose in the
footnotes to the consolidated financial statements net income and earnings per
share computed under the "fair value" based method. National Patent has elected
to continue accounting for stock-based compensation arrangements using the
"intrinsic value" based method; therefore, the adoption of SFAS 123 will not
impact National Patent's results of operations or financial condition.
Forward-Looking Statements.
This Joint Proxy Statement/Prospectus contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including, but not
limited to, National Patent's ability to reverse its history of operating
losses; National Patent's dependence on its subsidiaries and its investments as
its primary source to service outstanding debt and to fund its operations; and
National Patent's ability to comply with financial covenants in connection with
various loan agreements.
57
<PAGE> 70
GENERAL PHYSICS -- SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information of General Physics as of and for each of the years ended December
31, 1995, 1994, 1993, 1992 and 1991 and as of and for each of nine-month periods
ended September 30, 1996 and 1995. The selected historical consolidated
financial information of General Physics for the years ended December 31, 1995,
1994, 1993, 1992 and 1991 is derived from General Physics' audited consolidated
financial statements. The financial data for the nine-month periods ended
September 30, 1996 and 1995 are derived from General Physics' unaudited
consolidated financial statements and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for the periods. The results for the nine months ended
September 30, 1996 may not be indicative of the results for the full year. The
following information should be read in conjunction with the consolidated
financial statements of General Physics and other financial information
appearing elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -----------------
1995 1994 1993 1992 1991 1996 1995
-------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:*
Revenue.................................. $107,549 $78,880 $58,112 $60,139 $63,919 $85,954 $80,399
Cost of revenue.......................... 95,181 69,779 51,331 52,833 59,461 75,385 71,420
-------- ------- ------- ------- ------- ------- -------
Gross profit............................. 12,368 9,101 6,781 7,306 4,458 10,569 8,979
General and administrative and other
expenses............................... 7,718 5,859 4,983 5,293 5,290 5,435 5,809
Interest expense......................... 2,208 1,366 735 700 1,456 1,361 1,732
Other income (expense), net.............. 12 (22) 107 290 763 73 (14)
-------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
equity in net earnings of investee
company................................ 2,454 1,854 1,170 1,603 (1,525) 3,846 1,424
Income taxes (benefit)................... 982 785 487 772 (553) 1,647 529
-------- ------- ------- ------- ------- ------- -------
Income (loss) before equity in net
earnings of investee company........... 1,472 1,069 683 831 (972) 2,199 895
Equity in net earnings of investee
company (including gain on issuance of
stock in 1995), net of income taxes.... 786 69 -- -- -- 87 776
-------- ------- ------- ------- ------- ------- -------
Net income (loss)........................ $ 2,258 $ 1,138 $ 683 $ 831 $ (972) $ 2,286 $ 1,671
======== ======= ======= ======= ======= ======= =======
Net income (loss) per share.............. $ 0.22 $ 0.15 $ 0.11 $ 0.13 $ (0.16) $ 0.22 $ 0.16
======== ======= ======= ======= ======= ======= =======
Weighted average number of shares........ 10,231 7,672 6,272 6,256 6,208 10,430 10,247
======== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1995 1994 1993 1992 1991 1996
------- ------- ------- ------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:*
Working capital................................ $16,815 $17,690 $15,822 $15,942 $15,914 $15,593
Total assets................................... 51,293 57,851 31,135 32,016 33,394 57,940
Long-term obligations.......................... 12,379 12,089 7,610 7,610 7,634 12,585
Stockholders' equity........................... 19,597 19,038 13,297 13,899 14,326 20,696
</TABLE>
- ---------------
* On August 31, 1994, General Physics acquired substantially all of the assets
and operations of GPS Technologies, Inc. and certain of its subsidiaries
("GPST Businesses"). As discussed in Note 1 to the Consolidated Financial
Statements of General Physics, the acquisition has been accounted for as a
reverse acquisition, whereby the GPST Businesses were deemed to have acquired
General Physics. Accordingly, the historical financial statements and
disclosures prior to August 31, 1994 are those of the GPST Businesses. No
historical information for General Physics is included above except as of and
for the nine months ended September 30, 1996 and 1995, as of and for the year
ended December 31, 1995, and as of and for the four-month period ended
December 31, 1994. Per share information is based on the weighted average
number of shares of GPC Common Stock outstanding.
58
<PAGE> 71
GENERAL PHYSICS' MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL.
On August 31, 1994, General Physics acquired substantially all of the
assets and operations of GPS Technologies, Inc. ("GPST") and certain of its
subsidiaries (together the "GPST Businesses") for approximately $32.5 million,
consisting of $10 million cash, 3,500,000 shares of GPC Common Stock, warrants
to acquire up to 1,000,000 shares of GPC Common Stock at $6.00 per share,
warrants to acquire up to 475,664 shares of GPC Common Stock at $7.00 per share,
and 6% ten year senior subordinated debentures in the aggregate principal amount
of $15 million. The fair value of the senior subordinated debentures was
estimated to be $10.7 million at the date of the acquisition.
National Patent, which owned approximately 92% of the GPST Businesses and
28% of General Physics prior to the transaction, owned approximately 54% of the
outstanding shares of General Physics after the acquisition. Accordingly, the
acquisition has been accounted for as a reverse acquisition, whereby the GPST
Businesses were deemed to have acquired General Physics in a transaction
accounted for as a purchase. General Physics remains the legal entity and
Commission registrant; however, the historical financial statements and
disclosures prior to August 31, 1994 included herein are those of the GPST
Businesses. Results for General Physics are included in the nine months ended
September 30, 1996, the year ended December 31, 1995, and the year ended
December 31, 1994 only for the period from September 1, 1994 to December 31,
1994.
On January 29, 1994, General Physics acquired substantially all of the
operations and net assets of Cygna Energy Services ("CES") related to its
business of providing engineering services to the commercial nuclear power
industry for a purchase price of approximately $3,131,000 including acquisition
costs.
General Physics and its subsidiaries provide engineering, environmental,
training, analytical and technical support services to commercial nuclear and
fossil power utilities, the United States Departments of Defense and Energy,
Fortune 500 companies and other commercial and governmental customers. General
Physics is organized into four groups: Training and Technology; Engineering and
Applied Sciences; Federal Systems and Department of Energy. General Physics'
performance is significantly affected by the timing of performance on contracts.
Results of operations are not seasonal, since contracts are performed throughout
the year.
On September 25, 1996, General Physics and National Patent announced that
they had reached an agreement pursuant to which National Patent would acquire
the remaining shares (approximately 48% of the outstanding shares) of GPC Common
Stock that it does not already own. The agreement was recommended to the Board
of Directors of General Physics by the Special Committee. National Patent and
General Physics entered into an amendment of the agreement on December 18, 1996.
Based on an agreed upon price of NPD Common Stock on September 18, 1996
($9.625), National Patent would issue 0.54 shares of its common stock, par value
$.01 per share, for each outstanding share of General Physics' common stock not
owned by National Patent. The Exchange Ratio, which is subject to certain
adjustments, would provide approximately $5.20 in value for each outstanding
share of General Physics. See "THE MERGER AGREEMENT -- Exchange Ratio and the
Collar."
From 1988 through mid-1992, General Physics experienced growth in revenue
primarily from services provided to the United States Department of Energy
("DOE") at its Savannah River site under subcontracts with Westinghouse Savannah
River Company ("Westinghouse"), and to a lesser extent from services provided to
the commercial nuclear power industry. Since mid-1992, General Physics has
experienced lower levels of contract activity at DOE facilities which resulted
in declining revenue. In addition, at the DOE's Savannah River Site, the volume
of contract activity for which General Physics is eligible to compete has been
further reduced since 1994 by the award to small businesses of certain types of
work which have been performed by General Physics. However, the lower level of
contract activity has been somewhat offset by task orders issued under an
architect engineering contract awarded to General Physics by Westinghouse in
July 1995. The eventual value of the contract to General Physics is not
presently determinable. In addition, in 1992 and 1993, the GPST Businesses
experienced declining revenue due to cutbacks in funding of United States
Department of Defense ("DoD") submarine and aviation programs and contract
reductions in the pharma-
59
<PAGE> 72
ceutical industry. General Physics has also experienced decreasing revenues from
commercial nuclear power utilities over the last three years as a result of cost
reduction efforts at many of the utilities. During 1995, revenues from
commercial nuclear power utilities decreased significantly. However, during the
first nine months of 1996, revenues from the commercial nuclear power utilities
were up slightly from the first nine months of 1995. The cost reduction efforts
by utilities are expected to continue, but the long term effect on General
Physics is not presently determinable.
In March 1996, the DoD awarded the Westinghouse Electric Corporation, a
nine-year, $575 million contract to destroy chemical weapons at the Anniston
Army Depot. General Physics will be a subcontractor to Westinghouse Electric
Corporation, responsible for training and operations engineering. The value of
the subcontract to General Physics is not presently determinable.
While General Physics continues to provide services to the DOE and DoD and
the commercial nuclear power industry, it is unsure what effect continued
cutbacks will have on General Physics' future results. In response to these
factors General Physics has focused its marketing resources on expanding
management and technical training services to manufacturing and process
industries and specialized engineering services to federal agencies and process
industries. During the latter part of 1994 and in 1995 and during the first nine
months of 1996, General Physics experienced growth in these areas and
anticipates future growth to come from these areas.
Effective July 31, 1996, General Physics acquired substantially all of the
operations and assets of Training Support Group, Inc. ("TSG"), located in
Fenton, Michigan. The purchase price consisted of $1 million in cash at closing,
$1.5 million payable on specific future dates, and $1.2 million contingent upon
future sales. TSG provides training programs and services to the automotive
industry, and operates as a component of General Physics' Training and
Technology Group.
In September 1996, General Physics was awarded a renewal of its contract to
operate the U.S. Army's Chemical Demilitarization Training Facility and provide
training services to the Army's chemical weapon demilitarization program
nationwide. General Physics estimates the value of the contract over its initial
five-year term and three-year option period, if the option is exercised, to be
approximately $45,000,000.
On December 3, 1996, General Physics announced that it had been notified by
the DoD that it had been selected for a repeat award of its contract to provide
environmental engineering support services at Aberdeen Proving Ground. The
contract is one of two awarded to successful contractors who will competitively
bid for work to be awarded in the future under separate delivery orders.
Although the maximum award value of the contract over its five year term is
approximately $100,000,000, the actual value of the contract will depend upon
the value of the individual delivery orders awarded to General Physics.
60
<PAGE> 73
Results of Operations.
The following table sets forth, for the periods shown, certain items in
General Physics' consolidated statements of operations as a percentage of
revenue.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
--------------------- -------------
1995 1994 1993 1996 1995
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue............................................ 88.5 88.5 88.3 87.7 88.8
----- ----- ----- ----- -----
Gross profit............................................... 11.5 11.5 11.7 12.3 11.2
General and administrative and other expenses.............. 7.2 7.4 8.6 6.3 7.2
Interest expense........................................... 2.0 1.7 1.3 1.6 2.2
Other income (expense), net................................ 0.0 0.0 0.2 0.1 0.0
----- ----- ----- ----- -----
Income before income taxes and equity in net earnings of
investee company......................................... 2.3 2.4 2.0 4.5 1.8
Income taxes............................................... 0.9 1.0 0.8 1.9 0.7
----- ----- ----- ----- -----
Income before equity in net earnings of investee company... 1.4% 1.4% 1.2% 2.6% 1.1%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth pro forma consolidated results of operations
for the years ended December 31, 1994 and 1993 and are presented as if the GPST
Businesses and CES acquisitions had occurred on January 1 of the respective
years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 % 1993 %
-------- ------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Proforma Results for 1994 and 1993:
Revenue............................................... $115,130 100.0% $130,731 100.0%
Cost of Revenue....................................... 101,962 88.6 114,255 87.4
-------- ------ -------- ------
Gross profit.......................................... 13,168 11.4 16,476 12.6
General and administrative and other expenses......... 6,818 5.9 7,756 5.9
Interest expense...................................... 2,141 1.9 2,040 1.6
Other income (expense), net........................... (1,401) (1.2) 107 0.1
-------- ------ -------- ------
Income before income taxes and equity in net earnings
of investee company................................. 2,808 2.4 6,787 5.2
Income taxes.......................................... 1,264 1.1 2,623 2.0
-------- ------ -------- ------
Income before equity in net earnings of investee
company............................................. $ 1,544 1.3% 4,164 3.2%
======== ====== ======== ======
Net Income per share.................................. $ 0.16 $ 0.43
======== ========
</TABLE>
The pro forma consolidated results of operations are based upon the
combined historical results of General Physics and the GPST Businesses after
giving effect to the following adjustments: (1) cost of revenue and general and
administrative and other expense reductions resulting from the GPST Businesses
acquisition, (2) interest expense related to bank borrowings of $10 million at
7 3/4% and senior subordinated debentures of $15 million at 6% net of interest
expense on certain obligations of GPST Businesses not assumed, (3) amortization
of the debt discount of $4.3 million related to the senior subordinated
debentures, (4) amortization of goodwill and (5) tax effects of the pro forma
adjustments.
Revenue.
Revenue for the nine months ended September 30, 1996 was approximately
$85,954,000, an increase of approximately $5,555,000, or 6.9% compared to
revenue for the nine months ended September 30, 1995 of approximately
$80,399,000. The increase was due primarily to expansion of managerial and
technical training services in manufacturing and process industries.
61
<PAGE> 74
Revenue for the year ended December 31, 1995 increased by approximately
$28,669,000, or 36%, from revenue for the year ended December 31, 1994 of
approximately $78,880,000. Revenue for the year ended December 31, 1994
increased by approximately $20,768,000, or 36%, from revenue for the year ended
December 31, 1993 of approximately $58,112,000. The increase for both periods
was due primarily to the acquisitions discussed above.
On a pro forma basis, revenue declined from $115,130,000 for the year ended
December 31, 1994 to $107,549,000 for the year ended December 31, 1995,
principally as a result of declining revenue from the DOE and commercial nuclear
power utilities.
On a pro forma basis, revenue for the year ended December 31, 1994 declined
$15,601,000 from $130,731,000 for the year ended December 31, 1993, principally
as a result of declining revenue from the DOE and commercial nuclear power
utilities.
Gross Profit.
Gross profit for the nine months ended September 30, 1996 was approximately
$10,569,000 (12.3% of revenue), an increase of approximately $1,590,000, or
17.7%, compared to gross profit of approximately $8,979,000 (11.2% of revenue)
for the nine months ended September 30, 1995. Gross profit increased because of
higher revenue and reduced overhead costs as a percent of revenue.
Gross profit for the year ended December 31, 1995 was approximately
$12,368,000 (11.5% of revenue), an increase of approximately $3,267,000, or 36%,
compared to gross profit of $9,101,000 (11.5% of revenue) for the year ended
December 31, 1994. Gross profit for the year ended December 31, 1994 increased
approximately $2,320,000, or 34%, from gross profit of approximately $6,781,000
(11.7% of revenue) for the year ended December 31, 1993. Gross profit was up for
both periods, primarily because of higher revenue, higher direct labor
utilization and reduced overhead costs as a percent of revenue.
For the year ended December 31, 1995, gross profit decreased approximately
$800,000, or 6%, from gross profit of $13,168,000 (11.4% of revenue), on a pro
forma basis, for the year ended December 31, 1994. This decrease is
predominantly a result of the decreased revenue discussed above.
On a pro forma basis, gross profit for the year ended December 31, 1994
declined approximately $3,308,000 or 20%, from gross profit of $16,476,000
(12.6% of revenue) for the year ended December 31, 1993. This decrease is also
predominantly a result of the decreased revenue discussed above.
General and Administrative Expenses and Other Expenses.
General and administrative and other expenses for the nine months ended
September 30, 1996 were approximately $5,435,000, or 6.3% of revenue, compared
to approximately $5,809,000, or 7.2% of revenue, for the nine months ended
September 30, 1995. The decrease is due to the recording of a reserve of
approximately $1,015,000 in 1995 related to potentially uncollectible revenue
recorded in years prior to December 31, 1993, offset by the recording of a
$259,000 reserve in the third quarter of 1996 for the settlement of a legal
action.
General and administrative and other expenses for the year ended December
31, 1995 were approximately $7,718,000, or 7.2% of revenue, compared to
approximately $5,859,000, or 7.4% of revenue, for the year ended December 31,
1994. The increase in dollars is the result of the increased volume of business
as a result of the acquisitions and the recording in 1995 of the reserve related
to potentially uncollectible revenue described above. The decrease in percentage
resulted from efforts to manage costs.
General and administrative and other expenses for the year ended December
31, 1994 increased approximately $876,000, from approximately $4,983,000, or
8.6% of revenue, for the year ended December 31, 1993. This increase is due to
the increased volume of business as a result of the acquisitions.
General and administrative and other expenses for the year ended December
31, 1995 increased approximately $900,000 from approximately $6,818,000, or 5.9%
of revenue, on a pro forma basis, for the year ended December 31, 1994. This
increase is principally the result of the recording of the reserve for
potentially uncollectible revenue described above.
General and administrative and other expenses on a pro forma basis, for the
year ended December 31, 1994, decreased $938,000, from $7,756,000, or 5.9% of
revenue, for the year ended December 31, 1993. The
62
<PAGE> 75
decrease in general and administrative and other expenses is due to efforts to
reduce duplicate costs as a result of combining the operations of General
Physics and the GPST Businesses.
Interest Expense.
Interest expense relates to interest on General Physics' senior
subordinated debentures issued in connection with the acquisition of the GPST
Businesses and the short term borrowings owed to a commercial bank under General
Physics' revolving credit agreement. Interest expense for the nine months ended
September 30, 1996 was approximately $1,361,000, compared to approximately
$1,732,000 for the nine months ended September 30, 1995. The decrease is due to
lower average outstanding borrowings under General Physics' line of credit
during the first nine months of 1996, compared to the first nine months of 1995.
Interest expense for the year ended December 31, 1995 was approximately
$2,208,000, compared to approximately $1,366,000 for the year ended December 31,
1994. Interest expense for the year ended December 31, 1994 increased
approximately $631,000 from $735,000 in 1993. These increases were primarily a
result of the increased debt incurred related to the acquisition of the GPST
Businesses described above.
On a pro forma basis, interest expense was $2,141,000 for the year ended
December 31, 1994 and $2,040,000 for the year ended December 31, 1993. The
minimal increase in interest expense for the year ended December 31, 1995 was
due to higher interest rates in 1995 as compared to 1994 and 1993, somewhat
offset by lower borrowings under General Physics' line of credit in 1995.
Income Before Income Taxes and Equity in Net Earnings of Investee Company.
Income before income taxes and equity in net earnings of investee company
for the nine months ended September 30, 1996 was approximately $3,846,000, an
increase of approximately $2,422,000 over the nine months ended September 30,
1995. The increase was due primarily to increased revenue in 1996 and the
recording in 1995 of the reserve related to potentially uncollectible revenue
discussed above.
Income before income taxes and equity in net earnings of investee company
for the year ended December 31, 1995 was approximately $2,454,000, an increase
of approximately $600,000 over the year ended December 31, 1994. Income before
income taxes and equity in net earnings of investee company for the year ended
December 31, 1994 was approximately $1,854,000, an increase of approximately
$684,000 from the year ended December 31, 1993. As a percentage of revenue,
income before income taxes and equity in net earnings of investee company was
1.4% for the years ended December 31, 1995 and 1994.
Income before income taxes and equity in net earnings of investee company
for the year ended December 31, 1995 decreased approximately $354,000 from
approximately $2,808,000, on a pro forma basis for the year ended December 31,
1994. This decrease was primarily due to lower revenues and the reserve recorded
in 1995 for potentially uncollectible revenue.
On a pro forma basis, income before income taxes and equity in net earnings
of investee company was $6,787,000, or 5.2% of revenue for the year ended
December 31, 1993. The decrease in 1994 was a result of the decreased revenue.
Income Taxes.
Effective January 1, 1993, General Physics adopted SFAS 109 -- Accounting
for Income Taxes ("SFAS No. 109"). SFAS No. 109 employs an asset and liability
approach in accounting for income taxes, the objective of which is to recognize
the amount of current and deferred taxes payable or refundable at the date of
the financial statements as a result of all events that have been recognized in
the financial statements and as measured by the provisions of enacted tax laws.
The adoption of SFAS No. 109 did not have a material impact on General Physics'
financial position or results of operations.
General Physics' effective income tax rates for the nine months ended
September 30, 1996 and 1995 were 42.8% and 37.1%, respectively. General Physics'
effective income tax rates for the years ended December 31, 1995, 1994 and 1993
were 40.0%, 42.3%, and 41.6%, respectively. On a pro forma basis, the income tax
rate for the years ended December 31, 1994 and 1993 were 45.0% and 38.6%,
respectively. The higher effective tax rates for the nine months in 1996 and the
year ended 1994 were the result of items which are not deductible
63
<PAGE> 76
for tax purposes. The lower effective tax rate in 1995 as compared to 1994 was
the result of permanent differences between book and tax and the reversal of
prior year over-accruals.
Equity in Net Earnings of Investee Company.
General Physics accounts for investments in investee companies over which
it has the ability to exercise significant influence over operations and
financial policies, using the equity method of accounting. In evaluating its
ability to exercise significant influence, General Physics evaluates a number of
factors, including the ownership interest in such companies of National Patent.
General Physics records any gain or loss in the consolidated statement of
operations, when an investee sells its shares at an offering price which differs
from General Physics' carrying amount per share of such investee company's
stock.
Prior to the acquisition of the GPST Businesses, General Physics and GPST
contributed assets to a newly formed joint venture, GSE Systems, Inc. ("GSES"),
for 10% and 35% ownership interests in the joint venture, respectively. On
August 1, 1995, GSES completed an initial public offering of 1,500,000 shares of
its common stock at $14 per share. General Physics owns 250,000 shares of GSES
common stock, which after the offering, represented approximately a 6% interest
in GSES. As this investment is accounted for using the equity method of
accounting, the capital transaction by GSES was treated as a sale of stock of a
subsidiary by General Physics and a gain of approximately $690,000 net of income
taxes, was recognized. General Physics presently does not expect transactions of
this nature to occur in the future.
For the nine months ended September 30, 1996 and 1995, General Physics
recognized its proportionate share of the net earnings of GSES of $87,000 and
$86,000, respectively. For the years ended December 31, 1995 and 1994, General
Physics recognized $96,000 and $69,000, respectively. Such amounts are net of
income taxes payable upon distribution of earnings by the investee.
Liquidity and Capital Resources.
General Physics has historically financed its operations through cash
generated from operations, bank borrowings, and, with respect to the GPST
Businesses, advances from its parent. Working capital was $15,593,000 at
September 30, 1996 and $16,815,000 and $17,690,000 at December 31, 1995 and
1994, respectively. Net cash provided by operating activities for the nine
months ended September 30, 1996 decreased from net cash provided by operating
activities for the nine months ended September 30, 1995 because of increased
accounts receivable and estimated earnings in excess of billings on uncompleted
contracts primarily as a result of higher revenue.
On April 7, 1995 General Physics and National Patent entered into a new
three-year credit agreement with a commercial bank providing for a $20,000,000
secured revolving line of credit expiring April 10, 1998 for General Physics and
a secured term loan for National Patent. General Physics terminated its previous
credit agreement. Borrowings under the new credit agreement bear interest at the
prime rate or at LIBOR plus 1.75%, whichever is elected by General Physics. The
credit agreement is secured by liens on accounts receivable of General Physics
and its domestic subsidiaries, and contains covenants that, among other things,
limit General Physics' ability to dispose of assets, incur debt, create liens,
make capital expenditures, and make certain investments or acquisitions. In
addition, General Physics is required to meet certain financial ratios. At
September 30, 1996, General Physics had available borrowings of approximately
$14,651,000 under the credit agreement and borrowings of $5,200,000 outstanding.
General Physics has not historically made substantial capital expenditures.
General Physics has no current plans to increase in any material respect its
historical level of capital expenditures, although General Physics will consider
making appropriate acquisitions as opportunities present themselves. General
Physics believes that funds provided from operations and available borrowings
will be sufficient to meet the operating needs and capital expenditures of
General Physics through 1996 and the twelve months thereafter.
Impact of Inflation.
As the cost of providing services has increased, General Physics has
historically been able to adjust prices, and, therefore, inflation has not had,
nor is it expected to have, a significant effect on the operations of General
Physics.
64
<PAGE> 77
Accounting Matters.
General Physics will adopt the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation" in
1996. Beginning in 1996, General Physics will present information required by
SFAS No. 123 with respect to stock compensation on a pro forma basis and will
continue to measure stock compensation in accordance with Accounting Principles
Board Opinion No. 25.
Forward-Looking Statements.
This Joint Proxy Statement/Prospectus contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including, but not
limited to, dependence on government contracts for a significant portion of
General Physics' revenue and profit; dependence on a few clients for a
substantial portion of business; dependence on the continued operation and
government regulation of the commercial nuclear power industry; potential
liability and uninsurable risks; and the risk of loss of technical personnel,
all of which are difficult to predict and many of which are beyond the control
of General Physics.
65
<PAGE> 78
PRO FORMA FINANCIAL DATA
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
The unaudited pro forma consolidated condensed balance sheet has been
prepared based upon the historical consolidated condensed balance sheet of
National Patent at September 30, 1996, and gives effect to the Merger as if it
had occurred on September 30, 1996. The historical consolidated balance sheet of
National Patent as of September 30, 1996 includes the accounts of General
Physics, its 52%-owned subsidiary. The pro forma balance sheet reflects the
purchase by National Patent of the approximately 48% minority interest in
General Physics and other effects of the Merger. The following unaudited
consolidated condensed pro forma balance sheet should be read in conjunction
with the separate financial statements and notes thereto of National Patent and
General Physics. The following unaudited consolidated condensed pro forma
balance sheet is presented for informational purposes only and is not
necessarily indicative of the financial position of National Patent after the
Merger.
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 23,371 (1,606)(b) $ 21,765
Marketable securities.............................................. 3,280 3,280
Accounts and other receivables..................................... 45,243 45,243
Inventories........................................................ 20,871 20,871
Costs and estimated earnings in excess of billings on uncompleted
contracts........................................................ 10,125 10,125
Prepaid expenses and other current assets.......................... 3,540 3,540
-------- --------
Total current assets...................................... 106,430 104,824
-------- --------
Investments and advances........................................... 23,392 23,392
-------- --------
Property, plant and equipment, at cost............................. 35,740 35,740
Less accumulated depreciation...................................... (26,521) (26,521 )
-------- --------
9,219 9,219
-------- --------
Intangible assets, net of amortization............................. 33,987 16,321(a) 55,075
3,842(b)
725(c)
200(d)
Other assets....................................................... 3,682 3,682
-------- --------
$176,710 $196,192
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt............................... $ 8,910 $ 8,910
Short-term borrowings.............................................. 21,540 21,540
Accounts payable and accrued expenses.............................. 24,825 2,236(b) 28,271
1,210(c)
Billings in excess of costs and estimated earnings on uncompleted
contracts........................................................ 8,395 8,395
-------- --------
Total current liabilities................................. 63,670 67,116
-------- --------
Long-term debt less current maturities............................. 11,853 11,853
-------- --------
Minority interests................................................. 9,903 (9,874)(a) 29
-------- --------
STOCKHOLDERS' EQUITY
Common stock....................................................... 73 27(a) 100
Class B capital stock.............................................. 1 1
Capital in excess of par value..................................... 130,080 26,168(a) 155,963
(485)(c)
200(d)
Deficit............................................................ (40,501) (40,501 )
Net unrealized gain on available for-sale securities............... 2,542 2,542
Minimum pension liability adjustment............................... (911) (911 )
-------- --------
Total stockholders' equity................................ 91,284 117,194
-------- --------
$176,710 $196,192
======== ========
</TABLE>
(footnotes appear on next page)
66
<PAGE> 79
(footnotes from previous page)
- ---------------
(a) Adjustment reflects the issuance of 2,721,537 shares of NPD Common Stock to
purchase the 48% minority interest in General Physics, represented by
5,039,882 shares of GPC Common Stock, based upon an exchange ratio of .54
shares (subject to adjustment) of NPD Common Stock per share of GPC Common
Stock. See "THE MERGER AGREEMENT -- Exchange Ratio and the Collar."
The shares issued by National Patent are valued at $9.625 per share for
purposes of the pro forma financial statements, which valuation may change
based upon changes in the Exchange Ratio, and other factors. See "THE
MERGER AGREEMENT -- Exchange Ratio and the Collar."
The goodwill recorded in the transaction reflects the excess of the fair
value of the National Patent stock issued ($26,194,793) over 48% of the
underlying book value of the General Physics net assets, and will be
amortized over a period of 28 years.
(b) Adjustment records the payment by National Patent to purchase the vested
but unexercised stock options ($1,606,000) and to accrue the liability for
the unvested stock options ($2,236,000) outstanding under the General
Physics Corporation 1991 Stock Option Plan.
(c) Adjustment records the estimated professional fees and other costs related
to (i) the acquisition of the 48% minority interest in General Physics
($725,000) and (ii) the registration of additional shares of NPD Common
Stock ($485,000).
(d) Adjustment records the issuance of $200,000 of NPD Common Stock in payment
of legal fees and related expenses in connection with the settlement of
litigation challenging the Merger.
67
<PAGE> 80
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
The unaudited pro forma consolidated statements of operations have been
prepared based upon the historical statements of operations of National Patent
for the nine months ended September 30, 1996 and the year ended December 31,
1995, and give effect to the Merger as if it had occurred on January 1, 1996 and
1995, respectively. The following unaudited consolidated condensed statements of
operations of National Patent for the aforementioned periods include the
accounts of General Physics, its 52%-owned subsidiary. The pro forma statements
of operations should be read in conjunction with the separate financial
statements and notes thereto of National Patent and General Physics. The
historical statements of operations are presented for informational purposes
only and are not necessarily indicative of the actual results of operations that
would have been achieved if the transactions had occurred as of the dates
indicated, or of future results that may be achieved.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------------------------ ------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Sales......................................... $185,025 $185,025 $152,536 $152,536
Investment and other income, net.............. 1,129 1,129 2,658 2,658
-------- -------- -------- --------
186,154 186,154 155,194 155,194
-------- -------- -------- --------
Costs and expenses
Cost of goods sold............................ 156,703 156,703 129,623 129,623
Selling, general and administrative........... 30,372 753(a) 30,775 22,269 565(a) 22,572
(350)(b) (262)(b)
Interest...................................... 5,019 5,019 3,142 3,142
-------- -------- -------- --------
192,094 192,497 155,034 155,337
-------- -------- -------- --------
Minority interests.............................. (1,104) 1,104(c) (1,094) 1,094(c)
Loss on investments............................. (4,000) (4,000 )
Unrealized gain on transfer from long-term
investments to trading securities............. 3,183 3,183 1,842 1,842
Gain on issuance of stock by subsidiaries and
affiliates.................................... 5,912 5,912 1,938 1,938
Gain on disposition of stock of a subsidiary and
an affiliate.................................. 3,768 3,768 12,200 12,200
-------- -------- -------- --------
Income before income taxes, discontinued
operation and extraordinary item.............. 5,819 6,520 11,046 11,837
Income tax benefit (expense).................... (1,787) 1,360(d) (427 ) 592 1,361(d) 1,953
-------- -------- -------- --------
Income before discontinued operation and
extraordinary item............................ $ 4,032 $ 6,093 $ 11,638 $ 13,790
======== ======== ======== ========
Income per share before discontinued operation
and extraordinary item........................ $ .60 $ .65 $ 1.58 $ 1.37
======== ======== ======== ========
</TABLE>
- ---------------
(a) The adjustment records amortization of goodwill arising in the Merger on a
straight-line basis over a 28-year period.
(b) The adjustment records estimated reductions in printing costs, meeting
expenses and other expenses as a result of General Physics ceasing to be a
separate reporting entity under federal securities laws.
(c) The adjustment records elimination of the minority interest in the earnings
of General Physics as a result of the Merger.
(d) The adjustment records income tax benefit (expense) to give effect to the
inclusion of General Physics in the consolidated income tax return of
National Patent. As a result of the Merger, on a pro forma basis, taxable
income of General Physics would be offset by operating losses of National
Patent, thereby eliminating Federal income tax expense of General Physics,
which amounted to $1,361,000 for the nine months ended September 30, 1996
and $1,360,000 for the year ended December 31, 1995. The tax benefit
reflected in the 1996 period is the result of the reduction of $2,386,000 in
the valuation allowance for deferred tax assets of National Patent.
68
<PAGE> 81
BUSINESS -- NATIONAL PATENT
National Patent, incorporated in Delaware in 1959, is a publicly traded
company with established core operating businesses, investments and emerging
technologies. National Patent's operations consist of three operating business
segments: Physical Science, Distribution and Optical Plastics.
National Patent's Physical Science Group consists of (i) SGLG, Inc.
("SGLG"), an approximately 92% owned subsidiary, and (ii) General Physics
Corporation ("General Physics"), an approximately 52% owned subsidiary. General
Physics provides engineering, environmental, training, analytical, and technical
support services to commercial nuclear and fossil power utilities, U.S.
Departments of Defense and Energy, Fortune 500 companies, and other commercial
and governmental customers. In addition, General Physics has an approximately 7%
interest in GSE Systems, Inc., a software simulator company. SGLG is a holding
company that has a 19% interest in GSE.
National Patent's Distribution Group, incorporated under the name Five Star
Group, Inc., is engaged in the wholesale distribution of home decorating,
hardware and finishing products.
The Optical Plastics Group, through National Patent's wholly-owned
subsidiary MXL Industries, Inc. ("MXL"), manufactures molded and coated optical
products, such as shields and face masks and non-optical plastic products. In
addition, National Patent has a division, Hydro Med Sciences ("HMS"), involved
in the manufacture of medical devices, drugs and cosmetic polymer products.
National Patent's investments include the following: Interferon Sciences,
Inc. (17% owned), a biopharmaceutical company engaged in the study, manufacture
and sale of pharmaceutical products based on its FDA-approved highly purified,
multi-species, natural-source alpha interferon; GTS Duratek Inc. (15% owned), an
environmental technology and services firm that uses its proprietary
vitrification processes to convert radioactive and hazardous waste into glass
for environmentally safe long-term storage and disposal; and American Drug
Company (54% owned), a company that distributes over-the-counter healthcare
products and prescription drugs in Russia.
PHYSICAL SCIENCE GROUP
General Physics
General. General Physics provides a wide range of engineering,
environmental, training, analytical and technical support services to commercial
nuclear and fossil power utilities, the DoD, the DOE, Fortune 500 companies and
other commercial and governmental customers. General Physics believes it is a
leader in the field of developing training materials, conducting training
programs and providing engineering and technical support services to operators,
technical staff and management personnel of capital-intensive facilities. For a
description of General Physics' business, see "BUSINESS -- GENERAL PHYSICS."
DISTRIBUTION GROUP
Five Star Group, Inc.
The Distribution Group, incorporated under the name Five Star Group, Inc.
("Five Star"), is engaged in the wholesale distribution of home decorating,
hardware and finishing products. Five Star has two strategically located
warehouses and office locations, with approximately 360,000 square feet of space
in New Jersey and Connecticut, which enables Five Star to service the market
from Maine to Virginia.
Five Star is the largest distributor in the U.S. of paint sundry items,
interior and exterior stains, brushes, rollers and caulking compounds and offers
products from leading manufacturers such as Cabot, Dap, 3-M, Minwax and
Rustoleum. Five Star distributes its products to retail dealers which include
discount chains, lumber yards, "do-it-yourself" centers, hardware stores and
paint suppliers principally in the northeast region. It carries an extensive
inventory of the products it distributes and provides delivery generally within
24 to 72 hours from the placement of an order.
The primary working capital investment for Five Star is inventory.
Inventory levels will vary throughout the year reflecting the seasonal nature of
the business. Five Star's strongest sales are typically in March
69
<PAGE> 82
through October because of strong seasonal consumer demand for its products. As
a result, inventory levels tend to peak in the spring and reach their lowest
levels in late fall.
The largest customer accounted for approximately 7% of Five Star's sales in
1995 and its 10 largest customers accounted for approximately 15% of such sales.
All such customers are unaffiliated companies and neither Five Star nor National
Patent has a long-term contractual relationship with any of them. Competition
within the industry is intense. There are much larger national companies
commonly associated with national franchises such as Servistar and True Value as
well as smaller regional distributors, all of whom offer similar products and
services. Additionally, in some instances manufacturers will bypass the
distributor and choose to sell and ship their products directly to the retail
outlet. The principal means of competition for Five Star are its strategically
placed distribution centers and its extensive inventory of quality name brand
products. Five Star will continue to focus its efforts on supplying its products
to its customers at a competitive price and on a timely, and consistent basis.
In the future, Five Star will attempt to acquire complementary distributors and
to expand the distribution of its line of private-label products sold under the
"Five Star" name.
OPTICAL PLASTICS GROUP
MXL Industries, Inc.
The Optical Plastics Group is engaged in the manufacture of molded and
coated optical products, such as shields and face masks and non-optical plastic
products through National Patent's wholly owned subsidiary MXL Industries, Inc.
MXL is a state-of-the-art injection molder and precision coater of large
optical products such as shields and face masks and non-optical plastics. MXL
believes that the principal strengths of its business are its state-of-the-art
injection molding equipment, advanced production technology, high quality
standards, and on time deliveries. Through its Woodland Mold and Tool Division,
MXL also designs and engineers state-of-the-art injection molding tools as well
as providing a commodity custom molding shop.
As the market for optical injection molding, tooling and coating is
focused, MXL believes that the combination of its proprietary "Anti-Fog"
coating, precise processing of the "Anti-Scratch" coatings, and precise molding
and proprietary grinding and polishing methods for its injection tools will
enable it to increase its sales in the future and to expand into related
products.
MXL uses only polycarbonate resin to manufacture shields, face masks and
lenses for over 55 clients in the safety, recreation and military industries.
For its manufacturing work as a subcontractor in the military industry, MXL is
required to comply with various federal regulations including Military
Specifications and Federal Acquisition Regulations for military end use
applications.
MXL is dependent upon one client which accounts for approximately 39% of
MXL's total sales and MXL's 10 largest customers accounted for approximately 89%
of its total sales.
MXL's sales and marketing effort concentrates on industry trade shows. In
addition, MXL employs one marketing and sales executive and one sales engineer.
HYDRO MED SCIENCES
Hydro Med Sciences ("HMS") is a division of National Patent involved in the
manufacture of medical devices, drugs and cosmetic polymer products. HMS was
originally established to investigate potential uses of a unique group of
polymers called Hydron in applications beyond the soft contact lens area, where
it was already in use. These polymers, which absorb water without dissolving,
have a number of biomedical applications.
HMS is currently developing gel implants for slow, long-term delivery
applications under grants from the Population Council. These implants could be
combined with chronic disease drugs. HMS is now seeking collaborations with a
number of major pharmaceutical companies with drugs going off-patent, to explore
opportunities to create new patent positions through combining their drugs with
the gel implant delivery system.
70
<PAGE> 83
NATIONAL PATENT'S INVESTMENTS
GTS Duratek, Inc.
GTS Duratek, Inc. ("Duratek") is an environmental technology and services
firm that uses its proprietary vitrification processes to convert radioactive
and hazardous waste into glass for environmentally safe long-term storage and
disposal. Duratek has three main operating units: (1) The Technology Group
treats and stabilizes hazardous wastes using its patented DuraMelter
vitrification process. The group's initial focus has been on radioactive cleanup
projects for the DOE. (2) In 1995 Duratek acquired 80% of a hazardous waste
recycling center in Texas, which it renamed DuraTherm. The facility uses a
patented thermal desorption technology to treat and stabilize hazardous oilfield
sludges. (3) The Services Group provides staff augmentation, consulting,
training, environmental safety and healthy services and liquid waste treatment
systems to a wide variety of government and corporate clients. On April 23,
1996, Duratek completed a secondary public offering of 3.6 million shares of
common stock at $18.50 per share, one million shares of which were sold by
National Patent, reducing National Patent's ownership to approximately 15% of
the currently outstanding shares of common stock of Duratek.
Interferon Sciences, Inc.
Interferon Sciences, Inc. ("ISI") is a biopharmaceutical company engaged in
the study, manufacture and sale of pharmaceutical products based on its highly
purified, multi species, natural-source alpha interferon. ISI's ALFERON(R) N
injection (Interferon Alfa-n3) product has been approved by the United States
Food and Drug Administration for the treatment of certain types of genital
warts, and is being studied for potential use in other indications. ISI also has
other natural-source alpha interferon formulations in various stages of
development for the potential treatment of viral and immune system diseases and
cancer. In April 1996, ISI completed an 8 million share secondary public
offering, priced at $2 per share, all of which shares were sold by ISI and none
by National Patent. National Patent currently owns approximately 17% of the
outstanding shares of common stock of ISI.
GSE Systems, Inc.
GSE Systems, Inc. ("GSE") was formed in 1994 through the consolidation of a
number of small, related business. GSE concluded an initial public offering in
August 1995. GSE is a global provider of process control, data acquisition,
simulation and information software, systems and services to the specialty
chemical, food and beverage, petroleum refining, oil and gas, pharmaceutical,
fossil and nuclear power generation, metals, electrical distribution and water
treatment industries. National Patent controls approximately 26% of the
outstanding shares of common stock of GSE.
American Drug Company
American Drug Company ("ADC") was organized in 1993 as a wholly-owned
subsidiary of National Patent to initiate marketing activities for American
generic pharmaceutical and medical products in Russia and the Commonwealth of
Independent States, from offices in Prague and Moscow. ADC's wholly-owned
subsidiary, NPD Trading (USA) Inc., provides consulting services to Western
companies doing business in Russia and Eastern Europe. ADC began distributing
products in 1995. As of September 30, 1996, ADC had completed registration for
28 products, including toothpaste, sanitary napkins, antibiotic ointments,
bandages and vitamins. As of September 30, 1996 ADC was a 54% owned subsidiary
of National Patent.
PROPERTIES
The following information describes the material physical properties owned
or leased by National Patent and its subsidiaries.
National Patent leases approximately 10,000 square feet of space for its
New York City principal executive offices. National Patent's Physical Science
Group leases approximately 31,650 square feet of an
71
<PAGE> 84
office building in Columbia, Maryland, and 208,350 square feet at 39 branch
offices in various other locations in the United States and abroad.
The Distribution Group leases 250,000 square feet in New Jersey and 110,000
square feet in Connecticut.
The Optical Plastics Group owns 33,000 square feet of office space in
Lancaster, Pennsylvania and 12,594 square feet of office space in Westmont,
Illinois.
The facilities owned or leased by National Patent are considered to be
suitable and adequate for their intended uses and are considered to be well
maintained and in good condition.
LEGAL PROCEEDINGS
On September 27, 1996, National Patent was named as a defendant in the case
styled Dunlop v. Pollak, et al., Civil Action No. 15237-NC in the Court of
Chancery of the State of Delaware. Certain directors of National Patent were
also named as defendants in the complaint. The plaintiff and the defendants have
reached an agreement in principle to settle this litigation. For a description
of this litigation, see "THE MERGER AGREEMENT -- Litigation Challenging the
Merger."
BUSINESS -- GENERAL PHYSICS
GENERAL
General Physics provides a wide range of engineering, environmental,
training, analytical and technical support services to commercial nuclear and
fossil power utilities, the United States Departments of Defense (the "DoD") and
Energy (the "DOE"), Fortune 500 companies and other commercial and governmental
customers. General Physics believes it is a leader in the field of developing
training materials, conducting training programs and providing engineering and
technical support services to operators, technical staff and management
personnel of capital-intensive facilities.
ORGANIZATION AND OPERATIONS
General Physics was incorporated in 1966 to provide technical consulting
services in the field of nuclear science and engineering to nuclear power
companies and government agencies. General Physics expanded its operations in
the late 1960's to provide, among other things, training and technical support
services to the commercial nuclear power industry. General Physics expanded its
markets even further in the late 1980's to provide training and technical
support services to United States Government nuclear weapons production and
waste processing facilities (primarily at the DOE's Savannah River facility),
and environmental services to governmental and commercial clients.
In January 1994, General Physics acquired substantially all of the
operating businesses of Cygna Energy Services ("CES"), other than its
non-nuclear seismic engineering business. The acquired businesses provide design
engineering, seismic engineering, systems engineering, materials management and
safety analysis services to the commercial nuclear power industry and to the
DOE.
On August 31, 1994, General Physics acquired substantially all of the
assets and operations of GPS Technologies, Inc. ("GPST") and certain of its
subsidiaries (together, the "GPST Businesses") for approximately $32.5 million,
consisting of $10 million cash, 3,500,000 shares of GPC Common Stock, warrants
to acquire up to 1,000,000 shares of GPC Common Stock at $6.00 per share,
warrants to acquire up to 475,664 shares of GPC Common Stock at $7.00 per share,
and 6% ten-year senior subordinated debentures in the aggregate principal amount
of $15 million. The senior subordinated debentures require payment of interest
only on a quarterly basis for the first five years, quarterly installments of
$525,000 principal plus interest for the next five years and the balance of $4.5
million at maturity. The fair value of the senior subordinated debentures was
estimated to be $10.7 million at the date of the acquisition.
National Patent, which owned approximately 92% of GPST and 28% of General
Physics prior to the transaction, owned approximately 54% of the outstanding
shares of General Physics after the acquisition.
72
<PAGE> 85
Accordingly, the acquisition has been accounted for as a reverse acquisition,
whereby the GPST Businesses were deemed to have acquired General Physics in a
transaction accounted for as a purchase. General Physics remains the legal
entity and Commission registrant.
General Physics and its subsidiaries provide engineering, environmental,
training, analytical and technical support services to the commercial nuclear
and fossil power industries, the DoD and DOE, Fortune 500 companies and other
commercial and governmental customers. General Physics is organized into four
groups: Training and Technology, Engineering and Applied Sciences, Federal
Systems and Department of Energy. General Physics' performance is significantly
affected by the timing of performance on contracts. Results of operations are
not seasonal, since contracts are performed throughout the year.
The following table sets forth the approximate revenue attributable to the
categories of services provided by General Physics for the nine-months ended
September 30, 1996 and the year ended December 31, 1995, and approximate pro
forma revenue for the years ended December 31, 1994 and 1993, as if the
acquisitions of CES and the GPST Businesses had occurred on January 1 of the
respective years (see "SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA -- General Physics' Management's Discussion and Analysis of Financial
Condition and Results of Operations"):
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------ SEPTEMBER 30,
1995 1994(1) 1993(1) 1996
-------- -------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Training and Technology Services......... $ 47,704 $ 46,466 $ 58,574 $ 42,701
Engineering and Applied Sciences......... 27,418 31,781 36,128 18,167
Federal Systems.......................... 23,924 18,078 16,096 6,340
DOE Services............................. 8,503 18,805 19,933 18,746
-------- -------- -------- --------
Total Revenue.................. $107,549 $115,130 $130,731 $ 85,954
======== ======== ======== ========
</TABLE>
- ---------------
(1) Pro forma amounts.
From 1988 through mid-1992, General Physics experienced growth in revenue
primarily from services provided to the DOE at its Savannah River site under
subcontracts with Westinghouse Savannah River Company ("Westinghouse"), and to a
lesser extent from services provided to the commercial nuclear power industry.
Since mid-1992, General Physics has experienced lower levels of contract
activity at DOE facilities which resulted in declining revenue. In addition, at
the DOE's Savannah River site, the volume of contract activity for which General
Physics is eligible to compete has been further reduced since 1994 by the award
to small businesses of certain types of work which have been performed by
General Physics. However, the lower level of contract activity has been somewhat
offset by task orders issued under an architect-engineering contract awarded to
General Physics by Westinghouse in July 1995. The eventual value of the contract
to General Physics is not presently determinable. In addition, in 1992 and 1993,
the GPST Businesses experienced declining revenue due to cutbacks in funding of
DoD submarine and aviation programs and contract reductions in the
pharmaceutical industry. General Physics has also experienced decreasing
revenues from commercial nuclear power utilities over the last three years as a
result of cost reduction efforts at many of the utilities. During 1995, revenues
from commercial nuclear power utilities decreased significantly. However, during
the first nine months of 1996, revenues from the commercial nuclear power
utilities were up slightly from the first nine months of 1995. The cost
reduction efforts by utilities are expected to continue, but the long-term
effect on General Physics is not presently determinable.
In March 1996, the DoD awarded Westinghouse Electric Corporation a
nine-year, $575 million contract to destroy chemical weapons at the Anniston
Army Depot. General Physics will be a subcontractor to Westinghouse Electric
Corporation, responsible for training and operations engineering. The value of
the subcontract to General Physics is not presently determinable.
73
<PAGE> 86
On December 3, 1996, General Physics announced that it had been notified by
the DoD that it had been selected for a repeat award of its contract to provide
environmental engineering support services at Aberdeen Proving Ground. The
contract is one of two awarded to successful contractors who will competitively
bid for work to be awarded in the future under separate delivery orders.
Although the maximum award value of the contract over its five year term is
approximately $100,000,000, the actual value of the contract will depend upon
the value of the individual delivery orders awarded to General Physics.
During 1995, General Physics' results were also adversely affected by
losses related to overruns on fixed-price contracts in its Southeast Asia
operations.
While General Physics continues to provide services to the DOE and DoD and
the commercial nuclear power industry, it is unsure what effect continued
cutbacks will have on General Physics' future results. In response to these
factors, General Physics has focused its marketing resources on expanding
management and technical training services to manufacturing and process
industries, and specialized engineering services to federal agencies and process
industries. During the latter part of 1994 and in 1995 and in the first nine
months of 1996, General Physics experienced growth in these areas and
anticipates future growth to come from these areas.
CUSTOMERS
General Physics currently provides services to more than 473 customers.
Significant customers include commercial nuclear utilities, the Department of
the Navy, the Department of the Air Force, the Department of the Army, major
automotive manufacturers, major defense and DOE contractors, and other United
States Government agencies. Revenue from the United States Government accounted
for approximately 48% and 53% of the revenue for the nine months ended September
30, 1996 and the year ended December 31, 1995, respectively, and approximately
48% and 35% of the pro forma revenue of General Physics for the years ended
December 31, 1994 and 1993, respectively. However, such revenue was derived from
many separate contracts and subcontracts with a variety of Government agencies
and contractors that are regarded by General Physics as separate customers. In
1995, 1994 and 1993, no other customer accounted for more than 10% of General
Physics' revenue.
TRAINING AND TECHNOLOGY GROUP
The Training and Technology Group focuses on training and human performance
improvement needs of commercial nuclear utilities, Fortune 500 and other
commercial companies, and governmental customers, providing technical training
and other technical services to customers that design, operate and maintain
equipment and facilities. This Group analyzes the human, organizational and
technical issues confronting its customers and recommends solutions to improve
performance.
Nuclear Services
General Physics has provided services at one time or another to virtually
all of the 110 licensed commercial nuclear power plants in the United States.
Historically, these services have been provided to 38 power plants that have
boiling water reactors (rather than pressurized water reactors); however,
General Physics currently derives a substantial portion of its nuclear services
revenue at power plants that have pressurized water reactors, and is capable of
providing training, engineering and technical support services at both types of
plants. The commercial nuclear power industry is highly regulated and has been
subject to increased public and governmental scrutiny as a result of the Three
Mile Island accident in March 1979. Since the accident and the resulting
increased public and governmental scrutiny, nuclear utilities have terminated
new plant orders, notwithstanding continued growth in demand for electrical
output. Instead, these companies have committed significant additional resources
to insure the safe operation of their existing nuclear power plants, some of
which will be nearing the end of their operating lifetimes (40 years, according
to current standards based on licenses granted by the United States Nuclear
Regulatory Commission ("NRC")) within the next decade. Also, the large
investment made in a nuclear power plant and the high cost of maintenance
necessitate that availability (the percentage of a year that a power plant
produces electrical output) and
74
<PAGE> 87
efficiency be maximized during the plant's operating lifetime. Furthermore, over
time, regulatory requirements have become increasingly restrictive, particularly
in the area of operator training. These regulatory requirements do not restrict
General Physics; rather, they impose operational restraints or mandates upon
General Physics' clients, thereby providing General Physics with additional
opportunities to render training and related services for achieving compliance.
Besides the foregoing, plant modifications and new safety concerns require
related training and support services.
Compliance with regulations at, and the efficient operation of, a nuclear
power plant require a well-trained engineering, operations and maintenance
staff. General Physics develops training programs, prepares training materials,
conducts training courses and provides other training-related services for
commercial nuclear power plants.
In addition to the training services it provides, General Physics also
furnishes a wide variety of engineering, technical and management support
services to the commercial nuclear power industry, specializing in services
which improve plant operation and maintenance and ultimately increase plant
availability. Services provided include development and upgrade of operations
and maintenance procedures; development and implementation of
Reliability-Centered Maintenance programs (analytical methods for determining
the optimal type and frequency of maintenance to achieve maximum plant
availability at minimum cost); spare parts management and procurement
assistance; plant configuration management (the modification of procedures and
practices at a power plant in light of engineering or other changes to the
plant); control room human factors engineering (improvements in control panel
design and plant procedures, and other work aids); training simulator
maintenance and modification; staff augmentation; and emergency preparedness
program assistance.
General Physics anticipates there will be continuing pressure on the gross
profit margins in the nuclear services area as a result of commercial nuclear
utilities trying to reduce costs.
Fortune 500 and Other Commercial Customers
Fortune 500 and other commercial customers represent a wide range of
industries with diverse technical and geographic needs. These industries include
automotive, forest products, steel, food and beverage, pharmaceutical and
others.
General Physics anticipates that the need for its services with Fortune 500
and other commercial customers will continue to grow. However, there can be no
assurance that such need will continue to grow or that such companies will
select General Physics over its competitors to provide such services.
Automotive Services
General Physics is a full-service training provider for the automotive
industry. Since 1987, General Physics has participated in a strategic business
partnership with the General Motors ("GM") Corporate Organization and Employee
Development Staff. Each year several thousand GM employees attend courses
conducted by General Physics. Additionally, training and consulting services are
provided on a project basis to many divisions of GM, including GM Overseas
Corporation, Beijing office. General Physics also provides training and
consulting services to Chrysler Corporation and Ford Motor Company as well as
many of the automotive supplier companies.
Industrial Training Services
General Physics develops and provides customized training programs to the
forest products, food and beverage, and petrochemical industries. These services
focus on continuous improvement in the maintenance and operations aspects of
plants and facilities. General Physics supports several customers by providing
complete process line or facility start-up services. Process Safety Management
training and technical services are also provided by General Physics. Major
customers include Georgia Pacific Corp., Anheuser-Busch, Inc. and Aramco
Services Company.
75
<PAGE> 88
Manufacturing Services
General Physics offers training and technical services to manufacturing
concerns. General Physics frequently supports the introduction of new work
practices associated with lean manufacturing, work teams and engineering.
General Physics' combination of technical skills and work practices training
helps meet the needs of a diverse customer base, including Ford Electronics,
U.S. Steel, Bell and Howell Co. and the United States Department of the
Treasury.
Operations and Maintenance Services
General Physics provides services designed to improve the operations of
conventional utility power plants, gas turbine combined cycle and cogeneration
plants, waste-to-energy plants, and industrial facilities. These services
include plant operations and maintenance documentation, simulator training
programs, plant startup engineering, maintenance management systems, and plant
operations and maintenance training. Major customers include Baltimore Gas and
Electric Company, Entergy Operations, Inc. and Alabama Electric Coop.
Power Systems Operations
General Physics provides training services to the power systems operations
centers of commercial utilities and related utility power pools, including
training system operators responsible for the buying, selling and overall flow
of bulk electric power throughout the United States. Major customers include
Consolidated Edison Company, Nevada Power, Baltimore Gas and Electric Company
and the Electric Power Research Institute.
Southeast Asia Operations
General Physics (Malaysia) Sdn. Bhd., located in Kuala Lumpur, Malaysia,
provides operations support, engineering and technical services to the power and
process industries in Southeast Asia. Customers include electric utilities,
independent power producers and process industries. Services include operations
support, development of technical and operational documentation, development of
operations and maintenance procedures and operations and technical training.
Government
General Physics operates the training center in Edgewood, Maryland
supporting the United States Army's chemical weapons demilitarization program.
General Physics provides training for personnel who will operate and maintain
demilitarization plants at seven locations across the country. General Physics
has trained chemical demilitarization specialists from Russia as part of an
effort to introduce U.S. technology and approaches for Russian chemical
munitions demilitarization programs. In addition, General Physics will be a
subcontractor to Westinghouse Electric Corporation at the Anniston Army Depot,
with responsibility for training and operations engineering in support of
Westinghouse Electric Corporation's contract to destroy chemical weapons.
ENGINEERING AND APPLIED SCIENCES GROUP
The Engineering and Applied Sciences Group provides engineering services to
the Government, utilities and the petrochemical industry. Multi-discipline
capabilities include environmental, mechanical, structural, chemical, electrical
and systems engineering, augmented with nondestructive examination, industrial
chemistry, and computer-aided design/drafting technical services. Specialized
engineering expertise is recognized nationally in areas of mechanical integrity
programs (including design, analysis, inspection and safety of capital intensive
and inherently hazardous facilities and systems) and electric power generation
(including operations, maintenance and performance engineering).
The Group's engineering and technical services are designed to increase
reliability and availability of plants and facilities, reduce probability of
component failure and address consequences of component or
76
<PAGE> 89
system failure. Components include pressure vessels, above-ground and
underground tanks, boilers, piping systems, rotating equipment and associated
instrumentation and controls. This Group also provides a full service
environmental analytical laboratory, with certified specialization in soils,
water, and military ordnance analysis and testing.
Pressure Systems Technology/Design and Analysis
General Physics provides mechanical, facility, civil/structural, welding
and electrical engineering design services for existing and new systems and
equipment. Customers include the DOE, Phillips Laboratory at Edwards AFB, Arnold
Engineering Development Center, AeroJet General Corp., the NASA Lewis Research
Center, commercial research facilities and chemical and petroleum manufacturers.
General Physics has also implemented comprehensive Process Safety Management
(PSM) programs, including assessment of mechanical integrity of critical
components, maintenance management, procedures development and management of
change.
Systems Engineering
General Physics provides expert and support personnel to The Johns Hopkins
University Applied Physics Laboratory in the areas of systems engineering and
computer science, focusing on the design, testing and evaluation of new and
modified Navy combat systems. These services include a wide range of computer
support capabilities, including computer analysts, programmers, computer
scientists, data reduction specialists, and computer operators.
Plant Performance Improvement Services
General Physics provides computer systems, engineering, chemistry and
technical training services to improve the efficiency, reliability and
probability of hydro and fossil power plants for the utility and independent
power generation industry. Senior staff of this Group are routinely employed as
expert witnesses in the area of power plant engineering and operations.
Systems Engineering and Licensing
General Physics provides a variety of engineering services to commercial
nuclear plants, including design engineering, service engineering, systems
engineering, licensing and safety analysis.
Environmental Services
General Physics provides environmental engineering, training and technical
support services to a number of United States Government agencies, including the
DoD, the DOE, the United States Postal Service and to a number of state and
local governments. General Physics also provides environmental services to a
number of commercial customers, including several of the largest domestic
industrial companies. A majority of the environmental services revenue is
derived from contracts to provide environmental engineering and other services
to the DoD at its Aberdeen Proving Ground in Aberdeen, Maryland.
General Physics provides environmental engineering services to its clients,
which call upon General Physics for support to obtain air, water and waste
permits and to determine if their sites and facilities are in compliance with
current federal, state and local regulations. General Physics provides a wide
range of engineering services to develop and manage site environmental
remediation plans, such as hazardous waste minimization programs, treatment
plans for specific contaminants, air emission control, erosion control, storm
water management, waste reduction and underground storage tank management.
However, General Physics subcontracts most remediation construction activities,
and in all cases subcontracts the removal and off-site disposal and treatment of
hazardous substances.
General Physics also furnishes various training and technical support
services to assist clients with environmental compliance. Support services range
from industrial hygiene services (anticipating, recognizing, evaluating and
controlling workplace health hazards) and risk assessment (evaluating
alternative risk
77
<PAGE> 90
reduction options and selecting the most cost-effective appropriate remediation
actions), to performance improvement and training (which includes the design and
implementation of customized training programs, compliance training courses to
meet regulatory requirements, advanced environmental courses and workshops and
Reliability-Centered Maintenance programs to enhance the operation and safety of
environmental facilities).
General Physics, through GP Environmental Services, Inc., a wholly-owned
subsidiary which operates an environmental laboratory located in Gaithersburg,
Maryland, provides environmental laboratory analytical services to industrial
and governmental customers with a primary concentration on locations in the mid-
Atlantic region. The laboratory performs analytical laboratory services,
focusing on soils, water and biological tissue samples, using automated
instrumentation and analytical facilities and a network combining all computer
automated equipment and reporting systems.
FEDERAL SYSTEMS GROUP
The Federal Systems Group ("FSG") consists of General Physics Federal
Systems, Inc., a subsidiary of General Physics. FSG provides technical services
to a variety of commands within the Department of the Navy and other Federal
Government agencies. These services include program management support, multi-
media/video production, technical training, quality assurance and independent
verification and validation of weapon systems, weapon systems life cycle support
and full spectrum integrated logistics support. Major Naval command customers
include NAVSEA, Naval Undersea Warfare Center, and Naval Surface Warfare Center.
Additionally, this Group provides services to other agencies of the Federal
Government, including the Defense Finance Accounting Service ("DFAS"),
Department of Treasury, Department of Justice and the United States Postal
Service through contract vehicles with the Office of Personnel Management,
Electronic Data Systems Corp. ("EDS") and Bell and Howell-Postal Systems, Inc.
Applied Technology and Undersea Warfare
FSG provides engineering services to United States Navy-related activities,
particularly the Naval Undersea Warfare Center, which is headquartered in
Newport, Rhode Island, with detachments throughout the United States. FSG has
considerable computerized Information Systems Management expertise and is noted
for its Bar Coded Inventory Management, Local Area Network and Wide Area Network
design and administration capabilities.
Performance Services
FSG specializes in providing program and financial management services for
DoD commands in support of major weapon systems acquisitions, including
providing the United States Navy with training/trainer products and services,
including Submarine Operational Readiness Assessment and Training, Universal
Threat Simulation, and support in networking aviation simulators. FSG also
maintains full-service broadcast quality video production and computer-generated
animation facilities and has developed more than 500 instructional hours of
computer-based training, linear videotape and interactive videodisc/CDROM
productions.
Training Systems
FSG provides office automation training through contracts with EDS. The
training is customer tailored for specific end-users, including the Department
of Defense-DFAS and the Department of Justice-Immigration and Naturalization
Service.
Aviation Systems
FSG provides aviation anti-submarine warfare aircrew training. With
personnel located throughout the United States, FSG developed the Deployable
Acoustic Readiness Training System ("DARTS"), consisting of a multi-track tape
reproducer and accompanying exercise manuals that can be used in any aircraft
location. In addition to DARTS, FSG provides specialized anti-submarine warfare
technical services and training, including development of computer-based
training used at the Naval Aviation Warfare Operator Training School.
78
<PAGE> 91
DEPARTMENT OF ENERGY SERVICES GROUP
The DOE has overall responsibility for the nation's nuclear weapons
complex. The operation of United States Government nuclear weapons production
and waste processing facilities recently has, like the commercial nuclear power
industry, come under increasingly intense public scrutiny. Due to such scrutiny,
the breakup of the Soviet Union and the heightened awareness created by the
nuclear incident at the Chernobyl power plant in the former Soviet Union, the
DOE has since the late 1980's focused its attention upon the safe production of
nuclear weapons and, in particular, the cleanup of serious pollution problems at
active and inactive weapons plants in more than 30 states. As a result, the DOE
has begun a research and cleanup program that it estimates could cost $200
billion or more over the next 30 years. General Physics organized its DOE
Services Group in order to take advantage of the United States Government's
increased focus on environmental, health and safety matters at DOE facilities
(and the DOE's resulting desire to improve personnel training and support
services to a level consistent with that of the commercial nuclear power
industry). The DOE typically does not itself perform many of the tasks relating
to nuclear weapons production and waste processing at these facilities; rather,
it awards large, multi-year, cost-plus-award-fee prime contracts to companies
such as Westinghouse, Martin Marietta Energy Systems, Inc. and EG & G, Inc.
These prime contractors, in turn, enter into a large number of contracts with
firms such as General Physics to provide a wide variety of services in support
of nuclear weapons production and waste processing facilities. The Group at the
DOE's Savannah River site, a 300-square mile nuclear weapons production and
waste processing site near Aiken, South Carolina, predominantly provides
professional services in such areas as the development and upgrade of detailed
operating and maintenance procedures, training program design, development and
accreditation assistance, maintenance engineering, technical support and quality
assurance and various other engineering and operations support services. In July
1995, General Physics was one of four companies awarded an architect engineering
contract by Westinghouse. General Physics also has staff augmentation contracts
at many of the DOE's research laboratories, including Los Alamos National
Laboratory, Princeton Plasma Physics Laboratory, Sandia National Laboratory, and
Brookhaven National Laboratory, for similar services.
General Physics anticipates that over the long term the DOE waste
processing industry will provide it with opportunities for growth due to the
DOE's increased emphasis on environmental, health and safety matters and the
DOE's resulting desire to improve personnel training and support services to a
level consistent with that of the commercial nuclear power industry. However,
the DOE's emphasis on nuclear weapons production declined from 1992 through
1995. General Physics experienced reductions in the number of its personnel on
contract because of cutbacks at Savannah River and as a result of contract
awards to small businesses of certain types of work which have been performed by
General Physics.
CONTRACTS
General Physics is currently performing under approximately 900 contracts.
General Physics' contracts with its clients provide for charges on a
time-and-materials basis, a fixed-price basis or a cost reimbursable basis.
General Physics' subcontracts with the United States Government have
predominantly been cost reimbursable contracts and time-and-materials contracts.
As with all Government contractors, General Physics is required to comply with
the Federal Acquisition Regulations and the Government Cost Accounting Standards
with respect to all of the services provided to the United States Government and
agencies thereof. These Regulations and Standards govern the procurement of
goods and services by the United States Government and the nature of costs that
can be charged with respect to such goods and services. All such contracts are
subject to audit by a designated government audit agency, which in most cases is
the Defense Contract Audit Agency (the "DCAA"). Although these contracts are
subject to audit, General Physics has not previously experienced material cost
disallowances. The DCAA has audited General Physics' contracts through 1994
without any material disallowances.
79
<PAGE> 92
The following table illustrates the percentage of total revenue
attributable to each type of contract for the nine months ended September 30,
1996, the year ended December 31, 1995 and total pro forma revenue attributable
to each type of contract for the years ended December 31, 1994 and 1993, as if
General Physics' acquisitions of CES and the GPST Businesses had occurred on
January 1 of the respective years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, NINE MONTHS ENDED
---------------------- SEPTEMBER 30,
1995 1994 1993 1996
---- ---- ---- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Time-and-Materials.................................... 36 % 37 % 44 % 36%
Fixed-Price........................................... 44 39 34 44
Cost Reimbursable..................................... 20 24 22 20
--- --- --- ---
Total Revenue............................... 100 % 100 % 100 % 100%
=== === === ===
</TABLE>
General Physics' time-and-materials contracts generally provide for General
Physics to bill for services based upon the hourly labor rates of the employees
performing the services and the actual expenses incurred, each multiplied by a
specified mark-up factor, up to a certain aggregate dollar amount. General
Physics' time-and-materials contracts include certain contracts under which
General Physics has agreed to provide training, engineering and technical
services at fixed hourly rates (subject to adjustment for labor costs).
Time-and-materials contracts generally permit the client to control the amount,
type and timing of the services to be performed by General Physics and to
terminate the contract on written notice. If a contract is terminated, General
Physics typically is paid for the services provided by it through the date of
termination. While General Physics' clients often modify the nature and timing
of services to be performed, no significant terminations of General Physics'
time-and-materials contracts have occurred.
General Physics' fixed-price contracts provide for General Physics to
perform specified services for a fixed price. General Physics bears the risk
that increased or unexpected costs required to perform the specified services
may reduce General Physics' profit or cause General Physics to sustain a loss,
but General Physics has the opportunity to derive increased profit if the costs
required to perform the specified services are less than expected. General
Physics' 1995 growth in government contracting was largely under fixed-price
contract vehicles. Fixed-price contracts generally permit the client to
terminate the contract on written notice; in the event of such termination,
General Physics would typically, at a minimum, be paid a proportionate amount of
the fixed price. No significant terminations of General Physics' fixed-price
contracts have occurred over the last three years.
General Physics' cost reimbursable contracts provide for General Physics to
be reimbursed for its actual costs plus a specified fee. These contracts also
are generally subject to termination at the convenience of the client. If a
contract is terminated, General Physics typically would be reimbursed for its
costs to the date of termination, plus the cost of an orderly termination, and
paid a proportionate amount of the fee. No significant terminations of General
Physics' cost reimbursable contracts have occurred.
COMPETITION
The principal competitive factors in General Physics' markets are the
experience and capability of technical personnel, performance, reputation and
price. Services such as those provided by General Physics' Training and
Technology Group and by General Physics' Engineering and Applied Sciences Group
are performed by many of the customers themselves, architectural and engineering
firms that design and construct power plants, major suppliers of equipment and
independent service companies such as General Physics. A significant factor
determining the business available to General Physics and its competitors is the
ability of customers to use their own personnel to perform services provided by
General Physics and its competitors. Competition has increased as architectural
and engineering firms have devoted additional efforts to these areas as their
work in other areas has diminished. Another factor affecting the competitive
environment is the existence of small, specialty companies located at or near
particular customer facilities and dedicated solely to servicing the technical
needs of those particular facilities.
80
<PAGE> 93
In the DOE services industry, competition comes from a number of companies,
including defense contractors, architect-engineering firms, smaller independent
service companies such as General Physics and small and disadvantaged businesses
under Section 8(a) of the Small Business Administration Act. Although the number
of competitors may be smaller than in the commercial power industry, several
have significantly greater resources than General Physics and, in general,
competition in both the DOE services and commercial power industries is
substantial. General Physics may compete for future contracts with certain
companies for which it performs subcontracting services at DOE facilities, such
as Westinghouse at the Savannah River facility.
Competition in the industries served by the Federal Systems Group is strong
and comes from large defense contractors and other service corporations, many of
which have significantly greater resources than General Physics, as well as from
small and disadvantaged businesses, which receive certain preferential treatment
in the awarding of government contracts.
Competition in the environmental services industry is intense and comes
from large corporations, such as architect-engineering firms, that have expanded
their businesses to include environmental services, specialized service firms
that work exclusively in the environmental arena, other analytical laboratories
and professional service firms such as General Physics. The competition in the
analytical services business is very intense, and the principal determining
factor is price. Most of the competitors are larger companies with multiple
facilities which have greater flexibility in capacity and pricing.
PERSONNEL
General Physics' principal resource is its technical personnel. General
Physics' future success will depend to a significant degree upon its continued
ability to hire, train, integrate into its operations and retain professionals.
General Physics competes for new professionals with clients, as well as with its
other competitors. As of November 1, 1996, General Physics employed
approximately 1,300 persons. Many of General Physics' employees perform multiple
functions depending upon changes in the mix of demand for the services provided
by General Physics.
General Physics' personnel have backgrounds in mechanical, electrical,
chemical, civil, nuclear and human factors engineering; in technical education
and training; in power plant design, operation and maintenance; in United States
Navy weapons systems design, operation and maintenance; and in toxicology,
industrial hygiene, health physics, chemistry, microbiology, ecology and
mathematical modeling.
The United States Navy, the United States Army, the DOE and various other
United States Government agencies generally require that contractor employees
have appropriate security clearances. Thus, recruiting and retaining employees
having appropriate security clearance to work at government facilities is
important to the continued growth of General Physics.
None of General Physics' employees is represented by a labor union. General
Physics generally has not entered into employment agreements with its employees,
but previously has entered into employment agreements with certain officers and
other employees. General Physics believes its relations with its employees are
good.
MARKETING
General Physics markets its services to customers primarily through its
technical personnel, using senior management to aid in the planning of marketing
strategies and evaluating current and long-term marketing opportunities and
business directions. General Physics also has other employees dedicated solely
to marketing efforts. Corporate level marketing is directed at long-term
strategic business development with specific customers and with international
business. General Physics has 40 offices and 52 sites, located in 30 states and
one office in Malaysia, from which it markets its services. Courses and
workshops given by General Physics personnel to the public from time to time
serve an important marketing function. General Physics also sends a variety of
sales literature to current and prospective clients whose names are maintained
in a computerized database which is updated periodically.
81
<PAGE> 94
The goal of General Physics' marketing process is to obtain awards of new
contracts and expansion of existing contracts. By staying in contact with
clients and looking for opportunities to provide further services, General
Physics sometimes obtains contract awards or extensions without having to
undergo competitive bidding. In other cases, clients request General Physics to
bid competitively. In both cases, General Physics submits formal proposals to
the client for evaluation. The period between submission of a proposal to final
award can range from 30 days or less (generally for non-competitive, short-term
contracts), to a year or more (generally for large, competitive multi-year
contracts with governmental clients).
BACKLOG
The following table sets forth the appropriate amounts of General Physics'
backlog for services under signed contracts and subcontracts as of September 30,
1996 and September 30, 1995, with information for each of General Physics' four
business groups:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1996 1995
------- -------
(UNAUDITED)
<S> <C> <C>
Training and Technology Services................................... $28,538 $26,820
Engineering and Applied Sciences................................... 21,561 18,365
Federal Systems.................................................... 7,953 9,114
DOE Services....................................................... 5,899 4,476
------ ------
Total Backlog............................................ $63,951 $58,775
====== ======
</TABLE>
General Physics anticipates that most of its backlog as of September 30, 1996
will be recognized as revenue during the fourth quarter of 1996 and fiscal year
1997; however, the rate at which services are performed under certain contracts,
and thus the rate at which backlog will be recognized, is at the discretion of
the client, and most contracts are, as mentioned above, subject to termination
by the client upon written notice.
INSURANCE
By providing services to the commercial electric power industry and to the
United States Armed Forces, General Physics is engaged in industries in which
there are substantial risks of potential liability. Prior to January 1, 1996,
General Physics maintained separate insurance policies. As of January 1, 1996,
General Physics' insurance was combined with National Patent's insurance in a
consolidated insurance program (including general liability coverage), which
General Physics believes to be adequate for its business. However, certain
liabilities associated with General Physics' business are not covered by these
insurance policies and may not be covered by indemnification provisions
contained in agreements with clients. In addition, such liabilities may not be
covered by Federal legislation providing a liability protection system for
licensees of the NRC (typically utilities) for certain damages caused by nuclear
incidents, since General Physics is not such a licensee. Finally, few of General
Physics' contracts with clients contain a waiver or limitation of liability.
Thus, to the extent a risk is neither insured or indemnified against nor limited
by an enforceable waiver or limitation of liability, General Physics could be
materially adversely affected by a nuclear incident. Certain other environmental
risks, such as liability under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended (Superfund), also may not be covered
by General Physics' insurance.
ENVIRONMENTAL STATUTES AND REGULATIONS
General Physics provides environmental engineering services to its clients,
including the development and management of site environmental remediation
plans. Due to the increasingly strict requirements imposed by Federal, state and
local environmental laws and regulations (including, without limitation, the
Clean Water Act, the Clean Air Act, Superfund, the Resource Conservation and
Recovery Act and the Occupational Safety and Health Act), General Physics'
opportunities to provide such services may increase.
82
<PAGE> 95
General Physics' activities in connection with providing environmental
engineering services may also subject General Physics itself to such Federal,
state and local environmental laws and regulations. Although General Physics
subcontracts most remediation construction activities and all removal and
offsite disposal and treatment of hazardous substances, General Physics could
still be held liable for clean-up or violations of such laws as an "operator" or
otherwise under such Federal, state and local environmental laws and regulations
with respect to a site where it has provided environmental engineering and
support services. General Physics believes, however, that it is in compliance in
all material respects with such environmental laws and regulations.
PROPERTIES
General Physics' principal executive offices are located at 6700 Alexander
Bell Drive, Suite 400, Columbia, Maryland 21046, and its telephone number is
(410) 290-2300.
General Physics leases approximately 31,650 square feet of an office
building at that address. General Physics also leases approximately 208,350
square feet of office space at various other locations throughout the United
States and in Malaysia. General Physics believes that its facilities are
adequate to carry on its business as currently conducted.
LEGAL PROCEEDINGS
On September 27, 1996, General Physics was named as a defendant in the case
styled Dunlop v. Pollak, et al., Civil Action No. 15237-NC in the Court of
Chancery of the State of Delaware. All of the directors of General Physics were
also named as defendants in the complaint. The plantiff and the defendants have
reached an agreement in principle to settle this litigation. For a description
of this litigation, see "THE MERGER -- Litigation Challenging the Merger."
83
<PAGE> 96
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
considerations arising from the Merger to a person that is a United States
holder (as defined below). Except as to factual matters or as to the matters
noted below, statements of legal conclusions in this summary represent the
opinion of Morgan, Lewis & Bockius LLP, counsel to National Patent ("tax
counsel"). For purposes of this summary, the term "United States holder" means a
beneficial owner of GPC Common Stock (other than National Patent or its
subsidiaries) that (i) is a citizen or resident of the United States or a United
States corporation and (ii) holds the GPC Common Stock and will hold the NPD
Common Stock as a capital asset (within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code")).
This summary is based upon the current provisions of the Code, and upon
regulations, rulings and decisions currently in effect, all of which are subject
to change. The discussion below is not intended as tax advice and does not
address federal income tax considerations that may be relevant to a United
States holder that is subject to special rules under the Code, such as banks,
insurance companies, dealers in securities, tax-exempt entities, holders that
are subject to the alternative minimum tax or holders that received GPC Common
Stock as compensation. This summary and the associated opinion have no binding
effect or official status of any kind; no assurance can be given that the
conclusions reached below would be sustained by a court if challenged by the
Internal Revenue Service (the "Service"). No ruling has been or will be
requested from the Service on any aspect of the tax considerations described
below. Each United States holder is advised to consult its own tax advisor in
determining the specific tax consequences to such holder of the Merger,
including the application to its particular situation of the tax considerations
discussed below, as well as the application of state, local or other tax laws.
THE MERGER
Based in part on the terms of the Merger Agreement and on representations
made to tax counsel by each of General Physics and National Patent, it is the
opinion of tax counsel that although the matter is not free from doubt, the
Merger should qualify as a tax-free reorganization under Section 368(a)(1)(B) of
the Code. Accordingly:
(i) A United States holder should not recognize gain or loss upon the
exchange of GPC Common Stock solely for NPD Common Stock in the Merger
(except with respect to cash received in lieu of a fractional share
interest in NPD Common Stock).
(ii) The tax basis of the NPD Common Stock received by a United States
holder should be the same as the tax basis of the shares of GPC Common
Stock surrendered in exchange therefor (reduced by any amount allocable to
a fractional share interest in NPD Common Stock for which cash is
received).
(iii) The holding period of the shares of NPD Common Stock received by
a United States holder should include the holding period of the shares of
GPC Common Stock surrendered in exchange therefor.
FRACTIONAL SHARE INTERESTS
The receipt of cash from National Patent in lieu of fractional share
interests in NPD Common Stock will constitute a taxable transaction for federal
income tax purposes to United States holders receiving such cash. A United
States holder receiving such cash generally will recognize gain or loss measured
by the difference between the cash so received and such holder's tax basis in
the shares of GPC Common Stock allocable to such fractional share interests.
Such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if such GPC Common Stock has been held for more than one year.
SECTION 382
At December 31, 1995, National Patent had aggregate net operating loss
carryforwards ("NOLs") of approximately $21 million for federal income tax
purposes. These NOLs arose principally in the taxable years of National Patent
ended 1986, 1988, 1989, 1990 and 1991. As of December 31, 1996, National Patent
expects to have remaining NOLs of approximately $13 million. Section 382 of the
Code contains complex rules that
84
<PAGE> 97
may limit the ability of a corporation that undergoes an "ownership change" to
use pre-change NOLs to shelter its post-change income. In general, an "ownership
change" occurs when the percentage of the corporation's stock owned by certain
"five-percent shareholders" increases by more than 50 percentage points over the
lowest percentage owned at any time during the applicable "testing period"
(generally the shorter of (i) the three-year period preceding the testing date
or (ii) the period of time since the most recent "ownership change" of the
corporation).
National Patent believes that (i) it last underwent an ownership change in
1991 and (ii) the issuance of NPD Common Stock in the Merger will not cause it
to undergo an additional ownership change at the Effective Time. At present, the
1991 ownership change no longer imposes any practical limitations on the use of
the NOLs of National Patent. No assurances are given, however, that the changes
in stock ownership resulting from the Merger combined with transactions
occurring prior to and after the Effective Time will not lead to an "ownership
change" under Section 382 in the future.
As a result of a number of uncertainties arising under Section 382 and
otherwise, tax counsel does not opine as to the application of Section 382 or
the availability of any particular amount of NOLs to National Patent.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS AND ARRANGEMENTS BETWEEN NATIONAL PATENT AND GENERAL PHYSICS
Since August 31, 1994 National Patent has owned more than 50% of the
outstanding shares of the common stock of General Physics. As is customary in
relationships between parent companies and their subsidiaries, various
transactions and arrangements are entered into between National Patent and
General Physics and their respective subsidiaries in the ordinary course of
business. Additionally, certain executive officers and directors of National
Patent are also executive officers and directors of General Physics.
The following officers and/or directors of National Patent are also
officers and/or directors of General Physics: Jerome I. Feldman, President and
Chief Executive Officer of National Patent, is the Chairman of the Executive
Committee of General Physics and the Chief Executive Officer of General Physics;
Martin M. Pollak, Executive Vice President, Treasurer and a director of National
Patent, is also Chairman of the Board of General Physics; Scott N. Greenberg,
Vice President-Finance and a director of National Patent, is a director of
General Physics; Lawrence M. Gordon, Vice President and General Counsel of
National Patent, is a director of General Physics; and Ogden R. Reid, a director
of National Patent, is also a director of General Physics.
On October 3, 1991, 4,000,000 shares of GPC Common Stock were sold in a
public offering at a price of $13 per share. National Patent offered 3,846,540
shares of GPC Common Stock, and the remaining number of shares was offered by
certain non-affiliated stockholders. National Patent received net proceeds after
expenses of $43,997,000, and from the proceeds made several repayments of
long-term debt and short-term borrowings.
In connection with the public offering, on September 25, 1991 a
reorganization was effected whereby General Physics transferred certain
operations and related assets and liabilities to a new subsidiary, General
Physics Services Corp. ("GPSC"). General Physics retained the business, assets
and liabilities of its Nuclear Services, DOE Services and Environmental Services
Groups. Included among the businesses and assets transferred to GPSC were
certain leases of property and equipment, and two finance subsidiaries that
owned power plant control room simulators. As a result of the public offering
and the reorganization, National Patent's ownership of General Physics fell to
approximately 30% of the then outstanding GPC Common Stock and 92% of the then
outstanding shares of common stock of GPSC.
On August 31, 1994, General Physics acquired substantially all of the
operations and assets of SGLG, Inc. ("SGLG") (formerly GPSC), a 92% owned
subsidiary, and assumed certain liabilities of SGLG, related to its business of
providing management and technical training services, and specialized
engineering consulting services, to various commercial industries and to the
United States government. However, for accounting and financial reporting
purposes, the transaction was treated as a reverse acquisition of General
Physics by SGLG since, among other factors, National Patent became the
beneficial owner of approximately 54% of the outstanding shares of the GPC
Common Stock as a result of the transaction. The assets acquired by General
85
<PAGE> 98
Physics also included all of the outstanding common stock of four wholly-owned
subsidiaries of SGLG. (Prior to the acquisition, GPSC changed its name to GPS
Technologies, Inc. and, immediately following the acquisition, to SGLG, Inc.)
The consideration paid by General Physics for the acquisition of the
operations and assets of SGLG totaled approximately $32,500,000 and consisted of
a) $10,000,000 in cash, b) 3,500,000 shares of GPC Common Stock, c) General
Physics' 6% Senior Subordinated Debentures due 2004 in the aggregate principal
amount of $15,000,000 ($1,500,000 of which was paid into escrow) (valued at
$10,700,000 after a $4,300,000 discount), d) warrants to purchase an aggregate
of 1,000,000 shares of GPC Common Stock at $6.00 per share and e) warrants to
purchase an aggregate of 475,664 shares of GPC Common Stock at $7.00 per share.
In addition, General Physics entered into a lease with SGLG of certain fixed
assets of SGLG for a period of 10 years for an aggregate rent of $2,000,000,
payable in equal quarterly installments. General Physics did not recognize a
gain or loss on this transaction.
Immediately prior to General Physics' acquisition of the operations and
assets of SGLG described above, National Patent directly and indirectly owned
approximately 28% of the then outstanding GPC Common Stock, and approximately
92% of the then outstanding common stock of SGLG. As of September 30, 1996,
National Patent owned directly or indirectly approximately 52% of the
outstanding GPC Common Stock and approximately 92% of the outstanding common
stock of SGLG.
In addition, during the period from April 21, 1995 through November 30,
1996, National Patent acquired an aggregate of 402,779 shares of GPC Common
Stock pursuant to an agreement between General Physics and National Patent which
provides that General Physics' employees' monthly contributions to its Profit
Investment Plan are matched in shares of NPD Common Stock and in exchange
National Patent receives shares of GPC Common Stock pursuant to a set formula.
General Physics and National Patent are borrowers under a revolving credit
and term loan agreement with Fleet Bank (as successor to NatWest Bank). The
agreement provides a $20 million revolving credit facility for General Physics
and provides for a $5 million term loan to National Patent.
As of January 1, 1996, substantially all of General Physics'
business-related insurance was combined with National Patent's insurance in a
consolidated insurance program. See "BUSINESS -- GENERAL PHYSICS -- Insurance."
Certain information is incorporated by reference to the headings "SELECTED
HISTORICAL FINANCIAL INFORMATION," "BUSINESS -- NATIONAL PATENT," "BUSINESS --
GENERAL PHYSICS," and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the NPD Board and the GPC Board with
respect to the Merger Agreement, the Merger and the consummation of the
transaction contemplated therein, stockholders should be aware that certain
members of the management and the boards of directors of National Patent and
General Physics have interests in the Merger that are in addition to, and which
may be adverse to, the interests of stockholders generally.
Certain officers and directors of National Patent and General Physics hold
vested and unvested stock options to purchase shares of GPC Common Stock. As a
result of the treatment of stock options in the Merger, such persons will
receive cash, aggregating approximately $296,450, in the Merger in lieu of
shares of NPD Common Stock. In particular, Jerome I. Feldman, the President and
Chief Executive Officer and a director of both General Physics and National
Patent, will receive a cash payment of $98,000, and Martin M. Pollak, the
Executive Vice President and Treasurer and a director of National Patent and a
director of General Physics, will receive a cash payment of $98,000. See "THE
MERGER AGREEMENT -- Options and Warrants." See also "RISK FACTORS -- Risks
Applicable to the Merger -- Benefits Accruing to Directors and Officers of
General Physics."
86
<PAGE> 99
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS
Each of National Patent and General Physics is a corporation organized
under the Delaware General Corporation Law. As a result of the Merger, the
rights of the holders of GPC Common Stock (to be converted into shares of NPD
Common Stock in the Merger) will be governed by the Certificate of Incorporation
and the By-laws of National Patent.
The Certificates of Incorporation and By-laws of National Patent and
General Physics are substantially similar. The following is a brief summary of
the terms of the capital stock of National Patent and General Physics and does
not purport to be complete and is subject to and qualified in its entirety by
reference to the GPC Charter and NPD Charter and the By-laws of National Patent
and General Physics, copies of which are exhibits to the Registration Statement
of which this Joint Proxy Statement/Prospectus is a part.
DESCRIPTION OF NATIONAL PATENT'S CAPITAL STOCK
Common Stock. The Certificate of Incorporation of National Patent (the
"NPD Charter") authorizes the issuance of 40,000,000 shares of NPD Common Stock
and 2,800,000 shares of NPD Class B Stock. One of the proposals to be voted on
at the NPD Special Meeting is an amendment to decrease the number of authorized
shares of NPD Common Stock to 25,000,000. See "THE CHARTER AMENDMENTS" and "THE
SPECIAL MEETINGS." As of December 17, 1996, 7,512,107 shares of NPD Common Stock
were issued and outstanding and 62,500 shares of NPD Class B Stock were issued
and outstanding. Each share of the NPD Common Stock is entitled to one vote per
share on all matters and each share of the NPD Class B Stock is 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 NPD Class B
Stock is convertible at any time into shares of NPD Common Stock on a share for
share basis.
Since the NPD Common Stock and NPD Class B Stock do not have cumulative
voting rights, the holders of shares having more than 50% of the voting power,
if they choose to do so, may elect all the directors of National Patent and the
holders of the remaining shares would not be able to elect any directors. The
holders of NPD Common Stock and NPD Class B Stock have no preemptive rights, nor
are there any redemption or sinking fund rights with respect to the NPD Common
Stock or the NPD Class B Stock.
The holders of NPD Common Stock and NPD Class B Stock are entitled to share
equally in any dividends that may be declared, but in the case of a stock split
or stock combination, if any stock dividends are declared, they are to be
declared and paid at the same rate on each class of stock in the shares of such
class. In the event of liquidation, dissolution or winding up of National
Patent, the holders of the NPD Common Stock and the NPD Class B Stock are
entitled to share equally in the corporate assets available for distribution to
stockholders after the payment of or reservation for corporate debts and
liabilities and liquidation preferences of, and unpaid dividends on, any class
of preferred stock which may then be outstanding. None of the shares of either
class has any preemptive or redemption rights or sinking fund provisions
applicable to it, and all the presently outstanding shares are fully paid and
non-assessable.
Preferred Stock. National Patent is currently authorized to issue
10,000,000 shares of preferred stock in one or more series. There are presently
no shares of preferred stock issued. To the extent that any shares of preferred
stock may be issued, such preferred stock may (i) have priority over NPD Common
Stock with respect to dividends and the assets of National Patent upon
liquidation; (ii) have significant voting power; (iii) provide for
representation of the holders of the preferred stock on National Patent's Board
of Directors upon the occurrence of certain events; and (iv) require the
approval of the holders of the preferred stock for the taking of certain
corporate actions, such as mergers.
The issuance of preferred stock with certain attributes and under certain
circumstances could have the effect of delaying, deferring or preventing a
change in control of National Patent without further action of the holders of
NPD Common Stock. The issuance of preferred stock with voting and conversion
rights could adversely affect the voting power of the holders of NPD Common
Stock, including the loss of voting control to others. National Patent has no
present plan or intention to issue any shares of preferred stock.
Transfer Agent and Registrar. Harris Trust Company of New York is the
transfer agent and registrar for the NPD Common Stock.
87
<PAGE> 100
DESCRIPTION OF GENERAL PHYSICS' CAPITAL STOCK
Common Stock. The Certificate of Incorporation of General Physics (the
"GPC Charter") authorizes the issuance of one class of Common Stock, the GPC
Common Stock. As of December 18, 1996 10,570,897 shares of GPC Common Stock were
issued and outstanding.
The holders of GPC Common Stock are entitled to one vote per share for the
election of directors and with respect to all other names submitted to a vote of
stockholders. Shares of GPC Common Stock do not have cumulative voting rights,
which means that the holders of more than 50% of such shares voting for the
election of directors can elect 100% of the directors if they choose to do so
and, in such event, the holders of the remaining shares so voting will not be
able to elect any directors.
The holders of GPC Common Stock are entitled to receive such dividends as
may lawfully be declared from time to time by the GPC Board at its discretion,
subject to the priorities accorded any class of preferred stock which may be
issued. The holders of GPC Common Stock have no preemptive or conversion rights,
nor are there any redemption or sinking fund rights with respect to the GPC
Common Stock.
Upon liquidation, dissolution or winding-up of General Physics, the holders
of GPC Common Stock are entitled to receive all assets remaining after the
payment of corporate debts and liabilities and liquidation preferences of, and
unpaid dividends on, any class of preferred stock which then may be outstanding.
Limitation on Foreign Ownership. The GPC Charter provides the right to
require the redemption or the prompt disposition under certain limited
circumstances of all or any portion of the shares of GPC Common Stock owned by a
foreign stockholder beneficially owning shares representing five percent or more
of the outstanding shares of GPC Common Stock (other than any shares acquired by
stockholders other than National Patent prior to July 1, 1991). The DOE and the
DoD (the "Departments") have policies regarding foreign ownership, control or
influence over government contractors who have access to classified information.
These policies are designed to protect against the risk to national security
that may result if classified information is made available to United States
Government contractors or subcontractors who are owned, controlled or influenced
by foreign governments, individuals or organizations. These policies require
General Physics, as well as the Departments' other contractors and
subcontractors, to submit information that will help the Departments determine
whether the award or continued performance of a contract may pose an undue risk
to the common defense and security of the United States. Specifically, the
Departments inquire whether any foreign interest has beneficial ownership of 5%
or more of a contractor's or subcontractor's voting securities. If either
Department determines that an undue risk to the common defense and security of
the United States exists, it may, among other things, terminate the contractor's
or subcontractor's existing contracts with it. Therefore, the GPC Charter
provides the right to require the redemption or the prompt disposition under
certain limited circumstances of all or any portion of the shares of GPC Common
Stock owned by a foreign stockholder beneficially owning shares representing 5%
or more of the outstanding GPC Common Stock (other than any shares acquired by
stockholders other than the National Patent prior to July 1, 1991). There can be
no assurance that this provision of the GPC Charter is enforceable under
applicable law.
Preferred Stock. General Physics is currently authorized to issue up to
5,000,000 shares of preferred stock in one or more series. There are presently
no shares of preferred stock issued. To the extent that any shares of preferred
stock may be issued, such preferred stock may (i) have priority over GPC Common
Stock with respect to dividends and the assets of General Physics upon
liquidation; (ii) have significant voting power; (iii) provide for
representation of the holders of the preferred stock on General Physics' Board
of Directors upon the occurrence of certain events; and (iv) require the
approval of the holders of the preferred stock for the taking of certain
corporate actions, such as mergers.
88
<PAGE> 101
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NATIONAL PATENT
Principal Holders of Securities
As of December 18, 1996, no person was known to National Patent to own
beneficially more than 5% of the NPD Common Stock or NPD Class B Stock except as
set forth below.
The following table shows as of such date the NPD Class B Stock
beneficially owned directly by Mr. Jerome I. Feldman, President and Chief
Executive Officer and a director of National Patent, and Mr. Martin M. Pollak,
Executive Vice President and Treasurer and a director of National Patent. (For
information with respect to the shares of NPD Common Stock beneficially owned by
Messrs. Feldman and Pollak, see "Security Ownership of National Patent's
Directors and Named Executive Officers"):
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF
TITLE OF CLASS OF BENEFICIAL OWNERS BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------ -------------------- -------------------- ----------------
<S> <C> <C> <C>
Class B....................... Jerome I. Feldman 316,575 shares(1) 50%(2)
c/o National Patent
Development Corp.
9 West 57th Street
Suite 4170
New York, NY 10019
Class B....................... Martin M. Pollak 316,575 shares(1) 50%(2)
c/o National Patent
Development Corp.
9 West 57th Street
Suite 4170
New York, NY 10019
</TABLE>
- ---------------
(1) Includes 285,325 shares each for Messrs. Feldman and Pollak which they have
the right to purchase pursuant to the exercise of stock options, which are
or will become exercisable within sixty days.
(2) Percentage could increase up to approximately 89% if either individual
exercised all of his stock options and the other individual did not
exercise any.
Based upon the NPD Common Stock and NPD Class B Stock outstanding at
December 17, 1996, Mr. Feldman and Mr. Pollak controlled in the aggregate
approximately 9.2% of the voting power of all voting securities of National
Patent. This percentage for Mr. Feldman and Mr. Pollak would increase to
approximately 48.8% if they exercised all the presently outstanding options to
purchase shares of the NPD Common Stock and NPD Class B Stock of National Patent
held by them.
On March 26, 1986, Mr. Feldman and Mr. Pollak entered into an agreement (i)
granting each other the right of first refusal over the sale or hypothecation of
the NPD Class B Stock and options to purchase NPD Class B Stock now owned or
subsequently acquired by each of them and (ii) in the event of the death of
either of them granting the survivor a right of first refusal over the sale or
hypothecation of the NPD Class B Stock or options to acquire shares of NPD Class
B Stock held by the estate of the decedent. The aforesaid right of first refusal
is for the duration of the life of the survivor of Mr. Feldman or Mr. Pollak.
Merrill Lynch & Co., Inc., Merrill Lynch Group, Inc., Princeton Services,
Inc., Fund Asset Management, L.P., and Merrill Lynch Phoenix Fund, Inc. filed a
Schedule 13-G which disclosed the ownership of 456,525 shares of the NPD Common
Stock representing approximately 6.9% of the outstanding shares of Common Stock
as of December 31, 1995.
89
<PAGE> 102
Security Ownership of Directors and Named Executive Officers
The following table sets forth, as of December 17, 1996, beneficial
ownership of shares of NPD Common Stock by each director, each of the named
executive officers and all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF OF TOTAL NUMBER OF SHARES
TOTAL NUMBER NPD COMMON BENEFICIALLY OWNED,
OF SHARES STOCK SHARES WHICH MAY BE
NAME BENEFICIALLY OWNED OWNED ACQUIRED WITHIN 60 DAYS
- ------------------------------------------- ------------------ ---------- -------------------------
<S> <C> <C> <C>
Jerome I. Feldman(1)(2)(3)(4)(6)........... 673,610 8.2% 577,867
Martin M. Pollak(1)(2)(3)(4)(6)............ 673,546 8.2% 580,367
Scott N. Greenberg(2)(3)................... 75,000 1.0% 70,850
Roald Hoffman, Ph.D.(5).................... 8,030 * 7,580
Ogden R. Reid(5)........................... 8,580 * 8,330
Paul A. Gould(1)(5)(6)..................... 84,930 1.1 7,330
Herbert R. Silverman(6).................... 6,580 * 5,330
Lawrence M. Gordon(1)...................... 36,653 * 36,025
Robert A. Feinberg......................... 1,000 * 1,000
Directors and Executive Officers as a Group
(9 persons)(1)(3)........................ 1,542,979 17.7 1,298,679
</TABLE>
- ---------------
* The number of shares owned is less than one percent of the outstanding
shares of NPD Common Stock.
(1) Included in the table are 31,250 shares for each of Messrs. Feldman and
Pollak which they currently have the right to acquire through the
conversion of shares of NPD Class B Stock into shares of NPD Common Stock
which they currently own, (see "Principal Holders of Securities"). Also
included in the table is 1,618 shares for a foundation of which Mr. Pollak
is a trustee. Also included in the table are 1,107 shares for Mr. Feldman,
604 shares for Mr. Pollak and 503 shares for Mr. Gordon and 2,214 shares
for all directors and executive officers as a group, issuable upon the
conversion of bonds issued with the Company's 12% Subordinated Debentures
Due 1997. Mr. Feldman disclaims beneficial ownership of the 404 shares
issuable upon conversion of bonds held by his wife pursuant to the
Debentures. Messrs. Feldman, Pollak and Gould disclaim beneficial ownership
of 1,173, 5,752 and 25 shares, respectively, held by members of their
families which are included in the table.
(2) Included in the table are options to purchase 285,325 shares of NPD Class B
Stock for each of Messrs. Feldman and Pollak, and 24,975 shares of NPD
Class B Stock for Mr. Greenberg, which they currently have the right to
acquire through the exercise of stock options, which shares are convertible
into shares of NPD Common Stock.
(3) Of the directors and executive officers of National Patent, the following
beneficially own the number of shares of common stock of General Physics
indicated: Jerome I. Feldman, 42,100 (of which 40,000 shares are issuable
upon exercise of currently exercisable stock options); Martin M. Pollak,
46,370 (of which 40,000 shares are issuable upon exercise of currently
exercisable stock options); Scott N. Greenberg, 21,000 (of which 20,000
shares are issuable upon exercise of currently exercisable stock options);
Ogden R. Reid, 1,000 (all of which shares are issuable upon exercise of
currently exercisable stock options); and Lawrence M. Gordon, 20,000 (all
of which shares are issuable upon exercise of currently exercisable stock
options). In addition, all directors and executive officers as a group
beneficially own 130,470 shares, of which 121,000 shares are issuable upon
exercise of currently exercisable stock options. Mr. Feldman and Mr. Pollak
through their ownership of NPD Common Stock, may be deemed to beneficially
own an aggregate of 6,880,629 shares of GPC Common Stock beneficially owned
by National Patent, Five Star and MXL, wholly-owned subsidiaries of
National Patent. However, Mr. Feldman and Mr. Pollak disclaim beneficial
ownership of such 6,880,629 shares (6,922,729 and 6,926,999 shares in the
aggregate for Mr. Feldman and Mr. Pollak, respectively). The total number
of shares of GPC Common Stock owned by all directors and executive officers
of National Patent as a group (other than Messrs. Feldman and Pollak) is
.40% of the outstanding shares of GPC Common Stock. All such persons have
sole voting and investment power as to all shares except as indicated.
(4) Member of the Executive Committee.
(5) Member of the Audit Committee.
(6) Member of the Compensation Committee.
90
<PAGE> 103
GENERAL PHYSICS
The table below sets forth the beneficial ownership of GPC Common Stock as
of December 18, 1996, by each director of General Physics, each named executive
officer of General Physics, each person known to General Physics to own
beneficially more than 5% of GPC Common Stock, and all directors and executive
officers of General Physics as a group:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
(SHARES OF GPC COMMON STOCK)
---------------------------------
BENEFICIAL OWNER NUMBER PERCENT
----------------------------------------------------- --------- -------
<S> <C> <C>
National Patent Development Corporation(1)........... 6,880,629 57.7%
9 West 57th Street
New York, NY 10019
Martin M. Pollak(1)(2)(3)............................ 6,926,999 57.9
Jerome I. Feldman(1)(2)(3)........................... 6,922,729 57.8
Brinson Partners, Inc.(4)............................ 614,300 5.81
209 South LaSalle
Chicago, IL 60604-1295
Sheldon L. Glashow(2)(3)............................. 1,000 *
Lawrence M. Gordon(3)................................ 20,000 *
Scott N. Greenberg(2)(3)............................. 21,000 *
Bernard M. Kauderer(2)(3)............................ 1,000 *
John C. McAuliffe(2)(3)(5)........................... 30,366 *
Ogden R. Reid(2)(3).................................. 1,000 *
Gordon Smale(3)...................................... 0 *
Russell C. Youngdahl(2)(3)........................... 23,520 *
John V. Moran(2)(3)(5)............................... 26,648 *
Jack E. Lee(2)(3)(5)................................. 16,323 *
All Directors and Executive Officers as a Group (15
persons)(1)(2)(3)(5)............................... 7,150,576 58.8%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding GPC Common Stock.
(1) Includes 3,823,274 shares of GPC Common Stock, and warrants to acquire an
aggregate of 1,357,355 shares of GPC Common Stock, owned directly by
National Patent; 1,062,500 shares of GPC Common Stock owned by Five Star;
and 637,500 shares of Common Stock owned by MXL. Five Star and MXL are
wholly-owned subsidiaries of National Patent. Based upon the NPD Common
Stock and NPD Class B Stock outstanding at December 17, 1996, Martin M.
Pollak, an officer and director of National Patent and a director of
General Physics, and Jerome I. Feldman, an officer and director of National
Patent and General Physics, controlled in the aggregate approximately 9.2%
of the voting power of all voting securities of National Patent. This
percentage for Messrs. Pollak and Feldman would increase to approximately
48.8% if they exercise all of the presently outstanding and currently
exercisable options to purchase shares of the NPD Common Stock and NPD
Class B Stock held by them. Accordingly, Messrs. Pollak and Feldman,
through their ownership of NPD Common Stock and NPD Class B Stock, may be
deemed to beneficially own the shares of NPD Common Stock and warrants to
acquire NPD Common Stock beneficially owned by National Patent. However,
Messrs. Pollak and Feldman each disclaims such beneficial ownership. Mr.
Pollak also owns 5,900 shares of GPC Common Stock and warrants to acquire
470 shares of GPC Common Stock. An aggregate of 5,120,495 shares of GPC
Common Stock owned by National Patent, Five Star and MXL have been pledged
to a bank as collateral to secure indebtedness owed to such bank.
(notes continued on next page)
91
<PAGE> 104
(notes continued from previous page)
On March 26, 1986, Mr. Feldman and Mr. Pollak entered into an agreement (i)
granting each other the right of first refusal over the sale or
hypothecation of the NPD Class B Stock and options to purchase NPD Class B
Stock now owned or subsequently acquired by each of them and (ii) in the
event of the death of either of them granting the survivor a right of first
refusal over the sale or hypothecation of the NPD Class B Stock or options
to acquire shares of NPD Class B Stock held by the estate of the decedent.
The aforesaid right of first refusal is for the duration of the life of the
survivor of Mr. Feldman or Mr. Pollak.
(2) Includes the following number of shares of GPC Common Stock indicated which
directors and named executive officers have the right to purchase pursuant
to the exercise of stock options which become exercisable within the next
sixty (60) days: Martin M. Pollak -- 40,000; Jerome I. Feldman -- 40,000;
Bernard M. Kauderer -- 1,000; Ogden R. Reid -- 1,000; Sheldon L.
Glashow -- 1,000; Lawrence M. Gordon -- 20,000; Scott N.
Greenberg -- 20,000; Russell C. Youngdahl -- 22,000; John C.
McAuliffe -- 26,000; John V. Moran -- 25,000; and Jack E. Lee -- 16,200. In
addition, all directors and executive officers as a group beneficially own
247,400 shares which are subject to stock options which become exercisable
within the next sixty (60) days.
(3) Of the directors and executive officers of General Physics, the following
beneficially own the number of shares of NPD Common Stock indicated as of
December 17, 1996, Martin M. Pollak -- 673,546 (of which 580,367 shares are
issuable upon exercise of currently exercisable stock options); Jerome I.
Feldman -- 673,610 (of which 577,867 shares are issuable upon exercise of
currently exercisable stock options); Sheldon L. Glashow -- 0; Lawrence M.
Gordon -- 36,653 (of which 36,025 shares are issuable upon exercise of
currently exercisable stock options); Scott N. Greenberg -- 75,000 (of
which 70,850 shares are issuable upon exercise of currently exercisable
stock options); Bernard M. Kauderer -- 0; John C. McAuliffe -- 2,353 (of
which 2,000 shares are issuable upon exercise of currently exercisable
stock options); Ogden R. Reid -- 8,580 (of which 8,330 shares are issuable
upon exercise of currently exercisable stock options); Gordon Smale -- 0;
Russell C. Youngdahl -- 0; John V. Moran -- 347; Jack E. Lee -- 380; and
all directors and executive officers as a group -- 1,267,495 (of which
1,070,736 shares are issuable upon exercise of currently exercisable stock
options). The total number of shares of National Patent owned by all
directors and executive officers of General Physics as a group (other than
Messrs. Feldman and Pollak) is approximately 1.5% of the outstanding shares
of NPD Common Stock. All such persons have sole voting and investment power
as to all shares except as indicated.
(4) Includes 157,051 shares of GPC Common Stock owned by Brinson Trust Company,
a wholly-owned subsidiary of Brinson Partners, Inc., based upon information
contained in filings made with the Commission showing beneficial ownership
as of December 31, 1995.
(5) Includes the following number of shares of GPC Common Stock indicated which
was allocated to the following executive officers' accounts as of December
31, 1995, pursuant to the provisions of General Physics' Profit Investment
Plan: John C. McAuliffe -- 2,866; John V. Moran -- 1,648; Jack E. Lee --
123; and all directors and executive officers as a group 16,972.
In addition, the following number of shares of NPD Common Stock were
allocated to the following executive officers' accounts as of December 31,
1995, pursuant to the provisions of General Physics' Profit Investment
Plan: John C. McAuliffe -- 353; John V. Moran -- 347; and Jack E.
Lee -- 380; and all directors and executive officers as a group -- 5,174.
PROXY SOLICITATION
Proxies are being solicited from National Patent's and General Physics'
stockholders by and on behalf of the respective Boards of Directors of each of
National Patent and General Physics. Each of National Patent and General Physics
will bear their own expenses for the solicitations, including the costs of
preparing and mailing this Joint Proxy Statement/Prospectus to their respective
stockholders. In addition to solicitation by mail, proxies may be solicited from
the shareholders of National Patent or General Physics by directors, officers
and regular employees of National Patent and General Physics, respectively, in
person, by telecopy or by telephone. Such directors, officers and employees will
not receive any additional compensation for such services but may be reimbursed
for reasonable expenses incurred by them in forwarding the proxy soliciting
materials to the beneficial owners of NPD Common Stock and GPC Common Stock.
National Patent has
92
<PAGE> 105
engaged the investor relations firm of W.F. Doring & Co. to solicit proxies by
telephone or by mail. The fees of such firm are expected to be approximately
$5,000 plus reasonable out-of-pocket expenses. Although there is no formal
agreement to do so, National Patent and General Physics, respectively, will
reimburse banks, brokerage firms and other custodians, nominees and fiduciaries
for the forwarding of proxy solicitation materials to beneficial owners of NPD
Common Stock and GPC Common Stock held of record by such persons.
LEGAL MATTERS
The validity of the NPD Common Stock offered hereby will be passed upon for
National Patent by Morgan, Lewis & Bockius LLP, New York, New York, who have
acted as counsel to National Patent in connection with this Joint Proxy
Statement/Prospectus and from time to time provide legal services to National
Patent and General Physics. David W. Pollak, a partner in Morgan, Lewis &
Bockius LLP, is a son of Martin M. Pollak, the Chairman of the Board and a
director of General Physics and a director of National Patent and an executive
officer, director and principal stockholder of National Patent.
EXPERTS
The consolidated financial statements and schedules of National Patent and
of General Physics as of December 31, 1994 and 1995 and for each of the years in
the three-year period ended December 31, 1995 included and incorporated by
reference herein and elsewhere in the Registration Statement have been included
and incorporated by reference herein and in the Registration Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and in the Registration Statement and
upon the authority of said firms as experts in accounting and auditing.
The consolidated financial statements of GSE Systems, Inc. and Subsidiaries
as of December 31, 1994 and 1995 and for the period April 14, 1994 through
December 31, 1994 and the year ended December 31, 1995 and the financial
statements of Simulation Systems & Services Technologies Company and MSHI, Inc.,
GP International Engineering & Simulation, Inc., and EuroSim AB for the year
ended December 31, 1993 and the period January 1, 1994 through April 13, 1994,
all included in and incorporated by reference in this Registration Statement,
have been included and incorporated herein in reliance on the reports of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
PROCEDURE FOR SUBMITTING STOCKHOLDER PROPOSALS
In the event the Merger is not consummated before the Annual Meeting of
Stockholders of General Physics to be held in 1997, the stockholders of General
Physics who wish to present a proposal for inclusion in the proxy statement for
such Annual Meeting must comply with the rules and regulations of the Commission
then in effect. Such proposals must be received by General Physics at its
principal office not later than January 13, 1997.
An Annual Meeting of Stockholders of National Patent will be held in 1997.
Notice of the date of such meeting will be publicly disclosed by National
Patent. Stockholder proposals intended to be presented at the 1997 Annual
Meeting must be submitted by January 13, 1997.
93
<PAGE> 106
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NATIONAL PATENT DEVELOPMENT CORPORATION
A. National Patent
1. Years Ended December 31, 1995, 1994 and 1993
Independent Auditors' Report..................................................... F-3
Consolidated Balance Sheets at December 31, 1995 and 1994........................ F-4
Consolidated Statements of Operations for the years ended December 31, 1995, 1994
and 1993....................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993............................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993....................................................................... F-7
Notes to Consolidated Financial Statements for the years ended December 31, 1995,
1994 and 1993.................................................................. F-9
2. Nine Months Ended September 30, 1996 and 1995 (unaudited)
Consolidated Condensed Balance Sheets at September 30, 1996...................... F-33
Consolidated Condensed Statements of Operations for the nine months ended
September 30, 1996 and 1995.................................................... F-34
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995.................................................... F-35
Notes to Consolidated Condensed Financial Statements for the nine months ended
September 30, 1996 and 1995.................................................... F-36
B. GSE Systems, Inc. and Subsidiaries*
Report of Independent Accountants................................................ F-38
Consolidated Balance Sheets at December 31, 1994 and 1995........................ F-39
Consolidated Statements of Operations for the period April 14, 1994 through
December 31, 1994 and for the year ended December 31, 1995..................... F-40
Consolidated Statements of Stockholders' Equity (Deficit) for the period April
14, 1994 through December 31, 1994 and for the year ended December 31, 1995.... F-41
Consolidated Statements of Cash Flows for the period April 14, 1994 through
December 31, 1994 and for the year ended December 31, 1995..................... F-42
Notes to Consolidated Financial Statements....................................... F-43
</TABLE>
- ---------------
* The financial statements of (1) GSE Systems, Inc. and Subsidiaries ("GSES"),
(2) Simulation Systems & Services Technologies Company and MSHI, Inc., (3) GP
International Engineering & Simulation, Inc. and (4) EuroSim AB are included
herein in accordance with Rule 3-09 of Regulation S-X.
F-1
<PAGE> 107
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
C. Simulation Systems & Services Technologies Company and MSHI, Inc.*
Report of Independent Accountants................................................ F-59
Consolidated Statements of Operations for the eight months ended August 31, 1993,
for the four months ended December 31, 1993 and for the period January 1, 1994
through April 13, 1994......................................................... F-60
Consolidated Statements of Stockholders' Equity for the eight months ended August
31, 1993, for the four months ended December 31, 1993 and for the period
January 1, 1994 through April 13, 1994......................................... F-61
Consolidated Statements of Cash Flows for the eight months ended August 31, 1993,
for the four months ended December 31, 1993 and for the period January 1, 1994
through April 13, 1994......................................................... F-62
Notes to Consolidated Financial Statements....................................... F-63
D. GP International Engineering & Simulation, Inc.*
Report of Independent Accountants................................................ F-69
Statements of Operations for the year ended December 31, 1993 and for the period
January 1, 1994 through April 13, 1994......................................... F-70
Statements of Stockholders' Equity (Deficit) for the year ended December 31, 1993
and for the period January 1, 1994 through April 13, 1994...................... F-71
Statements of Cash Flows for the year ended December 31, 1993 and for the period
January 1, 1994 through April 13, 1994......................................... F-72
Notes to Consolidated Financial Statements....................................... F-73
E. EuroSim AB*
Report of Independent Accountants................................................ F-77
Statements of Operations for the year ended December 31, 1993 and for the period
January 1, 1994 through April 13, 1994......................................... F-78
Statements of Stockholder's Equity for the year ended December 31, 1993 and for
the period January 1, 1994 through April 13, 1994.............................. F-79
Statements of Cash Flows for the year ended December 31, 1993 and for the period
January 1, 1994 through April 13, 1994......................................... F-80
Notes to Financial Statements.................................................... F-81
GENERAL PHYSICS CORPORATION
Independent Auditors' Report..................................................... F-85
Consolidated Balance Sheets at September 30, 1996 (unaudited), December 31, 1995
and December 31, 1994.......................................................... F-86
Consolidated Statements of Operations for the nine months ended September 30,
1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and
1993........................................................................... F-87
Consolidated Statements of Stockholders' Equity for the nine months ended
September 30, 1996 (unaudited) and the years ended December 31, 1995, 1994 and
1993........................................................................... F-88
Consolidated Statements of Cash Flows for the nine months ended September 30,
1996 and 1995 (unaudited) and the years ended December 31, 1995, 1994 and
1993........................................................................... F-89
Notes to Consolidated Financial Statements....................................... F-90
</TABLE>
F-2
<PAGE> 108
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, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
March 28, 1996
F-3
<PAGE> 109
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PAR VALUE PER SHARE)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 8,094 $ 10,075
Marketable securities........................................................ 3,563
Accounts and other receivables (of which $13,013 and $15,152 are from
government contracts) less allowance for doubtful accounts of $3,066 and
$2,092..................................................................... 39,466 52,487
Inventories.................................................................. 20,444 20,642
Costs and estimated earnings in excess of billings on uncompleted contracts,
of which $1,473 and $6,897 relates to government contracts................. 9,118 15,237
Prepaid expenses and other current assets.................................... 3,640 6,770
-------- --------
TOTAL CURRENT ASSETS......................................................... 84,325 105,211
-------- --------
INVESTMENTS AND ADVANCES..................................................... 21,452 11,600
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST....................................... 33,367 37,423
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION............................... (24,374) (22,843)
-------- --------
8,993 14,580
-------- --------
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $27,901 AND $26,970
Goodwill..................................................................... 32,999 35,986
Patents, licenses and deferred charges....................................... 54 1,039
-------- --------
33,053 37,025
-------- --------
INVESTMENT IN FINANCED ASSETS................................................ 684
-------- --------
OTHER ASSETS................................................................. 3,897 6,446
-------- --------
$151,720 $175,546
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt......................................... $ 4,167 $ 14,279
Short-term borrowings........................................................ 18,043 31,060
Accounts payable and accrued expenses........................................ 20,865 27,958
Billings in excess of costs and estimated earnings on uncompleted
contracts.................................................................. 8,301 6,091
-------- --------
TOTAL CURRENT LIABILITIES.................................................... 51,376 79,388
-------- --------
LONG-TERM DEBT LESS CURRENT MATURITIES....................................... 19,765 17,513
-------- --------
MINORITY INTERESTS........................................................... 9,581 11,970
-------- --------
COMMITMENTS AND CONTINGENCIES................................................
-------- --------
COMMON STOCK ISSUED SUBJECT TO REPURCHASE OBLIGATION......................... 1,510
-------- --------
STOCKHOLDERS' EQUITY*
Preferred stock, authorized 10,000,000 shares, par value $.01 per share, none
issued
Common stock, authorized 40,000,000 shares, par value $.01 per share, issued
6,825,723 and 6,035,190 shares (of which 1,497 and 5,661 shares are held in
treasury).................................................................. 68 60
Class B capital stock, authorized 2,800,000 shares, par value $.01 per share,
issued and outstanding 62,500 shares....................................... 1 1
Capital in excess of par value............................................... 125,419 120,038
Deficit...................................................................... (52,139) (53,151)
Net unrealized loss on available-for-sale securities......................... (1,440) (1,783)
Minimum pension liability adjustment......................................... (911)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................................... 70,998 65,165
-------- --------
$151,720 $175,546
========= =========
</TABLE>
- ---------------
* Stockholders' equity has been restated to reflect the effect of the one for
four reverse stock split (See Note 16 to the consolidated financial
statements).
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 110
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Sales......................................................... $185,025 $204,774 $185,846
Investment and other income (expense), net (including interest
income of $555, $360 and $875).............................. 1,129 (1,808) 3,379
-------- -------- --------
186,154 202,966 189,225
-------- -------- --------
COSTS AND EXPENSES
Cost of goods sold............................................ 156,703 172,215 158,872
Selling, general and administrative........................... 29,984 34,301 34,255
Research and development...................................... 388 431 2,847
Interest...................................................... 5,019 6,458 8,199
-------- -------- --------
192,094 213,405 204,173
-------- -------- --------
Gain on disposition of stock of a subsidiary and an
affiliate................................................... 3,768 3,795
-------- -------- --------
Gain on issuance of stock by a subsidiary and affiliates...... 5,912 1,353
-------- -------- --------
Unrealized gain on transfer from long-term investments to
trading securities.......................................... 3,183
-------- -------- --------
Minority interests............................................ (1,104) (209) 2,376
-------- -------- --------
Income (loss) before income taxes, discontinued operation and
extraordinary item.......................................... 5,819 (10,648) (7,424)
Income tax expense (benefit).................................. 1,787 749 (575)
-------- -------- --------
Income (loss) before discontinued operation and extraordinary
item........................................................ 4,032 (11,397) (6,849)
-------- -------- --------
DISCONTINUED OPERATION
Loss from operations.......................................... (331) (1,789) (947)
Loss on disposal including provision of $100 in 1994 during
phase-out period............................................ (2,610) (785)
-------- -------- --------
Loss from discontinued operation.............................. (2,941) (2,574) (947)
-------- -------- --------
Income (loss) before extraordinary item....................... 1,091 (13,971) (7,796)
-------- -------- --------
EXTRAORDINARY ITEM
Extinguishment of debt, (net of income tax)................... (79) 1,819
-------- -------- --------
NET INCOME (LOSS)............................................. $ 1,012 $(13,971) $ (5,977)
-------- -------- --------
Income (loss) per share:*
Income (loss) before discontinued operation and extraordinary
item........................................................ $ .60 $ (2.10) $ (1.60)
Discontinued operation........................................ (.44) (.47) (.22)
Extraordinary item............................................ (.01) .42
-------- -------- --------
NET INCOME (LOSS) PER SHARE................................... $ .15 $ (2.57) $ (1.40)
======== ======== ========
</TABLE>
- ---------------
* All periods have been restated to reflect the effect of the one for four
reverse stock split (See Note 16 to the consolidated financial statements).
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 111
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSANDS, EXCEPT SHARES, PAR VALUE PER SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
CLASS B ON MINIMUM
COMMON CAPITAL CAPITAL IN AVAILABLE- PENSION TOTAL
STOCK STOCK EXCESS OF FOR-SALES LIABILITY STOCKHOLDERS'
($.01 PAR) ($.01 PAR) PAR VALUE DEFICIT SECURITIES ADJUSTMENT EQUITY
---------- ---------- ---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992........ $ 40* $1* $ 96,833* $ (33,051) $ $ $ 63,823
--
--- ---------- ---------- ----------- ---------- ------------
Exercise of stock options and
warrants.......................... 412 412
Net loss............................ (5,977) (5,977)
Conversion of 12% Debentures........ 82 82
Issuance of stock in connection with
Swiss Bonds....................... 7 8,713 8,720
Issuance and sale of common stock... 1 377 378
--
--- ---------- ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1993........ 48 1 106,417 (39,028) 67,438
--
--- ---------- ---------- ----------- ---------- ------------
Implementation of SFAS 115.......... 1,157 1,157
Exercise of stock options and
warrants.......................... 99 99
Issuance of stock in connection with
Swiss Bonds....................... 10 9,985 9,995
Transfer from common stock issued
subject to repurchase
obligation........................ 1 2,731 2,732
Conversion of 12% Debentures........ 35 35
Distribution of shares in a
subsidiary........................ (152) (152)
Issuance and sale of common stock... 1 771 772
Net unrealized loss on
available-for-sales securities.... (2,940) (2,940)
Net loss............................ (13,971) (13,971)
--
--- ---------- ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1994........ 60 1 120,038 (53,151) (1,783) 65,165
--
--- ---------- ---------- ----------- ---------- ------------
Minimum pension liability
adjustment........................ (911) (911)
Net unrealized gain on
available-for-sales securities.... 343 343
Net income.......................... 1,012 1,012
Issuance of stock in connection with
Swiss Bonds....................... 6 3,725 3,731
Issuance and sale of common stock... 2 1,046 1,048
Transfer from common stock issued
subject to repurchase
obligation........................ 610 610
--
--- ---------- ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1995........ $ 68 $1 $125,419 $ (52,139) $(1,440) $ (911) $ 70,998
========== ========== ========= ========= ========== ========== ===========
</TABLE>
- ---------------
* All periods have been restated to reflect the effect of the one-for-four
reverse stock split (See Note 16 to the consolidated financial statements.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 112
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss).............................................. $ 1,012 $(13,971) $(5,977)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Provision for discontinued operation...................... 2,460 1,570
Depreciation and amortization............................. 4,316 6,063 5,296
Income tax benefit allocated to continuing operations..... (1,043)
Loss (gain) from extinguishment of debt, net of income
tax..................................................... 79 (1,819)
Gain on disposition of stock of a subsidiary and an
affiliate............................................... (3,768) (3,795)
Gain on issuance of stock by a subsidiary and
affiliates.............................................. (5,912) (1,353)
Unrealized gain on transfer from long-term investments to
trading securities...................................... (3,183)
Changes in other operating items, net of effect of
acquisitions and disposals:
Accounts and other receivables....................... 1,228 (3,887) 4,817
Inventories.......................................... (1,687) 1,163 (381)
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. 6,119 1,349 (2,379)
Prepaid expenses and other current assets............ 2,993 (817) (44)
Accounts payable and accrued expenses................ (4,768) 4,626 2,680
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................. 2,210 (1,014) 1,491
-------- -------- -------
NET CASH PROVIDED BY (USED IN) OPERATIONS...................... 1,099 (4,918) (2,507)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of stock of a subsidiary.................... 7,051
Sales of certain net assets and businesses of a subsidiary..... 4,470
Marketable securities.......................................... 651
Additions to property, plant and equipment, net................ (2,006) (4,006) (2,077)
Additions to intangible assets................................. (388) (5,824) (303)
Reduction of (additions to) investments and other assets....... 388 664 (864)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............ 5,045 (4,696) (2,593)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowings............................ (11,020) (5,650) (28,011)
Proceeds from short-term borrowings............................ 5,634 15,320 20,424
Decrease in restricted cash.................................... 1,200
Proceeds from issuance of long-term debt....................... 5,162 3,638 10,973
Reduction of long-term debt.................................... (8,145) (4,882) (8,515)
Proceeds from issuance of common stock......................... 244 188 198
Proceeds from issuance of stock by a subsidiary................ 1,473
Exercise of common stock options and warrants.................. 99 413
-------- -------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............ (8,125) 8,713 (1,845)
-------- -------- -------
Net decrease in cash and cash equivalents...................... (1,981) (901) (6,945)
Cash and cash equivalents at beginning of year................. 10,075 10,976 17,921
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $ 8,094 $ 10,075 $10,976
======== ======== =======
</TABLE>
F-7
<PAGE> 113
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 4,577 $ 4,147 $ 5,344
Income taxes.............................................. $ 655 $ 607 $ 692
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS:
Reduction of debt.............................................. $ 6,250 $ 9,167 $21,900
Additions to other assets and prepaid expenses................. 625 100 179
Reduction of accounts payable.................................. 267
Reduction of accrued interest payable.......................... 1,045 607
Increase in accrued pension liability.......................... (911)
Issuances of common stock...................................... (4,535) (10,579) (8,981)
Issuance of long-term debt..................................... (2,340) (3,006)
Common stock issued subject to repurchase obligation........... (4,242)
Gain on disposition of stock of a subsidiary and an
affiliate.................................................... (3,795)
Gain on exchange of debt before income tax effect.............. (2,662)
Minimum pension liability adjustment........................... 911
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 114
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business. National Patent Development Corporation (the
"Company"), is primarily a holding company, which is a legal entity separate and
distinct from its various operating subsidiaries. The Company's operations
consist of three operating business segments: Physical Science, Distribution and
Optical Plastics. In addition, the Company owns approximately 54% of the
outstanding shares of common stock of the American Drug Company (See Note 5).
The Company also has a 22% investment in Interferon Sciences, Inc. (See Note 4),
a 31% investment in GTS Duratek, Inc. (See Note 3) and controls 26% of GSE
Systems, Inc. (See Note 6), a company in the business of software simulation and
controls. The Company's Physical Science Group, through its 51% owned
subsidiary, General Physics Corporation, provides a wide range of services in
training, engineering, environmental and technical support services to
commercial nuclear and fossil power utilities, the United States Departments of
Defense ("DOD") and Energy (the "DOE"), Fortune 500 companies and other
commercial and governmental customers. The Company's Distribution Group,
incorporated under the name Five Star Group, Inc. (Five Star), is engaged in the
wholesale distribution of home decorating, hardware and finishing products. The
Company's Optical Plastics Group, through its wholly owned subsidiary MXL
Industries, Inc. (MXL) manufactures molded and coated optical products, such as
shields and face masks and non-optical plastic products.
Principles of consolidation and investments. The consolidated financial
statements include the operations of National Patent Development Corporation and
its majority-owned subsidiaries (the Company). Investments in 20% - 50% owned
companies are accounted for on the equity basis. All significant intercompany
balances and transactions have been eliminated in consolidation.
Statements of cash flows. For purposes of the statements of cash flows,
the Company considers all highly liquid instruments with original maturities of
three months or less from purchase date to be cash equivalents.
Marketable securities. Marketable securities at December 31, 1995 consist
of U.S. corporate equity securities. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (Statement 115) as of January 1, 1994.
Under Statement 115, the Company classifies its marketable equity securities as
trading and available-for-sale.
Inventories. Inventories are valued at the lower of cost or market,
principally using the first-in, first-out (FIFO) method.
Foreign currency transactions. The Company's Swiss Bonds (see Note 11) are
subject to currency fluctuations and the Company has hedged portions of such
debt from time to time, but not within the three year period ended December 31,
1995. During the years ended December 31, 1995, 1994, and 1993, the Company
realized foreign currency transaction gains (losses) of $(1,066,000),
$(2,124,000) and $901,000, respectively. These amounts are included in
Investment and other income (expense), net. At December 31, 1995, the Company
had not hedged its Swiss Franc obligations. The Company's 54% owned subsidiary,
the American Drug Company (See Note 5) conducts its business primarily in U.S.
dollars.
Contract revenue and cost recognition. The Company provides services under
time-and-materials, cost-plus-fixed-fee and fixed-price contracts. Revenue is
recognized as costs are incurred and includes estimated fees at predetermined
rates. Differences between recorded costs and estimated earnings and final
billings are recognized in the period in which they become determinable. Costs
and estimated earnings in excess of billings on uncompleted contracts are
recorded as a current asset. Billings in excess of costs and estimated earnings
on uncompleted contracts are recorded as a current liability. Generally,
contracts provide for the billing of costs incurred and estimated earnings on a
monthly basis. Retainages, amounts subject to future negotiation and amounts
which are expected to be collected after one year are not material for any
period.
F-9
<PAGE> 115
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
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:
<TABLE>
<CAPTION>
CLASS OF ASSETS USEFUL LIFE
- ------------------------------------------------ ---------------------------------------
<S> <C>
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
</TABLE>
Intangible assets. The excess of cost over the fair value of net assets of
businesses acquired is recorded as goodwill and is amortized on a straight-line
basis generally over periods ranging from 5 to 40 years. The Company capitalizes
costs incurred to obtain and maintain patents and licenses. Patent costs are
amortized over the lesser of 17 years or the remaining lives of the patents, and
license costs over the lives of the licenses. The Company also capitalizes costs
incurred to obtain long-term debt financing. Such costs are amortized on an
effective yield basis over the terms of the related debt and such amortization
is classified as interest expense in the Consolidated Statements of Operations.
The periods of amortization of goodwill are evaluated at least annually to
determine whether events and circumstances warrant revised estimates of useful
lives. This evaluation considers, among other factors, expected cash flows and
profits of the businesses to which the goodwill relates. Based upon the periodic
analysis, goodwill is written down or written off if it appears that future
profits or cash flows will be insufficient to recover such goodwill.
Reverse stock split. As a result of a one-for-four reverse stock split
effective on October 6, 1995, all shares and per share information have been
restated.
Treasury stock. Treasury stock is recorded at cost. Reissuances of
treasury stock are valued at market value at the date of reissuance. The cost of
the treasury stock is relieved from the treasury stock account and the
difference between the cost and market value is recorded as additional paid in
capital.
Sales of stock by a subsidiary. The Company records in the Consolidated
Statements of Operations any gain or loss realized when a subsidiary sells its
shares at an offering price which differs from the Company's carrying amount per
share of such subsidiary's stock.
Income taxes. The Company files a consolidated Federal income tax return
that includes each domestic subsidiary in which the Company has at least 80%
voting control.
Income (loss) per share. Per share data is based on the weighted average
number of shares outstanding, including Class B capital stock, and dilutive
common stock equivalents. Presentation of fully diluted earnings per share is
not required because the effect is less than 3% or is antidilutive. The weighted
average number of shares outstanding for the years ended December 31, 1995, 1994
and 1993, was 6,637,639, 5,431,166 and 4,281,475, respectively.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
F-10
<PAGE> 116
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Concentrations of credit risk. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments and accounts receivable. The Company places its
cash investments with high quality financial institutions and limits the amount
of credit exposure to any one institution. With respect to accounts receivable,
33% are related to United States government contracts, and the remainder are
dispersed among various industries, customers and geographic regions.
2. GENERAL PHYSICS CORPORATION
On August 31, 1994, General Physics Corporation, a formerly 28% owned
affiliate, (GP) acquired substantially all of the operations and assets of SGLG,
Inc. (SGLG) (formerly GPS Technologies, Inc.), a 92% owned subsidiary, and
assumed certain liabilities of SGLG, related to its business of providing
management and technical training services, and specialized engineering
consulting services, to various commercial industries and to the United States
government. However, for accounting and financial reporting purposes, the
transaction has been treated as a reverse acquisition of GP by SGLG since, among
other factors, the Company became the beneficial owner of approximately 54% of
the outstanding shares of GP's common stock as a result of the transaction. The
assets acquired by GP also included all of the outstanding common stock of four
wholly-owned subsidiaries of SGLG: GPS Technologies, Inc. Federal Systems Group
(GPSTFSG), which provides technical services to the U.S. Department of the Navy
and other federal government agencies; GP Environmental Services, Inc. (GPES),
which provides environmental laboratory analytical services; and General Physics
Asia Pte. Ltd., located in Singapore, and General Physics (Malaysia) Sdn. Bhd.,
located in Malaysia, which provide operations support, engineering and technical
services to power and process industries in Southeast Asia.
The consideration paid by GP totaled approximately $34,000,00 and consisted
of (a) $10,000,000 in cash, (b) 3,500,000 shares of GP common stock, (c) GP's 6%
Senior Subordinated Debentures due 2004 in the aggregate principal amount of
$15,000,000 ($1,500,000 of which was paid into escrow), (valued at $10,700,000
after a $4,300,000 discount), (d) warrants to purchase an aggregate of 1,000,000
shares of GP common stock at $6.00 per share, and (e) warrants to purchase an
aggregate of 475,664 shares of GP common stock at $7.00 per share. In addition,
GP entered into a lease with SGLG of certain fixed assets of SGLG for a period
of 10 years for an aggregate rent of $2,000,000, payable in equal quarterly
installments of $50,000. The Company did not recognize a gain or loss on this
transaction.
The cash portion of the purchase price for the SGLG operations and assets
was derived from funds borrowed by GP under a $20,000,000 revolving credit
facility secured by liens on the assets of GP, GPSTFSG, GPES and Inventory
Management Corporation, all wholly-owned subsidiaries of GP (See Note 9(d)).
Prior to the transaction, the Company directly and indirectly owned
approximately 28% of the outstanding common stock of GP, and approximately 92%
of the outstanding common stock of SGLG. The Company currently owns directly or
indirectly approximately 51% of the outstanding common stock of GP and
approximately 92% of the outstanding common stock of SGLG.
In December 1994, as part of the above transaction, SGLG distributed its
shares of GTS Duratek, Inc. (Duratek) common stock, totaling 3,950,000 shares,
on a pro rata basis to its shareholders. Therefore, the Company received
3,630,538 shares of Duratek, and the minority shareholders received the
remaining 319,462 shares.
From October 3, 1991 through August 31, 1994, the Company's investment in
GP has been accounted for on the equity basis and the Company's share of GP's
income (loss) for the eight months ended August 31, 1994 and the year ended
December 31, 1993 in the amount of $(719,000) and $316,000, respectively, after
the amortization of the underlying goodwill, was included in the caption
"Investment and other income (expense), net" appearing in the consolidated
statements of operations. The financial position and results of
F-11
<PAGE> 117
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. GENERAL PHYSICS CORPORATION -- (CONTINUED)
operations of SGLG were included in the consolidated accounts of the Company for
the years ended December 31, 1995, 1994 and 1993.
The following information shows on a pro forma basis, the results of
operations for the Company as if the above transaction had occurred as of
January 1, 1993 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1993
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues..................................................... $239,416 $251,187
Loss before discontinued operation and extraordinary item.... (11,238) (6,132)
Net loss..................................................... (13,812) (5,260)
Loss per share before discontinued operation and
extraordinary item......................................... (.13) (.09)
Loss per share............................................... (.16) (.08)
</TABLE>
The above pro forma information is not necessarily indicative of the actual
financial position or results of operations that would have been achieved if the
transactions had occurred as of or for the period indicated, or of future
results that may be achieved.
3. GTS DURATEK, INC.
On January 24, 1995, the Company sold 1,666,667 shares of common stock of
GTS Duratek, Inc. (Duratek) at a price of $3.00 per share to The Carlyle Group
(Carlyle) in connection with a $16 million financing by Duratek with Carlyle, a
Washington, D.C. based private merchant bank. In addition, the Company granted
Carlyle an option, which was exercised in December 1995, to purchase up to an
additional 500,000 shares of the Company's Duratek common stock over the next
year at $3.75 per share. The Company realized a gain of $3,768,000 on sales of
Duratek common stock, primarily in these two transactions.
Duratek received $16 million from Carlyle in exchange for 160,000 shares of
newly issued 8% cumulative convertible preferred stock (convertible into
5,333,333 shares of Duratek common stock at $3.00 per share). Duratek granted
Carlyle an option to purchase up to 1,250,000 shares of newly issued Duratek
common stock from Duratek over the next four years.
As a result of the above transactions, at December 31, 1995 the Company
owns approximately 2,948,000 shares of Duratek's common stock (approximately 31%
of the outstanding shares of common stock). As a result of the Company's
ownership in Duratek falling below 50%, commencing on January 24, 1995 the
Company has accounted for its investment in Duratek on the equity basis.
In connection with the transaction, Carlyle will have the right, through
its preferred stock, to elect a majority of Duratek's Board of Directors. Upon
conversion of the preferred stock, Carlyle would own approximately 50% of
Duratek's common stock if all of its options are exercised.
On March 20, 1996, Duratek filed a registration statement with the
Securities and Exchange Commission relating to a proposed offering of 3,600,000
shares of common stock of which 2,500,000 shares (3,040,000 shares if the
underwriters' over-allotment option is exercised) will be sold by Duratek and
1,000,000 will be sold by the Company.
Duratek is an integrated environmental services and technology firm with
proprietary waste processing systems applicable to radioactive, hazardous, mixed
and other wastes.
The Company's investment in Duratek of approximately $4,121,000 as of
December 31, 1995, is included in Investments and advances on the consolidated
balance sheet of which $2,447,000 represents the Company's
F-12
<PAGE> 118
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. GTS DURATEK, INC. -- (CONTINUED)
percentage of underlying net assets and $1,674,000 represents goodwill. At
December 31, 1995, the Company owned 2,948,000 shares of Duratek, of which
250,000 shares have been classified as Marketable securities, (See Note 19). The
total shares held of 2,948,000 have a market value of $42,009,000. The Company's
share of Duratek's income included in Investment and other income (expense), net
is $31,000 in 1995.
Condensed financial information for Duratek is as follows as of December
31, 1995 and for the year then ended (in thousands):
<TABLE>
<S> <C>
Current assets............................................................. $28,780
Non current assets......................................................... 9,880
Current liabilities........................................................ 4,665
Non current liabilities.................................................... 10,123
Redeemable convertible preferred stock..................................... 14,609
Stockholders' equity....................................................... 9,257
Revenues................................................................... 40,418
Gross profit............................................................... 8,197
Net income................................................................. 60
</TABLE>
4. INTERFERON SCIENCES, INC.
Interferon Sciences, Inc. (ISI) is a 22% owned affiliate of the Company. It
is engaged in the manufacture and sale of ALFERONR(R) N Injection, ISI's first
product commercially approved by the FDA for the treatment of recurring and
refractory external genital warts, and the research and development of other
alpha interferon based products for the treatment of viral diseases, cancers and
diseases of the immune system.
On July 12, 1993, the Company commenced an Exchange Offer for its Swiss
Franc denominated Bonds and its Dual Currency Bonds. (See Note 11(b)). As a
result of the inclusion of a portion of the Company's shares of Common Stock of
ISI as part of the consideration in the Exchange Offer, the Company's ownership
in ISI fell below 50%, and therefore, commencing during the third quarter of
1993, the Company accounted for the results of ISI on the equity basis.
In 1995, the Company realized a $2,775,000 gain on issuance of stock by
this affiliate, primarily as the result of the issuance of 12,000,000 shares of
Common Stock by ISI at $1.20 per share in August and September 1995.
The information relating to the Company's investment in ISI is as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Investments and advances:
Underlying assets............................................ $ 2,837 $ 1,072
Goodwill..................................................... 924 1,152
------- -------
Total........................................................ $ 3,761 $ 2,224
======= =======
Number of shares owned............................................ 7,475 6,975
Market value of share............................................. $14,016 $ 9,373
Equity in income (loss) included in Investment and other income
(expenses), net................................................. (1,953) (4,409)
</TABLE>
F-13
<PAGE> 119
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INTERFERON SCIENCES, INC. -- (CONTINUED)
Condensed financial information for ISI is as follows as of December 31,
1995 and 1994 and for the years then ended (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
Current assets................................................... $ 8,188 $ 1,691
Non current assets............................................... 5,765 6,491
Current liabilities.............................................. 1,126 2,473
Non current liabilities.......................................... 2,730
Stockholders' equity............................................. 12,827 2,979
Revenues......................................................... 1,296 1,166
Gross margin..................................................... (1,780) (1,612)
Net loss......................................................... (7,372) (12,078)
</TABLE>
5. AMERICAN DRUG COMPANY
The Company owns approximately 54% of the outstanding common stock of
American Drug Company (ADC), which was organized in 1993, as a wholly-owned
subsidiary of the Company to initiate marketing activities for American generic
pharmaceutical and medical pharmaceuticals in Russia and the Commonwealth of
Independent States (the "CIS"). ADC's subsidiary, NPD Trading (USA), Inc.
provides consulting services to Western businesses in Russia and Eastern Europe.
ADC sells American-made generic pharmaceutical and health care products under
its own label in Russia and the CIS.
In August 1994, pursuant to a Transfer and Distribution Agreement, the
Company distributed 46% of its interest in ADC to the Company's shareholders. In
addition, ADC issued warrants to the Company's shareholders to purchase its
stock for a period of two years, subject to cancellation under certain
circumstances.
6. GSE SYSTEMS, INC.
In March 1994, GP and SGLG contributed assets to a newly formed, multi
party joint venture, GSE Systems, Inc. (GSES), for 10% and 35% ownership
interests in the joint venture, respectively. GSES designs, develops and
delivers business and technology solutions by applying process control, data
acquisition, simulation, and business software, systems and services to the
energy, process and manufacturing industries worldwide. On August 1, 1995, GSES
completed an initial public offering of 1,725,000 shares (including an
over-allotment option) of its common stock at $14 per share. As a result of the
offering, the Company recognized a gain on issuance of stock by an affiliate of
approximately $3,137,000 and at December 31, 1995, controls 26% of GSES.
The Company accounts for its investment in GSES on the equity basis. The
Company's investment in GSES of approximately $8,944,000 as of December 31, 1995
is included in Investments and advances on the consolidated balance sheet, of
which $5,476,000 represents the Company's percentage of underlying net assets
and $3,468,000 represents goodwill. At December 31, 1995, the Company controls
1,125,000 shares of GSES with a market value of $16,172,000. The Company's share
of GSES's income included in Investment and other income (expense), net is
$1,237,000 in 1995.
F-14
<PAGE> 120
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. GSE SYSTEMS, INC. -- (CONTINUED)
Condensed financial information for GSES is as follows as of December 31,
1995 and for the year then ended (in thousands):
<TABLE>
<S> <C>
Current assets............................................................. $41,507
Non current assets......................................................... 9,853
Current liabilities........................................................ 24,961
Non current liabilities.................................................... 5,783
Stockholders' equity....................................................... 20,616
Revenue.................................................................... 85,302
Gross profit............................................................... 27,926
Net income................................................................. 3,490
</TABLE>
7. INVENTORIES
Inventories, consisting of material, labor and overhead, are classified as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
Raw materials..................................................... $ 580 $ 1,973
Work in process................................................... 219 462
Finished goods.................................................... 19,645 15,557
Land held for resale.............................................. 2,650
------- -------
$20,444 $20,642
======= =======
</TABLE>
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------
1995 1994
-------- --------
<S> <C> <C>
Land............................................................ $ 173 $ 173
Buildings and improvements...................................... 1,374 1,367
Machinery and equipment......................................... 11,072 16,357
Furniture and fixtures.......................................... 13,878 14,650
Leasehold improvements.......................................... 6,870 4,876
-------- --------
33,367 37,423
Accumulated depreciation and amortization....................... (24,374) (22,843)
-------- --------
$ 8,993 $ 14,580
======== ========
</TABLE>
F-15
<PAGE> 121
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHORT-TERM BORROWINGS
Short-term borrowings are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
Line of Credit Agreement (a)...................................... $14,593 $12,409
Revolving Loan and Line of Credit Arrangements (b)................ 920
Revolving Line of Credit Agreement (c)............................ 7,631
Revolving Credit Agreement (d).................................... 3,450 10,100
------- -------
$18,043 $31,060
======= =======
</TABLE>
- ---------------
(a) In April 1993, Five Star Group, Inc. (Five Star) and MXL Industries, Inc.
(MXL) each entered into a revolving credit and term loan agreement (the
"Five Star Loan Agreement" and "MXL Loan Agreement"), which was amended on
October 23, 1995. The Five Star Loan Agreement provided for a $20,000,000
revolving credit facility (the "Five Star Revolving Credit Facility") and a
$5,000,000 loan (the "Five Star Term Loan"). The Five Star Revolving Credit
Facility is a three year committed facility which allows Five Star to
borrow amounts up to 50% of Eligible Inventory (as defined) and 80% of
Eligible Receivables (as defined) at an interest rate of 1% in excess of
the prime rate. At December 31, 1995, the interest rate was 9.5%. As of
December 31, 1995, $14,593,000 was borrowed under the Five Star Revolving
Credit Facility and Five Star had $282,000 available.
As of November 1, 1995, the Five Star Term Loan, which was $1,667,000 on
October 30, 1995, was repaid in its entirety. The Five Star Revolving
Credit Agreement is secured by all of the assets of Five Star and 1,359,375
shares of common stock of ISI and 1,062,500 shares of common stock of GP,
which were contributed to Five Star in connection with the forgoing
transactions.
The amended MXL Loan Agreement provides for a $1,500,000 revolving credit
facility (the "MXL Revolving Credit Facility") and a $4,500,000 term loan,
which was adjusted to a balance of $3,960,000 at November 1, 1995 (the "MXL
Term Loan"). The MXL Revolving Credit Facility is a three year committed
facility which allows MXL to borrow amounts equal to 25% of Eligible
Inventory (as defined) and 80% of Eligible Receivables (as defined) at an
interest rate of 1% in excess of the prime rate. As of December 31, 1995,
there were no borrowings under the MXL Revolving Credit Facility and the
balance of the MXL Term Loan was $3,713,000. MXL had $822,000 available
under its Revolving Credit Facility at December 31, 1995. At December 31,
1995, under the terms of the revolving credit agreement, approximately
$2,000,000 was available to the Company. The amended MXL Term Loan is
repayable in 16 quarterly payments of approximately $247,500, which
commenced on October 31, 1995. The MXL Term Loan bears interest at 1.375%
in excess of the prime rate, and was 9.875% at December 31, 1995. The
facilities are secured by all of the assets (other than certain equipment)
of MXL and by 815,625 shares of common stock of ISI and 637,500 shares of
common stock of GP, which were contributed to MXL in connection with the
forgoing transactions.
The Five Star Revolving Credit Facility and Five Star Term Loan and the MXL
Revolving Credit Agreement and MXL Term Loan are guaranteed by the Company.
In April 1993, $4,196,000 of the proceeds from the original term loans were
used to repay the balance of a revolving credit and term loan agreement
entered into by the Company. The amended Agreements, among other things,
limit the amount that Five Star and MXL may borrow from other sources, the
amount and nature of certain expenditures, acquisitions and sales of
assets, and the amount that Five Star and MXL can loan or dividend to the
Company. Under the terms of the amended agreements, MXL is allowed to lend
Five Star and the Company up to an additional $750,000 and $500,000,
respectively. The agreements have several covenants, including provisions
regarding working capital, tangible net worth, leverage and cash flow
ratios.
F-16
<PAGE> 122
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHORT-TERM BORROWINGS -- (CONTINUED)
(b) In August 1991, Eastern Electronics Manufacturing Corporation (Eastern)
assigned the outstanding balance on its line of credit with a bank to a
finance company, with whom Eastern entered into a Security Agreement. As
part of management's plan to discontinue the operations of Eastern (See
Note 15), the balance was repaid and the facility cancelled in 1995.
(c) On February 9, 1993, Duratek entered into a $7,000,000 Revolving Line of
Credit (the Line) and a $400,000 Loans to Facility (the Facility) for fixed
asset purchases with a commercial bank. On June 11, 1993, the Line was
increased to $7,750,000 and the Facility was increased to $750,000. In
January 1995, Duratek used proceeds from the Carlyle financing (See Note 3)
to retire amounts outstanding under the Line and as a result of the
Company's ownership in Duratek falling below 50%, the Company currently
accounts for its investment in Duratek on the equity basis.
(d) On August 31, 1994, GP entered into a $20,000,000 secured revolving credit
agreement with a commercial bank. Borrowings under this agreement bore
interest at the prime rate. This agreement contained certain covenants,
which among other things, limited the amount and nature of certain
expenditures and required GP to maintain certain financial ratios.
On April 7, 1995, the Company and GP entered into a new three year
$20,000,000 secured revolving credit agreement with a commercial bank, and
terminated the above credit agreement. Borrowings under the new credit agreement
bear interest at the prime rate (8.5% at December 31, 1995) or 1.75% over LIBOR
(7.43% at December 31, 1995), whichever rate is elected by GP. The new credit
agreement is secured by the accounts receivable of GP and certain of its
subsidiaries, and contains certain covenants which, among other things, limit
the amount and nature of certain expenditures by GP, and requires GP to maintain
certain financial ratios. At December 31, 1995, under the terms of the new
credit agreement, approximately $2,000,000 was available to the Company. At
December 31, 1995, $3,450,000 was borrowed under the new credit agreement and
there were available borrowings of $16,550,000 under the agreement.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
Accounts payable.................................................. $12,833 $15,371
Payroll and related costs......................................... 4,130 4,098
Interest.......................................................... 425 1,882
Other............................................................. 3,477 6,607
------- -------
$20,865 $27,958
======= =======
</TABLE>
F-17
<PAGE> 123
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
8% Swiss Bonds, due 2000 (a)...................................... $ 2,365 $
5% Convertible Bonds due 1999 (c)................................. 2,249 2,129
8% Swiss Bonds due 1995 (b)(d).................................... 247 2,999
6% Convertible Swiss Bonds due 1995 (b)(e)........................ 494 4,036
5.75% Convertible Swiss Bonds due 1995 (e)........................ 104 2,014
5.625% Convertible Swiss Bonds due 1996 (f)....................... 538 1,716
7% Dual Currency Convertible Bonds due 1996 (f)................... 615 2,391
12% Subordinated Debentures due 1997 (g).......................... 6,749 6,783
Term loan with banks (Note 9(a)).................................. 3,713 5,541
Senior Subordinated Debentures (h)................................ 827 801
Notes payable in connection with settlement of litigation (i)..... 521 745
Term loan with bank (j)........................................... 5,000
Equipment lease obligations*...................................... 510 2,058
------- -------
23,932 31,213
Less current maturities........................................... 4,167 13,700
------- -------
$19,765 $17,513
======= =======
</TABLE>
- ---------------
* Secured by assets held under capital lease obligations.
(a) On June 28, 1995, the Company's Exchange Offer for certain issues of its
outstanding indebtedness expired. The Company accepted for exchange Swiss
Francs ("SFr") 1,299,000 of its 8% Swiss Bonds due March 1, 1995, SFr.
1,120,000 of its Convertible Swiss Bonds due March 7, 1995, SFr. 945,000 of
its 5.75% Convertible Bonds due May 9, 1995, SFr. 795,000 of its 5.625%
Convertible Bonds due March 18, 1996, and $1,212,000 of its 7% Dual
Currency Bonds due March 18, 1996. In exchange for the forgoing bonds, the
Company issued an aggregate of SFr. 3,604,000 of new 8% Swiss Bonds, due
June 28, 2000 (the "New 8% Bonds") and paid $2,873,000 in cash. The New 8%
Bonds were valued at $2,340,000 (after an original issue discount of 25%).
The principal and interest on the New 8% Bonds are payable either in cash
or in shares of common stock of the Company, at the option of the Company.
As a result of the Exchange Offer, the Company reduced its long-term debt
due in 1995 and 1996 by $4,824,000 and realized a loss of $393,000 on the
Exchange Offer.
(b) On June 10, 1994, the Company commenced an Exchange Offer for up to 60% of
its Swiss denominated 8% Bonds due March 1, 1995, 6% Convertible Bonds due
March 7, 1995, 5.75% Convertible Bonds due May 9, 1995, 5.625% Convertible
Bonds due March 18, 1996 and 7% Dual Currency Bonds due March 18, 1996,
("the Bonds"). The Company offered for exchange its Common Stock with a
value of $1,000 for each $1,000 principal amount of the Bonds. In addition,
the Company offered for exchange its Common Stock with a value of SFr.
1,000 for each SFr. 1,000 principal amount of the Bonds. Accrued interest
on the Bonds accepted for exchange by the Company was paid in Common Stock
of the Company. The purpose of the Exchange Offer was to reduce the
Company's long-term indebtedness and related interest expense.
In July 1994, as a result of the Exchange Offer, the Company received an
aggregate of SFr. 2,569,000 principal amount of its Swiss denominated bonds
and $1,377,000 of its 7% Dual Currency Convertible Bonds. In addition, the
Company completed four private transactions for SFr. 6,971,000 principal
amount of its Swiss denominated bonds and $159,000 of its 7% Dual Currency
Convertible Bonds.
F-18
<PAGE> 124
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT -- (CONTINUED)
As a result of the above transactions, the Company issued approximately
852,000 shares of its common stock and reduced its long-term debt by
approximately $8,582,000.
(c) The Company commenced an Exchange Offer on July 12, 1993, for any and all
of the Bonds. The purpose of the Exchange Offer was to reduce the Company's
long-term indebtedness and related interest expense.
The consideration offered by the Company for each SFr. 1,000 principal
amount of the Bonds validly tendered and not withdrawn prior to the
Expiration Date (August 19, 1993) was: a) 5% U.S. dollar denominated
Convertible Bonds of the Company due August 31, 1999 (the "New 5% Bonds")
in a principal amount of $130 and convertible into 8 shares of the
Company's Common Stock ("Common Stock"), b) 14 shares of Common Stock, c)
26 shares of Common Stock of ISI (the "ISI Common Stock"), d) 26 shares of
Common Stock of Duratek (the "Duratek Common Stock") and e) $43 in cash.
The consideration offered by the Company for each $1,000 principal amount
of the Bonds validly tendered and not withdrawn prior to the Expiration
Date was: a) New 5% Bonds in a principal amount of $200 and convertible
into 12 shares of Common Stock, b) 21 shares of Common Stock, c) 39 shares
of ISI Common Stock, d) 39 shares of Duratek Common Stock and e) $60 in
cash.
On the Expiration Date the Company accepted the following amounts of Old
Bonds for exchange: SFr. 3,640,000 of the 6% Bonds due March 7, 1995,
SFr. 1,125,000 of the 5.75% Bonds due May 9, 1995, SFr. 2,765,000 of the
5.625% Bonds due March 18, 1996, SFr. 16,806,000 of the 8% Bonds due
March 1, 1995 and $882,000 of the 7% Bonds due March 18, 1996. Under the
terms of the Offer, which included all unpaid accrued interest thereon,
the Company issued the following amounts of consideration to the exchanging
bondholders: a) 346,397 shares of Common Stock, valued at $5,582,000, b)
667,134 shares of ISI Common Stock, valued at $2,536,000, c) 667,134 shares
of Duratek Common Stock, valued at $2,536,000, d) $3,340,080 principal
amount of New 5% Bonds which will be convertible into 191,959 shares of the
Common Stock, and e) $1,099,368 in cash. The Company recorded an original
issue discount on the New 5% Bonds of 10%. At December 31, 1995, $2,309,000
of the New 5% Bonds were outstanding.
As a result of the Exchange Offer, in 1993 the Company realized a gain of
$3,795,000 from the issuance of the ISI and Duratek Common Stock, and an
extraordinary gain from the early extinguishment of debt, before income tax
effect, of $1,227,000.
(d) On December 20, 1989, as part of an Exchange offer for its Swiss
Denominated Bonds, the Company issued: (a) SFr. 51,264,000 ($32,140,000)
of its 8% Swiss Bonds due March 1, 1995, each in the principal amount of
SFr. 3,000, (the New Bonds) of which SFr. 285,000 are outstanding at
December 31, 1995, (b) 17,088 Reset Warrants, each of which entitled the
holder to purchase 19 shares of the Company's common stock, at a price
determined by formula, which were exercisable until March 1, 1995, (c)
17,088 Common Stock Warrants, each of which entitled the holder to acquire
without further consideration shares of the Company's common stock with a
market value of SFr. 250, which were exercisable until March 1, 1995, and
(d) SFr. 750 in cash. During the first quarter of 1996 all the outstanding
8% Swiss Bonds plus accrued interest were fully redeemed for cash.
(e) 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. 570,000 were outstanding
as of December 31, 1995. 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. 120,000 were outstanding as of December 31, 1995.
In the first quarter of 1996, all the outstanding 6% and 5.75% Convertible
Bonds, plus accrued interest were fully redeemed for cash.
F-19
<PAGE> 125
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT -- (CONTINUED)
(f) 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. 620,000 are currently outstanding at December 31, 1995. 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 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. In the first quarter of 1996, all the
outstanding 5.625% Convertible Bonds and 7% Dual Currency Bonds were fully
redeemed at maturity.
In addition to the bonds exchanged (see (a), (b) and (c) above), during
1995, 1994 and 1993 the Company repurchased a portion of each of the Swiss
Public Bond Issues as well as Dual Currency Convertible Bonds.
Extraordinary gains (losses) from the extinguishment of the Bonds in all
such transactions (net of income taxes), amounted to $(79,000), zero and
$1,819,000 in 1995, 1994 and 1993, respectively.
(g) During the third quarter of 1987, the Company issued $12,500,000 of
Subordinated Debentures (Debentures) which mature in 1997. Each $100
principal amount Debenture was sold with warrants to purchase one share of
the Company's common stock at a price of $74.00 per share. In connection
with the terms of the Debentures, the Company is subject to certain
covenants which limit the amount that may be used for the payment of
dividends and for the purchase of the Company's outstanding equity
securities (common or Class B). In September 1990, under the terms of an
Indenture, the Debentures became exchangeable for the Company's Common
Stock, for the remaining term of the Debentures, at a price of
approximately $20.00 per share. In 1995 and 1994, zero and $35,000,
respectively, of Debentures were converted into zero and 1,761 shares,
respectively, of the Company's Common Stock. At December 31, 1995, the
Debentures are convertible into approximately 339,000 shares of the
Company's Common Stock. At December 31, 1995, the Company was precluded
from paying dividends under the terms of the Debentures.
(h) In August 1994, GP, as a result of the acquisition of substantially all the
assets of SGLG (See Note 2), issued $15 million of 6% Senior Subordinated
Debentures, which have a carrying value of $11,173,000, net of a debt
discount of $3,827,000. The debentures are unsecured and require payments
of interest only on a quarterly basis through June 30, 1999, quarterly
principal installments of $525,000 plus interest through June 30, 2004 and
the balance of $4.5 million on June 30, 2004. The debentures are
subordinated to borrowings under the line of credit agreement. At December
31, 1995, the carrying value of the debentures held by the Company was
$10,346,000, which was eliminated in consolidation, and the remaining
$827,000 of debentures were held by the minority shareholders of SGLG.
(i) In March 1987, the Company and Ryder International Corporation (Ryder)
agreed to a settlement of litigation relating to the Company's Caridex(R)
system. Under the terms of the settlement agreement, the Company agreed to
pay Ryder amongst other things, $300,000 per year (in cash or common stock
of the Company) for a ten year period commencing January 15, 1988, the
present value of which is discounted at 10%, and included in long-term
debt.
(j) On April 7, 1995, the Company entered into a $5,000,000 Term Loan Agreement
with a bank, of which the Company received approximately $4,910,000 after
closing fees. The interest rate is at the bank's prime rate of interest
plus 2%. At December 31, 1995, the interest rate was 10.5%. The Term Loan
is payable in sixteen consecutive quarterly installments, commencing on
June 30, 1996. The first fifteen installments will be $250,000 and the last
installment shall be $1,250,000. The Company has used a portion of the
proceeds in July 1995 to repay and refinance certain of its Swiss
denominated long-term
F-20
<PAGE> 126
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT -- (CONTINUED)
debt due in 1995 and 1996. The Term Loan is secured by certain assets of
the Company and requires the Company to meet certain financial covenants.
Aggregate annual maturities of long-term debt outstanding at December 31,
1995 for each of the next five years are as follows (in thousands):
<TABLE>
<S> <C>
1996........................................................................ $4,167
1997........................................................................ 9,269
1998........................................................................ 2,160
1999........................................................................ 4,158
2000........................................................................ 3,646
</TABLE>
12. COMMON STOCK ISSUED SUBJECT TO REPURCHASE OBLIGATION
During the fourth quarter of 1993, the Company entered into several
privately negotiated agreements (the Agreements), pursuant to which it
reacquired previously outstanding Swiss Bonds in exchange for newly issued
common stock. In addition to common stock, the Company issued to the exchanging
bondholder in each transaction a non-negotiable, non-interest bearing promissory
note (the Note) in a principal amount equal to the market value of the common
stock issued in the exchange. The recipient in each transaction obtained the
rights, exercisable within approximately a one year period from the date of the
Agreement, to sell, retain, or return to the Company the common stock received,
in whole or in part. Net proceeds of any sales of common stock by the recipient
during the period reduces the amount due under the Note, and sales of common
stock for net proceeds equal to or in excess of the principal amount of the Note
would cause the Note to be deemed as paid in full. Any excess proceeds of sale
of the stock over the principal amount of the Note are retained by the
stockholder.
The Company has accounted for the issuance of the common stock as permanent
equity to the extent of the proceeds of subsequent sales of stock by the
recipients, and as temporary equity for the balance of the market value of the
common stock issued. The Notes serve as a guarantee of the amounts which may be
refundable to the recipients of the common stock under the Agreement. The
Company's maximum repurchase or refund obligation under these Agreements as of
December 31, 1994 aggregated $1,510,000. In 1995, the Company paid $900,000 and
issued an additional 16,100 shares to the Noteholder, in exchange for the
cancellation of the Note. At December 31, 1995, there was no common stock issued
subject to repurchase obligation.
13. EMPLOYEE BENEFIT PLANS
The Company had a Defined Benefit Pension Plan (the Plan) for employees of
certain divisions and subsidiaries. Benefits were based primarily on years of
service and a fixed rate of benefits per year of service. Contributions were
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
Effective December 31, 1991, the Plan benefits were frozen. Accrued vested
benefits will be paid to terminated participants in the form of a lump sum
distribution in cases where the accrued vested benefit is less than $3,500.
Terminated participants can elect a lump sum distribution if the accrued vested
benefit is greater than $3,500 but less than $7,500.
In the event that the accrued vested benefit exceeds the $7,500 payable
limit as outlined in the Plan, payment will be deferred until a terminated
vested participant reaches age 65 or elects early retirement, at age
F-21
<PAGE> 127
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
60 or later. The pension expense amounted to $26,000, $31,000 and $377,000, for
1995, 1994 and 1993, 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):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT PLAN OBLIGATIONS:
Accumulated benefit obligation (including vested benefits
of $5,365, $4,436 and $4,838).......................... $(5,890) $(4,469) $(4,917)
------- ------- -------
Projected benefit obligation for service rendered to
date................................................... $(5,890) $(4,469) $(4,917)
Plan assets at fair value................................ 4,353 3,405 3,528
------- ------- -------
Projected benefit obligation in excess of plan assets.... (1,537) (1,064) (1,389)
Unrecognized net loss from past experience different from
that assumed........................................... 911 339
------- ------- -------
Minimum pension liability................................ (911)
ACCRUED PENSION COST INCLUDED IN ACCOUNTS PAYABLE AND
ACCRUED EXPENSES IN THE CONSOLIDATED BALANCE SHEETS.... $(1,537) $(1,064) $(1,050)
------- ------- -------
THE NET PERIODIC PENSION EXPENSE IS AS FOLLOWS:
Service cost-benefits earned............................. $ $ $
Interest cost on projected benefit obligations........... 420 360 341
Actual return on plan assets............................. (424) (350) (414)
Net amortization and deferral and other.................. 30 21 450
------- ------- -------
Net periodic pension expense............................. $ 26 $ 31 $ 377
======= ======= =======
</TABLE>
The Company's assumptions used as of December 31, 1995, 1994, and 1993 in
determining the pension cost and pension cost liability shown above were as
follows:
<TABLE>
<CAPTION>
PERCENT
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Discount rate.................................................. 7.25 8.25 7.5
Long-term rate of return on assets............................. 10.0 10.0 10.0
</TABLE>
Financial Accounting Standards Board Statement No. 87 (FASB No. 87)
requires that a company record an additional minimum pension liability to the
extent that a company's accumulated pension benefit obligation exceeds the fair
value of pension plan assets and accrued pension liabilities. This additional
minimum pension liability is offset by an intangible asset, not to exceed prior
service costs of the pension plan. Amounts in excess of prior service costs are
reflected as a reduction in stockholders' equity.
Effective March 1, 1992, the Company adopted the 1992 401(K) Savings Plan
(the Savings Plan). Effective December 31, 1991, the Plan participants would no
longer accrue benefits under the Defined Benefit Pension Plan, but became
eligible to participate in the Company's Savings Plan.
The Company's Savings Plan is available to employees who have completed one
year of service; however, past vesting service credit was recognized for
employees who participated in the Savings Plan at the date of initial
enrollment, March 1, 1992.
F-22
<PAGE> 128
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The Savings Plan permits pre-tax contributions to the Savings Plan by
participants pursuant to Section 401(K) of the Internal Revenue Code of 2% to 6%
of base compensation. The Company matches 40% of the participants' eligible
contributions based on a formula set forth in the Savings Plan. Participants are
fully vested in their contributions and may withdraw such contributions at time
of employment termination, or at age 59 1/2 or earlier in the event of financial
hardship. Amounts otherwise are paid at retirement or in the event of death or
disability. Employer contributions vest at a rate of 20% per year.
The Savings Plan is administered by a trustee appointed by the Board of
Directors of the Company and all contributions are held by the trustee and
invested at the participants' direction in various mutual funds. The expense
associated with the Savings Plan was $223,000, $285,000 and $236,000 in 1995,
1994 and 1993, respectively.
14. INCOME TAXES
For U.S. Federal income tax purposes, a parent corporation with an 80% or
greater equity interest in its subsidiary may file a consolidated tax return.
Accordingly, the Company and its greater than 80% owned subsidiaries will file a
consolidated Federal income tax return for the year ended December 31, 1995. The
subsidiaries in which the Company has an equity ownership between 50% and 80%,
are consolidated for financial reporting purposes, but file separate U.S.
Federal income tax returns for the year ended December 31, 1995.
The components of pretax income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Continuing operations................................... $ 5,819 $(10,648) $(7,424)
Discontinued operation.................................. (2,941) (2,574) (947)
</TABLE>
The components of income tax expense (benefit) from continuing operations
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1994 1993
------ ---- -----
<S> <C> <C> <C>
Current
State and local.......................................... $ 221 $283 $ 398
Federal tax expense (benefit)............................ 37 (973)
------ ---- -----
258 283 (575)
------ ---- -----
Deferred
State and local.......................................... 206 11
Federal.................................................. 1,323 455
------ ---- -----
1,529 466
------ ---- -----
$1,787 $749 $(575)
====== ==== =====
</TABLE>
F-23
<PAGE> 129
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES -- (CONTINUED)
The difference between the provision for income taxes computed at the
statutory rate and the reported amount of tax expense attributable to
consolidated earnings from continuing operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994 1993
----- ------ ------
<S> <C> <C> <C>
Federal income tax rate...................................... 35.0% (35.0)% (35.0)%
State and local taxes net of Federal benefit................. 4.8 2.0 3.0
Items not deductible -- primarily amortization of goodwill... 14.0 6.0 5.0
Valuation allowance adjustment............................... (22.6)
GP acquisition of SGLG....................................... 33.00
Deconsolidation of ISI....................................... 17.00
Other........................................................ (.5) 1.0 2.0
----- ----- ---- -
Effective tax rate........................................... 30.7% 7.0% (8.0)%
===== ===== =====
</TABLE>
The decrease in the valuation allowance in 1995 was attributable to various
adjustments that affect the 1995 income tax provision as well as the
deconsolidation of Duratek. The deconsolidation of Duratek resulted in a
decrease in deferred tax assets and a corresponding decrease in the valuation
allowance. Such adjustment had no effect on the 1995 income tax provision.
In 1993, the Company recorded an income tax benefit of $1,043,000, of which
$973,000 relates to Federal income taxes, in continuing operations as a result
of the income tax expense allocated to the extraordinary gain recognized on the
early extinguishment of debt under the provisions of FASB No. 109.
In 1994, the Company recorded an income tax expense of $749,000. The
current income tax provision of $283,000 reflected above, represents the
estimated taxes payable by the Company for the year ended December 31, 1994. The
deferred income tax provision of $466,000 represents the deferred taxes of GP,
the Company's 51% owned subsidiary.
In 1995, the Company recorded an income tax expense of $1,787,000. The
current income tax provision of $258,000 reflected above, represents the
estimated taxes payable by the Company for the year ended December 31, 1995. The
deferred income tax provision of $1,529,000 represents the deferred taxes of GP,
the Company's 51% owned subsidiary.
As of December 31, 1995, the Company has approximately $23,204,000 of net
operating loss carryovers consisting of $21,155,000 with respect to net
operating losses generated from the Company's consolidated tax return and
$2,049,000 generated by ADC as a separate tax filer for Federal income tax
return purposes. These carryovers expire in the years 2001 through 2010. In
addition, the Company has approximately $2,784,000 of available credit
carryovers which expire in the years 1998 through 2003.
In 1993, the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). This statement requires
that deferred income taxes be recorded following the liability method of
accounting and adjusted periodically when income tax rates change.
F-24
<PAGE> 130
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities that are included in the net deferred
tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accounts receivable, principally due to allowance for doubtful
accounts....................................................... $ 799 $ 854
Investment in partially owned companies.......................... 3,151
Inventory........................................................ 57 406
Lawsuit settlements.............................................. 234 351
Accrued expenses................................................. 929 310
Litigation accrual............................................... 535
Other accrued liabilities........................................ 66 496
Net operating loss carryforwards................................. 9,028 9,329
Investment tax credit carryforwards.............................. 2,784 2,784
------- --------
Deferred tax assets.............................................. 13,897 18,216
------- --------
DEFERRED TAX LIABILITIES:
Property and equipment, principally due to differences in
depreciation................................................... 1,274 1,650
Unamortized debt discount........................................ 65
Unrealized exchange gain......................................... 1,139 1,555
State taxes...................................................... 115
Prepaid expenses................................................. 129 186
Unrealized marketable security gain.............................. 1,243
Investment in partially owned companies.......................... 1,918
------- --------
Deferred tax liabilities......................................... 5,703 3,571
------- --------
Net deferred tax assets.......................................... 8,194 14,645
------- --------
Less valuation allowance......................................... (8,248) (13,170)
------- --------
Net deferred tax asset (liability)............................... $ (54) $ 1,475
======= ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers income taxes
paid in the past three years and future taxable income in making this
assessment. A full valuation allowance is appropriate for the Company and its
greater than 80% owned subsidiaries included in the Company's consolidated
Federal income tax return, based on the Company's recent history of annual net
losses. As a result, effective December 31, 1995, the Company has deferred tax
assets of approximately $13,897,000, deferred tax liabilities of $5,703,000 and
a valuation allowance of approximately $8,248,000. The net deferred tax
liability of $54,000 results from GP, which is not included in the Company's
Federal income tax return.
15. DISCONTINUED OPERATION
In December 1994, the Company decided to sell its Eastern Electronics
Manufacturing Corporation (Eastern) subsidiary, which was the only company in
the Electronics segment. As a result of the decision to sell Eastern, the
Company reflected Eastern as a discontinued operation. In 1994, the Company
wrote down various assets to their estimated net realizable value and recorded a
$100,000 reserve for the cost of discontinuing Eastern, totaling $1,570,000. Net
realizable value of the segment's fixed assets was estimated
F-25
<PAGE> 131
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. DISCONTINUED OPERATION -- (CONTINUED)
based upon a prior appraisal and net realizable value of the segment's
inventories was estimated based upon negotiations with a prospective purchaser
in a bulk sale transaction. Goodwill was written off as non-recoverable. The
total loss for discontinued operation recognized in 1994 was $2,574,000, of
which $1,789,000, which included an $800,000 write-down of inventories, was from
operations and $785,000 was a loss on disposal, which was comprised of: (a) a
$200,000 write-down of property and equipment; (b) a $485,000 write-off of
goodwill relating to Eastern; (c) $100,000 for expected losses through the date
of disposal. In 1995,the Company recognized a loss from discontinued operation
of $2,941,000, of which a total of $2,610,000 was a loss on disposal incurred on
the sale of inventory ($1,550,000), write-offs of accounts receivable ($360,000)
and sales of fixed assets ($700,000). At the time the Company adopted a plan of
disposal in December 1994, the Company was in negotiations to sell a substantial
portion of its specific use inventory. These negotiations subsequently broke off
and the Company therefore fully reserved this inventory in 1995.
The December 31, 1994 estimated net realizable value of Eastern's fixed
assets was based upon a prior appraisal, but the actual sale in 1995 resulted in
less proceeds than prior estimates. Receivable write-offs in 1995 were caused
when the Company liquidated its assets rather than selling its inventory as part
of a continuing business, therefore making it more difficult to collect the
outstanding receivables. In addition, $331,000 in operating expenses were
incurred during 1995. The Company sold or otherwise liquidated substantially all
of Eastern's assets during 1995. It plans to sell its remaining fixed assets
during the first six months of 1996, and to recover its current assets during
1996. The segment's current assets, consisting principally of trade receivables,
are stated at estimated net realizable value based upon a review of
collectibility. The carrying amount of property and equipment was determined
based on discussions with prospective buyers.
The consolidated statements of operations have been restated for all years
presented to report the results of discontinued operations for Eastern
separately from continuing operations and where applicable, related notes to the
consolidated financial statements exclude the amounts for discontinued
operations.
Assets and liabilities of Eastern included in the consolidated balance
sheet at December 31, 1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ------
<S> <C> <C>
Current assets....................................................... $250 $3,284
Current liabilities.................................................. 120 1,247
Property and equipment............................................... 100 1,155
</TABLE>
16. COMMON STOCK, STOCK OPTIONS, WARRANTS AND OTHER SHARES RESERVED
(a) On September 20, 1995, the Company's stockholders and Board of
Directors approved the proposal to amend the Company's Restated Certificate of
Incorporation to effect a one-for-four reverse stock split of its common stock.
The reverse stock split was effective on October 6, 1995 (the "Effective Date").
As of September 20, 1995, there were 27,115,240 shares of common stock
outstanding and after the Effective Date there were approximately 6,778,810
shares of common stock outstanding.
On the Effective Date, the shares of common stock held by stockholders of
record were converted into the amount of whole shares of new common stock equal
to the number of their shares divided by four, with any fractional shares
rounded up to the next whole share.
The balance sheets at December 31, 1995 and 1994 and as well as the
earnings (loss) per share for the years ended December 31, 1995, 1994 and 1993
have been restated to reflect the reverse split as if it had occurred on January
1, 1993.
F-26
<PAGE> 132
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMON STOCK, STOCK OPTIONS, WARRANTS AND OTHER SHARES
RESERVED -- (CONTINUED)
(b) Under the Company's non-qualified stock option plan, employees and
certain other parties may be granted options to purchase shares of common stock.
The options may be granted at a price not less than 85% of the fair market value
of the common stock on the date of grant and are exercisable over periods not
exceeding ten years from the date of grant. Shares of common stock are also
reserved for issuance pursuant to other agreements, as described below. Changes
in options and warrants outstanding during 1993, 1994, and 1995, options and
warrants exercisable and shares reserved for issuance at December 31, 1993,
1994, and 1995 are as follows:
<TABLE>
<CAPTION>
COMMON STOCK CLASS B CAPITAL STOCK
---------------------------- -----------------------
NUMBER
OPTIONS AND WARRANTS PRICE RANGE NUMBER PRICE RANGE OF
OUTSTANDING PER SHARE OF SHARES PER SHARE SHARES
------------------------------------- --------------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1992.................... $ 9.00 -24.00 1,145,401 $9.00 387,500
Granted.............................. 11.50 -16.50 4,500
Exercised............................ 9.00 -20.60 (43,782)
Terminated........................... 9.00 -22.50 (11,760)
--------- -------
December 31, 1993.................... 9.00 -24.00 1,094,359 9.00 387,500
--------- -------
Granted..............................
Exercised............................ 9.00 (10,774)
Terminated........................... 9.00 -18.00 (6,570)
--------- -------
December 31, 1994.................... 9.00 -24.00 1,077,015 9.00 387,500
--------- -------
Granted.............................. 8.375 - 8.50 451,239 8.50 125,000
Exercised............................
Terminated........................... 9.00 -20.50 (651,182)
--------- -------
DECEMBER 31, 1995.................... 8.375 -24.00 877,072 8.50 -9.00 512,500
--------- -------
Options and warrants exercisable
December 31, 1993.................... 9.00 -24.00 1,079,420 9.00 387,500
December 31, 1994.................... 9.00 -24.00 1,072,228 9.00 387,500
DECEMBER 31, 1995.................... 8.375 -24.00 770,685 8.50 -9.00 512,500
Shares reserved for issuance
December 31, 1993.................... 2,846,865 387,500
======== =======
December 31, 1994.................... 3,339,368 387,500
======== =======
DECEMBER 31, 1995.................... 2,106,665 512,500
======== =======
</TABLE>
At December 31, 1995, 1994, and 1993, options outstanding included 629,334,
504,334 and 504,334 shares for two officers who are principal shareholders of
the Company.
Class B Capital stock aggregating 512,500, 387,500 and 387,500 shares at
December 31, 1995, 1994, and 1993 were reserved for issuance to these same two
officers.
The holders of common stock are entitled to one vote per share and the
holders of Class B capital stock are entitled to ten votes per share on all
matters without distinction between classes, except when approval of a majority
of each class is required by statute. The Class B capital stock is convertible
at any time, at the option of the holders of such stock, into shares of common
stock on a share-for-share basis. Common shares reserved for issuance at
December 31, 1995, 1994, and 1993 include 512,500, 387,500 and 387,500 shares,
respectively in connection with Class B shares.
F-27
<PAGE> 133
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMON STOCK, STOCK OPTIONS, WARRANTS AND OTHER SHARES
RESERVED -- (CONTINUED)
At December 31, 1995, 1994, and 1993, shares reserved for issuance were
primarily related to shares reserved for options, warrants and the conversion of
long-term debt.
17. BUSINESS SEGMENTS
The operations of the Company consist of the following business segments:
Physical Science Group -- products and services for the power
industry, as well as for governmental agencies and industry in general;
Distribution Group -- wholesale distribution of home decorating, hardware
and finishing products; Optical Plastics Group -- the manufacture and
distribution of coated and molded plastic products; Health Care
Group -- interferon research and production.
As a result of the Exchange Offer, (See Note 11(c)), ISI is currently
accounted for on the equity basis. Therefore, its operating activities are
reflected in the Health Care Group only through the completion of the Exchange
Offer in 1993 (See Note 4).
The following tables set forth the revenues and operating results
attributable to each line of business and include a reconciliation of the
groups' revenues to consolidated revenues and operating results to consolidated
income (loss) from operations before income taxes, discontinued operation and
extraordinary item for the periods presented (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Physical Science...................................... $111,804 $119,341 $103,152
Distribution.......................................... 66,229 76,746 74,974
Optical Plastics...................................... 11,103 9,426 7,952
Health Care........................................... 1,533
Other................................................. 1,579 2,649 989
-------- -------- --------
190,715 208,162 188,600
Investment and other income (expense), net............ (4,201) (5,196) 625
-------- -------- --------
Total revenues.............................. $186,154 $202,966 $189,225
-------- -------- --------
OPERATING RESULTS
Physical Science...................................... $ 5,883 $ 5,053 $ 500
Distribution.......................................... 1,374 1,484 1,948
Optical Plastics...................................... 2,661 2,227 1,378
Health Care........................................... (4,431)
Other (principally American Drug Company)............. (1,575) (1,854) (587)
-------- -------- --------
Total operating profit (loss)............... 8,343 6,910 (1,192)
Interest expense...................................... (5,019) (6,458) (8,199)
Indirect administrative expenses (at the holding
company level), net of gains or losses from
dispositions of investments, minority interests,
foreign currency exchange gains or losses, and other
revenue............................................. 2,495 (11,100) 1,967
-------- -------- --------
Income (loss) from operations before income taxes,
discontinued operation and extraordinary item....... $ 5,819 $(10,648) $ (7,424)
======== ======== ========
</TABLE>
F-28
<PAGE> 134
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. BUSINESS SEGMENTS -- (CONTINUED)
Operating profits represent gross revenues less operating expenses. In
computing operating profits, none of the following items have been added or
deducted; general corporate expenses at the holding company level, foreign
currency transaction gains and losses, investment income and interest expense.
General corporate expenses at the holding company level, which are primarily
salaries, occupancy costs, professional fees and costs associated with being a
publicly traded company, totaled approximately $6,173,000, $6,177,000 and
$6,595,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
For the years ended December 31, 1995, 1994 and 1993, sales to the United
States government and its agencies represented approximately 31%, 23% and 17%,
respectively, of sales.
Additional information relating to the Company's business segments is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Physical Science...................................... $ 82,022 $104,572 $ 74,551
Distribution.......................................... 44,400 42,879 34,255
Optical Plastics...................................... 12,267 11,552 7,129
Corporate and other................................... 12,681 12,104 44,121
Assets relating to discontinued operation............. 350 4,439 6,001
-------- -------- --------
$151,720 $175,546 $166,057
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
ADDITIONS TO PROPERTY, PLANT, AND EQUIPMENT, NET
Physical Science...................................... $ 1,555 $ 2,599 $ 1,360
Distribution.......................................... 352 1,336 557
Optical Plastics...................................... 565 189 41
Corporate and other................................... 39 62 89
Discontinued operation, net........................... (505) (180) 30
-------- -------- --------
$ 2,006 $ 4,006 $ 2,077
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION
Physical Science...................................... $ 1,785 $ 3,523 $ 2,193
Distribution.......................................... 1,069 1,000 710
Optical Plastics...................................... 788 839 876
Health Care........................................... 552
Corporate and other................................... 674 503 800
Discontinued operation................................ 198 165
-------- -------- --------
$ 4,316 $ 6,063 $ 5,296
======== ======== ========
</TABLE>
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.
F-29
<PAGE> 135
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, short-term
investments, accounts receivable, accounts payable and short-term borrowings
approximate estimated market values because of short maturities and interest
rates that approximate current rates.
The carrying values of investments, other than those accounted for on the
equity basis, approximate fair values based upon quoted market prices. The
investments for which there is no quoted market price are not significant.
The estimated fair value for the Company's major long-term debt components
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------- -------------------
<S> <C> <C> <C> <C>
8% Swiss Bonds due 2000..................... $ 2,365 $ 1,987 $ $
Swiss Bonds................................. 1,383 1,176 10,765 9,537
5% Convertible Bonds........................ 2,249 2,092 2,129 1,980
7% Dual Currency Convertible Bonds.......... 615 553 2,391 1,769
12% Subordinated Debentures................. 6,749 4,859 6,783 3,052
Other long-term debt........................ 10,571 10,571 9,145 9,145
</TABLE>
Limitations. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve uncertainties
and matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
19. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
As of January 1, 1994 the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115). The Company's marketable securities consist of
corporate equity securities which are included in both Marketable securities,
which are expected to be sold within one year, and Investments and advances on
the consolidated balance sheet Under SFAS No. 115, the Company classifies these
equity securities as either trading or available-for-sale and records the
securities at their fair value. Trading securities are held principally for the
purpose of selling them in the near term. Unrealized holding gains and losses on
trading securities are included in earnings. Unrealized holding gains and losses
on available-for-sale securities are excluded from earnings and are reported as
a separate component of stockholders' equity until realized.
A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security. In 1995, the Company
recognized a permanent impairment in one of its available-for-sale securities as
a result of receipt of a tender offer at a price below the Company's carrying
cost, and recorded a loss of $785,000 to adjust the carrying amount to the
tender offer price, which loss is included in Investment and other income
(expense), net.
Realized gains and losses for securities classified as available-for-sale
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
Marketable securities at December 31, 1995 consists of 250,000 shares of
Duratek common stock, which were transferred from long-term investments
available-for-sale to trading securities during 1995 resulting in the
recognition of a $3,183,000 gain on the transfer, representing the excess of the
quoted market value of such
F-30
<PAGE> 136
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES -- (CONTINUED)
shares on the date of transfer over the Company's carrying amount. At December
31, 1995, the Company was permitted to sell approximately 295,000 shares of
Common Stock of Duratek pursuant to Rule 144 of the Securities Act of 1933. At
December 31, 1995, the Company had determined to sell promptly 250,000 shares of
its Duratek Common Stock in 1996 pursuant to Rule 144, and therefore, classified
such securities in the trading category.
The gross unrealized holding losses and fair value for available-for-sale
securities were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS
UNREALIZED
COST HOLDING LOSSES FAIR VALUE
------ -------------- ----------
<S> <C> <C> <C>
AVAILABLE-FOR-SALE:
Equity Securities
DECEMBER 31, 1995.................................... $2,210 $ (1,440) $ 770
December 31, 1994.................................... 9,186 (1,783) 7,403
</TABLE>
The gains and losses realized on available-for-sale securities sold were as
follows (in thousands):
<TABLE>
<CAPTION>
SALES REALIZED
COST PROCEEDS GAIN (LOSS)
------ -------- -----------
<S> <C> <C> <C>
December 31, 1994:
Realized loss....................................... $1,850 $1,514 $(336)
Realized gain....................................... 461 1,260 799
------ -------- -----------
Net realized gain................................... $2,311 $2,774 $ 463
====== ====== ========
</TABLE>
The Company did not realize any gains or losses on available-for-sale
securities for the year ended December 31, 1995.
20. RECENT ACCOUNTING DEVELOPMENTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Statement 121 requires the
Company to estimate the future cash flows expected to result from the use and
eventual disposition of its property, plant and equipment and other long lived
assets, and if the sum of such cash flows is less than the carrying amount of
these assets, to recognize an impairment loss to the extent, if any, that the
carrying amount of the assets exceeds their fair values. The Company believes
that expected future cash flows derived from these assets will be at least equal
to their carrying values, and that no impairment loss will be indicated.
In December 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for
years beginning after December 15, 1995. Under SFAS 123, the Company may elect
either a "fair value" based method or the current "intrinsic value" based method
of accounting prescribed by APB No. 25, "Accounting for Stock Issued to
Employees," for its stock-based compensation arrangements. Under the "intrinsic
value" based method, the Company will be required to disclose in the footnotes
to the consolidated financial statements net income and earnings per share
computed under the "fair value" based method. The Company has elected to
continue accounting for stock-based compensation arrangements using the
"intrinsic value" based method; therefore, the adoption of SFAS 123 will not
impact the Company's results of operations or financial condition.
F-31
<PAGE> 137
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. COMMITMENTS AND CONTINGENCIES
(a) The Company has several noncancellable leases which cover real
property, machinery and equipment and certain manufacturing facilities. Such
leases expire at various dates with, in some cases, options to extend their
terms.
Minimum rentals under long-term operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
REAL MACHINERY &
PROPERTY EQUIPMENT TOTAL
-------- ----------- -------
<S> <C> <C> <C>
1996.................................................. $ 3,941 $ 1,026 $ 4,967
1997.................................................. 3,451 877 4,328
1998.................................................. 2,746 852 3,598
1999.................................................. 2,267 851 3,118
2000.................................................. 2,217 237 2,454
After 2000............................................ 2,981 49 3,030
-------- ----------- -------
Total....................................... $ 17,603 $ 3,892 $21,495
======= ========= =======
</TABLE>
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
$5,598,000, $8,115,000 and $7,792,000 for 1995, 1994 and 1993, respectively.
(b) In February 1986, Duratek completed its initial public offering of
common stock. In connection with Duratek's public offering, the Company issued
to certain officers of Duratek and the Company 358,609 options for the purchase
of Duratek common stock owned by the Company at a price equal to the greater of
(a) $1.75 per share or (b) the net book value per share of Duratek's common
stock as of the end of the most recently completed fiscal quarter which ends not
less than 60 days before the date of exercise of such option. In 1991, an
additional 270,000 options for the purchase of Duratek common stock owned by the
Company at a price of $1.90 per share were issued to certain employees and
officers of the Company. Through December 31, 1995, 44,600 options under the
plan were exercised, 57,500 were cancelled, and at December 31, 1995, 465,750
options are currently exercisable. At December 31, 1995, the Company owned
approximately 31% of Duratek (See Note 3).
(c) The Company is party to several lawsuits and claims incidental to its
business, including claims regarding environmental matters, one of which is in
the early stages of investigation. It is not possible at the present time to
estimate the ultimate legal and financial liability, if any, of the Company in
respect to such litigation and claims; however, management believes that the
ultimate liability, if any, will not have a material adverse effect on the
Company's consolidated financial statements.
F-32
<PAGE> 138
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
SEPTEMBER 30, ------------
1996 (A)
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 23,371 $ 8,094
Marketable securities............................................... 3,280 3,563
Accounts and other receivables, of which $15,354 and $13,013 is from
government contracts.............................................. 45,243 39,466
Inventories......................................................... 20,871 20,444
Costs and estimated earnings in excess of billings on uncompleted
contracts, of which $645 and $1,473 relates to government
contracts......................................................... 10,125 9,118
Prepaid expenses and other current assets........................... 3,540 3,640
------------- ------------
Total current assets...................................... 106,430 84,325
------------- ------------
Investments and advances............................................ 23,392 21,452
------------- ------------
Property, plant and equipment, at cost.............................. 35,740 33,367
Less accumulated depreciation....................................... (26,521) (24,374)
------------- ------------
9,219 8,993
------------- ------------
Intangible assets, net of amortization.............................. 33,987 33,053
------------- ------------
Other assets........................................................ 3,682 3,897
------------- ------------
$176,710 $151,720
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................................ $ 8,910 $ 4,167
Short-term borrowings............................................... 21,540 18,043
Accounts payable and accrued expenses............................... 24,825 20,865
Billings in excess of costs and estimated earnings on uncompleted
contracts......................................................... 8,395 8,301
------------- ------------
Total current liabilities................................. 63,670 51,376
------------- ------------
Long-term debt less current maturities.............................. 11,853 19,765
------------- ------------
Minority interests and other........................................ 9,903 9,581
------------- ------------
STOCKHOLDERS' EQUITY:
Common stock........................................................ 73 68
Class B capital stock............................................... 1 1
Capital in excess of par value...................................... 130,080 125,419
Deficit............................................................. (40,501) (52,139)
Net unrealized gain (loss) on available-for-sale securities......... 2,542 (1,440)
Minimum pension liability adjustment................................ (911) (911)
------------- ------------
Total stockholders' equity................................ 91,284 70,998
------------- ------------
$176,710 $151,720
========== ==========
</TABLE>
- ---------------
(a) The Consolidated Condensed Balance Sheet as of December 31, 1995 has been
summarized from the Company's audited Consolidated Balance sheet as of that
date.
See accompanying notes to the consolidated condensed financial statements.
F-33
<PAGE> 139
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues
Sales.............................................................. $152,536 $142,519
Investment and other income, net................................... 2,658 924
-------- --------
155,194 143,443
-------- --------
Costs and expenses
Costs of goods sold................................................ 129,623 119,310
Selling, general & administrative.................................. 22,269 23,968
Interest........................................................... 3,142 3,636
-------- --------
155,034 146,914
-------- --------
Minority interests...................................................... (1,094) (818)
Loss on investments..................................................... (4,000)
Unrealized gain on transfer from long-term investment to trading
securities............................................................ 1,842
Gain on issuance of stock by affiliates................................. 1,938 5,912
Gain on disposition of stock of a subsidiary and affiliate.............. 12,200 2,567
-------- --------
Income before income taxes, discontinued operation and extraordinary
item.................................................................. 11,046 4,190
Income tax benefit (expense)............................................ 592 (1,073)
-------- --------
Income before discontinued operation and extraordinary item............. 11,638 3,117
Discontinued operation.................................................. (2,154)
-------- --------
Income before extraordinary item........................................ 11,638 963
Extraordinary item
Extinguishment of debt, net of income tax.......................... (79)
-------- --------
Net income.............................................................. $ 11,638 $ 884
======== ========
Income per share:
Income before discontinued operation and extraordinary item........ $ 1.58 $ .47
Discontinued operation............................................. (.33)
Extraordinary item................................................. (.01)
-------- --------
Income per share................................................... $ 1.58 $ .13
======== ========
Dividends per share..................................................... none none
======== ========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
F-34
<PAGE> 140
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income................................................................ $11,638 $ 884
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Provision for discontinued operation................................. 2,075
Depreciation and amortization........................................ 3,919 3,640
Loss from extinguishment of debt..................................... 79
Gain on disposition of stock of an affiliate......................... (12,200) (2,567)
Gain on issuance of stock by affiliates.............................. (1,938) (5,912)
Loss on investments.................................................. 4,000
Reduction in valuation allowance for deferred tax asset.............. (2,386)
Unrealized gain on transfer from long-term investments to trading
securities.......................................................... (1,842)
Change in other operating items........................................... (3,685) 3,792
------- -------
Net cash (used for) provided by operations................................ (2,494) 1,991
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of stock of a subsidiary............................... 17,700 5,000
Additions to property, plant & equipment.................................. (2,373) (1,701)
Additions to intangible assets............................................ (2,706) (988)
Reduction of investments and other assets, net............................ 1,238 139
------- -------
Net cash provided by investing activities................................. 13,859 2,450
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................................... 5,247 7,160
Repayments of short-term borrowings....................................... (1,750) (11,020)
Proceeds from issuance of long-term debt.................................. 1,400 4,910
Reduction of long-term debt............................................... (3,545) (8,728)
Exercise of common stock options and warrants............................. 7
Proceeds from issuance of common stock.................................... 2,553
------- -------
Net cash provided by (used for) financing activities................. 3,912 (7,678)
------- -------
Net increase (decrease) in cash and cash equivalents................. 15,277 (3,237)
Cash and cash equivalents at the beginning of the periods............ 8,094 10,075
------- -------
Cash and cash equivalents at the end of the periods.................. $23,371 $ 6,838
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest............................................................. $ 3,449 $ 3,939
======= =======
Income taxes......................................................... $ 836 $ 421
======= =======
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
F-35
<PAGE> 141
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. INVENTORIES
Inventories are valued at the lower of cost or market, principally using
the first-in, first-out (FIFO) method. Inventories consisting of material,
labor, and overhead are classified as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER
SEPTEMBER 30, 31,
1996 1995
------------- -----------
<S> <C> <C>
Raw materials............................................... $ 780 $ 580
Work in process............................................. 230 219
Finished goods.............................................. 19,861 19,645
------------- -----------
$20,871 $20,444
========== =========
</TABLE>
2. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
8% Swiss bonds due 1995..................................... $ $ 247
8% Swiss bonds due 2000..................................... 2,301 2,365
Swiss convertible bonds..................................... 1,751
5% Convertible bonds due 1999............................... 1,740 2,249
12% Subordinated debentures due to 1997..................... 6,732 6,749
Term loans with banks....................................... 7,470 8,713
Other....................................................... 2,520 1,858
------------- ------------
20,763 23,932
Less current maturities..................................... 8,910 4,167
------------- ------------
$11,853 $ 19,765
========== ==========
</TABLE>
3. GENERAL PHYSICS CORPORATION
In September 1996, National Patent and General Physics Corporation reached
an agreement pursuant to which the Company would acquire the remaining 5,039,732
shares (48% of the outstanding shares) of General Physics that it does not
already own. The agreement was recommended to the Board of Directors of General
Physics by a Special Committee of the Board composed of independent directors.
Based on an agreed upon price of National Patent's Common Stock on September 18,
1996 ($9.625), National Patent would issue .53 shares of its common stock, par
value $.01 per share, for each outstanding share of General Physics Common Stock
not owned by National Patent. The exchange ratio, which is subject to certain
adjustments, would provide approximately $5.10 in value for each outstanding
share of General Physics. The proposed transaction is subject, among other
things, to the execution of a definitive merger agreement, the approval by
stockholders of each of National Patent and General Physics, receipt of a
fairness opinion from the investment banker retained by the Special Committee,
and registration under the Securities Act of 1933 of the shares of National
Patent's Common Stock to be issued in the proposed transaction.
On September 27, 1996, General Physics, all of the directors of General
Physics and National Patent were named as defendants in a complaint filed in the
Court of Chancery of the State of Delaware in and for
F-36
<PAGE> 142
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. GENERAL PHYSICS CORPORATION -- (CONTINUED)
New Castle County, styled Dunlop v. Pollak, et all., Civil Action No. 15237-NC.
The complaint was brought by an alleged stockholder of General Physics,
individually and purportedly as a class action on behalf of all other
stockholders of General Physics. The complaint alleges purported breaches of
fiduciary duty by the directors of General Physics, including certain directors
who are also directors of National Patent, and purported breaches of fiduciary
duty by National Patent, as an alleged majority and controlling shareholder,
arising primarily from the Merger. The complaint alleges, among other things,
that the Merger has been timed to allow National Patent to take advantage of the
current trading price of General Physics Common Stock, which plaintiff alleges
is depressed. The complaint seeks, among other things, injunctive relief
prohibiting the Merger or, if the Merger is consummated, an order rescinding the
Merger or granting plaintiff and the other members of the purported class
damages. Plaintiff has granted the defendants extensions of the time in which to
answer the complaint and to respond to plaintiff's pending request to review
documents relating to the Merger. The defendants believe that the claims set
forth in the complaint are without merit, and intend vigorously to defend the
litigation.
4. SHORT-TERM BORROWINGS
On September 30, 1996, the Five Star Group, Inc. (Five Star) and MXL
Industries, Inc. (MXL) entered into an extension of, as well as various
amendments to the Five Star Loan Agreement and MXL Loan Agreement. The amended
agreements expire on September 30, 1997. Under the terms of the amendments,
several Five Star covenants, including provisions regarding working capital,
tangible net worth, capital expenditures and cash flow ratios were revised.
F-37
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
GSE Systems, Inc.
We have audited the consolidated balance sheets of GSE Systems, Inc. and
Subsidiaries (the Company) as of December 31, 1994 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the period April 14, 1994 (date of inception) to December 31,
1994 and for the year ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 GSE Systems,
Inc. and Subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for the period April 14, 1994 (date of
inception) to December 31, 1994 and for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
March 1, 1996
F-38
<PAGE> 144
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 4,352 $ 9,016
Contract receivables........................................... 20,261 26,912
Inventories.................................................... 1,837 2,293
Prepaid expenses and other current assets...................... 1,548 2,877
Deferred income taxes.......................................... 902 409
------------ ------------
Total current assets...................................... 28,900 41,507
Property and equipment, net......................................... 3,741 3,468
Software development costs, net..................................... 728 1,921
Goodwill and other intangible assets, net........................... 5,098 2,348
Due from stockholder................................................ 2,400 --
Deferred income taxes............................................... 285 1,856
Other assets........................................................ 160 260
------------ ------------
Total assets.............................................. $ 41,312 $ 51,360
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................... $ 3,327 $ 5,830
Accrued expenses............................................... 4,703 3,984
Notes payable, current portion................................. 7,071 75
Billings in excess of revenue earned........................... 6,353 10,239
Accrued contract reserves...................................... 1,938 641
Accrued warranty reserves...................................... 2,855 2,119
Other current liabilities...................................... 586 1,061
Income taxes payable........................................... 409 1,012
------------ ------------
Total current liabilities................................. 27,242 24,961
Notes payable, less current portion................................. 5,728 171
Billings in excess of revenues earned............................... 5,792 2,485
Accrued contract and warranty reserves.............................. 1,893 1,495
Accrued facility costs.............................................. 1,451 1,103
Other liabilities................................................... 919 529
------------ ------------
Total liabilities......................................... 43,025 30,744
------------ ------------
Commitments and contingencies:
Redeemable preferred stock; 4,000 shares authorized, 2,400 and none
issued and outstanding; stated and liquidation value of $1,000 per
share............................................................. 2,400 --
------------ ------------
Stockholders' equity (deficit):
Common stock; $.01 par value, 8,000,000 shares authorized,
2,500,000 and 4,225,000 shares issued and outstanding........ 25 42
Additional paid-in capital..................................... -- 21,121
Retained earnings (deficit) -- at formation.................... (5,048) (5,112)
Retained earnings -- since formation........................... 923 4,413
Pension liability adjustment................................... (73) (102)
Cumulative translation adjustment.............................. 60 254
------------ ------------
Total stockholders' equity (deficit)...................... (4,113) 20,616
------------ ------------
Total liabilities & stockholders' equity (deficit)........ $ 41,312 $ 51,360
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 145
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- ------------
<S> <C> <C>
Contract revenue................................................... $ 33,637 $ 85,302
Cost of revenue.................................................... 25,538 57,376
-------------- ------------
Gross profit............................................. 8,099 27,926
-------------- ------------
Operating expenses:
Selling, general and administrative........................... 5,311 19,745
Depreciation and amortization................................. 1,000 2,173
-------------- ------------
Total operating expenses................................. 6,311 21,918
-------------- ------------
Operating income......................................... 1,788 6,008
Interest expense................................................... 402 983
Other income....................................................... (192) (364)
-------------- ------------
Income before income taxes............................... 1,578 5,389
Provision for income taxes......................................... 579 1,899
-------------- ------------
Net income............................................... 999 3,490
Preferred dividends................................................ 76 --
-------------- ------------
Net income available to common shares.................... $ 923 $ 3,490
========== ==========
Earnings per common share.......................................... $ .37 $ 1.08
========== ==========
Weighted average common shares outstanding......................... 2,500 3,218
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 146
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD APRIL 14, 1994 THROUGH DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED EARNINGS
(DEFICIT)
COMMON STOCK ADDITIONAL ---------------------- PENSION FOREIGN
---------------- PAID-IN AT SINCE LIABILITY CURRENCY
SHARES AMOUNT CAPITAL FORMATION FORMATION ADJUSTMENT TRANSLATION TOTAL
------ ------ ---------- --------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 14, 1994....... -- $-- $ -- $ 1,676 $ -- $-- $-- $ 1,676
Issuance of common stock...... 100 1 -- -- -- -- -- 1
Stock dividends............... 2,400 24 -- (24) -- -- -- --
Issuance of preferred stock... -- -- -- (4,000) -- -- -- (4,000)
Distribution to shareholder... -- -- -- (1,000) -- -- -- (1,000)
Notes payable to
shareholder................. -- -- -- (1,700) -- -- -- (1,700)
Preferred dividend............ -- -- -- -- (76) -- -- (76)
Foreign currency
translation................. -- -- -- -- -- -- 60 60
Pension liability
adjustment.................. -- -- -- -- -- (73) -- (73)
Net income.................... -- -- -- -- 999 -- -- 999
------ ------ ---------- --------- --------- ---------- ----- -------
Balance, December 31, 1994
............................ 2,500 25 -- (5,048) 923 (73) 60 (4,113)
Issuance of common stock...... 1,725 17 21,121 -- -- -- -- 21,138
Distribution to shareholder... -- -- -- (64) -- -- -- (64)
Foreign currency
translation................. -- -- -- -- -- -- 194 194
Pension liability
adjustment.................. -- -- -- -- -- (29) -- (29)
Net income.................... -- -- -- -- 3,490 -- -- 3,490
------ ------ ---------- --------- --------- ---------- ----- -------
Balance, December 31, 1995.... 4,225 $ 42 $ 21,121 $(5,112) $ 4,413 $ (102) $ 254 $20,616
====== ======= ========= ========= ========= ========== ========== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
<PAGE> 147
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 999 $ 3,490
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................. 1,351 2,645
Provisions for doubtful contract receivables and inventory
reserve...................................................... 72 83
Deferred income taxes......................................... 152 582
Changes in assets and liabilities, net of effects of
acquisitions:
Contract receivables..................................... 8,150 (5,955)
Inventories.............................................. 19 271
Prepaid expenses and other current assets................ (220) (1,205)
Other assets............................................. (7) (150)
Accounts payable and accrued expenses.................... (317) 2,145
Billings in excess of revenue earned..................... (4,686) 383
Accrued contract and warranty reserves................... (2,116) (2,605)
Other current liabilities................................ 586 (157)
Income taxes payable..................................... 287 603
Accrued facility costs................................... (278) (348)
Other liabilities........................................ 26 (1)
-------------- ------------
Net cash provided by (used in) operating activities................ 4,018 (219)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of Process Solutions..................... (2,000) --
Capital expenditures.......................................... (468) (1,041)
Capitalization of software development costs.................. -- (1,664)
-------------- ------------
Net cash used in investing activities.............................. (2,468) (2,705)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayment) under lines of credit with bank........ 1,517 (4,236)
Borrowings from (repayment to) Vattenfall..................... 478 (1,411)
Principal payments under capital lease obligations............ (49) (69)
Principal payments under term note............................ (1,042) (7,882)
Payment to shareholder at formation........................... (1,000) (64)
Payment on shareholder notes.................................. (767) --
Net proceeds from sale of common stock........................ 1 21,138
Redemption of preferred stock................................. (1,600) (2,400)
Preferred dividends........................................... (76) --
Repayment of amounts due from stockholder..................... 3,000 2,400
-------------- ------------
Net cash provided by financing activities.......................... 462 7,476
-------------- ------------
Effect of exchange rates on cash................................... 70 112
-------------- ------------
Net increase in cash and cash equivalents.......................... 2,082 4,664
Cash and cash equivalents at beginning of period................... 2,270 4,352
-------------- ------------
Cash and cash equivalents at end of period......................... $ 4,352 $ 9,016
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 148
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
GSE Systems, Inc. (the "Company") designs, develops and delivers business
and technology solutions by applying process control, data acquisition,
simulation, and business software, systems and services to the energy, process
and manufacturing industries worldwide. The Company was formed on April 13, 1994
through the consolidation of operations of Simulation, Systems & Services
Technologies Company ("S3 Technologies"), GP International Engineering &
Simulation, Inc. ("GPI") and EuroSim AB ("EuroSim") (collectively, the
"Predecessors"). In December 1994, the Company expanded into the process control
and data acquisition business through the acquisition of the net assets of the
process control systems division of Texas Instruments Incorporated ("TI"), which
now does business as GSE Process Solutions, Inc. ("Process Solutions").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Formation of the Company
The Company was formed through the contribution of the businesses of S3
Technologies (and its immediate parent), GPI and EuroSim by their parent
organizations, ManTech International Corporation ("ManTech") and certain of its
employees and related parties, National Patent Development Corporation ("NPDC")
and NPDC's affiliates, SGLG, Inc. (formerly named GPS Technologies, Inc. and
hereinafter called "GPS") and General Physics Corporation ("GPC"), and
Vattenfall Engineering AB ("Vattenfall"). In exchange, the contributors received
shares of Common Stock of the Company. In addition, ManTech received shares of
preferred stock of the Company and Vattenfall received cash and notes. In light
of the equality of interests of the Company's principal stockholders, there was
no identifiable acquirer in the consolidation. Thus, the assets and liabilities
of each of the businesses contributed were recorded at historical cost. (See
Note 14).
Principles of consolidation
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiaries: S3 Technologies,
GPI, EuroSim, and Process Solutions' domestic and international operations
(since the dates of their acquisition). All intercompany balances and
transactions have been eliminated.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and short-term highly
liquid investments with original maturities of less than three months at the
date of purchase. The Company had restricted cash of approximately $129,000 at
December 31, 1994 relating to cash held in escrow to collateralize bid bonds
issued for prospective new contracts.
F-43
<PAGE> 149
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14 THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
---------------- ------------
<S> <C> <C>
Cash paid for:
Interest..................................... $381 $880
============ ==========
Income taxes................................. $ 11 $767
============ ==========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
As discussed in Note 3, the Company acquired Process Solutions'
domestic operations in December 1994 and international operations in the
second quarter of 1995. In conjunction with these acquisitions, the
purchase price consisted of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14 THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
---------------- ------------
<S> <C> <C>
Cash paid......................................... $2,000 $ --
Short-term notes payable issued................... 2,000 --
Long-term notes payable issued.................... 4,839 1,043
------- ------------
Total fair value of acquisitions........ $8,839 $1,043
============ ==========
</TABLE>
Inventories
Inventories are stated at the lower of cost, as determined by the average
cost method, or market. Obsolete or unsaleable inventory is reflected at its
estimated net realizable value. Inventory costs include raw materials and
purchased parts.
A summary of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------ ------
<S> <C> <C>
Raw materials............................................... $ 992 $1,524
Service parts............................................... 845 769
------ ------
Total............................................. $1,837 $2,293
====== ======
</TABLE>
Property and equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method with estimated useful lives ranging from three to ten
years. Leasehold improvements are amortized over the life of the lease or the
estimated useful life, whichever is shorter, using the straight-line method.
Upon sale or retirement, the cost and related amortization is eliminated from
the respective accounts and any resulting gain or loss is included in income.
Maintenance and repairs are charged to expense as incurred.
F-44
<PAGE> 150
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Software development costs
In compliance with Statement of Financial Accounting Standards ("SFAS") No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, certain computer software development costs are capitalized
in the accompanying consolidated balance sheets. Capitalization of computer
software development costs begins upon the establishment of technological
feasibility. Capitalization ceases and amortization of capitalized costs begins
when the software product is commercially available for general release to
customers. Amortization of capitalized computer software development costs is
included in cost of revenues and is provided at the greater of the amount
computed using (a) the ratio of current gross revenues for a product to the
total of current and anticipated future gross revenues or (b) the straight-line
method over the remaining estimated economic life of the product, not to exceed
five years.
Research and development
Development expenditures incurred to meet customer specifications under
contracts accounted for under the percentage of completion method are charged to
contract costs. Company sponsored research and development expenditures are
charged to operations as incurred and are included in selling, general and
administrative expenses. The amount incurred for Company sponsored research and
development activities relating to the development of new products and services
or the improvement of existing products and services, exclusive of amounts
capitalized, was approximately $963,000 for the period April 14, 1994 to
December 31, 1994 and $2,945,000 during 1995.
Goodwill and other intangible assets
Intangible assets consist of amounts relating to goodwill, backlog and
proposal values, all arising from acquisitions. Backlog and proposal values are
estimated by management and represent the fair value of the profit to be earned
on uncompleted contracts and on future contracts for which bids have been
submitted. Goodwill represents the excess of purchase price over the fair value
of net tangible and intangible assets acquired. These amounts are amortized on a
straight-line basis over periods ranging from three to four years for backlog
and proposal values and ten to fifteen years for goodwill.
At each balance sheet date, management evaluates the recoverability of
intangible assets using certain financial indicators, such as historical and
future ability to generate income from operations. The Company's policy is to
record an impairment loss against the net unamortized cost of the intangible
asset in the period when it is determined that the carrying amount of the asset
may not be recoverable. This determination is based on an evaluation of such
factors as the occurrence of a significant event, a significant change in the
environment in which the business operates, or if the expected future net cash
flows (undiscounted and without interest) would become less than the carrying
amount of the asset.
Foreign currency translation
Balance sheet accounts for foreign operations are translated at the
exchange rate at the balance sheet date, and income statement accounts are
translated at the average exchange rate for the period. The resulting
translation adjustments are included as a separate component of stockholders'
equity. Transaction gains and losses included in income were not significant.
Revenue recognition
Revenue under long-term fixed-price contracts generally is accounted for on
the percentage-of-completion method, based on contract costs incurred to date
and estimated costs to complete. Estimated contract earnings are reviewed and
revised periodically as the work progresses and the cumulative effect of any
F-45
<PAGE> 151
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
change is recognized in the period in which the change is determined. Estimated
losses are charged against earnings in the period such losses are identified.
The remaining liability for contract costs to be incurred in excess of contract
revenue is reflected as accrued contract reserves in the Company's consolidated
balance sheet. Revenue from sales of other products is recorded when the
products are shipped. The Company has no significant vendor obligations or
collectibility risk associated with its product sales.
Warranties
As the Company recognizes revenue under the percentage-of-completion
method, it provides an accrual for estimated future warranty costs based on
historical and projected claims experience.
Income taxes
Deferred income taxes are provided under the asset and liability method.
Under this method, deferred income taxes are determined based on the difference
between the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Income tax expense
consists of the Company's current liability for federal, state and foreign
income taxes and the change in the Company's deferred income tax assets and
liabilities. No provision has been made for the undistributed earnings of the
Company's foreign subsidiaries as they are considered permanently invested.
Earnings per share
Net income per common share is computed based on the weighted average
number of shares of Common Stock outstanding during the period. The difference
between primary and fully-diluted per share amounts is insignificant.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments and contract
receivables. The Company restricts investments of temporary cash to financial
institutions with high credit standing. Credit risk on contract receivables is
mitigated by the nature of the Company's worldwide customer base and its credit
policies. The Company's customers are not concentrated in any specific
geographic region, but are concentrated in the energy and manufacturing
industries. No single customer accounted for a significant (greater than 10%)
amount of the Company's revenue and there were no significant contract
receivables from a single customer. The Company performs a credit evaluation
before extending credit and may require letters of credit, bank guarantees or
advance payments. Thereafter, the Company continues to monitor its contract
receivables exposure after giving effect to letters of credit, bank guarantees,
the status of work performed on contracts, and its customers' financial
condition.
Off balance sheet risk and foreign exchange contracts
The Company enters into forward exchange contracts, options and swaps as a
hedge against certain foreign currency commitments. The Company also enters into
letters of credit and performance guarantees in the ordinary course of business
as required by certain contracts and proposal requirements.
Gains and losses on foreign exchange contracts and swaps are recognized as
part of the cost of the underlying transactions being hedged. Foreign exchange
contracts have an element of risk that the counterparty may not be able to meet
the terms of the agreement. However, the Company minimizes such risk
F-46
<PAGE> 152
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
exposure by limiting counterparties to nationally recognized financial
institutions. Foreign exchange options contracts permit but do not require the
Company to exchange foreign currencies at a future date with counterparties at a
contracted exchange rate. Costs associated with such contracts are amortized
over the life of the contract matching the underlying receipts.
New accounting pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS 121, which is required to be adopted by January 1, 1996, establishes
accounting standards for the impairment of long-lived assets, certain intangible
assets and cost in excess of net assets related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of.
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123, which is required to be adopted by January 1, 1996,
established financial accounting and reporting standards for stock-based
employee compensation plans, and establishes accounting standards for issuance
of equity instruments to acquire goods and services from non-employees.
The Company does not expect that adoption of SFAS 121 and 123 will have a
material effect on its consolidated financial position, consolidated statement
of income, or liquidity.
3. PROCESS SOLUTIONS ACQUISITION
The Company acquired the net assets of the domestic operations of Process
Solutions on December 30, 1994 and the international operations in the second
quarter of 1995. This acquisition has been accounted for under the purchase
method. The financial results of Process Solutions have been included in the
results of operations from the date of acquisition. The purchase price was
allocated to assets and liabilities based on estimated fair values as of the
date of the acquisition. The excess of the purchase price over net tangible and
intangible assets acquired was allocated to goodwill.
The aggregate purchase price for the net assets of Process Solutions was
$9,882,000. The domestic acquisition was financed through a promissory note
payable in the amount $4,839,000 with a five year term (the "TI Five-Year
Note"), a short-term promissory note payable in the amount of $2,000,000 and
cash from operations of the Company in the amount of $2,000,000. On completion
of the acquisition of the international operations, and a final adjustment to
the purchase price for the domestic operations, $1,043,000 was added to the TI
Five-Year Note. The TI Five-Year Note and the short-term promissory note bore an
interest rate of 8%. The TI Five-Year Note was guaranteed by the Company and
certain of its stockholders. The TI Five-Year Note and the short-term promissory
note were fully repaid in 1995.
The Company is also required to make quarterly performance payments to TI
equal to 15% of the revenue it earns between December 30, 1994 and December 30,
1999 attributable to the Real Time Business Controls portion of the acquired
business with a minimum payment of $750,000 and a maximum payment of $4,000,000.
The minimum amount of $750,000 has been accrued and recorded as goodwill, and
all additional payments above $750,000 will be recorded as goodwill if paid. The
book value of assets acquired was $14,952,000 and liabilities assumed was
$6,070,000. The acquisition resulted in a goodwill of $2,427,000, consisting of
a purchase price premium of $1,000,000 over book value, acquisition and
severance costs of $677,000 and the minimum performance payments of $750,000,
that will be amortized over fifteen years.
F-47
<PAGE> 153
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROCESS SOLUTIONS ACQUISITION -- (CONTINUED)
Pro forma information (unaudited)
As discussed above, the Company acquired the domestic operations of Process
Solutions in December 1994 and its international operations in the second
quarter of 1995. Further, as discussed in Note 12, the Company consummated the
initial public offering of its Common Stock, selling 1,725,000 shares of Common
Stock at $14.00 per share in August 1995. Part of the proceeds from the initial
public offering were used to pay down all outstanding indebtedness. Pro forma
supplementary earnings per share showing what the earnings would have been if
the acquisition and payment of debt had taken place at the beginning of each
period are presented below. The appropriate number of shares of Common Stock
whose sale proceeds would have been required to pay down the outstanding
indebtedness during each period presented below are included in the weighted
average number shares outstanding for that period.
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Pro Forma Revenues................................ $91,400 $86,319
Pro Forma Net Income.............................. $ 3,208 $ 3,666
Pro Forma Earnings Per Share...................... $ 0.99 $ 1.16
Weighted Average Number of Shares Outstanding..... 3,243 3,156
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition and the payment of debt have been made at the
beginning of the above periods. In addition, they are not intended to be a
projection of future results.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
-------------------------------- -------------------------------
NOTIONAL/ NOTIONAL/
CARRYING FAIR CONTRACT CARRYING FAIR CONTRACT
AMOUNT VALUE VALUE AMOUNT VALUE VALUE
-------- ------- --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $4,352 $ 4,352 $ -- $9,016 $9,016 $ --
Short-term portion of debt.............. $7,071 $ 7,071 $ -- $ 75 $ 75 $ --
Long-term portion of debt............... $5,728 $ 5,728 $ -- $ 171 $ 171 $ --
Redeemable preferred stock.............. $2,400 $ 2,400 $ -- $ -- $ -- $ --
Foreign currency instruments:
Options............................ $ 349 $ 124 $ 6,096 $ 326 $ 188 $ 5,004
Forward contracts.................. $ -- $(1,308) $10,368 $ 721 $ 870 $12,470
Swaps.............................. $ 473 $ 81 $ 1,835 $ 209 $ 206 $ 1,667
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents
The carrying amounts approximate fair value because of the short-term
maturity of the instruments.
F-48
<PAGE> 154
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Short-term portion of debt
The carrying amounts approximate fair value due to the short-term
maturity of the instruments.
Long-term portion of debt
Fair value estimates were based on market prices for the same or
similar issues or on the current rates offered to the Company for similar
debt of the same maturities.
Redeemable preferred stock
The fair value of the redeemable preferred stock is based on the
stated liquidation value.
Foreign currency instruments
Fair value estimates were based on quotes from financial institutions.
5. CONTRACT RECEIVABLES AND BILLINGS IN EXCESS OF REVENUE EARNED
Contract receivables represent balances due from a broad base of both
domestic and international customers.
Due to the various billing and payment terms, none of these individual
customer balances is significant (more than 10%). All contract receivables are
considered to be collectible within twelve months. The components of contract
receivables are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------- -------
<S> <C> <C>
Billed receivables........................................ $15,133 $16,205
Recoverable costs and accrued profit -- not billed........ 5,661 11,643
Allowance for doubtful accounts........................... (533) (936)
------- -------
Total contract receivables...................... $20,261 $26,912
======= =======
</TABLE>
Recoverable costs and accrued profit -- not billed represent costs incurred
and profit accrued on contracts that will become billable upon future milestones
or completion of contracts.
Revisions in estimated contract costs at completion are reflected in the
period during which facts and circumstances necessitating such a change first
become known. The effect of changes in estimates of contract profits was to
decrease gross profit by $633,000 during the period from April 14, 1994 through
December 31, 1994 and increase gross profit by $1,019,000 during 1995 from that
which would have been reported had the revised estimate been used as the basis
of recognition of contract profits in the preceding periods.
At December 31, 1995, the total estimated contract revenues and costs at
completion for two international contracts include claims revenue, which is
equal to estimated future costs, of $1,200,000. The Company has valid claims far
in excess of the $1,200,000 of costs. To the extent claims received are less
than $1,200,000, the shortfall will reduce the contract earnings in 1996.
F-49
<PAGE> 155
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------- -------
<S> <C> <C>
Computer equipment........................................ $ 2,494 $ 4,052
Leasehold improvements.................................... 1,889 1,473
Furniture and fixtures.................................... 743 769
------- -------
5,126 6,294
Accumulated depreciation and amortization................. (1,385) (2,826)
------- -------
Property and equipment, net.......................... $ 3,741 $ 3,468
======= =======
</TABLE>
Depreciation and amortization expense of property and equipment was
$585,000 and $1,407,000 for the period April 14, 1994 through December 31, 1994
and for 1995, respectively.
7. SOFTWARE DEVELOPMENT COSTS
Software development cost, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------- -------
<S> <C> <C>
Capitalized software development costs.................... $ 2,354 $ 4,018
Accumulated amortization.................................. (1,626) (2,097)
------- -------
Software development costs, net........................... $ 728 $ 1,921
======= =======
</TABLE>
Software development costs capitalized were $0 in 1994 and $1,664,000 in
1995. Amortization of software development costs capitalized was $351,000 and
$471,000 for the period April 14 through December 31, 1994 and year ended
December 31, 1995, respectively, and are included within cost of revenue.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
--------------------------------- ---------------------------------
OTHER OTHER
GOODWILL INTANGIBLES TOTAL GOODWILL INTANGIBLES TOTAL
-------- ----------- ------ -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Cost................................... $3,896 $ 1,990 $5,886 $2,744 $-- $2,744
Accumulated amortization............... (125) (663) (788) (396) -- (396)
-------- ----------- ------ -------- --- ------
Total........................ $3,771 $ 1,327 $5,098 $2,348 $-- $2,348
====== ======== ====== ====== ======== ======
</TABLE>
Amortization expense for goodwill and other intangible assets was $67,000
and $348,000, respectively, for the period from April 14, 1994 through December
31, 1994 and $270,000 and $497,000, respectively for 1995.
As discussed in Note 11, the Company reduced the valuation allowance
(against deferred tax assets) that was set up in connection with the acquisition
of S3 Technologies in August 1993. This resulted in a corresponding reduction of
goodwill by $829,000 and other intangibles by $829,000 arising out of the S3
Technologies acquisition.
F-50
<PAGE> 156
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------ ------
<S> <C> <C>
Accrued vacation, severance and other benefits.............. $2,721 $2,037
Accrued compensation and payroll taxes...................... 1,511 1,806
Due to stockholders and affiliates.......................... 471 141
------ ------
Total............................................. $4,703 $3,984
====== ======
</TABLE>
10. NOTES PAYABLE AND FINANCING ARRANGEMENTS
Notes payable and financing arrangements consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------- ----
<S> <C> <C>
Lines of credit with bank................................... $ 4,236 $--
TI short-term promissory note............................... 2,000 --
TI five-year note........................................... 4,839 --
Vattenfall promissory notes................................. 1,411 --
Capital lease obligations................................... 313 246
------- ----
Total notes payable and financing arrangements.... 12,799 246
Less amounts payable within one year........................ (7,071) (75)
------- ----
Long-term portion................................. $ 5,728 $171
======= ====
</TABLE>
Lines of Credit
At December 31, 1995, the Company (through its subsidiaries) had three
lines of credit amounting to $15,100,000, none of which had borrowings
outstanding as of such time. Subsequent to the year end, S3 Technologies
terminated its two lines of credit with NationsBank and established a single
facility under more favorable terms with CoreStates Bank, N.A. ("CoreStates"),
as discussed below. Also discussed below, certain favorable modifications were
made to the existing Process Solutions line of credit subsequent to the year
end.
At December 31, 1995, S3 Technologies had two line of credit agreements
with NationsBank. The purpose of these lines of credit was to support letters of
credit for foreign contracts, margin requirements on forward contracts and
working capital requirements. The first line of credit provided a $7,000,000
line of credit with NationsBank through June 30, 1996, bore interest at the
bank's prime rate (8.5% at December 31, 1995), and was guaranteed by the
Export-Import Bank of the United States ("EXIM"). S3 Technologies was able to
draw on this line of credit to the extent it had obtained guaranties from
certain of its stockholders. As of December 31, 1995, there were guaranties
authorizing $4,800,000 of draws on the line. The second line of credit,
established in September 1994, totaled $1,100,000, bore interest at the bank's
prime rate plus 1/2% (9.0% at December 31, 1995) and matured on January 31,
1996. The line was guaranteed by both the Company and ManTech and amounts
outstanding were insured by the Maryland Industrial Development Financing
Authority ("MIDFA").
Process Solutions obtained a $6,000,000 line of credit facility from
CoreStates in January 1995 for working capital, capital expenditures and letter
of credit requirements. The line of credit bore interest at the bank's prime
rate plus 1% (9.5% at December 31, 1995), was to expire on February 29, 1996,
and was partially
F-51
<PAGE> 157
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. NOTES PAYABLE AND FINANCING ARRANGEMENTS -- (CONTINUED)
guaranteed by ManTech. The borrowings under this line of credit were
collateralized with substantially all of the assets of Process Solutions. In
October 1995, this line of credit was increased to a $7,000,000 line when MIDFA
agreed to insure up to $1,000,000 of Process Solutions' obligations to the bank.
In August 1995, the Company utilized $2,500,000 of the proceeds from its
initial public offering to pay down all indebtedness under the aforementioned
lines of credit, and, at December 31, 1995, there were no outstanding borrowings
under such lines of credit.
On January 30, 1996, S3 Technologies terminated each of its two lines of
credit from NationsBank and established a $7,000,000 line of credit with
CoreStates. EXIM has guaranteed 90% of outstanding principal amounts under this
line of credit. S3 Technologies' obligations under this line of credit are also
guaranteed by the Company. The line of credit is collateralized by S3
Technologies' contract receivables and inventory. This line of credit expires
January 1, 1998, subject to earlier termination upon the expiration of the EXIM
guaranty (currently effective through July 31, 1996).
On February 23, 1996, Process Solutions and CoreStates agreed to
modifications of certain provisions of the existing $7,000,000 line of credit in
order that they conform with corresponding provisions of the newly established
S3 Technologies line of credit. These modifications include the release of
ManTech's partial guaranty, the establishment of a guaranty from the Company for
all of Process Solutions' obligations under the line of credit, and the
reduction of the interest rate to the bank's prime rate. The availability of
this line of credit has been extended through January 1, 1998, subject to
earlier termination upon the expiration of the EXIM guaranty for the S3
Technologies line of credit (currently effective through July 31, 1996).
The aforementioned lines of credit also contain certain negative covenants
which restrict the Company from, among other things, incurring additional
indebtedness, entering into merger, consolidation or acquisition transactions,
disposing of all or substantially all of its assets, creating liens on assets,
and creating guaranty obligations. Further, the Company is required to comply
with certain financial ratios, including minimum levels of debt to net worth and
cash flow to fixed obligations, and is also required to provide the bank with
certain periodic financial reports.
Other debt
The Company has entered into a capital lease agreement for property and
equipment. This obligation bears interest at 10% per annum and expires on
December 31, 1998.
Debt maturities
Aggregate maturities of debt as of December 31, 1995 are as follows (in
thousands): 1996, $75; 1997, $82; and 1998, $89.
F-52
<PAGE> 158
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The consolidated income before income tax, by domestic and foreign sources,
is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14 THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
---------------- ------------
<S> <C> <C>
Domestic.......................................... $ 305 $3,540
Foreign........................................... 1,273 1,849
------- ------------
Total................................... $1,578 $5,389
============ ==========
</TABLE>
Provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14 THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
---------------- ------------
<S> <C> <C>
Current:
Federal...................................... $ 250 $ 151
State........................................ 35 26
Foreign...................................... 140 508
------- ------------
425 685
============ ==========
Deferred:
Federal...................................... (130) 1,124
State........................................ (8) 90
Foreign...................................... 292 --
------- ------------
154 1,214
------- ------------
$ 579 $1,899
============ ==========
</TABLE>
The provision for income taxes varies from the amount of income tax
determined by applying the applicable U.S. statutory rate to pre-tax income as a
result of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14 THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
---------------- ------------
<S> <C> <C>
Statutory U.S. tax rate........................... 34.0% 34.0%
State income tax, net of federal tax benefit...... 2.1 2.7
Effect of foreign operations, including foreign
tax credits..................................... -- 2.4
Amortization of goodwill and other intangible
assets.......................................... 1.8 .5
Reduction in valuation allowance.................. -- (3.6)
Research and development credit................... -- (1.5)
Others............................................ (1.2) .7
----- -----
Effective tax rate................................ 36.7% 35.2%
============ ==========
</TABLE>
At December 31, 1995, the Company had available $3,324,000 of federal net
operating loss carryforwards which expire in 2007. These carryforwards will be
utilized to reduce taxable income in subsequent years. The net operating losses
were generated by the subsidiaries prior to the formation of the Company and, as
a result, there are limitations on the amounts that can be utilized to offset
taxable income in a given year.
F-53
<PAGE> 159
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. A summary of the tax effect of the significant components of
deferred income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1994 1995
----------------- -----------------
DEFERRED TAX DEFERRED TAX
ASSET/(LIABILITY) ASSET/(LIABILITY)
----------------- -----------------
<S> <C> <C>
Contract loss reserves......................... $ 413 $ 196
Property and equipment......................... (193) (177)
Accrued liabilities............................ 230 277
Net operating loss carryforwards............... 1,297 1,220
Book reserves not deductible for tax
purposes..................................... 1,346 1,685
Software licenses.............................. 220 (465)
Deferred revenues.............................. 780 691
Others......................................... (67) 58
----------------- -----------------
4,026 3,485
Valuation allowance............................ (2,839) (1,220)
----------------- -----------------
$ 1,187 $ 2,265
============ ============
</TABLE>
Most of the valuation allowance relating to the realizability of net
operating loss carryforwards and other deferred tax assets was determined as
part of the purchase accounting adjustment made at the time S3 Technologies was
acquired by ManTech. During 1995, the Company reduced the valuation allowance by
$1,619,000, of which $1,354,000 reduced goodwill and other intangibles arising
out of the acquisition of S3 Technologies. The valuation allowance at December
31, 1995 relates to the future utilization of net operating loss carryforwards
that expire in year 2007; the Company has determined these carryforwards to be
not realizable at this time. To the extent the valuation allowance is reduced,
it must first be applied to any remaining goodwill that arose from the
acquisition of S3 Technologies.
12. COMMON STOCK
The Company has authorized the issuance of up to 8,000,000 shares of Common
Stock and 2,500,000 of these shares were issued and outstanding at December 31,
1994.
In April 1995, the Board of Directors and stockholders of the Company
approved a stock dividend pursuant to which each outstanding share of Common
Stock was converted into 25 shares. The change in the Company's Common Stock for
the stock dividend has been given retroactive effect for the period April 14,
1994 through December 14, 1994.
In August 1995, the Company consummated the initial public offering of its
Common Stock, selling 1,725,000 shares of Common Stock, including the
underwriter's overallotment option of 225,000 shares, for $14.00 per share. The
initial public offering resulted in net proceeds to the Company of approximately
$21,138,000 after deducting underwriting discounts and offering expenses payable
by the Company. With this, there were 4,225,000 shares issued and outstanding at
December 31, 1995.
13. STOCK OPTION PLAN
Pursuant to the Company's 1995 Long-Term Incentive Plan (the "Plan"), on
July 27, 1995, the Company granted to employees stock options to acquire an
aggregate of 252,500 shares of Common Stock at
F-54
<PAGE> 160
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK OPTION PLAN -- (CONTINUED)
an exercise price of $14.00 per share, the initial public offering price of the
Common Stock. Upon election to the Company's Board of Directors on August 1,
1995, each of the four independent directors was granted an option to acquire
1,500 shares of Common Stock at an exercise price of $14.00 per share pursuant
to the Plan. On October 11, 1995, the Company made similar grants to employees
to acquire 36,500 shares of Common Stock at an exercise price of $14.00 per
share, which was the fair market value at the date of the grant. In connection
with service on the Company's Board of Directors from August 1, 1995 through
December 31, 1995, each of the Company's four independent directors was granted
an option, as of December 31, 1995, to acquire 629 shares of Common Stock at an
exercise price of $14.00 per share, which was the fair market value at the date
of the grant. All of the options described above expire ten years from the date
of the grant and generally become exercisable in three installments with 40%
vesting on the first anniversary of the date of grant and 30% vesting on each of
the second and third anniversaries of the date of grant, subject to acceleration
under certain circumstances. At December 31, 1995, 127,484 shares are still
available for future grants under this incentive plan.
14. MANDATORILY REDEEMABLE PREFERRED STOCK
The Company has authorized the issuance of up to 4,000 shares of Series A
Preferred Stock. The Series A Preferred Stock is redeemable and has a stated and
liquidation value of $1,000 per share, and entitles the holder to receive an
annual dividend equal to 3.75% of the stated value payable quarterly in arrears
on March 31, June 30, September 30, and December 31. The Series A Preferred
Stock is subject to a mandatory redemption at the stated value at the holder's
option as a whole or in part at any time after the occurrence of certain events.
In connection with the formation of the Company on April 13, 1994, the
Company issued 4,000 shares of Series A Preferred Stock to ManTech. On December
14, 1994, the Company received notice from ManTech requesting redemption of the
4,000 shares, including all accrued and unpaid dividends. The redemption was
paid in two installments of $1,600,000 on December 15, 1994 and $2,400,000 on
January 3, 1995. There were $46,000 of accrued and unpaid dividends at December
31, 1994 related to the Series A Preferred Stock.
15. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under certain noncancelable operating leases for
office facilities and equipment. Future minimum lease payments under
noncancelable operating leases as of December 31, 1995 are approximately as
follows (in thousands):
<TABLE>
<S> <C>
1996............................................................... $ 3,928
1997............................................................... 2,667
1998............................................................... 2,344
1999............................................................... 1,908
2000............................................................... 1,861
Thereafter......................................................... 1,846
-------
$14,554
=======
</TABLE>
Total rent expense under operating leases was $999,000 for the period April
14, 1994 to December 31, 1994 and $2,267,000 for 1995. Rent expense is net of
amortization of $407,000 for 1994 and $322,000 for 1995 for excess facility
costs. At December 31, 1994 and 1995, the Company had accrued $1,744,000 and
$1,451,000, respectively, of excess facility costs.
F-55
<PAGE> 161
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Letters of credit
As of December 31, 1995, the Company and certain of its subsidiaries were
contingently liable under letters of credit totaling $1,459,000. Further, the
performance of certain of the Company's customer contracts is collateralized by
performance guarantees totaling $8,423,000 and letters of credit totaling
$220,000, furnished by its subsidiaries' respective former parent organizations
prior to the formation of the Company on April 13, 1994.
16. RELATED PARTY TRANSACTIONS
Upon consummation of the initial public offering on August 1, 1995, a
management fee of $981 per day, previously due to certain stockholders, was
eliminated. Such management fee, was included within selling, general and
administrative expenses and amounted to $257,000 for the period from April 14,
1994 through December 31, 1994 and $204,000 for 1995.
S3 Technologies subleases office space to ManTech at market price based on
square footage used. For the period April 14 through December 31, 1994 and for
the year 1995, such charges amounted to $61,000 and $46,000, respectively. S3
Technologies purchases computer run-time from ManTech; such charges amounted to
$63,000 in 1995. GPC historically has performed services as a subcontractor on
certain GPI contracts and GPI may continue to subcontract with GPC from time to
time. The Company believes that the terms of such transactions are at least as
favorable to the Company as would be available from an independent third party,
and that any future subcontracting with GPC will be entered into on similar
terms. For the period April 14 through December 31, 1994 and year 1995, such
subcontract costs amounted to $89,000 and $51,000, respectively. (Also see Notes
1, 10 and 14.)
17. EMPLOYEE BENEFITS
The Company maintains non-qualified and qualified supplemental defined
benefit plans for certain retired employees. Net periodic pension expense for
the periods ended December 31, 1994 and 1995 was $29,000 for each such period
and the recorded unfunded liability related to these plans was $134,000 as of
December 31, 1994 and $132,000 as of December 31, 1995. Due to the immateriality
of these plans, actuarial plan information has not been presented.
The Company also has a qualified defined contribution plan that covers
substantially all employees and complies with Section 401(k) of the Internal
Revenue Code. Under this plan, the Company's stipulated basic matching
contribution matches a portion of the participants' contributions based upon a
defined schedule. Contributions are invested by an independent investment
company in one or more of several investment alternatives. The choice of
investment alternatives is at the election of each participating employee. The
Company's contributions to the plan were approximately $134,000 and $484,000 for
the period April 14, 1994 through December 31, 1994 and the year 1995,
respectively.
18. FINANCIAL INFORMATION BY GEOGRAPHIC AREA
The Company operates in a single industry segment: it designs, develops and
delivers business and technology solutions to the energy, process and
manufacturing industries worldwide. Revenues, income from
F-56
<PAGE> 162
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FINANCIAL INFORMATION BY GEOGRAPHIC AREA -- (CONTINUED)
operations and identifiable assets for the Company's United States, European and
Asian operations are as follows (in thousands).
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 14 THROUGH DECEMBER 31, 1994
-------------------------------------------------------
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
------------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues.......................................... $29,403 $4,234 $ -- $ 33,637
Transfers between geographic locations............ 550 50 (600) --
------------- ------ ------------ ------------
Total revenues.................................... $29,953 $4,284 $ (600) $ 33,637
========== ====== ========= =========
Income from operations............................ $ 1,205 $1,183 $ (600) $ 1,788
========== ====== ========= =========
Identifiable assets............................... $39,823 $3,639 $ (2,150) $ 41,312
========== ====== ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
UNITED STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------------- ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $76,251 $7,050 $2,001 $ -- $ 85,302
Transfers between geographic locations.... 1,173 -- -- (1,173) --
------------- ------ ------ ------------ ------------
Total revenues............................ $77,424 $7,050 $2,001 $ (1,173) $ 85,302
========== ====== ====== ========= =========
Income from operations.................... $ 4,724 $1,628 $ 7 $ (351) $ 6,008
========== ====== ====== ========= =========
Identifiable assets....................... $46,630 $7,298 $2,337 $ (4,905) $ 51,360
========== ====== ====== ========= =========
</TABLE>
The Company has intercompany distribution arrangements with its
subsidiaries. The basis of these arrangements, disclosed below as transfers
between geographic locations, is principally at market prices.
Domestic and export sales from the Company's United States operations in
thousands of dollars and as a percentage of revenues are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 14 THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
---------------- ----------------
<S> <C> <C> <C> <C>
Domestic.......................................... $ 7,913 26.9% $34,464 45.2%
Export:
Germany...................................... 6,336 21.5 8,039 10.5
Remaining Western Europe..................... 5,578 19.0 12,400 16.3
Russia....................................... 6,413 21.8 9,135 12.0
Remaining Eastern Europe..................... 961 3.3 4,547 5.9
Asia......................................... 2,202 7.5 6,853 9.0
South America and others..................... -- -- 813 1.1
------- ----- ------- -----
$29,403 100.0% $76,251 100.0%
======= ===== ======= =====
</TABLE>
F-57
<PAGE> 163
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
1995 1995 1995 1995 1995
--------- -------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Contract Revenue........................ $19,016 $ 22,825 $21,186 $ 22,275 $85,302
Gross profit............................ $ 5,815 $ 7,200 $ 7,073 $ 7,838 $27,926
Net income.............................. $ 571 $ 826 $ 1,010 $ 1,083 $ 3,490
Earnings per common share............... $ 0.23 $ 0.33 $ 0.28 $ 0.26 $ 1.08
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
1994 (1) 1994 (1) 1994 1994 1994
--------- -------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Contract Revenue........................ $11,135 $ 11,885 $12,032 $ 12,095 $47,147
Gross profit............................ $ 3,372 $ 2,766 $ 2,844 $ 3,045 $12,027
Net income (2).......................... $ 478 $ 375 $ 331 $ 385 $ 1,569
Earnings per common share............... $ 0.19 $ 0.15 $ 0.12 $ 0.14 $ 0.60
</TABLE>
- ---------------
(1) Historical results of operations for the Predecessors for the periods
beginning January 1 through April 13, 1994 include the combined results of
operations on a historical cost basis of S3 Technologies, GPI and EuroSim.
(2) After preferred dividend of $38,000 in the third and fourth quarter of 1994.
F-58
<PAGE> 164
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Simulation, Systems & Services Technologies Company and MSHI, Inc.
We have audited the consolidated statements of operations, stockholder's
equity and cash flows for the four month period ended December 31, 1993, and for
the period January 1, 1994 through April 13, 1994 of Simulation, Systems &
Services Technologies Company and its immediate parent company, MSHI, Inc.
(formerly a wholly-owned subsidiary of ManTech International Corporation). We
have also audited the statements of operations, stockholder's equity and cash
flows of Simulation, Systems & Services Technologies Company (formerly a
wholly-owned subsidiary of Bicoastal Corporation) for the eight month period
ended August 31, 1993. These financial statements are the responsibility of the
companies' management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Simulation, Systems & Services Technologies Company and its immediate parent
company, MSHI, Inc. for the four month period ended December 31, 1993, and for
the period January 1, 1994 through April 13, 1994, and the results of operations
and cash flows of Simulation, Systems & Services Technologies Company for the
eight month period ended August 31, 1993, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
March 31, 1995
F-59
<PAGE> 165
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
(FORMERLY A WHOLLY OWNED SUBSIDIARY OF MANTECH INTERNATIONAL CORPORATION FOR THE
PERIODS ENDED DECEMBER 31, 1993 AND APRIL 13, 1994, AND FORMERLY A WHOLLY OWNED
SUBSIDIARY OF BICOASTAL CORPORATION FOR THE PERIOD ENDED AUGUST 31, 1993)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTH FOUR MONTH FOR THE PERIOD
PERIOD ENDED PERIOD ENDED JANUARY 1, 1994
AUGUST 31, DECEMBER 31, TO APRIL 13,
1993 1993 1994
------------ ------------ ---------------
<S> <C> <C> <C>
Contract revenue....................................... $ 20,822 $ 12,065 $ 8,271
Cost of revenue........................................ 22,977 9,169 5,943
------------ ------------ -------
Gross profit (loss)............................... (2,155) 2,896 2,328
Operating Expenses:
Selling, general and administrative............... 4,572 2,350 1,473
Depreciation and amortization..................... 475 366 324
------------ ------------ -------
Total operating expenses..................... 5,047 2,716 1,797
------------ ------------ -------
Operating income (loss)...................... (7,202) 180 531
Interest expense....................................... 12 5 40
Other (income) expense................................. 57 5 (3)
------------ ------------ -------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle.................................. (7,271) 170 494
Provision (benefit) for income taxes................... -- 65 444
------------ ------------ -------
Net income (loss) before cumulative effect of
change in accounting principle............. (7,271) 105 50
Cumulative effect of change in accounting principle.... -- -- --
------------ ------------ -------
Net income (loss)............................ $ (7,271) $ 105 $ 50
========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 166
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
(FORMERLY A WHOLLY OWNED SUBSIDIARY OF MANTECH INTERNATIONAL CORPORATION FOR THE
PERIODS ENDED DECEMBER 31, 1993 AND APRIL 13, 1994, AND FORMERLY A WHOLLY OWNED
SUBSIDIARY OF BICOASTAL CORPORATION FOR THE PERIOD ENDED AUGUST 31, 1993)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN-CAPITAL EARNINGS
------ --------------- --------
<S> <C> <C> <C>
Balance, January 1, 1993..................................... $ 1 $ 12,749 $ 618
Net loss..................................................... -- -- (7,271)
------ --------------- --------
Balance, August 31, 1993..................................... 1 12,749 (6,653)
Adjustment to reflect purchase of the Company................ (1) (12,749) 6,653
Capitalization of the Company................................ 1 49 --
------ --------------- --------
Balance, September 1, 1993................................... 1 49 --
Net Income................................................... -- -- 105
------ --------------- --------
Balance, December 31, 1993................................... 1 49 105
Net income................................................... -- -- 50
------ --------------- --------
Balance, April 13, 1994...................................... $ 1 $ 49 $ 155
====== =========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 167
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
(FORMERLY A WHOLLY OWNED SUBSIDIARY OF MANTECH INTERNATIONAL CORPORATION FOR THE
PERIODS ENDED DECEMBER 31, 1993 AND APRIL 13, 1994, AND FORMERLY A WHOLLY OWNED
SUBSIDIARY OF BICOASTAL CORPORATION FOR THE PERIOD ENDED AUGUST 31, 1993)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS FOUR MONTHS FOR THE PERIOD
ENDED ENDED JANUARY 1, 1994
AUGUST 31, DECEMBER 31, TO APRIL 13,
1993 1993 1994
------------ ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ (7,271) $ 105 $ 50
Cumulative effect of change in accounting principle.... -- -- --
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash losses expensed in net income............ 75 -- --
Depreciation and amortization..................... 475 366 324
Change in assets and liabilities:
Contract receivables......................... 1,487 2,283 (1,683)
Inventories.................................. 105 (26) (13)
Foreign currency options..................... -- (1,257) 472
Prepaid expenses and other current assets.... (261) 270 (223)
Deferred tax assets.......................... -- 268 942
Other assets................................. 87 -- --
Accounts payable............................. 1,165 (445) (257)
Accrued salaries............................. (717) (214) (90)
Billings in excess of revenue earned......... 578 4,735 5,228
Accrued facility costs....................... 84 (214) (14)
Accrued contract and warranty reserves....... 3,795 (794) (1,536)
Accrued retirement........................... 19 -- 9
------------ ------------ ---------------
Net cash (used in) provided by operating activities.... (379) 5,077 3,209
------------ ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of S3 Technologies, net of acquired
cash............................................ -- (6,041) --
Purchase of property and equipment................ (172) (250) (276)
Investment in joint ventures...................... -- (153) --
------------ ------------ ---------------
Net cash used in investing activities.................. (172) (6,444) (276)
------------ ------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings........................................ -- 1,250 2,719
Repayment of borrowings........................... -- -- (208)
Proceeds from sale of common stock................ -- 50 --
Principal payments under capital lease............ (38) (20) (15)
Increase (decrease) in payable to stockholder..... 648 86 (5,487)
------------ ------------ ---------------
Net cash provided by (used in) financing activities.... 610 1,366 (2,991)
------------ ------------ ---------------
Net increase (decrease) in cash and cash equivalents... 59 (1) (58)
Cash and cash equivalents at beginning of period....... 0 59 58
------------ ------------ ---------------
Cash and cash equivalents at end of period............. $ 59 $ 58 $ 0
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 168
SIMULATION, SYSTEMS & SERVICES TECHNOLOGY COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Simulation, Systems & Services Technologies Company is a designer,
developer and supplier of high fidelity real-time simulation software, systems
and services in the energy and manufacturing industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements represent the accounts
of Simulation, Systems & Services Technologies Company and its immediate parent
MSHI, Inc. (together referred to as "S3 Technologies"). MSHI, Inc. was a
wholly-owned subsidiary of ManTech International Corporation ("ManTech") until
April 13, 1994, at which time it became part of GSE Systems, Inc. (See Note 11.)
All intercompany transactions have been eliminated.
On August 31, 1993, MSHI, Inc. acquired 100 percent of the issued and
outstanding common stock of Simulation, Systems & Services Technologies Company
from Aerospace Holdings Company, a wholly-owned subsidiary of Bicoastal
Corporation. This acquisition was accounted for using the purchase method.
Simulation, Systems & Services Technologies Company was previously acquired
by Bicoastal Corporation on February 3, 1988. This acquisition was accounted for
using the purchase method and the purchase price adjustments were pushed down
into the financial statements.
The consolidated financial statements presented reflect allocations of
costs for general and administrative expenses and income taxes. Such costs and
expenses have been allocated to the Company based on actual usage or other
methods (i.e., proportional allocational method) that approximate actual usage.
Management believes that the allocation methods used are reasonable and that
allocated costs and expenses approximate what such amounts would be if the
Company had operated on a stand alone basis.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and short-term highly
liquid investments with original maturity dates of less than three months at the
date of purchase.
Inventories
Inventories are stated at the lower of cost, as determined by the average
cost method, or market. Obsolete or unsaleable inventory is reflected at its
estimated net realizable value. Inventory costs consist only of raw materials.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method with estimated useful lives ranging from three to seven
years. Leasehold improvements are amortized over the life of the lease or the
estimated useful life, whichever is shorter, using the straight-line method.
Prior to its acquisition, S3 Technologies used the sum of the years' digits
method over lives ranging from four to 15 years. Upon sale or retirement, the
cost and related accumulated depreciation or amortization are eliminated from
the respective accounts and any resulting gain or loss is included in income.
Maintenance and repairs are charged to expense as incurred.
F-63
<PAGE> 169
SIMULATION, SYSTEMS & SERVICES TECHNOLOGY COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
Goodwill and other intangibles assets
Intangible assets consist of amounts relating to goodwill, backlog and
proposal values, all arising from acquisitions. Backlog and proposal values are
estimated by management and represent the fair value of the profit to be earned
on uncompleted contracts and on future contracts for which bids have been
submitted. Goodwill represents the excess of purchase price over the fair value
of net tangible and intangible assets acquired. These amounts are amortized on a
straight-line basis over periods ranging from three to four years for backlog
and proposal values and fifteen years for goodwill. Prior to the acquisition of
S3 Technologies by ManTech, goodwill was amortized on a straight-line basis over
40 years. As a part of the purchase accounting adjustments made in connection
with ManTech's acquisition of S3 Technologies, existing goodwill was eliminated.
At each balance sheet date, management evaluates the recoverability of
intangible assets using certain financial indicators, such as historical and
future ability to generate income from operations. S3 Technologies' policy is to
record an impairment loss against the net unamortized cost of the intangible
asset in the period when it is determined that the carrying amount of the asset
may not be recoverable. This determination is based on an evaluation of such
factors as the occurrence of a significant event, a significant change in the
environment in which the business operates, or if the expected future net cash
flows (undiscounted and without interest) would become less than the carrying
amount of the asset.
Revenue recognition
Revenue under long-term fixed-price contracts generally is accounted for on
the percentage-of-completion method, based on contract costs incurred to date
and estimated costs to complete. Estimated contract earnings are reviewed and
revised periodically as the work progresses and the cumulative effect of any
change is recognized in the period in which the change is determined. Estimated
losses are charged against earnings in the period such losses are identified.
The remaining liability for contract costs to be incurred in excess of contract
revenues is reflected as accrued contract reserves in the Company's consolidated
balance sheet. Revenues from sales of other products are recorded when the
products are shipped. The Company has no significant vendor obligations or
collectibility risk associated with its product sales.
Research and development
Development expenditures incurred to meet customer specifications under
contracts accounted for under the percentage of completion method are charged to
contract costs. Company sponsored research and development expenditures are
charged to operations as incurred and are included in selling, general and
administrative expenses. The amounts incurred for Company sponsored research and
development activities relating to the development of new products and services
or the improvement of existing products and services were approximately
$736,000, $156,000, and $343,000 for the eight month period ended August 31,
1993, the four month period ended December 31, 1993, and the period from January
1, 1994 through April 13, 1994, respectively.
Warranties
As the Company recognizes revenue under the percentage of completion
method, it provides an accrual for estimated future warranty costs on historical
and projected claims experience.
F-64
<PAGE> 170
SIMULATION, SYSTEMS & SERVICES TECHNOLOGY COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
Through April 13, 1994, the Company was included in the consolidated
federal income tax returns of ManTech and, through August 31, 1993, Bicoastal
Corporation. As such, the income and losses generated by the Company are used on
an annual basis to reduce the overall tax liability of the other members of the
consolidated group. The Company is reimbursed for the benefit provided to the
consolidated group.
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, effective January 1, 1992 and the cumulative effect
of this change is reflected in the statement of operations. Under this standard,
deferred income taxes are provided under the asset and liability method. This
method requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are determined based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense consists of the Company's current liability,
computed on a separate company basis, for federal and state income taxes and the
change in the Company's deferred income tax assets and liabilities.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of contract receivables. Credit risk on
contract receivables is mitigated by the nature of the Company's worldwide
customer base and its credit policies. The Company's customers are not
concentrated in any specific geographic region, but are concentrated in the
energy and manufacturing industries. The Company performs credit evaluation
before extending credit and may require letters of credit, bank guarantees or
advance payments. Thereafter, the Company continues to monitor its contract
receivables exposure after giving effect to letters of credit, bank guarantees,
the status of the work performed on the contract, or its customers' financial
condition.
Off balance sheet risk and foreign exchange contracts
The Company enters into forward exchange contracts and options as a hedge
against certain foreign currency commitments. The Company also enters into
letters of credit and performance guarantees in the ordinary course of business
as required by certain contracts and proposal requirements.
A significant portion of the Company's international revenue is received in
a currency other than the currency in which the expenses relating to such
revenue are paid. The Company attempts to offset or "hedge" its foreign currency
exposure primarily by entering into foreign currency exchange agreements and
purchasing foreign currency options. The former require the Company on a
specified date, or during a specified period to exchange a set amount of foreign
currency for United States dollars or another base currency at a specified
exchange rate. The latter provide the Company with the option to exchange
foreign currency for United States dollars or another base currency during a
specified period or at a specified exchange rate. The Company utilizes these
foreign exchange agreements and options only to reduce the impact of foreign
currency fluctuations on its operating results and does not engage in foreign
currency speculation. Foreign exchange contracts do not expose the Company to
material risk because any losses on the contracts are offset by gains on the
value of the foreign receivables being hedged. Foreign exchange options do not
expose the Company to material risk since the Company has the right not to
exercise the option.
F-65
<PAGE> 171
SIMULATION, SYSTEMS & SERVICES TECHNOLOGY COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
Foreign exchange contacts have an element of risk that the counterparty may
not be able to meet the terms of the agreement. However, the Company minimizes
such risk exposure by limiting counterparties to Paine Webber Financial Products
Inc. and NationsBank, N.A. ("NationsBank"). Management believes that the risk of
incurring such losses is immaterial. The Company has also entered into foreign
exchange option contracts with NationsBank which permit but do not require the
Company to exchange foreign currencies at a future date with the bank at a
contracted exchange rate. Costs associated with such contracts are amortized
over the life of the contract matching the underlying receipts.
The fair values of foreign exchange forward contracts and foreign exchange
options are estimated by obtaining quotes for such contracts with similar terms,
adjusted where necessary for maturity differences. However, such fair values are
offset by gains or losses on assets and liabilities hedged by such contracts and
options. Furthermore, the costs of the contracts and options are included in the
Company's estimates of costs and earnings on its long-term fixed price
contracts. Accordingly, there is no significant difference between the recorded
value and fair value of the Company's net foreign exchange position.
3. CONTRACT RECEIVABLES
Fixed-price contracts generated 93%, 91% and 89% of total revenue for the
eight month period ended August 31, 1993, the four month period ended December
31, 1993, and for the period from January 1, 1994 through April 13, 1994,
respectively.
Revisions in estimated contract costs at completion are reflected in the
period during which facts and circumstances necessitating such a change first
became known. The effect of changes in estimates of contract profits was to
decrease gross profit by $6,141,000 during the eight month period ended August
31, 1993 from that which would have been reported had the revised estimate been
used as the basis of recognition of contract profits in the preceding periods.
4. DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation expense for the eight month period ended August 31, 1993, the
four month period ended December 31, 1993, and the period January 1, 1994
through April 13, 1994, was $366,000, $169,000, and $148,000, respectively.
Amortization expense for the eight months ended August 31, 1993, the four
months ended December 31, 1993, and for the period from January 1, 1994 through
April 13, 1994 was $109,000, $197,000, and $176,000, respectively.
5. CAPITAL LEASE EXPENSE
Interest paid under this lease was $24,000, $11,000, and $8,000 for the
eight month period ended August 31, 1993, the four month period ended December
31, 1993, and the period from January 1, 1994 through April 13, 1994,
respectively.
F-66
<PAGE> 172
SIMULATION, SYSTEMS & SERVICES TECHNOLOGY COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provisions (benefit) for income taxes on pre-tax earnings are as
follows (in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS FOUR MONTHS FOR THE PERIOD
ENDED ENDED JANUARY 1, 1994
AUGUST 31, DECEMBER 31, TO APRIL 13,
1993 1993 1994
------------ ------------ ---------------
<S> <C> <C> <C>
Current tax expense (benefit).................. $-- $ (232) $(498)
Deferred tax expense........................... -- 297 942
---------- ---------- -----------
Total provision (benefit)................. $-- $ 65 $ 444
========== ========== ===========
</TABLE>
The provision for income taxes varies from the amount of income tax
determined by applying the applicable U.S. statutory tax rate to pre-tax income
as a result of the following:
<TABLE>
<CAPTION>
EIGHT MONTHS FOUR MONTHS FOR THE PERIOD
ENDED ENDED JANUARY 1, 1994
AUGUST 31, DECEMBER 31, TO APRIL 13,
1993 1993 1994
------------ ------------ ---------------
<S> <C> <C> <C>
Statutory U.S. tax rate........................ 34.0% 34.0% 34.0%
Increase (decrease) in rate resulting from:
State taxes, net of Federal benefit....... 2.8 2.8 2.8
Change in the valuation allowance......... (36.6) -- 52.8
Goodwill amortization..................... (0.1) 0.2 0.2
Other..................................... (0.1) 1.2 0.1
------ ----- -----
Effective tax rate................... 0.0% 38.2% 89.9%
========== ========== ===========
</TABLE>
At April 13, 1994 the Company had available $3,962,000 of net operating
loss carryforwards which expire in 2007. These carryforwards will be utilized to
reduce taxable income in subsequent years. The net operating losses were
generated prior to the acquisition of the Company and there are limitations on
the amounts that can be utilized to offset taxable income in a given year.
7. RETIREMENT PLANS
The Company maintains a non-qualified supplemental defined benefit pension
plan for certain retired employees. The amounts related to this plan are not
material.
The Company also maintains a qualified defined benefit pension plan for
certain union employees. Pension expense for this plan was $6,000, and $3,000
and $29,000 for the eight month period ended August 31, 1993, the four month
period ended December 31, 1993 and the period from January 1, 1994 through April
13, 1994, respectively.
The Company established a qualified defined contribution plan during the
first quarter of 1993, which covers substantially all employees, that complies
with Section 401(k) of the Internal Revenue Code. Under this plan, the Company's
stipulated basic matching contribution matches a portion of the participants'
contributions based upon a defined schedule. Contributions are invested by an
independent investment company in one or more of several investment
alternatives. The choice of investment alternatives is at the election of each
participating employee. The Company's contributions to the plan were $77,000,
$58,000 and $63,000 for the eight month period ended August 31, 1993, the four
month period ended December 31, 1993, and the period from January 1, 1994
through April 13, 1994, respectively.
F-67
<PAGE> 173
SIMULATION, SYSTEMS & SERVICES TECHNOLOGY COMPANY
(INCLUDING ITS IMMEDIATE PARENT MSHI, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RENT EXPENSE
Rent expense totaled $1,162,000, $306,000 and $404,000 for the eight month
period ended August 31, 1993, the four month period ended December 31, 1993, and
the period from January 1, 1994 through April 13, 1994, respectively. Rent
expense is net of amortization of $274,000 for the period ended December 31,
1993 and $167,000 for the period ended April 13, 1994 for excess facility costs.
9. RELATED PARTY TRANSACTIONS
Corporate allocations for overhead and general and administrative expenses
were $0, $213,000, and $145,000 for the eight month period ended August 31,
1993, the four month period ended December 31, 1993, and the period from January
1, 1994 through April 13, 1994, respectively.
10. GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company earns a significant portion of its revenues from contracts
outside of the United States, although it has no foreign operations. Revenues
from these international sales are as follows (in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS FOUR MONTHS FOR THE PERIOD
ENDED ENDED JANUARY 1, 1994
AUGUST 31, DECEMBER 31, TO APRIL 13,
1993 1993 1994
------------ ------------ ---------------
<S> <C> <C> <C>
Germany........................................ $ 3,264 $2,357 $ 2,247
Russia......................................... 2,886 1,941 714
Remaining Europe............................... 2,295 1,496 1,330
China.......................................... 1,080 201 28
South Korea.................................... -- -- 1,140
Taiwan......................................... 1,206 775 398
Remaining Asia................................. 1,535 587 9
Other regions.................................. 82 25 --
------------ ------------ -------
Total international revenues.............. $ 12,348 $7,382 $ 5,866
========== ========== ===========
</TABLE>
No customer accounted for 10% or more of revenues for the eight month
period ended August 31, 1993, the four month period ended December 31, 1993 and
for the period January 1, 1994 through April 13, 1994.
11. FORMATION OF GSE SYSTEMS, INC.
On April 13, 1994, the parent companies of the Company, GP International
Engineering & Simulation, Inc., and EuroSim AB consolidated the operations of
these subsidiaries into a new company, GSE Systems, Inc.
F-68
<PAGE> 174
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholder of
GP International Engineering & Simulation, Inc.
We have audited the statements of operations, stockholder's equity
(deficit) and cash flows of GP International Engineering & Simulation, Inc. (the
"Company"), formerly a wholly-owned subsidiary of GPS Technologies, Inc. (now
known as SGLG, Inc.), for the year ended December 31, 1993 and for the period
January 1, 1994 through April 13, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of GP
International Engineering & Simulation, Inc. for the year ended December 31,
1993, and for the period January 1, 1994 through April 13, 1994, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
March 31, 1995
F-69
<PAGE> 175
GP INTERNATIONAL ENGINEERING & SIMULATION INC.
(FORMERLY A WHOLLY-OWNED SUBSIDIARY OF GPS TECHNOLOGIES, INC. (NOW KNOWN AS
SGLG, INC.))
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
Contract revenue.................................................. $ 10,226 $ 3,642
Cost of revenue................................................... 10,492 2,905
------------ -------
Gross profit................................................. (266) 737
Operating expenses:
Selling, general and administrative.......................... 1,747 381
Depreciation and amortization................................ 42 26
------------ -------
Total operating expenses................................ 1,789 407
------------ -------
Operating income (loss)................................. (2,055) 330
Other expenses.................................................... 93 3
------------ -------
Income (loss) before income taxes....................... (2,148) 327
Provision (benefit) for income taxes.............................. (788) 121
------------ -------
Net income (loss)....................................... $ (1,360) $ 206
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE> 176
GP INTERNATIONAL ENGINEERING & SIMULATION INC.
(FORMERLY A WHOLLY-OWNED SUBSIDIARY OF GPS TECHNOLOGIES, INC. (NOW KNOWN AS
SGLG, INC.))
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT
------ -----------
<S> <C> <C>
Balance, January 1, 1993............................................... $1 $(2,296)
Net loss............................................................... -- (1,360)
--
-----------
Balance, December 31, 1993............................................. 1 (3,656)
Net income............................................................. -- 206
--
-----------
Balance, April 13, 1994................................................ $1 $(3,450)
====== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE> 177
GP INTERNATIONAL ENGINEERING & SIMULATION INC.
(FORMERLY A WHOLLY-OWNED SUBSIDIARY OF GPS TECHNOLOGIES, INC. (NOW KNOWN AS
SGLG, INC.))
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)............................................ $ (1,360) $ 206
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 514 146
Change in assets and liabilities:
Contract receivables............................... 652 (153)
Prepaid expenses and other......................... (37) (9)
Accounts payable................................... 18 537
Accrued salaries and related expenses.............. 90 (168)
Billings in excess of revenue earned............... 1,102 (893)
Accrued warranty reserves.......................... 228 281
Accrued contract reserves.......................... 271 (146)
------------ -------
Net cash provided by (used in) operating activities............... 1,478 (199)
------------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment, and software............... (142) (39)
------------ -------
Net cash used in investing activities............................. (142) (39)
------------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to GPS Technologies, Inc................................. (1,414) 225
------------ -------
Net cash (used in) provided by financing activities............... (1,414) 225
------------ -------
Net decrease in cash and cash equivalents......................... (78) (13)
Cash and cash equivalents at beginning of period.................. 91 13
------------ -------
Cash and cash equivalents at end of period........................ $ 13 $ --
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE> 178
GP INTERNATIONAL ENGINEERING & SIMULATION INC.
(FORMERLY A WHOLLY-OWNED SUBSIDIARY OF GPS TECHNOLOGIES, INC. (NOW KNOWN AS
SGLG, INC.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
GP International Engineering & Simulation, Inc. ("GPI") is a designer,
developer and supplier of high fidelity real-time simulation software, systems
and services in the energy and manufacturing industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements represents the accounts of GPI, a
wholly owned subsidiary of GPS Technologies, Inc. (hereinafter "GPS" and now
known as SGLG, Inc.), until April 13, 1994, at which time it became part of GSE
Systems, Inc. (See Note 9.)
The financial statements presented reflect allocations of costs of shared
facilities, overhead, general and administrative expenses and income taxes. Such
costs and expenses have been allocated to the Company based on actual usages or
other methods (i.e. proportional cost allocation method) that approximate actual
usage. Management believes that the allocation methods used are reasonable and
that allocated costs and expenses approximate what such amounts would be if the
Company had operated on a standalone basis.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and amounts due from
banks.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method with estimated useful lives ranging from three to ten
years. Upon sale or retirement, the cost and related depreciation or
amortization are eliminated from the respective accounts and the resulting gain
or loss is included in income. Maintenance and repairs are charged to expense as
incurred.
Revenue recognition
Revenue under long-term fixed-price contracts generally is accounted for on
the percentage-of-completion method, based on contract costs incurred to date
and estimated costs to complete. Estimated contract earnings are reviewed and
revised periodically as the work progresses and the cumulative effect of any
change is recognized in the period in which the change is determined. Estimated
losses are charged against earnings in the period such losses are identified.
The remaining liability for contract costs to be incurred in excess of contract
revenue is reflected as accrued contract reserves in the Company's balance
sheet. Revenue from sales of other products is recorded when the products are
shipped. The Company has no significant vender obligations or collectibility
risk associated with its product sales.
Software development costs
In compliance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company has capitalized approximately $2,354,000 of computer
software development costs. Software development costs are capitalized once
technological feasibility is achieved, based on a detailed program design that
is complete, has been confirmed and for which no high-risk development issues
remain. Capitalization of costs ceases when the software is commercially
available. Amortization of software development costs is computed using the
straight-line method over the estimated economic life of the product of five
years. Amortization expense was approximately
F-73
<PAGE> 179
GP INTERNATIONAL ENGINEERING & SIMULATION INC.
(FORMERLY A WHOLLY-OWNED SUBSIDIARY OF GPS TECHNOLOGIES, INC. (NOW KNOWN AS
SGLG, INC.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
$472,000, and $120,000 for the year ended December 31, 1993, and for the period
January 1, 1994 through April 13, 1994, respectively.
Research and development
Development expenditures incurred to meet customer specifications under
contracts accounted for under the percentage of completion method are charged to
contract costs. Company sponsored research and development expenditures are
charged to operations as incurred and are included in selling, general and
administrative expenses. The amounts incurred for research and development
activities relating to the development of new products and services or the
improvement of existing products and services were approximately $314,000 and
$203,000 for the year ended December 31, 1993, and for the period January 1,
1994 through April 13, 1994, respectively.
Warranties
As the Company recognizes revenue under the percentage of completion
method, it provides an accrual for estimated future warranty costs based on
historical and projected claims experience.
Income Taxes
The Company was included in the consolidated federal income tax return of
GPS. As such, the income and losses generated by the Company are used on an
annual basis to reduce the overall tax liability of the other members of the
consolidated group. The Company is reimbursed for the benefit provided to the
consolidated group. The Company files separate income tax returns in the state
jurisdictions in which it operates.
GPS allocates its federal consolidated tax provision (benefit) to its
subsidiaries based on each subsidiary's proportionate share of its income or
loss to the consolidated totals, after adjusting for each subsidiary's permanent
differences arising between financial and tax reporting basis. The allocated tax
provision (benefit) approximates the Company's tax provision (benefit) had
income taxes been calculated on a standalone basis. The resulting income tax
payable (or receivable) is recorded as an intercompany amount due to (or from)
GPS.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of contract receivables. Credit risk on
contract receivables is mitigated by the nature of the Company's worldwide
customer base and its credit policies. The Company's customers are not
concentrated in any specific geographic region, but are concentrated in the
energy and manufacturing industries. The Company performs credit evaluation
before extending credit and may require letters of credit, bank guarantees or
advance payments. Thereafter, the Company continues to monitor its contract
receivables exposure after giving effect to letters of credit, bank guarantees,
the status of the work performed on the contract, and its customer's financial
condition.
Off balance sheet risk and foreign exchange contracts
GPS has entered into forward exchange contracts on behalf of the Company.
Foreign exchange forward contracts are legal agreements between two parties to
purchase and sell a foreign currency for a price specified at the contract date,
with delivery and settlement in the future. The Company uses such contracts to
hedge risk of changes in foreign currency exchange rates associated with certain
assets, liabilities and firm future revenue commitments denominated in foreign
currency.
F-74
<PAGE> 180
GP INTERNATIONAL ENGINEERING & SIMULATION INC.
(FORMERLY A WHOLLY-OWNED SUBSIDIARY OF GPS TECHNOLOGIES, INC. (NOW KNOWN AS
SGLG, INC.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACT RECEIVABLES AND BILLINGS IN EXCESS OF REVENUE EARNED
Revisions in estimated contract costs at completion are reflected in the
period during which facts and circumstances necessitating such a change first
became known. The effect of changes in estimates of contract profits was to
decrease gross profit by $1,359,000 during the year ended December 31, 1993 from
that which would have been reported had the revised estimate been used as the
basis of recognition of contract profits in the preceding periods.
4. DEPRECIATION EXPENSE
Depreciation expense for the year ended December 31, 1993 and for the
period January 1, 1994 through April 13, 1994 was $42,000 and $26,000,
respectively.
5. INCOME TAXES
The provisions (benefit) for income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
Current provision (benefit)............................... $ (595) $ (1)
Deferred provision (benefit).............................. (193) 122
------------ ------
Total provision (benefit)............................ $ (788) $ 121
========== ============
</TABLE>
The provision for income taxes varies from the amount of income tax
determined by applying the applicable U.S. statutory tax rate to pre-tax income
as a result of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
Statutory U.S. tax rate................................... 34.0% 34.0%
State taxes, net of Federal benefit....................... 2.7 2.7
----- -----
Effective tax rate................................... 36.7% 36.7%
========== ============
</TABLE>
At April 13, 1994, the Company had available $256,000 of net operating loss
carryforwards that will expire by 2008. These carryforwards will be utilized to
reduce taxable income in subsequent years.
6. RETIREMENT PLANS
The Company has a qualified defined contribution plan that covers
substantially all employees and complies with Section 401(k) of the Internal
Revenue Code. Under this plan, the Company's stipulated basic matching
contribution matches a portion of the participants' contributions based upon a
defined schedule. Contributions are invested by an independent investment
company in one or more of several investment alternatives. The choice of
investment alternatives is at the election of each participating employee. The
Company's contributions to the plan were $41,000, and $24,000 for the year ended
December 31, 1993 and for the period January 1, 1994 through April 13, 1994,
respectively.
F-75
<PAGE> 181
GP INTERNATIONAL ENGINEERING & SIMULATION INC.
(FORMERLY A WHOLLY-OWNED SUBSIDIARY OF GPS TECHNOLOGIES, INC. (NOW KNOWN AS
SGLG, INC.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
Corporate allocations for overhead and general and administrative expenses
were $887,000, and $244,000 for the year ended December 31, 1993, and for the
period January 1 through April 13, 1994, respectively.
8. GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company earns a significant portion of its revenues from contracts
outside of the United States, although it has no foreign operations. Revenues
from these international sales were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
Taiwan............................................ $1,031 $ 57
Czech Republic.................................... 1,351 286
Great Britain..................................... 4,401 642
Russia............................................ 1,885 1,801
Other regions..................................... 489 366
------------ -------
Total international revenues................. $9,157 $ 3,152
========== ============
</TABLE>
The Company earned revenues of $1,351,000 from one customer and $1,031,000
from a second customer during the year ended December 31, 1993. The Company
earned revenues of $4,401,000 and $642,000 from a third customer for the year
ended December 31, 1993 and for the period January 1, 1994, through April 13,
1994, respectively. The Company earned revenues of $1,755,000 and $1,741,000
from a fourth customer during the year ended December 31, 1993 and the period
January 1, 1994 through April 13, 1994, respectively.
9. FORMATION OF GSE SYSTEMS, INC.
On April 13, 1994, the parent companies of the Company, Simulation, Systems
& Services Technologies Company and EuroSim AB consolidated the operations of
these subsidiaries into a new company, GSE Systems, Inc.
F-76
<PAGE> 182
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Director and Stockholder of
EuroSim AB
We have audited the statements of operations, stockholder's equity and cash
flows of EuroSim AB (the "Company"), formerly a wholly-owned subsidiary of
Vattenfall Engineering AB, for the year ended December 31, 1993 and for the
period from January 1, 1994 through April 13, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of EuroSim AB
for the year ended December 31, 1993 and for the period from January 1, 1994
through April 13, 1994, in conformity with accounting principles generally
accepted in the United States.
COOPERS & LYBRAND
Stockholm, Sweden
April 21, 1995
F-77
<PAGE> 183
EUROSIM AB
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL
1993 13, 1994
------------ ----------------
<S> <C> <C>
Contract revenue.................................................. $4,571 $1,597
Cost of revenue................................................... 1,572 734
------ ------
Gross profit................................................. 2,999 863
------ ------
Operating expenses:
Selling, general and administrative.......................... 1,548 440
Depreciation and amortization................................ 101 29
------ ------
Total operating expenses..................................... 1,649 469
------ ------
Operating income (loss)...................................... 1,350 394
Interest expense.................................................. 31 1
Other (income) expenses........................................... (98) (43)
------ ------
Income (loss) before income taxes............................ 1,417 436
Provision (benefit) for income taxes.............................. (100) 122
------ ------
Net income (loss)............................................ $1,517 $ 314
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE> 184
EUROSIM AB
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN
COMMON PAID-IN TRANSLATION RETAINED
STOCK CAPITAL ADJUSTMENT EARNINGS
------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993.............................. $175 $210 $ 98 $ 155
Net income............................................ -- -- -- 1,517
Translation adjustment................................ -- -- (194) --
Distribution of capital............................... -- -- -- (1,608)
---- ---- ----- -------
Balance, December 31, 1993............................ 175 210 (96) 64
Net Income............................................ -- -- -- 314
Translation adjustment................................ -- -- 8 --
---- ---- ----- -------
Balance, April 13, 1994............................... $175 $210 $ (88) $ 378
==== ==== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 185
EUROSIM AB
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1994
YEAR ENDED THROUGH
DECEMBER 31, APRIL 13,
1993 1994
------------ ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ 1,517 $ 314
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 101 29
Deferred taxes........................................... (111) --
Change in assets and liabilities:
Contract receivables................................ (31) (577)
Prepaid expenses and other current assets........... (56) 66
Accounts payable.................................... 54 158
Accrued expenses.................................... 12 (25)
Income tax payable.................................. -- 122
Billings in excess of revenue earned................ 1,004 617
Accrued contract reserves........................... -- 381
------- -------
Net cash provided by operating activities.......................... 2,490 1,085
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (139) (36)
------- -------
Net cash used in investing activities.............................. (139) (36)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions of capital...................................... (1,608) --
Increase (decrease) in amounts due to stockholder............. 1,933 (1,287)
------- -------
Net cash provided by (used in) financing activities................ 325 (1,287)
------- -------
Effects of exchange rate on cash................................... (176) 8
------- -------
Net increase (decrease) in cash and cash equivalents............... 2,500 (230)
Cash and cash equivalents at beginning of period................... -- 2,500
------- -------
Cash and cash equivalents at end of period......................... $ 2,500 $ 2,270
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE> 186
EUROSIM AB
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
EuroSim AB ("EuroSim" or the "Company") is a designer, developer and
supplier of high fidelity real-time simulation software, systems and services
for the energy and manufacturing industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements represent the accounts of EuroSim.
EuroSim was a wholly-owned subsidiary of Vattenfall Engineering AB ("Vattenfall
Engineering") until April 13, 1994, at which time it became a wholly-owned
subsidiary of GSE Systems, Inc. (See Note 11.) Vattenfall Engineering was
wholly-owned by Vattenfall AB ("Vattenfall") and was absorbed by Vattenfall
effective January 1, 1995. Effective January 1, 1992, Vattenfall became a
government-owned Swedish corporation. Prior to January 1, 1992, Vattenfall was a
public entity governed by special public rules.
The Company was formed in 1990. The Company's records are maintained in
accordance with Swedish laws and reporting requirements. These financial
statements have been prepared in accordance with United States generally
accepted accounting principles ("U.S. GAAP") and have been translated into U.S.
dollars.
The financial statements presented reflect allocations of costs of
services, insurance and consulting fees for all periods presented. Such costs
and expenses have been allocated to the Company based on actual usage.
Management believes that the allocation methods used are reasonable and that
allocated costs and expenses approximate what such amounts would be if the
Company had operated on a stand-alone basis.
Foreign currency translation
The functional currency for the Company's operations is the Swedish krona.
The translation from Swedish krona to U.S. dollars is performed for the balance
sheet accounts using the exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate during
the period. The resulting translation adjustments are recorded directly into a
separate component of stockholder's equity.
Contributions to and from Vattenfall Engineering
The Company has given group contributions to Vattenfall Engineering during
1993. Group contributions are principally made to transfer taxable income from
one group entity with the objective of reducing the group's total current tax
expenses. These contributions lead to a taxable income for the recipient and a
taxable expense for the donor. The Company's annual current tax expense has
therefore been impacted by the group contributions. Since the contributions are
permanent differences for tax purposes, no deferred tax accounting related to
group contributions has been applied.
For Swedish statutory reporting purposes, group contributions are accounted
for as an appropriation in the statement of operations. This accounting
methodology is utilized primarily to obtain an agreement between a company's
financial statement income and taxable income. Group contributions are thus not
related to a company's operations. For U.S. GAAP purposes, group contributions
provided have been treated as a transfer from stockholder's equity.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and short-term, highly
liquid investments with original maturity dates of less than three months at the
date of purchase.
F-81
<PAGE> 187
EUROSIM AB
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method with estimated useful lives ranging from three to five
years. Upon sale or retirement, the cost and related accumulated depreciation or
amortization are eliminated from the respective accounts and any resulting gain
or loss is included in income. Maintenance and repairs are charged to expense as
incurred.
Revenue recognition
Revenue under long-term, fixed-price contracts generally is accounted for
on the percentage-of-completion method, based on contract costs incurred to date
and estimated costs to complete. Estimated contract earnings are reviewed and
revised periodically as the work progresses and the cumulative effect of any
change is recognized in the period in which the change is determined. Estimated
losses are charged against earnings in the period such losses are identified.
The remaining liability for contract costs to be incurred in excess of contract
revenue is reflected as accrued contract reserves in the Company's balance
sheet. Revenue from sales of other products is recorded when the products are
shipped. The Company has no significant vendor obligations or collectibility
risk associated with its product sales.
Research and development
Company sponsored research and development expenditures under contracts
accounted for under the percentage of completion method are charged to
operations as incurred and are included in selling, general and administrative
expenses. The amounts incurred for Company sponsored research and development
activities relating to the development of new products and services or the
improvement of existing products and services were approximately $97,000 and
$1,000 for the year ended December 31, 1993, and for the period from January 1,
1994 through April 13, 1994, respectively.
Warranties
As the Company recognizes revenue under the percentage of completion
method, it provides an accrual for estimated future warranty costs based on
historical and projected claims experience.
Income taxes
Deferred income taxes are provided under the asset and liability method.
This method requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are determined based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense consists of the Company's current liability
for income taxes and the change in the Company's deferred income tax assets and
liabilities.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments and contract
receivables. The Company restricts investments of temporary cash to financial
institutions with high credit standing. Credit risk on contract receivables is
mitigated by its credit policies. The Company's customers are concentrated in
Japan and in the energy and manufacturing industries. The Company performs
credit evaluations before extending credit and may require letters of credit,
bank guarantees or advance payments. Thereafter, the Company continues to
monitor its
F-82
<PAGE> 188
EUROSIM AB
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
contract receivables exposure after giving effect to letters of credit, bank
guarantees, the status of the work performed on the contract and its customers'
financial condition.
Off balance sheet risk and foreign exchange contracts
Vattenfall Engineering has entered into forward exchange contracts on
behalf of the Company as a hedge against certain foreign currency commitments.
Forward exchange contracts are legal agreements between two parties to purchase
and sell different currencies, for a price specified at the contract date, with
delivery and settlement in the future. The Company uses such contracts to hedge
risk of changes in currency exchange rates associated with certain assets,
liabilities and firm future revenue commitments denominated in a different
currency.
3. CONTRACT RECEIVABLES AND BILLINGS IN EXCESS OF REVENUE EARNED
Fixed-price contracts generated approximately 99% and 100% of total sales
for the year ended December 31, 1993, and for the period from January 1, 1994
through April 13, 1994, respectively.
4. DEPRECIATION EXPENSE
Depreciation expense for the year ended December 31, 1993, and for the
period from January 1, 1994 through April 13, 1994, was $101,000 and $29,000,
respectively.
5. INCOME TAXES
The provisions (benefit) for income taxes on pre-tax earnings were as
follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
Current tax expense (benefit)............................. $ 11 $ 122
Deferred tax expense (benefit)............................ (111) --
------------ ------
Total provision (benefit)............................ $ (100) $ 122
========== ============
</TABLE>
The provision for income taxes varies from the amount of income tax
determined by applying the applicable domestic statutory tax rate to pre-tax
income as a result of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
Statutory tax rate........................................ 28% 28%
Group contribution........................................ (32) --
Other..................................................... (3) --
--
---
Effective tax rate................................... (7)% 28%
========== ============
</TABLE>
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
F-83
<PAGE> 189
EUROSIM AB
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RETIREMENT PLANS
The Company employees are covered by compulsory and voluntary pension
plans. The amounts paid by the Company were $54,000 and $18,000 for year ended
December 31, 1993 and for the period January 1, 1994 to April 13, 1994,
respectively.
7. RENT EXPENSE
Rent expense totaled $172,000 and $47,000 for the year ended December 31,
1993, and for the period from January 1, 1994 through April 13, 1994,
respectively.
8. RELATED PARTY TRANSACTIONS
Sales to affiliates for the year ended December 31, 1993, and for the
period from January 1, 1994 through April 13, 1994, were approximately 3% and 0%
of total sales, respectively.
The components of allocated expenses included in the Company's statement of
operations are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED JANUARY 1, 1994,
DECEMBER 31, THROUGH APRIL 13,
1993 1994
------------ -----------------
<S> <C> <C>
Overhead and general and administrative expenses.......... $232 $82
Interest income (expense), net............................ 64 42
------ ---
Total................................................ $168 $40
========== ============
</TABLE>
9. RESTRICTION ON RETAINED EARNINGS
Under the provisions of the Swedish Companies Act a legal reserve must be
established in an amount equal to 20% of the share capital. This reserve is
established by appropriating 10% of the statutory net income each year until the
prescribed amount has been appropriated. The legal reserve may be used to absorb
deficit, but usually may not be distributed as dividends.
10. GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company earns a significant portion of its revenue from contracts in
Japan, although it has no operations in that country. Revenues from these
Japanese contracts totaled $4,297,000 and $1,565,000 for the year ended December
31, 1993 and for the period January 1, 1994 through April 13, 1994,
respectively.
The Company earned revenues of $637,000 from one customer during the year
ended December 31, 1993. The Company earned revenues of $2,253,000 and
$1,134,000 from a second customer during the year ended December 31, 1993 and
the period January 1, 1994 through April 13, 1994.
11. FORMATION OF GSE SYSTEMS, INC.
On April 13, 1994, the parent companies of the Company, Simulation, Systems
& Services Technologies Company and GP International Engineering & Simulation,
Inc. consolidated the operations of these subsidiaries into a new company, GSE
Systems, Inc.
F-84
<PAGE> 190
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
General Physics Corporation:
We have audited the accompanying consolidated balance sheets of General
Physics Corporation and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
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 General
Physics Corporation and subsidiaries as of December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, on August
31, 1994, the Company completed an acquisition of substantially all of the
assets and operations of GPS Technologies, Inc. and certain of its subsidiaries
(together the "GPST Businesses"), that has been accounted for as a "reverse
acquisition" whereby the GPST Businesses are treated as the acquiror for
accounting purposes even though the Company remains the continuing legal entity.
Accordingly, the financial statements of the Company for the period prior to
August 31, 1994, are those of the GPST Businesses and differ from the
consolidated financial statements of the Company and its subsidiary as
previously reported for these periods.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
February 29, 1996
F-85
<PAGE> 191
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1996
------------------ -------------
1995 1994
------- ------- (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................... $ 108 $ 328 $ 99
Accounts receivable, less allowance for doubtful
accounts of $1,000, $1,292 and $1,191 (note 13)....... 25,066 25,854 29,043
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 9,118 15,237 10,125
Income taxes recoverable................................ 777 384 --
Prepaid expenses and other current assets............... 1,063 1,136 985
Deferred income taxes (note 8).......................... -- 1,475 --
------- ------- -------------
Total current assets............................... 36,132 44,414 40,252
------- ------- -------------
Property and equipment, at cost (note 3)..................... 5,625 4,069 7,159
Less accumulated depreciation and amortization............... (1,924) (1,101) (2,935)
------- ------- -------------
Net property and equipment......................... 3,701 2,968 4,224
------- ------- -------------
Excess of costs over net assets of subsidiaries acquired,
less accumulated amortization of $1,571, $1,279 and $1,798
(note 1)................................................... 9,887 10,178 11,712
Other assets................................................. 1,573 291 1,752
------- ------- -------------
$51,293 $57,851 $57,940
======= ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (note 5).......... $ 6,770 $ 9,787 $ 8,574
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 8,301 6,091 8,395
Short-term borrowings (note 6).......................... 3,450 10,100 5,200
Note payable............................................ -- -- 1,414
Capital lease obligation (note 9)....................... 119 147 124
Dividends payable....................................... 623 599 633
Income taxes payable.................................... -- -- 206
Deferred income taxes (note 8).......................... 54 -- 113
------- ------- -------------
Total current liabilities.......................... 19,317 26,724 24,659
Senior subordinated debentures (note 7)...................... 11,173 10,813 11,473
Capital lease obligation (note 9)............................ 1,206 1,276 1,112
------- ------- -------------
Total liabilities.................................. 31,696 38,813 37,244
------- ------- -------------
Stockholders' equity (notes 1 and 11):
Preferred stock, par value $.025 per share, 5,000,000
shares authorized, none issued........................ -- -- --
Common stock, par value $.025 per share, 20,000,000
shares authorized; 11,085,720, 11,079,960 and
11,086,420 shares issued.............................. 277 277 277
Additional paid-in capital.............................. 25,074 26,161 24,488
Accumulated deficit..................................... (657) (451) (260)
Treasury stock at cost, 750,722, 1,023,648 and 560,494
shares................................................ (5,097) (6,949) (3,809)
------- ------- -------------
Net stockholders' equity........................... 19,597 19,038 20,696
Commitments and contingencies (notes 9 and 12)............... -- -- --
------- ------- -------------
$51,293 $57,851 $57,940
======= ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-86
<PAGE> 192
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------
1995 1994 1993 1996 1995
-------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................................... $107,549 $78,880 $58,112 $85,954 $80,399
Cost of revenue............................... 95,181 69,779 51,331 75,385 71,420
-------- ------- ------- ------- -------
Gross profit.................................. 12,368 9,101 6,781 10,569 8,979
General and administrative and other
expenses.................................... 7,718 5,859 4,983 5,435 5,809
Interest expense.............................. 2,208 1,366 735 1,361 1,732
Other income (expense), net................... 12 (22) 107 73 (14)
-------- ------- ------- ------- -------
Income before income taxes and equity in net
earnings of investee company................ 2,454 1,854 1,170 3,846 1,424
Income taxes (note 8)......................... 982 785 487 1,647 529
-------- ------- ------- ------- -------
Income before equity in net earnings of
investee company............................ 1,472 1,069 683 2,199 895
Equity in net earnings of investee company
(including gain on issuance of stock in
1995), net of income taxes (note 4)......... 786 69 -- 87 776
-------- ------- ------- ------- -------
Net income.................................... $ 2,258 $ 1,138 $ 683 $ 2,286 $ 1,671
======== ======= ======= ======= =======
Net income per share.......................... $ .22 $ .15 $ .11 $ .22 $ .16
======== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-87
<PAGE> 193
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL NET
PREFERRED COMMON PAID-IN ACCUMULATED NET TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT ASSETS STOCK EQUITY
--------- ------ ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993,
1994, 1995:
Balance at December 31, 1992.... $-- $-- $ -- $ -- $ 13,899 $ -- $13,899
Net income...................... -- -- -- -- 683 -- 683
Net transactions with parent
(note 14)..................... -- -- -- -- (1,285) -- (1,285)
--- ------ ---------- ----------- -------- -------- -------------
Balance at December 31, 1993.... -- -- -- -- 13,297 -- 13,297
Net transactions with parent
(note 14)..................... -- -- -- -- 5,509 -- 5,509
Acquisition (note 1)............ -- 277 26,581 -- (19,197) (7,661) --
Net income...................... -- -- -- 747 391 -- 1,138
Dividends ($.12 per share)...... -- -- -- (1,198) -- -- (1,198)
Issuance of treasury stock to
benefit plan (123,145
shares)....................... -- -- (420) -- -- 712 292
--- ------ ---------- ----------- -------- -------- -------------
Balance at December 31, 1994.... -- 277 26,161 (451) -- (6,949) 19,038
Net income...................... -- -- -- 2,258 -- -- 2,258
Dividends ($.24 per share)...... -- -- -- (2,464) -- -- (2,464)
Issuance of treasury stock to
benefit plan (272,926
shares)....................... -- -- (1,087) -- -- 1,852 765
--- ------ ---------- ----------- -------- -------- -------------
Balance at December 31, 1995.... $-- $277 $ 25,074 $ (657) $ -- $ (5,097) $19,597
======= ======= ======== ========== ========= ======== ==========
NINE MONTHS ENDED SEPTEMBER 30,
1996 (UNAUDITED):
Balance at December 31, 1995.... $-- $277 $ 25,074 $ (657) $ -- $ (5,097) $19,597
Net income...................... -- -- -- 2,286 -- -- 2,286
Dividends ($0.18 per share)..... -- -- -- (1,889) -- -- (1,889)
Issuance of treasury stock to
benefit plan (189,378
shares)....................... -- -- (586) -- -- 1,288 702
--- ------ ---------- ----------- -------- -------- -------------
Balance at September 30, 1996... $-- $277 $ 24,488 $ (260) $ -- $ (3,809) $20,696
======= ======= ======== ========== ========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-88
<PAGE> 194
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1995 1994 1993 1996 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 2,258 $ 1,138 $ 683 $ 2,286 $ 1,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 1,474 626 285 1,538 1,012
Provision for doubtful accounts, net........... 1,068 205 151 295 48
Provision for deferred income taxes............ 1,019 422 113 2 253
Equity in net earnings of investee company..... (96) (69) -- (87) (86)
Gain on issuance of stock by investee
company..................................... (690) -- -- -- (690)
Issuance of treasury stock to benefit plan..... 765 292 -- 701 765
Changes in operating assets and liabilities:
Accounts receivable....................... (280) (348) 1,926 (3,709) 2,212
Costs and estimated earnings in excess of
billings on uncompleted contracts....... 6,119 (1,484) (1,763) (1,007) 5,381
Income taxes recoverable.................. (393) -- -- 777 (65)
Prepaid expenses and other current
assets.................................. 73 411 375 78 11
Accounts payable and accrued expenses..... (3,017) (2,006) (213) 1,673 (3,244)
Billings in excess of costs and estimated
earnings on uncompleted contracts....... 2,210 1,861 234 94 758
Income taxes payable...................... -- -- -- 206 --
Other..................................... 14 (199) (92) 65 58
------- ------- ------- ------- -------
Net cash provided by operating activities.......... 10,524 849 1,699 2,912 8,084
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................ (1,556) (785) (5) (1,504) (996)
Repayments of notes receivable..................... -- 194 175 -- --
Acquisition of businesses.......................... -- -- -- (1,200) --
Acquisition of net assets, less cash acquired (note
1)............................................... -- (8,433) -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities....................................... (1,556) (9,024) 170 (2,704) (996)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (payments)............... (6,650) 8,605 368 1,750 (5,000)
Principal payments on obligations under capital
leases........................................... (98) (49) (21) (89) (47)
Payment of dividends............................... (2,440) (597) -- (1,878) (1,838)
Net transactions with parent (note 14)............. -- 10 (1,932) -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities....................................... (9,188) 7,969 (1,585) (217) (6,885)
------- ------- ------- ------- -------
Increase (decrease) in cash........................ (220) (206) 284 (9) 203
Cash at beginning of period........................ 328 534 250 108 328
------- ------- ------- ------- -------
Cash at end of period.............................. $ 108 $ 328 $ 534 $ 99 $ 531
======== ======== ======== ======== ========
Supplemental cash flow information:
Cash paid for interest during the period....... $ 1,734 $ 903 $ 763 $ 1,165 $ 1,629
======== ======== ======== ======== ========
Cash paid for income taxes during the period... $ 370 $ 440 $ 513 $ 715 $ 322
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-89
<PAGE> 195
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 1. ACQUISITION AND BASIS OF PRESENTATION AND BUSINESS
General Physics Corporation (GPC or the Company) is incorporated in the
state of Delaware. The Company and its subsidiaries provide engineering,
environmental, training, analytical and technical support services to commercial
nuclear and fossil power utilities, the United States Departments of Defense and
Energy, Fortune 500 companies, and other commercial and governmental customers.
On August 31, 1994, the Company acquired substantially all of the assets
and operations of GPS Technologies, Inc. (GPST) and certain of its subsidiaries
(together the GPST Businesses) for approximately $32.5 million, consisting of
$10 million cash, 3,500,000 shares of common stock, warrants to acquire up to
1,000,000 shares of common stock at $6.00 per share, warrants to acquire up to
475,664 shares of common stock at $7.00 per share and 6% ten year senior
subordinated debentures in the aggregate principal amount of $15 million.
National Patent Development Corporation (NPDC), which owned approximately
92% of the GPST Businesses and 28% of GPC prior to the transaction, owned
approximately 54% of the outstanding shares of GPC after the acquisition.
Accordingly, the acquisition was accounted for as a reverse acquisition whereby
the GPST Businesses were deemed to have acquired GPC in a transaction accounted
for as a purchase. GPC remains the legal entity and Securities and Exchange
Commission registrant; however, the historical financial statements and
disclosures prior to August 31, 1994 included herein are those of the GPST
Businesses. Results of GPC are included in the nine months ended September 30,
1996 and 1995, the year ended December 31, 1995 and the year ended December 31,
1994 only for the period from September 1, 1994 to December 31, 1994.
The cash and subordinated debentures were deemed to be a dividend to the
shareholders of GPST. The estimated purchase price of the net assets of GPC was
determined as follows (in thousands):
<TABLE>
<S> <C>
Cash (financed with bank borrowings)...................................... $ 10,000
Subordinated debentures, net of $4.3 discount............................. 10,700
Common Stock -- 3.5 million shares at $3.................................. 10,500
Warrants to purchase Common Stock......................................... 1,300
Transaction costs......................................................... 676
--------
Fair value of consideration.......................................... $ 33,176
Less deemed dividend...................................................... (20,700)
Plus fair value of additional interest (26%) of GPC acquired by NPDC based
upon fair value of GPC's common stock outstanding, on date of
acquisition............................................................. 4,770
--------
Estimated purchase price............................................. $ 17,246
========
</TABLE>
F-90
<PAGE> 196
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 1. ACQUISITION AND BASIS OF PRESENTATION AND BUSINESS -- (CONTINUED)
The purchase price, which exceeded the estimated fair value of the net
tangible assets acquired by $5.6 million, was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash....................................................................... $ 1,567
Accounts receivable........................................................ 11,969
Costs and estimated earnings in excess of billings on uncompleted
contracts................................................................ 3,505
Other current assets....................................................... 2,215
Property and equipment..................................................... 720
Goodwill................................................................... 5,618
Liabilities assumed........................................................ (8,348)
-------
Net assets................................................................. $17,246
=======
</TABLE>
On January 29, 1994, GPC acquired substantially all of the operations and
net assets of Cygna Energy Services (CES) related to its business of providing
engineering services to the commercial nuclear power industry for a purchase
price of approximately $3,131,000, including acquisition costs. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the related acquired assets and assumed
liabilities based on the respective fair values. The purchase exceeded the fair
value of the net assets acquired by approximately $2,677,000.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1994 and 1993 are presented as if the GPST
Businesses and CES acquisitions had occurred on January 1 of the respective
years (in thousands, except per share data).
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Revenue......................................................... $115,130 $130,731
Net income...................................................... 1,613 4,164
Net income per share............................................ $ 0.16 $ 0.43
</TABLE>
The unaudited pro forma consolidated results of operations are based upon
the combined historical results of GPC and the GPST Businesses after giving
effect to the following adjustments: (1) costs of revenue and general and
administrative and other expense reductions resulting from the GPST Business and
CES acquisitions, (2) interest expense related to the bank borrowings of $10
million at 7 3/4% and senior subordinated debentures of $15 million at 6%, net
of interest expense on certain obligations of GPST not assumed, (3) amortization
of the debt discount of $4.3 million related to senior subordinated debentures,
(4) amortization of goodwill and (5) tax effects of the pro forma adjustments.
The earnings per share amounts are based on 9,933,167 shares of GPC common
stock outstanding after the transaction. Common shares issuable upon exercise of
stock options and warrants are excluded from the computation because their
effect is not material or is antidilutive.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of General Physics Corporation and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Contract Revenue and Cost Recognition. The Company provides services under
time-and-materials, cost-plus-fixed-fee and fixed-price contracts. Revenue is
recognized as costs are incurred and includes
F-91
<PAGE> 197
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
estimated fees at predetermined rates. Differences between recorded costs and
estimated earnings and final billings are recognized in the period in which they
become determinable. Costs and estimated earnings in excess of billings on
uncompleted contracts are recorded as a current asset. Billings in excess of
costs and estimated earnings on uncompleted contracts are recorded as a current
liability. Generally, contracts provide for the billing of costs incurred and
estimated earnings on a monthly basis. Retainages, amounts subject to future
negotiation and amounts which are expected to be collected after one year are
not material for any period.
Allowance for Doubtful Accounts. Management periodically reviews accounts
receivable for possible uncollectible amounts. In the event management
determines a specific need for an allowance, a provision for doubtful accounts
is provided. The allowance for doubtful accounts was $1,000,000 and $1,292,000
at December 31, 1995 and 1994, respectively and $1,191,000 and $1,711,000 at
September 30, 1996 and 1995, respectively.
Property and Equipment. Depreciation and amortization are calculated using
the straight-line method over the estimated useful lives of the related assets
that range from three to ten years. Leasehold improvements are amortized over
the shorter of the lease term or estimated useful life of the assets.
Equity in Net Earnings of Investee Company. The Company accounts for
investments in investee companies, over which it has the ability to exercise
significant influence over operations and financial policies, using the equity
method of accounting. In evaluating its ability to exercise significant
influence, the Company evaluates a number of factors, including the ownership
interest in such companies of NPDC. The Company records any gain or loss in the
consolidated statement of operations when an investee company sells its shares
at an offering price which differs from the Company's carrying amount per share
of each investee company's stock.
Excess of Cost over Net Assets of Subsidiaries Acquired. The excess of
cost over net assets of subsidiaries acquired is being amortized over forty
years using the straight-line method. The Company assesses the recoverability of
the excess of cost over net assets of subsidiaries acquired by determining
whether the amortization over its remaining life can be recovered through the
estimated undiscounted future operating cash flows of the related acquired
operations.
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities based on enacted tax rates in
effect when such amounts are expected to be realized or settled. Recognition of
deferred assets for tax loss or credit carryforwards is limited to amounts
expected to be realized based on consideration of available evidence, including
tax planning strategies and other factors. The effects of changes in tax laws or
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
Fair Value of Financial Instruments. The estimated fair value of financial
instruments such as accounts receivable and accounts payable approximate
carrying values.
Net Income Per Share. Net income per share is based on the weighted
average number of shares of General Physics Corporation's common stock
outstanding during the years ended December 31, 1995, 1994, and 1993 of
10,230,899, 7,671,909 and 6,271,879 respectively and during the nine months
ended September 30, 1996 and 1995 of 10,429,740 and 10,246,547 respectively.
Common shares issuable upon exercise of stock options are excluded from the
computation because their effect is not material or antidilutive.
F-92
<PAGE> 198
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates. Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and their
related disclosures to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications. Certain amounts for 1994 and 1993 have been
reclassified to conform to the presentation for 1995 and 1996.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1994 1996
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and equipment................................ $2,906 $1,223 $ 4,069
Equipment subject to capitalized leases................ 1,472 1,472 1,472
Leasehold improvements................................. 1,247 1,374 1,281
------ ------ ----------
$5,625 $4,069 $ 7,159
====== ====== ==========
</TABLE>
NOTE 4. EQUITY IN NET EARNINGS OF INVESTEE COMPANY
Prior to the acquisition of the GPST Businesses, GPC and GPST contributed
assets to a newly formed joint venture, GSE Systems, Inc. (GSES), for 10% and
35% ownership interests in the joint venture, respectively. On August 1, 1995,
GSES completed an initial public offering of 1,500,000 shares of its common
stock at $14 per share. The Company owns 250,000 shares of GSES common stock,
which, after the offering, represented approximately a 6% interest in GSES. As
this investment is accounted for using the equity method of accounting, the
capital transaction by GSES was treated as a sale of stock of a subsidiary by
the Company and a gain of approximately $690,000 net of income taxes was
recognized.
The results for GSES include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1994 1996
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets......................................... $51,360 $43,971 $47,789
Stockholders' equity................................. 20,616 (2,272) 20,532
Revenue.............................................. 85,302 45,582 71,971
Net income........................................... 3,490 1,130 2,683
</TABLE>
For the years ended December 31, 1995 and 1994, the Company recognized its
proportionate share of the net earnings of GSES of $96,000 and $69,000,
respectively. For the nine months ended September 30, 1996 and 1995, the Company
recognized $87,000 and $86,000, respectively. Such amounts are net of income
taxes payable upon distribution of the earnings by the investee.
F-93
<PAGE> 199
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 4. EQUITY IN NET EARNINGS OF INVESTEE COMPANY -- (CONTINUED)
At December 31, 1995 and September 30, 1996, the estimated fair value
(based upon the quoted market price) of the GSES common stock held by the
Company was approximately $3,600,000 and $2,875,000, respectively and the
carrying value was approximately $1,517,000 and $1,630,000, respectively.
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1994 1996
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts payable -- trade.............................. $3,074 $4,090 $ 3,349
Accrued salaries and benefits.......................... 1,200 801 1,963
Accrued vacation....................................... 1,247 1,360 1,626
Accrued rent obligations............................... -- 838 46
Litigation accrual (note 12)........................... -- 1,361 --
Other accrued expenses................................. 1,249 1,337 1,590
------ ------ ----------
$6,770 $9,787 $ 8,574
====== ====== ==========
</TABLE>
NOTE 6. LINES OF CREDIT
On April 7, 1995, the Company and NPDC entered into a new three-year credit
agreement with a commercial bank providing for a $20,000,000 secured revolving
line of credit expiring April 10, 1998 for the Company and a secured term loan
for NPDC. The Company terminated its previous credit agreement. Borrowings under
the new credit agreement bear interest at the prime rate or at LIBOR plus 1.75%,
whichever is elected by the Company. The credit agreement is secured by liens on
accounts receivable of the Company and its domestic subsidiaries, and contains
covenants that, among other things, limit the Company's ability to dispose of
assets, incur debt, create liens, make capital expenditures, and make certain
investments or acquisitions. In addition, the Company is required to meet
certain financial ratios. At September 30, 1996, the Company had available
borrowings of approximately $14,651,000 under the credit agreement and
borrowings of $5,200,000 outstanding.
NOTE 7. SENIOR SUBORDINATED DEBENTURES
The $15 million of 6% Senior Subordinated Debentures issued in the GPST
Businesses acquisition, substantially all of which are held by NPDC, have a
carrying value at December 31, 1995 of $11,173,000 which is net of a debt
discount of $3,827,000, and a carrying value at September 30, 1996 of
$11,473,000 which is net of a debt discount of $3,527,000. The debentures are
unsecured and require payments of interest only on a quarterly basis through
June 30, 1999, quarterly principal installments of $525,000 plus interest
through June 30, 2004 and the balance of $4,500,000 on June 30, 2004. The
debentures are subordinated to borrowings under the line of credit agreement.
F-94
<PAGE> 200
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 7. SENIOR SUBORDINATED DEBENTURES -- (CONTINUED)
At December 31, 1995 and September 30, 1996, the estimated fair value of
the debentures was approximately $9,500,000 and $10,400,000, respectively.
NOTE 8. INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. For periods prior to August 31, 1994, the GPST Business filed
consolidated Federal income tax returns with NPDC and paid Federal income taxes
due in accordance with a tax sharing arrangement with NPDC. Under the terms of
the acquisition of the GPST Businesses, SGLG, Inc. (formerly known as GPS
Technologies, Inc.) is responsible for all Federal and state income taxes
payable on income earned by the GPST Businesses for the period through the date
of the acquisition.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER ENDED
31, SEPTEMBER 30,
---------------------- ----------------
1995 1994 1993 1996 1995
------ ---- ---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current
Federal................................... $ 37 $292 $260 $1,310 $ 289
State..................................... (74) 71 114 335 (13)
------ ---- ---- ------ ------
(37) 363 374 1,645 276
------ ---- ---- ------ ------
Deferred
Federal................................... 1,323 455 78 51 654
State..................................... 206 11 35 8 102
------ ---- ---- ------ ------
1,529 466 113 59 756
------ ---- ---- ------ ------
$1,492 $829 $487 $1,704 $1,032
====== ==== ==== ====== ======
</TABLE>
Income taxes for the years ended December 31, 1995, 1994 and 1993 and the
nine months ended September 30, 1996 and 1995 were allocated to income taxes and
equity in net earnings of investee company as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER ENDED
31, SEPTEMBER 30,
---------------------- ----------------
1995 1994 1993 1996 1995
------ ---- ---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income taxes................................... $ 982 $785 $487 $1,647 $ 529
Equity in net earnings of investee company..... 510 44 -- 57 503
------ ---- ---- ------ ------
$1,492 $829 $487 $1,704 $1,032
====== ==== ==== ====== ======
</TABLE>
F-95
<PAGE> 201
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 8. INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1994 1996
---- ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts..................... $393 $ 507 $ 480
Accrued vacation.................................... 380 259 464
Litigation accrual.................................. -- 535 --
Net operating loss.................................. -- -- 135
Other accrued liabilities........................... 66 458 --
---- ------ ----------
839 1,759 1,079
---- ------ ----------
Deferred tax liabilities:
Accelerated depreciation and amortization........... 210 65 318
State income taxes.................................. -- 33 --
Prepaid expenses.................................... 129 128 109
GSES investment..................................... 554 44 610
Other............................................... -- 14 155
---- ------ ----------
893 284 1,192
---- ------ ----------
Net deferred tax asset (liability)....................... $(54) $1,475 $ (113)
==== ====== ==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of the deferred tax asset
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers income taxes
paid in the past three years and projected future taxable income in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which temporary differences are
deductible, management has deemed no valuation allowances are necessary at
December 31, 1995 and 1994 and September 30, 1996.
F-96
<PAGE> 202
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 8. INCOME TAXES -- (CONTINUED)
The reconciliation of statutory Federal income taxes consists of the
following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------
1995 1994 1993 1996 1995
------ ---- ---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory Federal income taxes................. $1,275 $669 $398 $1,357 $ 916
State income taxes, net of Federal tax
benefit...................................... 87 105 98 226 59
Items not deductible for tax purposes, net..... 130 55 (9) 121 57
------ ---- ---- ------ ------
$1,492 $829 $487 $1,704 $1,032
====== ==== ==== ====== ======
</TABLE>
NOTE 9. LEASES
The Company leases facilities and certain equipment under operating leases
expiring on various dates through 2004. Certain of the facility leases provide
for renewals for various periods and for proportionate increases in rent based
on increases in property taxes and certain other expenses.
In connection with the acquisition of the GPST Businesses discussed in note
1, the Company leased certain equipment from SGLG, Inc. under a ten-year capital
lease.
Approximate future minimum rentals under noncancellable operating and
capital leases with initial or remaining terms of one year or more for the three
months ending December 31, 1996 and the years ending thereafter are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1996.......................................................... $ 635 $ 50
1997.......................................................... 2,236 200
1998.......................................................... 1,593 200
1999.......................................................... 788 200
2000.......................................................... 616 200
Thereafter.................................................... 814 733
--------- -------
Total minimum lease payments....................................... $ 6,682 1,583
=======
Less portion reflective of interest................................ 346
-------
Capital lease obligation........................................... $ 1,237
======
</TABLE>
Rental expense amounted to $3,850,000, $4,259,000 and $4,743,000 for the
years ended December 31, 1995, 1994 and 1993, respectively and $2,241,000 and
$2,595,000 for the nine months ended September 30, 1996 and 1995, respectively.
NOTE 10. PROFIT INVESTMENT PLAN
The Company maintains a Profit Investment Plan (the Plan) for employees who
have completed ninety days of service with the Company. The Plan is administered
by a committee appointed by the Board of Directors. The Plan permits pre-tax
contributions to the Plan by participants pursuant to Section 401(k) of the
Internal Revenue Code of 1% to 14% of base compensation. The Company matches
participants' contributions up to a specific percentage of the first 7% of base
compensation contributed for employees who
F-97
<PAGE> 203
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 10. PROFIT INVESTMENT PLAN -- (CONTINUED)
have completed one year of service with the Company and may make additional
matching contributions. On April 20, 1995, the Company and NPDC agreed to
exchange shares of the Company's common stock or other consideration, for shares
of the common stock of NPDC upon terms which would permit the Company to match
participants' contributions in shares of NPDC common stock up to 57% of monthly
employee salary deferral contributions. Previously, since April 1993, the
Company had made contributions of its own common stock to the Plan equal to
approximately 50% of monthly employee salary deferral contributions. During the
first nine months of 1996 and in 1995, the exchange included 189,378 and 176,171
shares, respectively of the Company's common stock and 85,232 and 98,251 shares,
respectively of the common stock of NPDC. It is expected that similar exchanges
of the Company's common stock or other consideration for NPDC's common stock
will continue in the future as long as a favorable rate of exchange is available
to the Company. All contributions are held by a trustee and invested at the
participant's direction in various mutual funds. Participants are fully vested
in their own contributions and may withdraw such contributions at age 59 1/2 or
earlier in the event of financial hardship. Amounts will otherwise be paid at
retirement or in the event of death or disability. Employer contributions vest
at a rate of 20% per year. The Company made matching contributions to the Plan
for employees of the continuing operations of the Company of approximately
$1,097,000, $705,000 and $521,000 for the years ended December 31, 1995, 1994,
and 1993, respectively and $803,000 and $846,000 for the nine months ended
September 30, 1996 and 1995, respectively.
The Company does not provide any post-retirement benefits to its employees
and post-employment benefits are not material.
NOTE 11. STOCK OPTIONS AND WARRANTS
Under the Company's non-qualified stock option plan adopted in May 1991,
directors, officers and other key employees may be granted options to purchase
shares of the Company's common stock. The exercise price of such options may not
be less than 85% of the fair market value of the common stock on the date of
grant and the exercise period may not be more than 10 years after such date.
[TABLE FOLLOWS]
F-98
<PAGE> 204
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 11. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
During the first quarter of 1995, the Company issued new options to acquire
shares of the Company's common stock at an exercise price of $2.75 and cancelled
all outstanding options previously granted to the recipients of the new options.
Changes in options outstanding, options exercisable, and shares reserved for
issuance pursuant to stock options are as follows:
<TABLE>
<CAPTION>
PRICE PER SHARE NUMBER OF SHARES
--------------- ----------------
<S> <C> <C>
December 31, 1992...................................... $ 13.00 575,390
---------------------------------------------------------------------------------------------
Granted................................................ 4.50 435,150
Forfeited.............................................. 13.00 (81,500)
4.50 (9,600)
---------------------------------------------------------------------------------------------
December 31, 1993...................................... 13.00 493,890
4.50 425,550
---------------------------------------------------------------------------------------------
Granted................................................ 4.63 20,000
2.88 60,000
Forfeited.............................................. 13.00 (110,400)
4.50 (98,950)
---------------------------------------------------------------------------------------------
December 31, 1994...................................... 13.00 383,490
4.63 20,000
4.50 326,600
2.88 60,000
---------------------------------------------------------------------------------------------
Granted................................................ 2.75 1,656,745
Cancelled.............................................. 13.00 (362,090)
4.63 (20,000)
4.50 (289,700)
Exercised.............................................. 2.75 (5,700)
Forfeited.............................................. 2.75 (136,575)
---------------------------------------------------------------------------------------------
December 31, 1995...................................... 13.00 21,400
4.50 36,900
2.88 60,000
2.75 1,514,470
---------------------------------------------------------------------------------------------
Granted................................................ 3.38 5,000
3.25 5,000
3.13 30,000
Cancelled.............................................. 13.00 (18,200)
4.50 (36,150)
Exercised.............................................. 2.75 (760)
Forfeited.............................................. 3.25 (5,000)
2.75 (31,500)
---------------------------------------------------------------------------------------------
September 30, 1996..................................... 13.00 3,200
4.50 750
3.38 5,000
3.13 30,000
2.88 60,000
2.75 1,482,210
=========== =============
</TABLE>
F-99
<PAGE> 205
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 11. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
In addition, at September 30, 1996, warrants to purchase 1,000,000 shares
of the Company's common stock at $6.00 per share and warrants to purchase
475,664 shares at $7.00 per share were outstanding. Such warrants expire on
August 31, 2001 and August 31, 2004, respectively. As of September 30, 1996, all
outstanding warrants and 3,200 of the $13.00 options, 750 of the $4.50 options,
1,000 of the $3.38 options, 6,000 of the $3.13 options, 60,000 of the $2.88
options, and 592,884 of the $2.75 options were exercisable and 2,000,000 shares
of the Company's common stock were reserved for issuance upon exercise of the
option and warrants.
NOTE 12. COMMITMENTS AND CONTINGENCIES
On October 25, 1996, the U.S. District Court for the Southern District of
Georgia gave final approval to a settlement of the action styled Bell v. General
Physics Corporation filed against the Company by a former employee on September
19, 1994, alleging that the Company willfully and intentionally violated the
Fair Labor Standard Act by failing to pay overtime to the plaintiff and other
similarly situated current and former employees of the Company. Under the terms
of the settlement, the Company will pay $259,000, inclusive of the plaintiffs'
legal fees and expenses. A reserve for these amounts is included in the general
and administrative and other expenses in the period ended September 30, 1996.
On April 5, 1995, the Company agreed to a settlement of all claims by a
former officer of the Company, including settlement of a previously announced
judgment for which the Company had recorded a reserve of $1,400,000 ($932,000
net of taxes). The settlement was approximately $915,000 including legal
expenses. Since the reserve related to a preacquisition contingency of GPC, the
over accrual of approximately $485,000 has adjusted the purchase price
adjustments recorded with respect to the reverse acquisition and, accordingly,
is not included in reported earnings for the period.
During 1995, the Company awarded options to acquire shares of the Company's
common stock to certain officers and employees of the Company and its
subsidiary, General Physics Federal Systems, Inc. (formerly known as GPS
Technologies, Inc. Federal Systems Group) pursuant to agreements restricting
such officers and employees from competing with the Company during their
employment and for a period of up to six months thereafter. Such agreements also
provide for severance payments equal to up to six months of salary upon
circumstances defined in such agreements.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 13. SIGNIFICANT CUSTOMERS
Services related to the United States Government represented approximately
53%, 48% and 46% of revenue for the years ended 1995, 1994 and 1993,
respectively and 48% and 55% for the nine months ended September 30, 1996 and
1995 respectively. No other customers represented 10% or more of revenue for
these periods.
At December 31, 1995, 1994 and 1993 and September 30, 1996 and 1995,
accounts receivable included approximately $13,013,000, $12,780,000, $8,582,000,
$15,334,000 and $8,880,000, respectively, relating to services provided to the
United States Government. The Company also had net costs and estimated earnings
in excess of billings of $1,473,000, $4,052,000, $2,916,000, $645,000 and
$1,734,000 at December 31, 1995, 1994 and 1993 and September 30, 1996 and 1995,
respectively, relating to services provided to the United States Government.
F-100
<PAGE> 206
GENERAL PHYSICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED.)
NOTE 14. OTHER RELATED PARTY TRANSACTIONS
The GPST Businesses paid NPDC approximately $600,000 for their portion of
legal, financial, consulting, and accounting services provided by NPDC for the
year ended December 31, 1993 and $400,000 for the eight months ended August 31,
1994. The GPST Businesses also paid NPDC, through GPST, for Federal income taxes
due under GPST's tax-sharing agreement with NPDC.
A summary of transactions with NPDC during the eight months ended August
31, 1994 and year ended December 31, 1993 is as follows (in thousands):
<TABLE>
<CAPTION>
Inter- Ser-
Net est In- vices
Pay- Ex- come Ren-
ments pense Taxes dered
-------- ------- ------ --------
<S> <C> <C> <C> <C>
1994............................................... $5,505 $ 568 $467 $400
1993............................................... 2,623 735 641 600
</TABLE>
The balance outstanding to NPDC at August 31, 1994 of $4,470,000, was
retired by SGLG, Inc. with proceeds from the sale of the GPST Businesses to GPC.
NOTE 15. SUBSEQUENT EVENTS
On September 25, 1996, the Company and NPDC announced that they had reached
an agreement pursuant to which NPDC would acquire the remaining shares
(approximately 48% of the outstanding shares) of the Company that it does not
already own (the "Merger"). The agreement was recommended to the Board of
Directors of the Company by a Special Committee of the Board composed of
independent directors. Based on an agreed upon price of NPDC common stock on
September 18, 1996 ($9.625 per share), NPDC would issue .53 shares of its common
stock, par value $.01 per share, for each outstanding share of the Company's
common stock not owned by NPDC. The exchange ratio, which is subject to certain
adjustments, would provide approximately $5.10 in value for each outstanding
share of the Company. The proposed transaction is subject, among other things,
to the execution of a definitive merger agreement, the approval by stockholders
of each of NPDC and the Company, receipt of a fairness opinion from the
investment banker for the Company, and registration under the Securities Act of
1933 of the shares of NPDC common stock to be issued in the proposed
transaction.
On September 27, 1996, the Company, all of the directors of the Company and
NPDC were named as defendants in a complaint filed in the Court of Chancery of
the State of Delaware in and for New Castle County, styled Dunlop v. Pollak et
al., Civil action No. 15237-NC. The complaint was brought by an alleged
stockholder of the Company, individually and purportedly as a class action on
behalf of all other stockholders of the Company. The complaint alleges purported
breaches of fiduciary duty by the directors of the Company, including certain
directors who are also directors of NPDC, and purported breaches of fiduciary
duty by NPDC, as an alleged majority and controlling shareholder, arising
primarily from the Merger. The complaint alleges, among other things, that the
Merger has been timed to allow NPDC to take advantage of the current trading
price of GPC Common Stock, which plaintiff alleges is depressed. The complaint
seeks, among other things, injunctive relief prohibiting the Merger or, if the
Merger is consummated, an order rescinding the Merger or granting plaintiff and
the other members of the purported class damages. Plaintiff has granted the
defendants extensions of the time in which to answer the complaint and to
respond to plaintiff's pending request to review documents relating to the
Merger. The defendants believe that the claims set forth in the complaint are
without merit, and intend vigorously to defend the litigation.
F-101
<PAGE> 207
ANNEX A -- MERGER AGREEMENT
AGREEMENT AND PLAN OF MERGER
DATED AS OF NOVEMBER 19, 1996
AMONG
GENERAL PHYSICS CORPORATION,
NATIONAL PATENT DEVELOPMENT CORPORATION
AND
GPX ACQUISITION INC.
<PAGE> 208
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE 1
THE MERGER......................................................................... A-1
Section 1.1. The Merger........................................................... A-1
Section 1.2. Closing.............................................................. A-1
Section 1.3. Effective Time....................................................... A-1
Section 1.4. Effects of the Merger................................................ A-1
Section 1.5. Certificate of Incorporation; By-laws................................ A-2
Section 1.6. Directors and Officers of the Surviving Corporation.................. A-2
ARTICLE 2
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT CORPORATIONS............. A-2
Section 2.1. Effect on Capital Stock.............................................. A-2
Section 2.2. Exchange of Certificates............................................. A-3
ARTICLE 3
REPRESENTATIONS AND WARRANTIES..................................................... A-5
Section 3.1. Representations and Warranties of General Physics.................... A-5
Section 3.2. Representations and Warranties of the Parent and Newco............... A-11
ARTICLE 4
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER.......................... A-16
Section 4.1. Certain Covenants.................................................... A-16
ARTICLE 5
ADDITIONAL AGREEMENTS.............................................................. A-19
Section 5.1. Preparation of Form S-4, the GPC Proxy Statement and the
NPD Proxy Statement................................................. A-19
Section 5.2. Meetings of Stockholders............................................. A-19
Section 5.3. Legal Requirements to Merger......................................... A-20
Section 5.4. Access to Information................................................ A-20
Section 5.5. Best Efforts......................................................... A-20
Section 5.6. Capital Stock........................................................ A-20
Section 5.7. Indemnification and Insurance........................................ A-20
Section 5.8. Public Announcements................................................. A-21
Section 5.9. No Solicitation, Etc................................................. A-21
Section 5.10. Consents, Approvals and Filings...................................... A-22
Section 5.11. Non-Interference, Etc................................................ A-22
Section 5.12. Affiliates........................................................... A-22
Section 5.13. Listing.............................................................. A-22
Section 5.14. Brokers and Finders.................................................. A-23
ARTICLE 6
CONDITIONS PRECEDENT............................................................... A-23
Section 6.1. Conditions to Each Party's Obligation to Effect the Merger........... A-23
Section 6.2. Conditions to Obligations of General Physics......................... A-24
Section 6.3. Conditions to Obligations of the Parent and Newco.................... A-24
</TABLE>
A-i
<PAGE> 209
<TABLE>
<CAPTION>
PAGE
--
<S> <C>
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER.................................................. A-25
Section 7.1. Termination.......................................................... A-25
Section 7.2. Fees and Expenses Upon Termination................................... A-26
Section 7.3. Effect of Termination................................................ A-27
Section 7.4. Extension; Waiver.................................................... A-27
Section 7.5. Procedure for Termination, Amendment, Extension or Waiver; Role of
the Special Committee up to the Effective Time....................... A-27
ARTICLE 8
DEFINITIONS........................................................................ A-27
Section 8.1. Certain Defined Terms................................................ A-27
Section 8.2. Certain Rules of Construction........................................ A-28
Section 8.3. Table of Defined Terms Defined in the Text of the Agreement.......... A-29
ARTICLE 9
GENERAL PROVISIONS................................................................. A-30
Section 9.1. Nonsurvival of Representations and Warranties........................ A-30
Section 9.2. Fees and Expenses.................................................... A-30
Section 9.3. Notices.............................................................. A-30
Section 9.4. Amendment............................................................ A-31
Section 9.5. Entire Agreement; Third-Party Beneficiaries.......................... A-31
Section 9.6. Governing Law........................................................ A-31
Section 9.7. Assignment........................................................... A-31
Section 9.8. Enforcement.......................................................... A-31
Section 9.9. Severability......................................................... A-32
Section 9.10. Counterparts......................................................... A-32
</TABLE>
A-ii
<PAGE> 210
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of November 19, 1996 among General
Physics Corporation, a Delaware corporation ("General Physics"), National Patent
Development Corporation, a Delaware corporation ("Parent"), and GPX Acquisition
Inc., a Delaware corporation ("Newco"). Capitalized terms are used as defined in
Article 8 hereof.
WITNESSETH:
WHEREAS, the Board of Directors of General Physics, based upon the
unanimous recommendation of the special committee of the independent directors
of General Physics (the "Special Committee"), and the Boards of Directors of the
Parent and of Newco deem it advisable and in the best interests of their
respective stockholders to consummate, and have unanimously approved, the merger
of Newco with and into General Physics upon the terms and subject to the
conditions set forth herein (the "Merger");
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements contained in this
Agreement, the parties hereto agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Delaware General Corporation
Law (the "DGCL"), Newco shall be merged with and into General Physics at the
Effective Time. Upon the Effective Time, the separate existence of Newco shall
cease, and General Physics shall continue as the surviving corporation (the
"Surviving Corporation").
SECTION 1.2. Closing. Unless this Agreement shall have been terminated
pursuant to Section 7.1 and subject to the satisfaction or waiver of each of the
conditions set forth in Article 6, the closing of the Merger (the "Closing")
will take place at 10:00 a.m. on the date (the "Closing Date") that is the
second business day following the date on which the last to be fulfilled or
waived of the conditions set forth in Article 6 shall be fulfilled or waived in
accordance with this Agreement, at the offices of Morgan, Lewis & Bockius LLP,
101 Park Avenue, New York, New York 10178, unless another date, time or place is
agreed to in writing by the parties hereto.
SECTION 1.3. Effective Time. The parties hereto will file with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
on the date of the Closing (or on such other later date as General Physics and
the Parent may agree) a certificate of merger or other appropriate documents,
prepared and executed in accordance with the relevant provisions of the DGCL,
and make all other filings and recordings required under the DGCL in connection
with the Merger. The Merger shall become effective upon the filing of the
certificate of merger with the Delaware Secretary of State, or at such later
time as is specified in the certificate of merger (the "Effective Time").
SECTION 1.4. Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, the capital stock of
Newco shall become the capital stock of the Surviving Corporation and all the
properties, rights, privileges, powers and franchises of Newco shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Newco shall
become the debts, liabilities and duties of the Surviving Corporation, all as
provided under the DGCL.
A-1
<PAGE> 211
SECTION 1.5. Certificate of Incorporation; By-laws.
(a) The Certificate of Incorporation of General Physics (the "GPC
Charter"), as in effect immediately prior to the Effective Time, shall from and
after the Effective Time, be the certificate of incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
(b) The by-laws of General Physics (the "GPC By-laws") as in effect
immediately prior to the Effective Time shall be the by-laws of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
SECTION 1.6. Directors and Officers of the Surviving Corporation.
(a) The directors of General Physics immediately prior to the Effective
Time shall be the directors of the Surviving Corporation until their respective
successors are duly elected and qualified or until their earlier death,
resignation or removal in accordance with the GPC Charter and the GPC By-laws,
or as otherwise provided by applicable law.
(b) The officers of General Physics immediately prior to the Effective Time
shall be the officers of the Surviving Corporation until their respective
successors are duly appointed and qualified or until their earlier death,
resignation or removal in accordance with the GPC Charter and the GPC By-laws,
or as otherwise provided by applicable law.
ARTICLE 2
EFFECT OF THE MERGER ON THE SECURITIES
OF THE CONSTITUENT CORPORATIONS
SECTION 2.1. Effect on Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holders of any shares of
General Physics' Common Stock, par value $.025 per share (the "GPC Common
Stock"), or any other shares of capital stock of General Physics:
(a) Cancellation of GPC Treasury Stock and Certain NPD-Owned Stock. Each
share of GPC Common Stock issued and outstanding immediately prior to the
Effective Time that is owned by General Physics or any Subsidiary of General
Physics or by the Parent shall automatically be canceled and retired and shall
cease to exist, and no shares of the Parent's Common Stock, par value $.01 per
share (the "NPD Common Stock"), cash or other consideration shall be delivered
or deliverable in exchange therefor.
(b) Conversion of GPC Common Stock. Subject to Section 2.2(f), each share
of GPC Common Stock issued and outstanding immediately prior to the Effective
Time (other than shares to be canceled in accordance with Section 2.1(a) above)
shall, as a matter of law, be converted into the right to receive from the
Parent a fraction of a validly issued, fully paid and non-assessable share of
NPD Common Stock equal to the Exchange Ratio (the "Stock Consideration"). (The
Stock Consideration and any cash to be paid in accordance with Section 2.2(f) in
lieu of fractional shares of NPD Common Stock are referred to collectively as
the "Merger Consideration".) The term "Exchange Ratio" means a ratio equal to
0.53, except (A) in the event that the Parent Stock Price is less than $9.336,
the Parent may elect at its option (without any obligation to do so) to increase
the Exchange Ratio to the Adjusted Exchange Ratio pursuant to the following
formula:
(9.336 / the Parent Stock Price) x 0.53 = Adjusted Exchange Ratio
(rounded to the nearest 1/100), provided that the Parent provides notice of its
election of such option (the "Parent Gross-Up Option") to General Physics no
later than the close of business on the second trading day after the Test Date
(such notice to specify the Adjusted Exchange Ratio) and (B) in the event that
the Parent Stock Price is greater than $9.914, General Physics may elect at its
option (without any obligation to do so) to decrease the Exchange Ratio to the
Adjusted Exchange Ratio pursuant to the following formula:
(9.914 / the Parent Stock Price) x 0.53 = Adjusted Exchange Ratio
A-2
<PAGE> 212
(rounded to the nearest 1/100), provided that General Physics provides notice of
its election of such option (the "GPC Reduction Option") to the Parent no later
than the close of business on the second trading day after the Test Date (such
notice to specify the Adjusted Exchange Ratio).
(c) General Physics Stock Options.
(i) As of the Effective Time, the holder of each outstanding stock
option to purchase GPC Common Stock granted under the 1991 General Physics
Corporation Stock Option Plan (such options, the "Options") which is then
unvested shall be entitled to receive (upon vesting) for each share of GPC
Common Stock which would have been obtainable upon exercise of the Option a
payment from the Parent in shares of NPD Common Stock equal to $5.10 less
the exercise price of the unvested Option as such exercise price is in
effect immediately prior to the Merger, subject to adjustment for stock
dividends, stock splits and the like. Such payment in shares of NPD Common
Stock shall be made to the holder of the Option at the time such Option
vests using the market price of NPD Common Stock as of the end of the
business day immediately preceding such vesting date. Each such Option
shall be cancelled upon payment therefor.
(ii) As of the Effective Time, all Options which have vested prior to,
or which will vest upon, the Effective Time (the "Vested Options") which
have not been repurchased by the Parent pursuant to Section 5.6 because the
holder(s) of such Vested Options have not consented to such repurchase (the
"Assumed Options") shall be adjusted such that the holder of each of the
Assumed Options shall be entitled to receive, upon payment of the exercise
price thereof (as in effect immediately prior to the Effective Time, as may
be adjusted thereafter for any stock splits, combinations,
reclassifications and the like), the shares of NPD Common Stock which such
holder would have been entitled to receive after the Effective Time had
such Assumed Option been exercised immediately prior to the Effective Time.
The form of Assumed Option shall be adjusted in a form as may be approved
by the Board of Directors of General Physics and by the Board of Directors
of National Patent to reflect adjustments in the exercise price thereof and
the number and kind of securities purchased under such Assumed Options.
(d) Warrants. At the Effective Time, the Warrants shall be adjusted such
that the holder of each of the Warrants shall be entitled to receive, upon
payment of the exercise price thereof, the shares of NPD Common Stock which such
holder would have owned or have been entitled to receive after the Effective
Time had such Warrant been exercised immediately prior to the Effective Time, as
such exercise price and number of shares shall be thereafter adjusted. The form
of Warrant shall be adjusted in a form as may be approved by the Board of
Directors of General Physics to reflect adjustments in the exercise price
thereof and the number and kind of securities purchased under such Warrants.
(e) Cancellation and Retirement of GPC Common Stock. As of the Effective
Time, all certificates representing shares of GPC Common Stock, other than
certificates representing shares to be canceled in accordance with Section
2.1(a), issued and outstanding immediately prior to the Effective Time, shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any such shares of
GPC Common Stock shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration upon surrender of such certificate in
accordance with Section 2.2, without interest.
SECTION 2.2. Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, the Parent shall deposit with
First City Transfer Company, or another bank or trust company designated by the
Parent and reasonably satisfactory to General Physics (the "Exchange Agent"),
for the benefit of the holders of shares of GPC Common Stock, certificates
representing shares of NPD Common Stock representing the aggregate Stock
Consideration (such certificates, together with any dividends or distributions
with respect to such certificates, being hereinafter referred to as the
"Exchange Fund").
A-3
<PAGE> 213
(b) Exchange Procedures.
(i) As soon as practicable after the Effective Time, each holder of an
outstanding certificate or certificates which prior thereto represented
shares of GPC Common Stock (except holders of shares of GPC Common Stock to
be canceled in accordance with Section 2.1(a)) shall, upon surrender to the
Exchange Agent of such certificate or certificates and acceptance thereof
by the Exchange Agent, be entitled to a certificate representing that
number of whole shares of NPD Common Stock (and cash in lieu of fractional
shares of NPD Common Stock as contemplated by Section 2.2(f)) which the
aggregate number of shares of GPC Common Stock previously represented by
such certificate or certificates surrendered shall have been converted into
the right to receive pursuant to Section 2.1(b).
(ii) The Exchange Agent shall accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose
to effect an orderly exchange thereof in accordance with normal exchange
practices. If the Merger Consideration (or any portion thereof) is to be
delivered to any person other than the person in whose name the certificate
representing shares of GPC Common Stock surrendered in exchange therefor is
registered, it shall be a condition to such exchange that the certificate
so surrendered shall be properly endorsed or otherwise be in proper form
for transfer and that the person requesting such exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the
payment of such consideration to a person other than the registered holder
of the certificate surrendered, or shall establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable.
(iii) After the Effective Time, there shall be no further transfer on
the records of General Physics or its transfer agent of certificates
representing shares of GPC Common Stock and if such certificates are
presented to General Physics for transfer, they shall be canceled against
delivery of the Merger Consideration as hereinabove provided. Until
surrendered as contemplated by this Section 2.2(b), each certificate
representing shares of GPC Common Stock (other than certificates
representing shares of GPC Common Stock to be canceled in accordance with
Section 2.1(a)) shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the Merger
Consideration, without any interest thereon, as contemplated by Section
2.1. No interest will be paid or will accrue on any cash payable as Merger
Consideration.
(c) Letter of Transmittal. Promptly after the Effective Time (but in no
event more than five days thereafter), the Surviving Corporation shall require
the Exchange Agent to mail to each record holder of certificates that
immediately prior to the Effective Time represented shares of GPC Common Stock
which have been converted pursuant to Section 2.1, a form of letter of
transmittal and instructions for use in surrendering such certificates and
receiving the Merger Consideration to which such holder shall be entitled
pursuant to Section 2.1.
(d) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to NPD Common Stock with a record date after the
Effective Time shall be paid to the holder of any certificate that immediately
prior to the Effective Time represented shares of GPC Common Stock which have
been converted pursuant to Section 2.1 ("Converted Shares"), until the surrender
for exchange of such certificate in accordance with this Article 2. Following
surrender for exchange of any such certificate, there shall be paid to the
holder of such certificate, without interest, (i) at the time of such surrender,
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid or payable with respect to the number of whole
shares of NPD Common Stock into which the shares of GPC Common Stock represented
by such certificate immediately prior to the Effective Time were converted
pursuant to Section 2.1 and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time,
but prior to such surrender, and with a payment date subsequent to such
surrender, payable with respect to such whole shares of NPD Common Stock.
(e) No Further Ownership Rights in General Physics. The Merger
Consideration paid upon the surrender for exchange of certificates representing
shares of GPC Common Stock in accordance with the terms of this Article 2 shall
be deemed to have been issued and paid in full satisfaction of all rights
pertaining to the shares of GPC Common Stock theretofore represented by such
certificates, subject, however, to the
A-4
<PAGE> 214
Surviving Corporation's obligations (if any) (which shall be satisfied
exclusively from the assets of the Surviving Corporation, and not, directly or
indirectly, from the assets of the Parent) to pay any dividends or make any
other distributions with a record date prior to the Effective Time which may
have been declared by General Physics on such shares of GPC Common Stock in
accordance with the terms of this Agreement or prior to the date of this
Agreement and which remain unpaid at the Effective Time.
(f) No Fractional Shares.
(i) No certificates or scrip representing fractional shares of NPD
Common Stock shall be issued upon the surrender for exchange of
certificates that immediately prior to the Effective Time represented
shares of GPC Common Stock which have been converted pursuant to Section
2.1, and such fractional share interests will not entitle the owner thereof
to vote or to any rights as a stockholder of the Parent.
(ii) Notwithstanding any other provisions of this Agreement, each
holder of shares of GPC Common Stock who would otherwise have been entitled
to receive a fraction of a share of NPD Common Stock (after taking into
account all certificates delivered by such holder) pursuant to Section 2.1
shall receive, in lieu thereof, cash (without interest) in an amount equal
to (x) such fractional part of a share of NPD Common Stock multiplied by
(y) the Parent Stock Price. The Parent shall provide the Exchange Agent
with the necessary cash for such payments as and when it is needed. No
General Physics stockholder shall be entitled to receive cash in lieu of
fractional shares in an amount greater than the value of one full share of
GPC Common Stock.
(g) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the certificates representing Converted
Shares for 180 days after the Effective Time shall be delivered to the Parent,
upon demand, and any holders of Converted Shares who have not theretofore
complied with this Article 2 shall thereafter look only to the Parent for
payment of their claim for any Merger Consideration and any dividends or
distributions with respect to NPD Common Stock.
(h) No Liability. None of General Physics, the Parent, the Surviving
Corporation or the Exchange Agent shall be liable to any person in respect of
any shares, cash, dividends or distributions payable from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. If any certificates representing Converted Shares shall
not have been surrendered prior to five years after the Effective Time (or
immediately prior to such earlier date on which any Merger Consideration in
respect of such certificate would otherwise escheat to or become the property of
any Governmental Entity), any such shares, cash, dividends or distributions
payable in respect of such certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interest of any person previously entitled thereto.
(i) Lost, Stolen or Destroyed Certificates. In the event that any
certificate for GPC Common Stock shall have been lost, stolen or destroyed, the
Exchange Agent shall issue in exchange therefor, upon the making of an affidavit
of that fact by the holder thereof, such shares of NPD Common Stock and cash in
lieu of fractional shares, if any, as may be required pursuant to this
Agreement; provided, however, that the Parent may, in its discretion, require
the delivery of a suitable bond or indemnity.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of General Physics. General
Physics represents and warrants to each of the Parent and Newco as follows:
(a) Organization, Standing and Power. Each of General Physics and its
Subsidiaries is a corporation, duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has all requisite
power and authority to own, lease and operate its properties and to carry on its
business, as now being conducted, and is duly qualified and in good standing to
do business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary except
when the failure to be so qualified would not have a GPC Material Adverse
Effect.
A-5
<PAGE> 215
(b) Capital Structure.
(i) As of the date hereof, the authorized capital stock of General
Physics consists of 20,000,000 shares of GPC Common Stock and 5,000,000
shares of Preferred Stock, par value $.025 per share (the "GPC Preferred
Stock"). At the close of business on September 30, 1996:
(A) 10,525,926 shares of GPC Common Stock were outstanding,
2,000,000 shares of GPC Common Stock were reserved for issuance upon the
exercise of outstanding stock options or pursuant to General Physics'
other benefit plans (such stock options and such benefit plans,
collectively, the "GPC Stock Plans");
(B) no shares of GPC Common Stock were held by its subsidiaries;
(C) except for the Warrants and the Options, no bonds, debentures,
notes or other indebtedness having the right to vote (or convertible
into or exercisable for securities having the right to vote) on any
matters on which stockholders may vote ("Voting Debt"), and no other
options or warrants to purchase shares of GPC Common Stock were issued
or outstanding; and
(D) no shares of GPC Preferred Stock were issued and outstanding.
All outstanding shares of General Physics capital stock are validly issued,
fully paid and nonassessable and not subject to preemptive rights.
(ii) As of the date of this Agreement, there are no options, warrants,
calls, rights, or agreements (other than the Options, the Warrants, this
Agreement and agreements with the Parent) to which General Physics or any
Subsidiary of General Physics is a party or by which it or any such
Subsidiary is bound obligating General Physics or any Subsidiary of General
Physics to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or any Voting Debt of General
Physics or of any Subsidiary of General Physics or obligating General
Physics or any Subsidiary of General Physics to grant, extend or enter into
any such option, warrant, call, right or agreement. Assuming compliance
with Section 2.1(c) after the Effective Time, there will be no option,
warrant, call, right or agreement obligating General Physics or any
Subsidiary of General Physics to issue, deliver or sell, or cause to be
issued, delivered or sold, any shares of capital stock or any Voting Debt
of General Physics or any Subsidiary of General Physics, or obligating
General Physics or any Subsidiary of General Physics to grant, extend or
enter into any such option, warrant, call, right or agreement.
(c) Authority.
(i) General Physics has all requisite corporate power and authority to
enter into this Agreement and, subject to approval of this Agreement and
the Merger by the stockholders of General Physics, to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
General Physics, subject to such approval of this Agreement by the
stockholders of General Physics. This Agreement has been duly executed and
delivered by General Physics and, subject to such approval of this
Agreement by the stockholders of General Physics, constitutes a valid and
binding obligation of General Physics enforceable against it in accordance
with its terms. The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or the loss of a material
benefit under, or the creation of a Lien (any such conflict, violation,
default, right of termination, cancellation or acceleration, loss or
creation, a "Violation"), pursuant to any provision of the Certificate of
Incorporation or By-laws of General Physics or any Subsidiary of General
Physics or, except as set forth on Schedule 3.1(c) hereto, result in any
Violation of any loan or credit agreement, note, mortgage, indenture,
lease, GPC Plan or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to General Physics or any
Subsidiary of General Physics or their respective properties or assets
which Violation would have a GPC Material Adverse Effect.
A-6
<PAGE> 216
(ii) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to General Physics or any of its Subsidiaries in connection with
the execution and delivery of this Agreement by General Physics, or the
consummation by General Physics of the transactions contemplated hereby,
the failure to obtain which would have a GPC Material Adverse Effect,
except for (A) the filing with the SEC of (x) a proxy statement in
definitive form relating to the meeting of General Physics' stockholders
(the "GPC Proxy Statement", which may be combined with the NPD Proxy
Statement, as so combined, the "Proxy Statement"), and, if required, a
meeting of the Parent's stockholders, to be held in connection with the
Merger and (y) such reports under Sections 13(a), 13(d) and 16(a) of the
Exchange Act, as may be required in connection with this Agreement and the
transactions contemplated hereby, (B) the filing of the Merger Filings and
appropriate documents with the relevant authorities of other states in
which General Physics is qualified to do business, (C) such filings,
authorizations, orders and approvals as may be required by foreign, state
or local governmental authorities and (D) such filings, authorizations,
orders and approvals (the "State Takeover Approvals") as may be required by
state takeover laws.
(d) SEC Documents. General Physics has delivered or made available to the
Parent a true and complete copy of each material report, schedule, registration
statement and definitive proxy statement filed by General Physics with the SEC
since January 1, 1993 (as such documents have since the time of their filing
been amended, the "GPC SEC Documents") which are all the documents (other than
preliminary material) that General Physics has been required to file with the
SEC since such date. As of their respective dates, the Form 10-K and 10-Q
included in the GPC SEC Documents (the "GPC Reports") complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable to
such GPC Reports and none of the GPC Reports contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The consolidated financial statements of
General Physics included in the GPC Reports comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal, year-end audit
adjustments) the consolidated financial position of General Physics and its
consolidated Subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.
(e) Information Supplied. None of the information supplied or to be
supplied by General Physics for inclusion or incorporation by reference in (i)
the registration statement on Form S-4 (which may be combined, if appropriate,
with the Proxy Statement) to be filed with the SEC by the Parent in connection
with the issuance of shares of NPD Common Stock in the Merger (the "S-4") will,
at the time the S-4 is filed with the SEC and at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the GPC Proxy Statement
will, at the date mailed to stockholders and at the times of the meeting or
meetings of stockholders to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The GPC
Proxy Statement will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
(f) Compliance with Applicable Laws. The businesses of General Physics and
each of its Subsidiaries have been and are being conducted in compliance with
all applicable laws, rules, ordinances, regulations, licenses, judgments, orders
or decrees of federal, state, local and foreign governmental authorities, except
for possible violations which individually or in the aggregate do not, and,
insofar as reasonably can be foreseen, in the future will not, have a GPC
Material Adverse Effect. General Physics and each of its Subsidiaries hold all
certificates of authority, franchises, grants, permits, licenses, easements,
consents, certificates, variances, exemptions, orders and approvals from all
Governmental Entities (collectively, "GPC Permits") which are
A-7
<PAGE> 217
necessary to own, lease and operate the assets and properties they currently
own, lease and operate and to conduct their respective businesses and operations
in the manner heretofore conducted and as proposed to be conducted, except for
those GPC Permits, the absence of which would not have a GPC Material Adverse
Effect.
(g) Financial Statements.
(i) General Physics has delivered, or (if not yet available) will
promptly deliver when available (and in any event prior to the Effective
Time), to the Parent complete and correct copies of:
(A) the audited consolidated balance sheets of General Physics and
its then-existing Subsidiaries as at December 31, 1995, 1994 and 1993,
and the related audited consolidated statements of operations and
stockholders' equity and cash flows, for the fiscal years ended on those
dates, together with all footnotes; and
(B) the unaudited interim consolidated financial statements for
General Physics and its Subsidiaries as at, and for the fiscal periods
ended on, March 31, 1996, June 30, 1996 and September 30, 1996.
All of such financial statements fairly present, or when delivered will
fairly present, as the case may be (subject, in the case of unaudited
interim financial statements, to normal, year-end audit adjustments which
are not expected to be, individually or in the aggregate, materially
adverse to General Physics and its Subsidiaries taken as a whole), the
financial position, results of operations and cash flows of General Physics
and each of its Subsidiaries as at the respective dates of such balance
sheets and for each of the respective periods then ended, in conformity
with GAAP applied on a basis consistent throughout the reported periods.
(ii) Neither such financial statements nor the financial statements of
General Physics included in the GPC SEC Documents (A) contain or when
delivered will contain, as the case may be, any item of extraordinary or
non-recurring income or expense (except as specified therein); (B) reflect
or when delivered will reflect, as the case may be, uncollectible accounts
receivable without a reserve fairly stated for uncollectible amounts; and
(C) reflect or when delivered will reflect, as the case may be, any
write-off or revaluation of assets (except as specified therein). As at the
respective dates of the balance sheets included in all such financial
statements, there was no material liability, indebtedness or obligation of
any nature or in any amount that should properly be reflected or provided
for in financial statements prepared in conformity with GAAP applied on a
basis consistent with that for prior periods, which was not fully reflected
in such financial statements.
(h) Litigation. Except (x) for the case styled Dunlop v. Pollak, et al.
pending in the Court of Chancery of the State of Delaware (Civil Action No.
15237-NC), (y) as disclosed in the GPC SEC Documents and (z) for actions and
suits arising in the ordinary course of General Physics' business, none of which
if decided adversely to General Physics or its Subsidiaries would have a
material adverse effect on General Physics or any such Subsidiary, there is no
action, suit, proceeding or investigation, either at law or in equity, at or
before any commission or other administrative authority in any domestic or
foreign jurisdiction, of any kind now pending or, to General Physics' knowledge,
threatened, involving General Physics, any of its Subsidiaries or any of their
respective properties or assets that (i) if asserted and decided adversely to
General Physics or any such Subsidiary could, individually or in the aggregate,
have a GPC Material Adverse Effect, (ii) questions the validity of this
Agreement or (iii) seeks to delay, prohibit or restrict in any manner the Merger
or any action taken or to be taken by General Physics or any of its Subsidiaries
under this Agreement. Except as publicly announced in the GPC SEC Documents or
in any press release prior to the date hereof, none of General Physics nor any
of its Subsidiaries, nor any of their respective properties or assets, is
subject to any continuing order of, consent decree, settlement agreement or
other similar written agreement (other than agreements related to the settlement
of insurance claims in the ordinary course of business), continuing
investigation (other than regularly scheduled audits) by any Governmental
Entity, or any judicial, administrative or arbitral judgment, order, writ,
decree, injunction, restraint, or award of any Governmental Entity or
arbitrator, including without limitation cease-and-desist or other orders.
Neither General Physics nor any of its
A-8
<PAGE> 218
Subsidiaries has agreed to, or is bound by, any extension or waiver of the
statute of limitations relating to any pending or potential action, suit, claim,
proceeding or investigation involving General Physics or any of its Subsidiaries
(other than extensions or waivers in connection with the settlement of insurance
claims in the ordinary course of business).
(i) Absence of Certain Changes. Since September 30, 1996, except (A) for
the execution and delivery of this Agreement and changes in its properties or
business attributable to the transactions contemplated by this Agreement, and
(B) as disclosed in General Physics' financial statements or in the GPC SEC
Documents previously delivered or made available to the Parent and Newco,
neither General Physics nor any of its Subsidiaries:
(i) had any change in its condition (financial or otherwise),
operations, business, properties, assets or liabilities, other than changes
in the ordinary course of business, none of which has been, individually or
in the aggregate, materially adverse to General Physics or any such
Subsidiary;
(ii) incurred or agreed to incur any material indebtedness for
borrowed money or any other liabilities;
(iii) paid or obligated itself to pay in excess of $500,000 in the
aggregate for any fixed assets;
(iv) sold, transferred, leased or otherwise disposed of, or agreed to
sell, transfer, lease or otherwise dispose of, (A) any properties or assets
to any director, officer or employee of General Physics or of any
Subsidiary of General Physics or any member of the family or any other
affiliate of any of the foregoing or (B) any properties or assets having a
fair market value of $250,000 or agreed to sell, transfer, lease or
otherwise dispose of, any assets (other than securities) having a fair
market value at the time of sale, transfer or disposition of $250,000;
(v) mortgaged, pledged or subjected to any charge, lien, claim or
encumbrance, or agreed to mortgage, pledge or subject to any charge, lien,
claim or encumbrance, any of its material properties or assets;
(vi) declared, set aside or paid any dividend or made any distribution
(whether in cash, property or stock) with respect to any of its capital
stock (other than the regular quarterly cash dividends of $.06 per share);
(vii) (A) increased, or agreed to increase, the compensation or
bonuses or special compensation of any kind of any of its directors,
officers or employees over the rate being paid to them on December 31,
1995, as set forth in General Physics' Proxy Statement for the 1995 Annual
Meeting of Stockholders, other than normal merit and cost-of-living
increases pursuant to customary arrangements consistently followed and
other than increases in monthly and quarterly cash bonus accruals arising
from General Physics' earnings pursuant to arrangements or formulas
disclosed to senior management of National Patent, or (B) since December
31, 1995, paid or made provision for the payment of any bonus or similar
compensation to any director, officer or employee (other than any insurance
agent or independent contractor) of General Physics or any Subsidiary of
General Physics (except for bonuses approved by the Board of Directors of
General Physics and other than increases in monthly and quarterly cash
bonus accruals arising from General Physics' earnings pursuant to
arrangements or formulas disclosed to senior management of National
Patent), or (C) entered into any employment, consulting or severance
agreement or arrangement with any director, officer or employee (other than
any agent or independent contractor) or adopted or increased any benefit
under any insurance, pension or other employee benefit plan, payment or
arrangement made to, for or with any director, officer or employee (other
than any agent or independent contractor);
(viii) had any resignation or termination of employment of any of its
key officers or employees, or become aware of any impending or threatened
termination of employment, that would, individually or in the aggregate,
have a GPC Material Adverse Effect;
(ix) canceled, or agreed to cancel, any debts or claims over $250,000
in the aggregate or $50,000 individually other than in the ordinary course
of business;
A-9
<PAGE> 219
(x) made any material change in its accounting methods or practices
with respect to its condition, operations, business, or practices; or
(xi) agreed or committed to do, or authorized or approved any action
looking to, any of the foregoing.
(j) Material Contracts. Neither General Physics nor any of its Subsidiaries
is a party to any contract that, individually or in the aggregate, would have a
GPC Material Adverse Effect, nor the performance of which will likely have a GPC
Material Adverse Effect. Neither General Physics nor any of its Subsidiaries is
in default in the observance or the performance of any term or obligation to be
performed by it under any material contract except the effect of which defaults
singly or in the aggregate would not have a GPC Material Adverse Effect. To the
knowledge of General Physics, no other person is in default in any material
respect in the observance or the performance of any term or obligation to be
performed by it under any material contract.
(k) Employee Benefit Plans.
(i) Certain Terms. The term "GPC Plan" means any employee benefit
plan, as defined in Section 3(3) of ERISA or any other material benefit
arrangement (including without limitation (A) any employment or consulting
agreement, (B) any incentive bonus or deferred bonus arrangement, (C) any
arrangement providing termination allowance, severance or similar benefits,
(D) any equity compensation plan, and (E) any deferred compensation plan)
sponsored, maintained or contributed to by General Physics or any
"Controlled Company" for the benefit of any of their employees or former
employees. For purposes of this Section 3.1(k), "Controlled Company" shall
mean any entity that, together with General Physics as of the relevant
determination date under ERISA, is or was required to be treated as a
single employer under Section 414 of the Code and any reference to General
Physics in this Section 3.1(m) shall also include a reference to a
Controlled Company.
(ii) No Title IV Plans. No GPC Plan (whether or not terminated since
1990) is regulated under Title IV of ERISA and there are no circumstances
under which General Physics would have liability under Title IV of ERISA.
(iii) Compliance with Law. General Physics has operated, and has
caused its appointees and nominees to operate, each GPC Plan in a manner
which is in material compliance with the terms thereof and with all
applicable law, regulations and administrative agency rulings and
requirements applicable thereto. There have been no material adverse
changes in the financial status of any GPC Plan since June 30, 1996. No
benefit under any GPC Plan, including without limitation any severance or
parachute payment plan or agreement, will be established or become
accelerated, vested or payable by reason of any transaction contemplated
under this Agreement (except as may be provided in Section 2.1(c)).
(iv) Contributions. Full payment has been made of all amounts which
General Physics is required, under applicable law or under any GPC Plan or
any agreement related to any GPC Plan to which General Physics is a party,
to have paid as contributions thereto as of the last day of the most recent
fiscal year of each GPC Plan ended prior to the date hereof.
(v) Tax Qualification. Each GPC Plan intended to be qualified under
Sections 401(a), 401(k) and 501(a) of the Code either has been determined
to be so qualified by the Internal Revenue Service or has been submitted to
the Internal Revenue Services for a determination with respect to such
qualified status. Each GPC Plan that has been submitted to the Internal
Revenue Service for a determination with respect to its qualified status
has been submitted in a timely manner so that any amendments necessary to
qualify the plan from its inception can be made within the remedial
amendment period established under Section 401(b) of the Code. To the
knowledge of General Physics, nothing has occurred since such
determination, or submission, as applicable, to affect materially and
adversely the qualification of any such GPC Plan.
(vi) Tax or Civil Liability. General Physics has not participated in
any conduct that could result in the imposition upon General Physics of any
material excise tax under Section 4971 through 4980B of the Code or
material civil liability under Section 502(i) of ERISA with respect to any
GPC Plan.
A-10
<PAGE> 220
(vii) Claims Liability. There is no action, claim or demand of any
kind (other than routine claims for benefits) that has been brought or
threatened against any GPC Plan, or the assets thereof, against any
fiduciary of any such GPC Plan, or against General Physics with respect to
any GPC Plan, and General Physics has no knowledge of any pending
investigation or administrative review by any Governmental Entity that
could result in the imposition on General Physics of any penalty or
assessment in connection with any GPC Plan.
(viii) Retiree Welfare Coverage. No GPC Plan provides any health, life
or other welfare coverage to employees of General Physics beyond
termination of their employment with General Physics by reason of
retirement or otherwise, other than coverage as may be required under
Section 4980B of the Code or Part 6 of ERISA, or under the continuation of
coverage provisions of the laws of any state or locality.
(ix) Reporting and Disclosure Obligations. General Physics has
complied in all material respects with all applicable reporting and
disclosure requirements of Title I of ERISA with respect to all GPC Plans.
(l) Taxes.
(i) Each of General Physics and its Subsidiaries has filed all Tax
returns and reports required to be filed by it or requests for extensions
to file such returns or reports have been timely filed, granted and have
not expired, except to the extent that such failures to file or to have
extensions granted that remain in effect individually or in the aggregate
would not have a GPC Material Adverse Effect. All Tax returns filed by
General Physics and each of its Subsidiaries are complete and accurate
except to the extent that such failure to be complete and accurate would
not have a GPC Material Adverse Effect. General Physics and each of its
Subsidiaries has paid (or General Physics has paid on the Subsidiaries'
behalf) all Taxes shown as due on such returns, and the most recent
financial statements contained in the GPC SEC Documents reflect an adequate
reserve, in accordance with GAAP, for all Taxes payable by General Physics
and its Subsidiaries for all taxable periods and portions thereof accrued
through the date of such financial statements.
(ii) No deficiencies for any Taxes have been proposed, asserted or
assessed against General Physics or any of its Subsidiaries that are not
adequately reserved for, except for deficiencies that individually or in
the aggregate would not have a GPC Material Adverse Effect, and no requests
for waivers of the time to assess any such Taxes have been granted or are
pending.
SECTION 3.2. Representations and Warranties of the Parent and Newco. The
Parent and Newco represent and warrant to General Physics as follows:
(a) Organization; Standing and Power. Each of the Parent and Newco is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation or organization and has all requisite power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted, and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary,
except where the failure to be so qualified would not have a NPD Material
Adverse Effect.
(b) Capital Structure.
(i) As of the date hereof, the authorized capital stock of the Parent
consists of 40,000,000 shares of NPD Common Stock, 2,800,000 shares of
Class B capital stock, $.01 par value per share (the "Class B Stock"), and
10,000,000 shares of Preferred Stock, $.01 par value per share. As of the
close of business on September 30, 1996:
(A) 7,402,747 shares of NPD Common Stock were outstanding;
(B) an aggregate of 1,612,926 shares of NPD Common Stock were
reserved for issuance pursuant to the Parent stock option plans and the
Parent restricted stock plans (collectively, "Parent Stock Plans"), and
pursuant to conversion of the Convertible Debentures;
A-11
<PAGE> 221
(C) 1,497 shares of NPD Common Stock and no shares of Class B Stock
were held by the Parent in its treasury;
(D) 62,500 shares of Class B Stock were issued and outstanding;
(E) no shares of Preferred Stock were issued and outstanding; and
(F) no Voting Debt (other than the Convertible Debentures) was
issued or outstanding.
All outstanding shares of the Parent's capital stock are, and the shares of
NPD Common Stock (x) to be issued pursuant to or as specifically
contemplated by this Agreement, and (y) when issued in accordance with this
Agreement, will be validly issued, fully paid and nonassessable and not
subject to preemptive rights.
(ii) As of the date of this Agreement, except for this Agreement,
options to purchase NPD Class B Stock, the Convertible Debentures, and the
Parent Stock Plans outstanding, there are no options, warrants, calls,
rights or agreements to which the Parent or any Subsidiary of the Parent is
a party or by which it or any such Subsidiary is bound obligating the
Parent or any Subsidiary of the Parent to issue, deliver or sell, or cause
to be issued, delivered or sold, additional shares of capital stock or any
Voting Debt of the Parent or of any Subsidiary of the Parent or obligating
the Parent or any Subsidiary of the Parent to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock
of the Parent or of any Subsidiary of the Parent to grant, extend or enter
into any such option, warrant, call, right or agreement.
(iii) As of the date hereof, the authorized capital stock of Newco
consists of 1,000 shares of Common Stock, par value $.01 per share, of
which 100 shares are issued and outstanding.
(c) Authority.
(i) The Parent and Newco have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of the Parent and
Newco, except that the approval of the Parent's stockholders of this
Agreement and the Merger and the transactions contemplated hereby may be
required. This Agreement has been duly executed and delivered by the Parent
and Newco and each constitutes a valid and binding obligation of the Parent
and Newco enforceable against each in accordance with its terms. The
execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby will not, conflict with, or result in
any Violation pursuant to any provision of the Certificate of Incorporation
or Bylaws of the Parent, except as set forth on Schedule 3.2(c) hereto or
result in any Violation of any material loan or credit agreement, note,
mortgage, indenture, lease, NPD Plan or other material agreement,
obligation, instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
the Parent or any Subsidiary of the Parent or their respective properties
or assets, which Violation would have a NPD Material Adverse Effect.
(ii) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to the Parent or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by the Parent and Newco or the
consummation by the Parent and Newco of the transactions contemplated
hereby, the failure to obtain which would have a NPD Material Adverse
Effect, except for (A) the filing with the SEC of the S-4, a proxy
statement in definitive form relating to the meeting of the Parent's
stockholders (the "NPD Proxy Statement"), the GPC Proxy Statement and such
reports under Sections 13(a), 13(d) and 16(a) of the Exchange Act, as may
be required in connection with this Agreement, and the transactions
contemplated hereby and the obtaining from the SEC of such orders as may be
so required, (B) the filing of such documents with, and the obtaining of
such orders from, the various state authorities, including state securities
authorities, that are required in connection with the transactions
contemplated by this Agreement, (C) the filing of the
A-12
<PAGE> 222
Merger Filings with the Secretary of State and appropriate documents with
the relevant authorities of other states in which the Parent is qualified
to do business and (D) the State Takeover Approvals.
(d) SEC Documents. The Parent has delivered or made available to General
Physics a true and complete copy of each material report, schedule, registration
statement and definitive proxy statement filed by the Parent with the SEC since
January 1, 1993 (as such documents have since the time of their filing been
amended, the "NPD SEC Documents") which are all the documents (other than
preliminary material) that the Parent was required to file with the SEC since
such date. As of their respective dates, the Forms 10-K and 10-Q included in the
NPD SEC Documents (the "NPD Reports") complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such NPD Reports
and none of the NPD Reports contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The consolidated financial statements of the Parent and
its consolidated Subsidiaries included in the NPD Reports comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-Q of the SEC) and
fairly present (subject, in the case of the unaudited statements, to normal
year-end audit adjustments) the consolidated financial position of the Parent
and its consolidated Subsidiaries as at the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended. No
representation or warranty is made as to any of the matters in this Section
3.2(d) with respect to General Physics or its subsidiaries.
(e) Information Supplied. None of the information supplied or to be
supplied by the Parent or Newco for inclusion or incorporation by reference in
(i) the S-4 will, at the time the S-4 is filed with the SEC and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (ii) the NPD
Proxy Statement will, at the date mailed to stockholders and at the times of the
meeting or meetings of stockholders to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The NPD Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder, and the S-4 will comply as to form in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
(f) Compliance with Applicable Laws. The businesses of the Parent and each
of its Subsidiaries have been and are being conducted in compliance with all
applicable laws, rules, ordinances, regulations, licenses, judgments, orders or
decrees of federal, state, local and foreign governmental authorities, except
for possible violations which individually or in the aggregate do not, and,
insofar as reasonably can be foreseen, in the future will not, have a NPD
Material Adverse Effect. The Parent and each Subsidiary of the Parent hold all
certificates of authority, franchises, grants, permits, licenses, easements,
consents, certificates, variances, exemptions, orders and approvals from all
Governmental Entities (collectively, the "NPD Permits") which are necessary to
own, lease and operate the assets and properties they currently own, lease and
operate and to conduct their respective businesses and operations in the manner
heretofore conducted and as proposed to be conducted, except for those NPD
Permits, the absence of which would not have a NPD Material Adverse Effect.
(g) Financial Statements.
(i) The Parent has delivered, or (if not yet available) will promptly
deliver when available (and in any event prior to the Effective Time), to
General Physics complete and correct copies of:
(A) the audited consolidated balance sheets of the Parent and its
subsidiaries as at December 31, 1995, 1994 and 1993, and the related
audited consolidated statements of operations and stockholders' equity
and cash flows, for the fiscal years ended on those dates, together with
all footnotes; and
A-13
<PAGE> 223
(B) the unaudited interim consolidated financial statements for the
Parent and its subsidiaries as at, and for the fiscal periods ended on,
March 31, 1996, June 30, 1996 and September 30, 1996.
All of such financial statements fairly present, or when delivered will
fairly present, as the case may be (subject, in the case of unaudited
interim financial statements, to normal year-end audit adjustments which
are not expected to be, individually or in the aggregate, materially
adverse to the Parent and its Subsidiaries taken as a whole), the financial
position, results of operations and cash flows of the Parent and each of
its Subsidiaries as at the respective dates of such balance sheets and for
each of the respective periods then ended, in conformity with GAAP applied
on a basis consistent throughout the reported periods (except no
representation or warranty is provided with respect to General Physics or
any of its subsidiaries).
(ii) Neither such financial statements nor the financial statements of
the Parent included in the NPD SEC Documents (except no representation or
warranty is provided with respect to General Physics or any of its
subsidiaries) (A) contain or when delivered will contain, as the case may
be, any item of extraordinary or non-recurring income or expense (except as
specified therein); (B) reflect or when delivered will reflect, as the case
may be, uncollectible accounts receivable without a reserve fairly stated
for uncollectible amounts; and (C) reflect or when delivered will reflect,
as the case may be, any write-off or revaluation of assets (except as
specified therein). As at the respective dates of the balance sheets
included in all such financial statements, there was no material liability,
indebtedness or obligation of any nature or in any amount that should
properly be reflected or provided for in financial statements prepared in
conformity with GAAP applied on a basis consistent with that for prior
periods, which was not fully reflected in such financial statements (except
no representation or warranty is provided with respect to General Physics
or any of its subsidiaries).
(h) Litigation. Except (A) for the case styled Dunlop v. Pollak, et al.
pending in the Court of Chancery of the State of Delaware (Civil Action No.
15237-NC), (B) as disclosed in the NPD SEC Documents and (C) for actions and
suits arising in the ordinary course of business, there is no action, suit,
proceeding or investigation, either at law or in equity, at or before any
commission or other administrative authority in any domestic or foreign
jurisdiction, of any kind now pending or, to the best of the Parent's or Newco's
knowledge, threatened, involving the Parent, Newco or any other Subsidiary of
the Parent, or any of the respective properties or assets of the Parent or Newco
that (i) if asserted and decided adversely to the Parent or Newco, could,
individually or in the aggregate, materially and adversely affect the condition
(financial or otherwise), operations, business, properties, assets or
liabilities of the Parent and its Subsidiaries, taken as a whole, (ii) questions
the validity of this Agreement, or (iii) seeks to delay, prohibit or restrict in
any manner any action taken or to be taken by the Parent or Newco under this
Agreement. Except as publicly announced in the NPD SEC Documents or in any press
release prior to the date hereof, none of the Parent nor any Subsidiary of the
Parent, nor any of their respective properties or assets is subject to any
material continuing order of, consent decree, settlement agreement or other
similar written agreement (other than agreements in the ordinary course of
business), continuing investigation (other than regularly scheduled audits) by
any Governmental Entity, or any judicial administrative or arbitral judgment,
order, writ, decree, injunction, restraint, or award of any Governmental Entity
or arbitrator, including without limitation cease-and-desist or other orders.
(i) Absence of Certain Changes or Events. Except as disclosed in the NPD
SEC Documents filed prior to or subsequent to the date of this Agreement or in
the audited consolidated balance sheets of the Parent and its Subsidiaries and
the related consolidated statements of income, stockholders' equity and cash
flows as of and for the period ended December 31, 1995, true and correct copies
of which have been delivered to General Physics, or except as contemplated by
this Agreement, since September 30, 1996, the Parent and its Subsidiaries have
conducted their respective businesses only in the ordinary and usual course,
and, as of the date of this Agreement, the Parent has not undergone or suffered
any change in its financial condition, properties, business or results of
operations which has had, individually or in the aggregate, a NPD Material
Adverse Effect.
A-14
<PAGE> 224
(j) Material Contracts. Neither the Parent nor any of its Subsidiaries is a
party to any contract that, individually or in the aggregate, would have a NPD
Material Adverse Effect, nor the performance of which will likely have a NPD
Material Adverse Effect. Neither the Parent nor any of its Subsidiaries is in
default in the observance or the performance of any term or obligation to be
performed by it under any material contract except the effect of which defaults
singly or in the aggregate would not have a NPD Material Adverse Effect. To the
knowledge of the Parent, no other person is in default in any material respect
in the observance or the performance of any term or obligation to be performed
by it under any material contract.
(k) Employee Benefit Plans.
(i) Certain Terms. The term "NPD Plan" means any employee benefit
plan, as defined in Section 3(3) of ERISA or any other material benefit
arrangement (including without limitation (A) any employment or consulting
agreement, (B) any incentive bonus or deferred bonus arrangement, (C) any
arrangement providing termination allowance, severance or similar benefits,
(D) any equity compensation plan, and (E) any deferred compensation plan)
sponsored, maintained or contributed to by the Parent or any NPD Controlled
Company for the benefit of any of their employees or former employees. For
purposes of this Section 3.2(k), "NPD Controlled Company" shall mean any
entity (other than General Physics and any Controlled Company) that,
together with the Parent as of the relevant determination date under ERISA,
is or was required to be treated as a single employer under Section 414 of
the Code and any reference to the Parent in this Section 3.2(k) shall also
include a reference to a NPD Controlled Company.
(ii) No Title IV Plans. Except as disclosed in National Patent's most
recent financial statements included in the NPD SEC Documents, no NPD Plan
(whether or not terminated) is regulated under Title IV of ERISA and there
are no circumstances under which the Parent would have liability under
Title IV of ERISA.
(iii) Compliance with Law. The Parent has operated, and has caused its
appointees and nominees to operate, each NPD Plan in a manner which is in
material compliance with the terms thereof and with all applicable law,
regulations and administrative agency rulings and requirements applicable
thereto. There have been no material adverse changes in the financial
status of any NPD Plan since September 30, 1996. No benefit under any NPD
Plan, including without limitation any severance or parachute payment plan
or agreement, will be established or become accelerated, vested or payable
by reason of any transaction contemplated under this Agreement.
(iv) Contributions. Full payment has been made of all amounts which
the Parent is required, under applicable law or under any NPD Plan or any
agreement related to any NPD Plan to which the Parent is a party, to have
paid as contributions thereto as of the last day of the most recent fiscal
year of each NPD Plan ended prior to the date hereof.
(v) Tax Qualification. Each NPD Plan intended to be qualified under
Sections 401(a), 401(k) and 501(a) of the Code either has been determined
to be so qualified by the Internal Revenue Service or has been submitted to
the Internal Revenue Services for a determination with respect to such
qualified status. Each NPD Plan that has been submitted to the Internal
Revenue Service for a determination with respect to its qualified status
has been submitted in a timely manner so that any amendments necessary to
qualify the plan from its inception can be made within the remedial
amendment period established under Section 401(b) of the Code. To the
knowledge of the Parent, nothing has occurred since such determination, or
submission, as applicable, to affect materially and adversely the
qualification of any such NPD Plan.
(vi) Tax or Civil Liability. The Parent has not participated in any
conduct that could result in the imposition upon the Parent of any material
excise tax under Section 4971 through 4980B of the Code or material civil
liability under Section 502(i) of ERISA with respect to any NPD Plan.
(vii) Claims Liability. There is no action, claim or demand of any
kind (other than routine claims for benefits) that has been brought or
threatened against any NPD Plan, or the assets thereof, against any
fiduciary of any such NPD Plan, or against the Parent with respect to any
NPD Plan, and the Parent has
A-15
<PAGE> 225
no knowledge of any pending investigation or administrative review by any
Governmental Entity that could result in the imposition on the Parent of
any penalty or assessment in connection with any NPD Plan.
(viii) Retiree Welfare Coverage. No NPD Plan provides any health, life
or other welfare coverage to employees of General Physics beyond
termination of their employment with General Physics by reason of
retirement or otherwise, other than coverage as may be required under
Section 4980B of the Code or Part 6 of ERISA, or under the continuation of
coverage provisions of the laws of any state or locality.
(ix) Reporting and Disclosure Obligations. The Parent has complied in
all material respects with all applicable reporting and disclosure
requirements of Title I of ERISA with respect to all NPD Plans.
(l) Taxes.
(i) Each of National Patent and its Subsidiaries has filed all Tax
returns and reports required to be filed by it or requests for extensions
to file such returns or reports have been timely filed, granted and have
not expired, except to the extent that such failures to file or to have
extensions granted that remain in effect individually or in the aggregate
would not have a NPD Material Adverse Effect. All Tax returns filed by
National Patent and each of its Subsidiaries are complete and accurate
except to the extent that such failure to be complete and accurate would
not have a NPD Material Adverse Effect. National Patent and each of its
Subsidiaries has paid (or National Patent has paid on the Subsidiaries'
behalf) all Taxes shown as due on such returns, and the most recent
financial statements contained in the NPD SEC Documents reflect an adequate
reserve, in accordance with GAAP, for all Taxes payable by National Patent
and its Subsidiaries for all taxable periods and portions thereof accrued
through the date of such financial statements. No representation or
warranty is made with respect to General Physics or any of its
Subsidiaries.
(ii) No deficiencies for any Taxes have been proposed, asserted or
assessed against National Patent or any of its Subsidiaries that are not
adequately reserved for, except for deficiencies that individually or in
the aggregate would not have a NPD Material Adverse Effect, and no requests
for waivers of the time to assess any such Taxes have been granted or are
pending. No representation or warranty is made with respect to General
Physics or any of its Subsidiaries.
ARTICLE 4
COVENANTS RELATING TO CONDUCT OF BUSINESS
PRIOR TO MERGER
SECTION 4.1. Certain Covenants.
(a) Conduct of Business of the Parent. During the period from the date of
this Agreement to the Effective Time, the Parent shall, and shall cause its
Subsidiaries to, carry on their respective businesses only in the ordinary
course of business substantially consistent with past practice and, to the
extent consistent therewith, use all reasonable best efforts to preserve intact
their current business organizations, keep available the services of their
current officers and employees and preserve their relationships with persons
having business dealings with them to the end that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, except as expressly contemplated by this Agreement, the
Parent shall not, and shall not permit any of its Subsidiaries to, without the
prior written consent of General Physics (by action of the Special Committee):
(i) amend its certificate of incorporation, by-laws or other
comparable charter or organizational documents except that the Parent may
amend its certificate of incorporation to decrease the number of authorized
shares of the NPD Common Stock to 25,000,000 and to add provisions
requiring redemption or disposition of shares of a foreign owner of NPD
Common Stock in the event that the number of shares beneficially owned by
such foreign owner exceeds a threshold percentage of issued and outstanding
shares of NPD Common Stock;
A-16
<PAGE> 226
(ii) (x) declare, set aside or pay any cash dividends on, or make any
other cash distributions in respect of, any outstanding capital stock of
the Parent, or (y) split, combine or reclassify any of the Parent's
outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
outstanding capital stock;
(iii) merge or consolidate with any other person (other than a merger
or consolidation of a subsidiary of the Parent with a wholly-owned
subsidiary of the Parent);
(iv) sell, lease, license, mortgage or otherwise encumber or subject
to any Lien or otherwise dispose of (or agree to any of the foregoing) any
of its properties or assets that are material, individually or in the
aggregate, to the Parent, except in the ordinary course of business
substantially consistent with past practice and sales of investment assets
in the ordinary course of business;
(v) incur any indebtedness for borrowed money or guarantee or
otherwise become responsible for any such indebtedness of another person
other than (x) pursuant to existing line of credit arrangements of the
Parent or its subsidiaries and letters of credit and related agreements of
the Parent or its subsidiaries in each case in the ordinary course of
business substantially consistent with past practice or (y) indebtedness in
principal amounts of less than $10,000,000 in the aggregate;
(vi) settle or compromise any derivative suit or other litigation or
claim arising out of the transactions contemplated hereby, or any other
litigation or claim involving the Parent or Newco if the settlement thereof
involves payment of in excess of $100,000; provided, that General Physics
will not unreasonably withhold its consent to any such settlement or
compromise;
(vii) take any action that requires the approval of its stockholders;
(viii) take any action that would, or would be reasonably likely to,
result in any of the representations and warranties of the Parent, Newco or
General Physics set forth in this Agreement not being true in all material
respects as of or at any time prior to the Effective Time or in any of the
conditions to the Merger set forth in Article 6 not being satisfied; or
(ix) agree in writing or otherwise to take any of the actions
prohibited by this Section 4.1(a).
(b) Conduct of Business of General Physics. During the period from the date
of this Agreement to the Effective Time, General Physics shall and shall cause
its subsidiaries to, carry on their respective businesses only in the ordinary
course of business substantially consistent with past practice and, to the
extent consistent therewith, use all reasonable best efforts to preserve intact
their current business organizations and preserve their relationships with
persons having business dealings with them to the end that their goodwill and
ongoing businesses shall be unimpaired at the Effective Time (and the Special
Committee shall not take any affirmative action that would cause General Physics
or its subsidiaries to breach the foregoing provisions of this clause (b)).
Without limiting the generality of the foregoing, during the period from the
date of this Agreement to the Effective Time, General Physics and its
subsidiaries shall not (without the prior written consent of the Special
Committee), and the Special Committee shall not (without the prior written
consent of the Parent) take any affirmative action that would cause General
Physics or its subsidiaries to, except as expressly contemplated by this
Agreement:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any
outstanding capital stock of General Physics, except for General Physics'
regular quarterly dividends of up to $0.06 per fiscal quarter per share, or
(y) split, combine or reclassify any of General Physics' outstanding
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its outstanding
capital stock or (z) purchase, redeem or otherwise acquire any shares of
outstanding capital stock or other securities of General Physics or its
subsidiaries or any rights, warrants or options to acquire any such shares
or securities;
(ii) issue, sell, grant, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities other than any such
issuance to National Patent or pursuant to
A-17
<PAGE> 227
(x) the exercise of stock options outstanding on the date hereof or (y) an
employee benefit plan approved by the Board of Directors of General
Physics;
(iii) amend its certificate of incorporation, by-laws or other
comparable charter or organizational documents;
(iv) merge or consolidate with any other person (other than a merger
or consolidation of a subsidiary of General Physics with a wholly-owned
subsidiary of General Physics) or acquire (by merger, consolidation,
acquisition of assets or otherwise) (x) any corporation, partnership, joint
venture, association or other business organization or division thereof or
(y) any assets that are material, individually or in the aggregate, to
General Physics and its subsidiaries taken as a whole;
(v) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of (or agree to any of the foregoing) any of
its properties or assets that are material, individually or in the
aggregate, to General Physics and its subsidiaries, except in the ordinary
course of business substantially consistent with past practice and sales of
investment assets in the ordinary course of business;
(vi) (x) incur any indebtedness for borrowed money or guarantee or
otherwise become responsible for any such indebtedness of another person
other than pursuant to existing line of credit arrangements of General
Physics or its subsidiaries and letters of credit and related agreements of
General Physics or its subsidiaries in each case in the ordinary course of
business substantially consistent with past practice; or (y) make any
loans, advances or capital contributions to, or investments in, any other
person, other than (A) to National Patent, General Physics or to any direct
or indirect wholly-owned Subsidiary of General Physics or National Patent;
(B) in the ordinary course of business (substantially consistent with past
practice); or (C) as may be required under the terms of the joint venture
agreements for the Aerospace Center Support Joint Venture and the Fleet
Technical Support Associates Joint Venture (as such terms are in effect as
of the date hereof) (copies of such agreements having been provided to the
Parent);
(vii) (x) enter into, adopt, amend (except as may be required by law)
or terminate any employee benefit plan or any agreement, arrangement, plan
or policy between General Physics and one or more of its directors,
officers or employees or (y) increase in any manner the compensation or
fringe benefits (including severance benefits) of any director, officer or
employee or pay any benefit not required by any plan and arrangement as in
effect as of the date hereof;
(viii) settle or compromise any derivative suit or other litigation or
claim arising out of the transactions contemplated hereby, or any other
litigation or claim involving General Physics if the settlement thereof
involves payment of in excess of $100,000; provided, that the Parent will
not unreasonably withhold its consent to any such settlement or compromise;
(ix) make any material change in accounting methods, principles or
practices used by General Physics or any of its subsidiaries except for any
such change required by reason of a concurrent change in GAAP;
(x) take any action that requires the approval of its stockholders;
(xi) take any action that would, or would be reasonably likely to,
result in any of General Physics' representations and warranties set forth
in this Agreement not being true in all material respects as of or at any
time prior to the Effective Time or in any of the conditions to the Merger
set forth in Article 6 not being satisfied; or
(xii) agree in writing or otherwise to take any of the actions
prohibited by this Section 4.1(b).
A-18
<PAGE> 228
ARTICLE 5
ADDITIONAL AGREEMENTS
SECTION 5.1. Preparation of Form S-4, the GPC Proxy Statement and the NPD
Proxy Statement.
(a) As soon as practicable following the date of this Agreement, the Parent
and General Physics jointly shall prepare and file with the SEC a proxy
statement (which shall be the GPC Proxy Statement and the NPD Proxy Statement)
and the Parent shall promptly prepare and file with the SEC the S-4 (which may
be combined, if appropriate, with the GPC Proxy Statement and the NPD Proxy
Statement). The Parent shall use its best efforts to have the S-4 declared
effective under the Securities Act as promptly as practicable after such filing.
The Parent shall also take, in consultation with General Physics and its
counsel, any action (other than qualifying to do business in any jurisdiction in
which it is not now so qualified) required to be taken under any applicable
state securities laws in connection with the issuance of Parent Common Stock in
the Merger and General Physics shall furnish all information concerning General
Physics and the holders of GPC Common Stock as may be reasonably requested in
connection with such action.
(b) As soon as practicable after the S-4 is declared effective by the SEC,
(x) the Parent shall prepare, in consultation with General Physics and its
counsel, proxy or consent solicitation materials based upon and incorporating
the NPD Proxy Statement and shall cause such materials to be mailed to the
Parent's stockholders as promptly as practicable thereafter; and (y) General
Physics shall prepare, in consultation with the Parent and its counsel, proxy or
consent solicitation materials based upon and incorporating the GPC Proxy
Statement and shall cause such materials to be mailed to General Physics'
stockholders as promptly as practicable thereafter.
SECTION 5.2. Meetings of Stockholders.
(a) The Parent will take all actions necessary in accordance with
applicable law and the NPD Charter and the Parent By-laws to convene as promptly
as practicable a meeting of its stockholders (the "NPD Stockholders Meeting") to
consider and vote upon the approval of this Agreement and the Merger and the
issuance of the Parent Common Stock in connection with the Merger in accordance
with the DGCL and the rules of the American Stock Exchange ("AMEX"); except that
no such meeting need be convened if the Board of Directors of the Parent, in
accordance with such Board's fiduciary duties to the Parent's stockholders, will
not recommend approval by the Parent's stockholders of this Agreement and the
Merger.
(b) General Physics will take all actions necessary in accordance with
applicable law and the GPC Charter and GPC By-laws to convene as promptly as
practicable a meeting of its stockholders (the "GPC Stockholders Meeting") to
consider and vote upon the approval of this Agreement and the Merger in
accordance with the DGCL and the rules of the New York Stock Exchange ("NYSE");
except that no such meeting need be convened if the Board of Directors of
General Physics, in accordance with its fiduciary duties to General Physics'
stockholders, will not recommend approval by General Physics' stockholders of
this Agreement and the Merger. The parties agree that the GPC Stockholders
Meeting and the NPD Stockholders Meeting will be scheduled for the same day.
(c) Each of the Parent and General Physics will, through its Board of
Directors, subject to compliance with their respective fiduciary duties to
stockholders as advised by counsel, recommend to its stockholders approval of
such matters; provided, that (x) at any time prior to the NPD Stockholders
Meeting, the Board of Directors of the Parent, or (y) at any time prior to the
GPC Stockholders Meeting either the Special Committee or the Board of Directors
of General Physics, as the case may be, each in accordance with its fiduciary
duties to stockholders as advised by counsel may revoke, modify or qualify its
recommendation with respect to this Agreement and the Merger. As long as the
Board of Directors of General Physics and the Special Committee recommend
approval of this Agreement and the Merger (and such recommendation has not been
revoked, modified or qualified), at the GPC Stockholders Meeting the Parent
shall vote or cause to be voted in favor of approval and adoption of this
Agreement all of its shares of GPC Common Stock. Notwithstanding anything
contained in this Agreement to the contrary, any action by the Board of
Directors of the Parent or of General Physics permitted by this Section 5.2
shall not constitute a breach of this Agreement by the Parent or General Physics
as the case may be.
A-19
<PAGE> 229
SECTION 5.3. Legal Requirements to Merger. Each of the Parent, Newco and
General Physics will take, or cause to be taken, all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed on
it with respect to the Merger and will promptly cooperate with and furnish
information to the other in connection with any such requirements imposed upon
any of them or any of their subsidiaries in connection with the Merger. Each of
the Parent, Newco and General Physics will, and will cause its subsidiaries to,
take all reasonable actions necessary to obtain (and will cooperate with each
other in obtaining) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity or other public or private third party,
required to be obtained by the Parent, Newco or General Physics or any of their
respective subsidiaries in connection with the Merger or the taking of any
action contemplated by this Agreement.
SECTION 5.4. Access to Information. Upon reasonable notice, each of the
Parent, Newco and General Physics shall (and shall cause each of its
subsidiaries to) afford to the officers, employees, accountants, counsel,
financial and other representatives of the other, access, during normal business
hours during the period prior to the Effective Time, to all its properties,
books, contracts, commitments and records and, during such period, each of the
Parent, Newco and General Physics shall (and shall cause each of its
subsidiaries to) furnish promptly to the other (i) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of the federal securities laws
and (ii) all other information concerning its business, properties and personnel
as the Parent, Newco or General Physics as the case may be, may reasonably
request.
SECTION 5.5. Best Efforts. Upon the terms and subject to the conditions and
other agreements set forth in this Agreement, each of the parties agrees to use
its best efforts to take, or cause to be taken, all actions, and to do, or cause
to be done, and to assist and cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement.
SECTION 5.6. Capital Stock.
(a) Prior to the Effective Time, the Parent shall use its reasonable best
efforts to repurchase all of the Vested Options so that each holder of a Vested
Option receives an amount in cash for each share of GPC Common Stock then
obtainable upon the exercise of such Vested Option equal to $5.10 less the
exercise price of such Vested Option as in effect immediately prior to such
repurchase. All such repurchased Vested Options shall thereupon be canceled.
(b) Prior to the Effective Time, the Parent shall contribute all or any
portion of the Warrants to purchase shares of GPC Common Stock held by it to the
capital of General Physics, such Warrants to be thereupon cancelled. Effective
upon consummation of the Merger, the Parent shall assume, jointly with General
Physics, the obligation to issue shares of NPD Common Stock to holders of the
remaining Warrants upon exercise thereof pursuant to the terms thereof.
(c) Prior to the Effective Time, the Parent shall cause its Subsidiaries
which hold shares of GPC Common Stock (other than General Physics) to dividend
such shares to the Parent.
SECTION 5.7. Indemnification and Insurance.
(a) From and after the Effective Time, the Surviving Corporation shall
indemnify and shall advance expenses to each person who is on the date of this
Agreement, or has been at any time prior to such date, or who becomes prior to
the Effective Time, an officer or director (the "Indemnified Party") of General
Physics or any of its subsidiaries against all losses, claims, damages,
liabilities, costs and expenses (including attorney's fees and expenses),
judgments, fines, losses, and amounts paid in settlement in connection with any
actual or threatened action, suit, claim, proceeding or investigation (each a
"Claim") to the extent that any such Claim is based on, or arises out of, (i)
the fact that such person is or was a director or officer of General Physics or
any of its subsidiaries at any time prior to the Effective Time (or is or was
serving as a member of the Special Committee at any time prior to or at the
Effective Time) or is or was serving at the request of General Physics or any of
its subsidiaries as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise at any time prior to the Effective
Time, or (ii) this Agreement or any of the transactions
A-20
<PAGE> 230
contemplated hereby, in each case to the extent that any such Claim pertains to
any matter or fact arising, existing, or occurring prior to or at the Effective
Time (or pertains to any act or function of the Special Committee relating to
this Agreement or the transactions contemplated hereby whether arising,
existing, or occurring prior to or at the Effective Time), regardless of whether
such Claim is asserted or claimed prior to, at or after the Effective Time (the
matters described in clauses (i) and (ii), the "Merger Matters"), to the fullest
extent permitted by Delaware law (including provisions relating to advancement
of expenses incurred in the defense of any Claim).
(b) The Parent and Newco agree that all limitations or exculpation of
liabilities existing in favor of an Indemnified Party as provided in the GPC
Charter and the GPC By-laws as in effect as of the date hereof shall continue in
full force and effect with respect to Merger Matters, without any amendment
thereto, to the extent such rights are consistent with the DGCL.
(c) The Surviving Corporation or the Parent shall cause to be maintained,
for a period of not less than six years from the Effective Time, General
Physics' current directors' and officers' liability insurance policy to the
extent that it provides coverage for events occurring prior to the Effective
Time and acts by or functions of the Special Committee prior to or at the
Effective Time (the "D&O Insurance") for all present directors and officers of
General Physics or any subsidiary thereof; provided, however, that the Surviving
Corporation, in lieu of maintaining such existing D&O Insurance as provided
above, may cause no less favorable coverage to be provided under any policy
maintained for the benefit of the directors and officers of the Surviving
Corporation or any of its subsidiaries. If the existing D&O Insurance expires,
is terminated or canceled by the insurer during such six-year period, the
Surviving Corporation shall use its best efforts to obtain, in lieu of such D&O
Insurance, such comparable directors' and officers' liability insurance as can
be obtained for the remainder of such period on terms and conditions no less
advantageous than the existing D&O Insurance. To the extent that after giving
effect to the preceding sentence such comparable insurance is not commercially
available, with the consent of such persons, the Surviving Corporation shall
provide self-insurance.
SECTION 5.8. Public Announcements. General Physics, on the one hand, and
the Parent, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press release
or other public statements with respect to the transactions contemplated by this
Agreement, including the Merger, and shall not issue any such press release or
make any such public statement without the consent of the other party (such
consent not to be unreasonably withheld), except as may be required by
applicable law, court process or by obligations pursuant to any listing
agreement with any national securities exchange.
SECTION 5.9. No Solicitation, Etc. General Physics shall not (nor will it
permit any of its officers, directors, agents or affiliates to) directly or
indirectly solicit, encourage (including by way of providing any non-public
information concerning General Physics or its subsidiaries to any person),
initiate or participate in any negotiations or discussions, or enter into (or
authorize) any agreement or agreement in principle, or announce any intention to
do any of the foregoing, with respect to any offer or proposal to acquire all or
a substantial part of its or its subsidiaries' business and properties or any of
its or its subsidiaries' capital stock whether by merger, purchase of assets,
tender offer or otherwise (all such actions being referred to herein as
"Acquisition Transactions"); provided, that nothing contained in this Section
5.9 shall prohibit the Special Committee, to the extent required by its
fiduciary duties under applicable law as advised by counsel, from providing
information to, participating in negotiations or discussions with, entering into
any agreement or transaction with, or announcing any intention to do any of the
foregoing with, any party that makes an unsolicited inquiry or proposal relating
to an Acquisition Transaction. General Physics shall promptly notify the Parent
of the receipt of any inquiry or proposal which it may receive in respect of any
Acquisition Transaction, including the identity of the person making such
inquiry or proposal and, unless advised by counsel that there is a significant
risk that such action would constitute a breach of the Special Committee's
fiduciary duties, the material terms and conditions thereof and any changes
therein. The Parent agrees that the Special Committee may provide to any such
party that makes an unsolicited inquiry or proposal respecting an Acquisition
Transaction any change in the terms of this Agreement proposed by the Parent in
response to such unsolicited inquiry or proposal; provided, that the Special
Committee has disclosed to the Parent the identity
A-21
<PAGE> 231
of the person making such inquiry or proposal and the material terms and
conditions of such proposed Acquisition Transaction and any changes therein.
SECTION 5.10. Consents, Approvals and Filings.
(a) The Parent, Newco and General Physics will make and cause their
respective subsidiaries to make all necessary filings, as soon as practicable,
including without limitation those required under the Securities Act, the
Exchange Act, state securities laws and state insurance laws in order to
facilitate prompt consummation of the Merger and the other transactions
contemplated by this Agreement. In addition, the Parent, Newco and General
Physics will each use their best efforts, and will cooperate fully with each
other (i) to comply as promptly as practicable with all governmental
requirements applicable to the Merger and the other transactions contemplated by
this Agreement and (ii) to obtain as promptly as practicable all necessary
permits, orders or other consents, approvals or authorizations of Governmental
Entities and consents or waivers of all third parties necessary or advisable for
the consummation of the Merger and the other transactions contemplated by this
Agreement. In connection with the foregoing, each of the Parent, Newco and
General Physics shall use its best efforts to provide such information and
communications to Governmental Entities as such Governmental Entities may
reasonably request.
(b) Each of the parties shall provide to the other party copies of all
applications and other documents in advance of filing or submission of such
applications and other documents to Governmental Entities in connection with
this Agreement.
SECTION 5.11. Non-Interference, Etc.
(a) Neither party hereto, nor any of their respective subsidiaries, shall
take any action, directly or indirectly, intended to, or which such party
reasonably believes would, result in (i) any of the other party's
representations and warranties set forth in this Agreement not being true and
correct in all material respects as of the Closing Date, (ii) any of the other
party's covenants not being performed or (iii) any of the conditions to such
party's obligations to consummate the transactions contemplated by this
Agreement not being satisfied.
(b) Each party shall give prompt notice to the other of (i) any
representation or warranty made by it contained in this Agreement that is
qualified as to materiality becoming untrue or inaccurate in any respect or any
such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure by it to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
SECTION 5.12. Affiliates. At least 30 days prior to the Closing Date,
General Physics and the Parent shall agree as to persons who are, at the time
the Merger is submitted for approval to the stockholders of General Physics,
"affiliates" of General Physics for purposes of Rule 145 under the Securities
Act. General Physics shall use its best efforts to cause each such person to
deliver to the Parent on or prior to the Closing Date a letter (an "Affiliate
Letter") to the effect that such person will not offer to sell, sell or
otherwise dispose of any shares of NPD Common Stock issued in the Merger, except
pursuant to an effective registration statement, in compliance with Rule 145, as
amended from time to time, or in a transaction which, in the opinion of legal
counsel satisfactory to the Parent, is exempt from the registration requirements
of the Securities Act. The Parent shall not be required to maintain the
effectiveness of the S-4 for the purpose of resale of the NPD Common Stock by
such affiliates and the certificates representing the NPD Common Stock received
by such affiliates in the Merger shall bear a customary legend regarding
applicable Securities Act restrictions and the provisions of this Section 5.12.
SECTION 5.13. Listing. The Parent shall use its best efforts to cause the
shares of NPD Common Stock to be issued to holders of GPC Common Stock pursuant
to this Agreement to be listed on the AMEX subject to official notice of
issuance, prior to the Effective Time.
A-22
<PAGE> 232
SECTION 5.14. Brokers and Finders.
(a) General Physics hereby represents and warrants that it and its
Subsidiaries have not engaged the services of any broker, finder, financial
advisor or other firm or person entitled to any broker's or finder's fee or any
other similar commission or fee in connection with any of the transactions
contemplated by this Agreement other than Oppenheimer & Co., Inc., whose fees
and expenses will be paid by General Physics, and General Physics agrees to
indemnify and hold harmless the Parent, Newco and their Subsidiaries (and
affiliates) from and against any and all claims, liabilities or obligations with
respect to any fees, commissions or expenses asserted by any such person who
claims to be entitled to such a fee or commission by reason of his, her or its
acting on behalf of General Physics or any of its subsidiaries.
(b) The Parent hereby represents and warrants that it and its subsidiaries
have not engaged the services of any agent, broker, finder, financial advisor or
other firm or person entitled to any broker's or finder's fee or any other
similar commission or fee in connection with any of the transactions
contemplated by this Agreement and the Parent agrees to indemnify and hold
harmless General Physics and its subsidiaries (and their affiliates) from and
against any and all claims, liabilities or obligations with respect to any fees,
commissions or expenses asserted by any such person who claims to be entitled to
such a fee or commission by reason of his, her or its acting on behalf of the
Parent or any of its subsidiaries.
ARTICLE 6
CONDITIONS PRECEDENT
SECTION 6.1. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the affirmative vote of the stockholders of the Parent
and General Physics by the requisite vote in accordance with applicable law and
rules of the AMEX and the NYSE, respectively.
(b) Governmental and Regulatory Consents. All filings required to be made
prior to the Effective Time with, and all consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time from,
Governmental Entities, in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby by the
parties hereto shall have been made or obtained (as the case may be), and such
consents, approvals, permits and authorizations shall be subject to no
conditions other than conditions that would not reasonably be expected to have a
NPD Material Adverse Effect or a GPC Material Adverse Effect.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any of the other transactions contemplated hereby
shall be in effect; provided, however, that the party invoking this condition
shall have used reasonable efforts to have any such order or injunction vacated.
(d) Form S-4. The S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings by the SEC seeking
a stop order.
(e) Third-Party Consents. All consents and waivers of third parties to the
consummation of the Merger and the other transactions contemplated hereby shall
have been obtained, other than those which, if not obtained, would not have a
NPD Material Adverse Effect or a GPC Material Adverse Effect.
(f) Listing. The shares of NPD Common Stock issuable to holders of GPC
Common Stock pursuant to this Agreement shall have been listed on the AMEX,
subject to official notice of issuance.
A-23
<PAGE> 233
SECTION 6.2. Conditions to Obligations of General Physics. The obligations
of General Physics to effect the Merger are further subject to the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Parent and Newco set forth in this Agreement that are qualified as to
materiality shall be true and correct and the representations and warranties of
the Parent and Newco set forth in this Agreement that are not so qualified shall
be true and correct in all material respects, in each case as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date, except to the extent any such representation and warranty speaks
as of an earlier date, in which event such representation and warranty shall be
true and correct, or true and correct in all material respects, as applicable,
as of such date, and General Physics shall have received a certificate signed on
behalf of each of the Parent and Newco by the chief executive officer and the
chief financial officer of each of the Parent and Newco to such effect.
(b) Performance of Obligations. The Parent and Newco each shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and General Physics
shall have received a certificate signed on behalf of each of the Parent and
Newco by the chief executive officer and the chief financial officer of each of
the Parent and Newco to such effect.
(c) No Material Adverse Change. Since June 30, 1996, there shall have been
no NPD Material Adverse Change, and no event or condition which individually or
in the aggregate could reasonably be expected to result in a NPD Material
Adverse Change. For purposes of this Agreement, "NPD Material Adverse Change"
means any material adverse change in the business, assets, liabilities,
financial condition or results of operations of the Parent and its subsidiaries
taken as a whole.
(d) Fairness Opinion. The written opinion of Oppenheimer & Co, Inc., dated
as of the Closing Date, to the effect that the Merger Consideration to be
received by the holders of GPC Common Stock (other than National Patent) is fair
to such holders from a financial point of view, shall have been delivered on the
Closing Date.
(e) Opinion of Counsel. General Physics shall have received an opinion of
Morgan, Lewis & Bockius LLP, counsel to the Parent, addressed to General
Physics, dated as of the Closing Date, and in form reasonably satisfactory to
the parties hereto.
(f) Third Party Consents. National Patent shall have received consents and
waivers of the third parties to the agreements listed on Schedule 3.2(a), to the
extent necessary, under the terms of such agreements to the consummation of the
Merger and the other transactions contemplated hereby.
SECTION 6.3. Conditions to Obligations of the Parent and Newco. The
obligations of the Parent and Newco to effect the Merger are further subject to
the following conditions:
(a) Representations and Warranties. The representations and warranties of
General Physics set forth in this Agreement that are qualified as to materiality
shall be true and correct and the representations and warranties of General
Physics set forth in this Agreement that are not so qualified shall be true and
correct in all material respects, in each case as of the date of this Agreement
and as of the Closing Date as though made on and as of the Closing Date, except
to the extent any such representation and warranty speaks as of an earlier date,
in which event such representation and warranty shall be true and correct, or
true and correct in all material respects, as applicable, as of such date, and
the Parent shall have received a certificate signed on behalf of General Physics
by a duly authorized representative of General Physics to such effect.
(b) Performance of Obligations. General Physics shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and the Parent shall have received a
certificate signed on behalf of General Physics by a duly authorized
representative of General Physics to such effect.
(c) No Material Adverse Change. Since June 30, 1996, there shall have been
no GPC Material Adverse Change, and no event or condition which individually or
in the aggregate could reasonably be expected to result in a GPC Material
Adverse Change. For purposes of this Agreement, "GPC Material Adverse Change"
A-24
<PAGE> 234
means any material adverse change in the business, financial condition or
results of operations of General Physics and its subsidiaries taken as a whole.
(d) Fairness Opinion. The written opinion of Oppenheimer & Co., Inc., dated
as of the Closing Date hereof, to the effect that the Merger Consideration to be
received by the holders of GPC Common Stock (other than National Patent) is fair
to such holders from a financial point of view, shall have been delivered on the
Closing Date.
(e) Opinion of Counsel. The Parent shall have received an opinion of
Ballard Spahr Andrews & Ingersoll, counsel to General Physics, addressed to the
Parent and Newco, dated as of the Closing Date, and in form reasonably
satisfactory to the parties hereto.
(f) Third Party Consents. General Physics shall have received consents and
waivers of the third parties to the agreements listed on Schedule 3.1(c), to the
extent necessary, under the terms of such agreements to the consummation of the
Merger and the other transactions contemplated hereby.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement and the Merger by the stockholders of the Parent
and/or General Physics):
(a) by mutual written consent of General Physics and the Parent;
(b) by written notice by either General Physics or the Parent:
(i) if the Merger shall not have been consummated on or before April
30, 1997 (the "End Date"), unless the failure to consummate the Merger is
the result of a willful and material breach of this Agreement by the party
seeking to terminate this Agreement; or
(ii) if any Governmental Entity shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable;
(c) by the Parent, if there shall have been a material breach of any
material representation, warranty, covenant or agreement on the part of General
Physics such that the conditions set forth in Section 6.3(a) or 6.3(b) would be
incapable of being satisfied by the End Date (or as otherwise extended);
provided, however, that if any such breach is curable by General Physics through
the exercise of its reasonable best efforts and for so long as General Physics
shall be using its reasonable best efforts to cure such breach, the Parent may
not terminate this Agreement pursuant to this Section 7.1(c);
(d) by General Physics, if there shall have been any material breach of any
material representation, warranty, covenant or agreement on the part of the
Parent or Newco such that the conditions set forth in Section 6.2(a) or 6.2(b)
would be incapable of being satisfied by the End Date (or as otherwise
extended); provided, however, that if any such breach is curable by the Parent
or Newco through the exercise of its reasonable best efforts and for so long as
the Parent or Newco shall be using its reasonable best efforts to cure such
breach, General Physics may not terminate this Agreement pursuant to this
Section 7.1(d);
(e) by the Parent, if the approval of the stockholders of the Parent
contemplated by this Agreement shall not have been obtained by reason of the
failure to obtain the required vote at the NPD Stockholders Meeting or any
adjournment thereof;
(f) by General Physics, (i) if the approval of the stockholders of the
Parent contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote at the NPD Stockholders Meeting or any
adjournment thereof or (ii) if the approval of the stockholders of General
Physics contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote at the GPC Stockholders Meeting or any
adjournment thereof (other than by reason of
A-25
<PAGE> 235
termination of this Agreement by General Physics or by reason of a failure to
hold a GPC Stockholders Meeting as provided under Section 5.2(b));
(g) by the Parent, if, prior to the GPC Stockholders Meeting, the Special
Committee or the Board of Directors of General Physics shall have withdrawn, or
modified or changed in any manner adverse to the Parent or Newco its approval or
recommendation of this Agreement or the Merger or if such Board will not convene
a GPC Stockholders Meeting as provided by the exception to Section 5.2(b);
(h) by General Physics, if, prior to the NPD Stockholders Meeting, the
Board of Directors of the Parent shall have withdrawn, or modified or changed in
any manner adverse to General Physics its approval or recommendation of this
Agreement or the Merger;
(i) by General Physics, if a person or group shall have made a bona fide
proposal for an Acquisition Transaction which the Special Committee believes,
and advises the Board of Directors of General Physics is superior to the Merger
from a financial point of view to the stockholders of General Physics, provided
that the provisions of Section 5.9 shall not have been breached;
(j) unless General Physics has exercised the GPC Reduction Option, by the
Parent on a date no earlier than the close of business on the second trading day
after the trading day which is five trading days' prior to the day when the GPC
Stockholders Meeting and the NPD Stockholders Meeting are first scheduled to
occur (the "Test Date"), and no later than the close of business on the fourth
trading day after the Test Date, if, as of the Test Date the Parent Stock Price
is greater than $9.914; or
(k) unless the Parent has exercised the Parent Gross-Up Option, by General
Physics on a date no earlier than the close of business on the second trading
day after the Test Date and no later than the close of business on the fourth
trading day after the Test Date, if, on the Test Date, the Parent Stock Price is
less than $9.336.
This Agreement will terminate without action taken by any party hereto if
(i) on the Test Date the Parent Stock Price is less than $9.336, (ii) the Parent
has not exercised the Parent Gross-Up Option, and (iii) if, on a date no earlier
than the close of business on the second trading day after the Test Date and no
later than the close of business on the fourth trading day after the Test Date,
the Special Committee has withdrawn its approval or recommendation of this
Agreement or the Merger, such termination to be effective as of the date such
approval is withdrawn.
Upon a termination of this Agreement pursuant to this Section 7.1, all
amounts, if any, payable pursuant to Section 7.2 shall be paid promptly in
accordance with the provisions of Section 7.2.
SECTION 7.2. Fees and Expenses Upon Termination. In the event that this
Agreement is terminated by General Physics pursuant to Section 7.1(d) or Section
7.1(f)(i), the Parent agrees that it will reimburse General Physics for all
documented, reasonable out-of-pocket expenses incurred by General Physics in
connection with this Agreement, the Merger and the transactions contemplated by
this Agreement. In the event that (A) this Agreement is terminated by General
Physics pursuant to Section 7.1(i) or if a person or group shall have made a
bona fide proposal for an Acquisition Transaction, General Physics has failed to
terminate this Agreement pursuant to Section 7.1(i) and the Parent has
terminated this Agreement pursuant to Section 7.1(g), and (B) prior to the first
anniversary of the date hereof General Physics or any of its Subsidiaries enters
into or authorizes any agreement or agreement in principle with any person other
than the Parent or its stockholders as a group to sell, lease or otherwise
transfer all or a substantial part of its or its subsidiaries' business and
properties or any of its or its subsidiaries' capital stock (excluding capital
stock held by the Parent) whether by merger, purchase of assets, tender offer or
otherwise, then General Physics agrees that it will thereupon reimburse the
Parent for all documented, reasonable out-of-pocket expenses incurred by the
Parent in connection with this Agreement, the Merger and the transactions
contemplated by this Agreement. Any such payment under this Section 7.2 shall be
as liquidated damages and not as a penalty, shall be in lieu of any other
remedies (other than in the circumstances contemplated by the proviso to Section
7.3), and shall be made by wire transfer of immediately available funds promptly
after receipt of appropriate documentation.
A-26
<PAGE> 236
SECTION 7.3. Effect of Termination. In the event of termination of this
Agreement by either the Parent or General Physics as provided in Section 7.1,
written notice thereof shall promptly be given to the other party specifying the
provision hereof pursuant to which such termination is made, and this Agreement
shall forthwith become void and have no effect, without any liability or
obligation on the part of the Parent, Newco or General Physics other than
Section 5.14, Article 7 and Article 9; provided, however, that nothing contained
in this Section or elsewhere in this Agreement shall relieve or limit upon
termination of this Agreement any party from any liability resulting from any
willful and material breach of any of its representations, warranties, covenants
or agreements set forth in this Agreement.
SECTION 7.4. Extension; Waiver. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) subject
to Section 9.4, waive compliance with any of the agreements or conditions of the
other parties contained in this Agreement. Any agreement on the part of a party
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. The failure of any party
to this Agreement to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights.
SECTION 7.5. Procedure for Termination, Amendment, Extension or Waiver;
Role of the Special Committee up to the Effective Time.
(a) A termination of this Agreement pursuant to Section 7.1, an amendment
of this Agreement pursuant to Section 9.4 or an extension or waiver pursuant to
Section 7.4 shall, in order to be effective, require in the case of General
Physics, action by the Special Committee or the duly authorized designee of the
Special Committee and in the case of the Parent, action by its Board of
Directors or the duly authorized designee of its Board of Directors.
(b) The Special Committee (and the directors of General Physics who serve
on the Special Committee) shall continue to function and act in such capacity
from the date of this Agreement until the Effective Time with respect to all
matters relating to General Physics in connection with this Agreement and the
transactions contemplated hereby.
ARTICLE 8
DEFINITIONS
SECTION 8.1. Certain Defined Terms. The following capitalized terms, when
used in this Agreement, have the respective meanings set forth below (such
definitions to be equally applicable to both singular and plural forms of the
terms defined).
"Affiliate" or "affiliate" of any person means another person that directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person; provided, that with respect
to the Parent or Newco, "affiliate" shall not include General Physics or its
subsidiaries and, with respect to General Physics, the term "affiliate" shall
not include the Parent or its Subsidiaries;
"Code" means the Internal Revenue Code of 1986, as amended.
"Convertible Debentures" means collectively the 12% Subordinated Debentures
of the Parent due 1997, the 5% Convertible Bonds of the Parent due 1999 and the
7% Convertible Notes of American Drug Company due 2001.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means United States generally accepted accounting principles.
"Governmental Entity" means any court, administrative agency or commission
or other governmental authority or instrumentality, domestic, local, state,
federal or foreign.
A-27
<PAGE> 237
"GPC Material Adverse Effect" means any circumstance relating to, change
in, or effect on General Physics and its Subsidiaries taken as a whole that,
individually or in the aggregate with any other circumstances relating to,
changes in, or effects on, any of General Physics or its Subsidiaries is
materially adverse to the business, assets, liabilities, financial condition, or
results of operations of General Physics and its Subsidiaries taken as a whole.
"Lien" means any lien, pledge, security interest or other encumbrance on
assets.
"NPD Material Adverse Effect" means any circumstance relating to, change
in, or effect on the Parent and its Subsidiaries taken as a whole that,
individually or in the aggregate with any other circumstances relating to,
changes in, or effects on, any of the Parent or its Subsidiaries is materially
adverse to the business, assets, liabilities, financial condition, or results of
operations of the Parent and its Subsidiaries taken as a whole.
"Parent Stock Price" means the amount which is equal to the overall average
of the high, low, opening and closing sales prices (averaged for each trading
day) of NPD Common Stock on the American Stock Exchange Composite Tape on each
of the ten consecutive trading days immediately preceding the trading day which
is five trading days prior to the day when the GPC Stockholders Meeting and the
NPD Stockholders Meeting occurs.
"Person" or "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity.
"SEC " means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof;
provided, that General Physics and each of General Physics' subsidiaries shall
not constitute a "Subsidiary" of the Parent or any of its Subsidiaries. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Taxes" shall include all federal, state, local and foreign income,
property, sales, excise, employment, payroll, withholding and other taxes,
tariffs or governmental charges of any nature, together with any interest,
penalties and additions to tax.
"Warrants" means the Warrants to purchase common stock of General Physics
issued pursuant to the Warrant Agreement dated as of August 31, 1994 between
General Physics and Midlantic National Bank as Warrant Agent and the Warrants to
purchase common stock of General Physics issued pursuant to the Warrant
Agreement dated as of August 31, 1994 between General Physics and Midlantic
National Bank as Warrant Agent.
SECTION 8.2. Certain Rules of Construction. When a reference is made in
this Agreement to a Section, Exhibit or Schedule, such reference shall be to a
Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation".
A-28
<PAGE> 238
SECTION 8.3. Table of Defined Terms Defined in the Text of the Agreement.
<TABLE>
<CAPTION>
TERM SECTION
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Acquisition Transactions.......................................................... 5.9
Affiliate Letter.................................................................. 5.12
AMEX.............................................................................. 5.2(a)
Assumed Options................................................................... 2.1(c)
Class B Stock..................................................................... 3.2(b)
Claim............................................................................. 5.7(a)
Closing........................................................................... 1.2
Closing Date...................................................................... 1.2
Controlled Company................................................................ 3.1(k)
Converted Shares.................................................................. 2.2(d)
D&O Insurance..................................................................... 5.7(c)
Delaware Court.................................................................... 9.8
Delaware Secretary of State....................................................... 1.3
DGCL.............................................................................. 1.1
Effective Time.................................................................... 1.3
End Date.......................................................................... 7.1(b)
Exchange Agent.................................................................... 2.2(a)
Exchange Fund..................................................................... 2.2(a)
General Physics................................................................... preamble
GPC By-laws....................................................................... 1.5(c)
GPC Charter....................................................................... 1.5(a)
GPC Charter Amendment............................................................. 1.5(b)
GPC Common Stock.................................................................. 2.1
GPC Material Adverse Change....................................................... 6.3(c)
GPC Permits....................................................................... 3.1(f)
GPC Plan.......................................................................... 3.1(k)
GPC Preferred Stock............................................................... 3.1(b)
GPC Proxy Statement............................................................... 3.1(c)
GPC Reduction Option.............................................................. 2.1(b)
GPC Reports....................................................................... 3.1(d)
GPC SEC Documents................................................................. 3.1(d)
GPC Stockholders Meeting.......................................................... 5.2(b)
GPC Stock Plans................................................................... 3.1(b)
Indemnified Party................................................................. 5.7(a)
Merger............................................................................ preamble
Merger Consideration.............................................................. 2.1(b)
Merger Matters.................................................................... 5.8(a)
NPD Common Stock.................................................................. 2.1(a)
NPD Controlled Company............................................................ 3.2(k)
NPD Material Adverse Change....................................................... 6.2(c)
NPD Permits....................................................................... 3.2(f)
NPD Plan.......................................................................... 3.2(k)
NPD Proxy Statement............................................................... 3.2(c)
NPD Reports....................................................................... 3.2(d)
NPD SEC Documents................................................................. 3.2(d)
NPD Stockholders Meeting.......................................................... 5.2(a)
</TABLE>
A-29
<PAGE> 239
<TABLE>
<CAPTION>
TERM SECTION
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Newco............................................................................. preamble
NYSE.............................................................................. 5.2(b)
Options........................................................................... 2.1(c)
Parent............................................................................ preamble
Parent Gross-Up Option............................................................ 2.1(b)
Parent Stock Plans................................................................ 3.2(b)
Proxy Statement................................................................... 3.1(c)
Relevant Group.................................................................... 3.1(p)
S-4............................................................................... 3.1(e)
Special Committee................................................................. preamble
State Takeover Approvals.......................................................... 3.1(c)
Stock Consideration............................................................... 2.1(b)
Surviving Corporation............................................................. 1.1
Test Date......................................................................... 7.1(j)
Vested Options.................................................................... 2.1(c)
Violation......................................................................... 3.1(c)
Voting Debt....................................................................... 3.1(b)
</TABLE>
ARTICLE 9
GENERAL PROVISIONS
SECTION 9.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement (including the exhibits and
schedules hereto) or in any instrument delivered pursuant to this Agreement
shall survive the Effective Time. This Section 9.1 shall not limit any covenant
or agreement of the parties which by its terms contemplates performance after
the Effective Time, including without limitation Section 5.7, Section 5.8 and
the Affiliate Letters delivered pursuant to Section 5.12.
SECTION 9.2. Fees and Expenses. Except as set forth in Section 7.2 and
except for expenses incurred in printing the GPC Proxy Statement, the NPD Proxy
Statement and the S-4, as well as the filing fees relating thereto, which costs
shall be shared equally by the Parent and General Physics whether or not the
Merger is consummated, each party hereto shall pay its own fees and expenses
incident to preparing for, entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby.
SECTION 9.3. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by facsimile (with confirmation of
receipt) or overnight courier (providing proof of delivery) to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to General Physics, to
General Physics Corporation
6700 Alexander Bell Drive
Columbia, Maryland 21046
Attention: General Counsel
Telephone No.: (410) 290-2300
Facsimile No.: (410) 290-2646
A-30
<PAGE> 240
with copy to:
Richards, Layton & Finger
One Rodney Square
Wilmington, Delaware 19801
Attention: Jesse Finkelstein
Telephone No.: (302) 651-7754
Facsimile No.: (302) 658-6548
(b) If to Parent or to Newco, to
National Patent Development Corporation
9 West 57th Street
New York, New York 10019
Attention: General Counsel
Telephone No.: (212) 230-9513
Facsimile No.: (212) 230-9545
with a copy to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178-0060
Attention: David W. Pollak
Telephone No.: (212) 309-6058
Facsimile No.: (212) 309-6273
SECTION 9.4. Amendment. Subject to the applicable provisions of the DGCL,
at any time prior to the Effective Time, the parties hereto may amend this
Agreement; provided, however, that after approval of the Merger by the
stockholders of General Physics and/or the Parent, no amendment shall be made
that by law requires the approval of General Physics' stockholders or the
Parent's stockholders, as the case may be, without the approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
SECTION 9.5. Entire Agreement; Third-Party Beneficiaries. This Agreement
and the other agreements referred to herein constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement. This Agreement
is not intended to confer upon any person other than the parties hereto any
rights or remedies.
SECTION 9.6. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware (without regard
to any conflicts of law rules thereof which might apply the laws of any other
jurisdiction).
SECTION 9.7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, and any such assignment that is not
consented to shall be null and void; provided, that Newco may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to the Parent or to any wholly-owned Subsidiary of the Parent. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
Section 9.8. Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or any state court sitting in the City of
Wilmington, Delaware (any such federal or state court, a "Delaware Court"), in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit
A-31
<PAGE> 241
itself to the personal jurisdiction of any Delaware Court in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement and (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction or venue by motion or other request for leave from any
such Delaware Court.
SECTION 9.9. Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
SECTION 9.10. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers or other representatives thereunto duly
authorized, all as of the date first written above.
GENERAL PHYSICS CORPORATION
By: /s/ John C. McAuliffe
Title: Executive Vice President
NATIONAL PATENT DEVELOPMENT
CORPORATION
By: /s/ Jerome I. Feldman
Title: President and Chief Executive
Officer
GPX ACQUISITION INC.
By: /s/ Scott N. Greenberg
Title: Vice President
A-32
<PAGE> 242
SCHEDULE 3.1(C)
The Merger requires the approval/waiver of Fleet Bank, N.A., as successor
lender to NatWest Bank N.A. under the Credit Agreement dated as of April 7,
1995, among NatWest Bank N.A., as lender, and National Patent Development
Corporation, General Physics Corporation, Inventory Management Corporation, GP
Environmental Services, Inc. and General Physics Federal Systems, Inc., as
borrowers.
A-33
<PAGE> 243
SCHEDULE 3.2(C)
AUTHORITY
1. Credit Agreement, dated as of April 7, 1995, among National Patent
Development Corporation; General Physics Corporation; Inventory Management
Corporation; GP Environmental Services, Inc.; and GPS Technologies, Inc. Federal
Systems Group, as Borrowers, and NatWest Bank N.A., as Bank.
2. Loan Agreement, dated as of April 29, 1993, by and among Five Star
Group, Inc., the Banks signatory hereto, and National Westminster Bank NJ, as
agent for such banks, as amended on February 28, 1994, July 1994, October 23,
1995, June 28, 1996, July 31, 1996, August 30, 1996, and September 30, 1996.
3. Loan Agreement dated as of April 29, 1993, by and among MXL Industries,
Inc., the Banks signatory hereto, and National Westminster Bank NJ, as agent for
such banks, as amended on October 23, 1995 and September 30, 1996.
A-34
<PAGE> 244
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 1 (the "Agreement") dated as of December 18, 1996 among
General Physics Corporation, a Delaware corporation ("General Physics"),
National Patent Development Corporation, a Delaware corporation ("Parent"), and
GPX Acquisition Inc., a Delaware corporation ("Newco").
W I T N E S S E T H:
WHEREAS, the Company has achieved an agreement in principle to settle the
action styled Dunlop v. Pollak, Civil Action No. 15237-NC (the "Cause of
Action"), pending before the Court of Chancery of the State of Delaware in and
for New Castle County (the "Settlement"), the terms of which will be set forth
in a Memorandum of Understanding among counsel thereto (the "Memorandum of
Understanding");
WHEREAS, the Settlement provides for the amendment of certain provisions of
the Agreement and Plan of Merger, dated as of November 19, 1996 (the "Merger
Agreement"), among General Physics, Newco and Parent, providing for, among other
things, (i) the merger of Newco with and into General Physics and (ii) the
issuance of the Common Stock of the Parent (capitalized terms not otherwise
defined in this Agreement are used as defined in the Merger Agreement);
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements contained in this
Agreement, the parties hereto agree as follows:
ARTICLE 1
AMENDMENTS; WAIVERS
SECTION 1.1. AMENDMENTS. Subject to Section 1.3 hereof, the Merger
Agreement is hereby amended as set forth in this Section 1.1. References to
Sections in this Agreement refer to Sections in the Merger Agreement unless
otherwise indicated.
(a) The third sentence of Section 2.1(b) is amended in its entirety and
restated as follows:
"The term "Exchange Ratio" means a ratio equal to 0.54, except (A) in
the event that the Parent Stock Price is less than $9.259, the Parent may
elect at its option (without any obligation to do so) to increase the
Exchange Ratio to the Adjusted Exchange Ratio pursuant to the following
formula:
(9.259/the Parent Stock Price) X 0.54 = Adjusted Exchange Ratio
(rounded to the nearest 1/100, provided that the Parent provides notice of
its election of such option (the "Parent Gross-Up Option") to General
Physics no later than the close of business on the second trading day after
the Test Date (such notice to specify the Adjusted Exchange Ratio) and (B)
in the event that the Parent Stock Price is greater than $10.00, General
Physics may elect at its option (without any obligation to do so) to
decrease the Exchange Ratio to the Adjusted Exchange Ratio pursuant to the
following formula:
(10.00/the Parent Stock Price) X 0.54 = Adjusted Exchange Ratio
(rounded to the nearest 1/100), provided that General Physics provides
notice of its election of such option (the "GPC Reduction Option") to the
Parent no later than the close of business on the second trading day after
the Test Date (such notice to specify the Adjusted Exchange Ratio)."
(b) Section 2.1(c) is amended so that the reference to "$5.10" will read
"$5.20." Section 5.6 is amended so that the reference to "$5.10" will read
"$5.20".
(c) The parties agree that Harris Trust Company of New York shall act as
the Exchange Agent under the terms of the Merger Agreement.
A-35
<PAGE> 245
(d) (i) Article 5 is amended to add the following:
"Section 5.15. Quarterly Dividends. In the event that the Closing has
not occurred prior to March 31, 1997, General Physics intends to make its
regular quarterly dividend with respect to the quarter ended March 31,
1997, provided that funds are legally available therefor and subject to the
fiduciary obligations of the Board of Directors of General Physics."
(ii) The second sentence of Section 9.1 is amended in its entirety and
restated as follows:
"This Section 9.1 shall not limit any covenant or agreement of the
parties which by its terms contemplated performance after the Effective
Time, including without limitation Section 5.7, Section 5.8, Section 5.15
and the Affiliate Letters delivered pursuant to Section 5.12."
(iii) Section 7.3 is amended to insert the words ", Section 5.15" after the
words "Section 5.14" appearing in such Section 7.3.
(e) Section 6.2(d) is amended in its entirety and restated as follows:
"(d) Fairness Opinion. The written opinion of Oppenheimer & Co. Inc.,
dated as of the Closing Date, to the effect that the Merger Consideration
to be received by the holders of GPC Common Stock (other than National
Patent) is fair to such holders from a financial point of view, shall have
been delivered on the Test Date and on the Closing Date."
(f) Section 7.1(j) is amended in its entirety and restated as follows:
"(j) unless General Physics has exercised the GPC Reduction Option, by
the Parent on a date no earlier than the close of business on the second
trading day after the trading day which is five trading days' prior to the
day when the GPC Stockholders Meeting and the NPD Stockholders Meeting are
first scheduled to occur (the "Test Date"), and no later than the close of
business on the fourth trading day after the Test Date, if, as of the Test
Date the Parent Stock Price is greater than $10.00; or"
(g) Section 7.1(k) is amended in its entirety and restated as follows:
"(k) unless the Parent has exercised the Parent Gross-Up Option, by
General Physics on a date no earlier than the close of business on the
second trading day after the Test Date and no later than the close of
business on the fourth trading day after the Test Date, if, on the Test
Date, the Parent Stock Price is less than $9.259."
(h) The next-to-last sentence of Section 7.1 is amended in its entirety and
restated as follows:
"This Agreement will terminate without action taken by any party
hereto if (i) on the Test Date the Parent Stock Price is less than $9.259,
(ii) the Parent has not exercised the Parent Gross-Up Option, and (iii) on
a date no earlier than the close of business on the second trading day
after the Test Date and no later than the close of business on the fourth
trading day after the Test Date, the Special Committee has withdrawn its
approval or recommendation of this Agreement or the Merger, such
termination to be effective as of the date such approval is withdrawn."
(i) Section 7.1 is amended to include the following two sentences
immediately after the next-to last sentence of Section 7.1:
"If the Closing has not occurred prior to February 15, 1997, the
Parent will deliver to the Special Committee updated financial statements
for the most recent calendar month to the extent available. In the event
that each of the Special Committee provides a written statement to the
Parent that in its belief and opinion the financial condition of the Parent
on a consolidated basis has materially deteriorated since the financial
condition as reported in the consolidated financial statements of the
Parent as of September 30, 1996, then General Physics has the right to
terminate the Agreement."
(j) The last sentence of Section 2.2(f)(ii) is amended to replace the words
"GPC Common Stock" with the words "NPD Common Stock."
A-36
<PAGE> 246
SECTION 1.2. CONSENTS TO SETTLEMENT. The Parent and Newco each hereby
consents to the settlement by General Physics, and General Physics hereby
consents to the settlement by the Parent, of the case styled Dunlop v. Pollak
pursuant to the terms set forth in the Memorandum of Understanding. Each party
further consents to the taking of any and all actions by any party as may be
required by the Memorandum of Understanding.
SECTION 1.3. UNILATERAL RESCISSION. Each of the amendments to the Merger
Agreement set forth in Section 1.1 hereof may be rescinded by the Parent prior
to the date of the NPD Special Meeting in the event that the Memorandum of
Understanding becomes null and void pursuant to the terms of Section 8 thereof
because the plaintiff's counsel in the Cause of Action has declared that the
Settlement is not fair and reasonable to the plaintiff. Any such rescission
shall be effective upon written notice from the Parent to General Physics, such
notice to indicate the amendments which are rescinded and to be given in
accordance with the terms of the Merger Agreement. In the event any such
amendments are rescinded, then the terms of the Merger Agreement shall thereupon
revert to their prior form without giving effect to such rescinded amendments as
if such terms had never been amended.
ARTICLE 2
GENERAL PROVISIONS
SECTION 2.1. AMENDMENT. Subject to the applicable provisions of the DGCL,
at any time prior to the Effective Time, the parties hereto may amend this
Agreement; provided, however, that after approval of the Merger by the
stockholders of General Physics and/or the Parent, no amendment shall be made
that by law requires the approval of General Physics' stockholders or the
Parent's stockholders, as the case may be, without the approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
SECTION 2.2. NO THIRD-PARTY BENEFICIARIES. This Agreement is not intended
to confer upon any person other than the parties hereto any rights or remedies.
SECTION 2.3. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware (without regard
to any conflicts of law rules thereof which might apply the laws of any other
jurisdiction).
SECTION 2.4. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, and any such assignment that is not
consented to shall be null and void; provided, that Newco may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to the Parent or to any wholly-owned Subsidiary of the Parent. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
SECTION 2.5. ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or any state court sitting in the City of
Wilmington, Delaware (any such federal or state court, a "Delaware Court"), in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any Delaware Court in the event any dispute arises out
of this Agreement or any of the transactions contemplated by this Agreement and
(b) agrees that it will not attempt to deny or defeat such personal jurisdiction
or venue by motion or other request for leave from any such Delaware Court.
SECTION 2.6. SEVERABILITY. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any
A-37
<PAGE> 247
respect under any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other provision or portion of
any provision in such jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been contained
herein.
SECTION 2.7. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-38
<PAGE> 248
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers or other representatives thereunto duly
authorized, all as of the date first written above.
GENERAL PHYSICS CORPORATION
By: /s/ JOHN C. MCAULIFFE
------------------------------------
Title: Executive Vice President
NATIONAL PATENT DEVELOPMENT
CORPORATION
By: /s/ SCOTT N. GREENBERG
------------------------------------
Title: Vice President -- Finance
GPX ACQUISITION INC.
By: /s/ SCOTT N. GREENBERG
------------------------------------
Title: Vice President
[Signature Page to Amendment No. 1]
A-39
<PAGE> 249
LOGO
ANNEX B -- OPINION OF OPPENHEIMER & CO., INC.
December 19, 1996
Special Committee of the
Board of Directors
General Physics Corporation
6700 Alexander Bell Drive
Columbia, MD 21046
Gentlemen:
You have asked Oppenheimer & Co., Inc. ("Oppenheimer") to render an opinion
(the "Opinion") as to the fairness, from a financial point of view, of the
consideration to be received by the holders of the Common Stock of General
Physics Corporation ("General Physics") in the proposed acquisition (the
"Transaction") by National Patent Development Corporation ("National Patent") of
the Common Stock of General Physics not currently owned by National Patent. We
understand that, pursuant to the Transaction, GPX Acquisition Inc., a newly
formed wholly-owned subsidiary of National Patent ("Merger Sub"), will be merged
with and into General Physics, with General Physics as the surviving
corporation. The Transaction will be consummated per the terms and conditions of
the Agreement and Plan of Merger among General Physics, National Patent and
Merger Sub dated November 19, 1996 and amended by Amendment No. 1 on December
18, 1996 (the "Merger Agreement").
We understand that upon the closing of the Transaction, among other things:
(i) Merger Sub will merge with and into General Physics, and (ii) each
outstanding share of Common Stock, $.025 par value, of General Physics (the
"General Physics Common Stock") shall be converted into the right to receive
that number of shares of Common Stock, $.01 par value, of National Patent
("National Patent Common Stock") determined in accordance with the Exchange
Ratio (as defined in the Merger Agreement). For purposes of the Opinion, the
Exchange Ratio means a ratio of 0.54 shares of National Patent Common Stock for
each share of General Physics Common Stock, subject to adjustment as provided in
the Merger Agreement. We understand that the Exchange Ratio will result in
holders of General Physics Common Stock having the right to receive per share of
General Physics Common Stock, National Patent Common Stock having a value of at
least $5.00.
In arriving at our Opinion, Oppenheimer has, among other things:
(i) reviewed the original proposal from National Patent dated July 26,
1996 and the Merger Agreement;
(ii) met with or interviewed by telephone certain members of the
senior management and key operating executives of General Physics, National
Patent, their respective divisions, subsidiaries and investee companies to
discuss the operations, financial conditions, future prospects and
projected operations and performance of their respective companies or
operating units;
(iii) reviewed the historical market prices and trading volume for
General Physics', National Patent's and their respective investee
companies' publicly traded securities;
(iv) reviewed certain publicly available financial data for companies
that we deem comparable to General Physics and National Patent and their
respective divisions, subsidiaries and investee companies;
B-1
<PAGE> 250
(v) reviewed certain publicly available financial data for
transactions that we deem comparable to the Transaction;
(vi) reviewed certain internal information including internally
generated business plans and projected financial statements prepared by
General Physics' and National Patent's management for the fiscal years
ended 1996 through 2000;
(vii) reviewed, wherever available, internally generated business
plans and information relating to operations, marketing, the competitive
environment and accounting for General Physics and the various National
Patent businesses;
(viii) reviewed the audited financial statements for each of the
fiscal years ended December 31, 1990 through December 31, 1995 and the
unaudited financial statements for the nine months ended September 30, 1996
for each of General Physics and National Patent;
(ix) reviewed management letters from the auditors and other
non-public information relating to General Physics and the divisions and
subsidiaries of National Patent;
(x) evaluated the financial impact on National Patent's financial
statements of a combination of General Physics and National Patent;
(xi) performed discounted cash flow and other analyses of General
Physics and National Patent using certain assumptions of future performance
provided to us by the managements of General Physics and National Patent;
and
(xii) conducted such other studies, analyses and inquiries as we
deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to us by General Physics and National
Patent and their respective representatives and advisors. With respect to the
forecasts regarding General Physics' and National Patent's future financial
condition and operating results provided to us, we assumed, without independent
verification or investigation, that such forecasts were reasonably prepared on
bases reflecting the best available information, estimates and judgement of
General Physics' and National Patent's respective managements. We have assumed,
without independent verification, the accuracy of the advice and conclusions of
General Physics' and National Patent's legal counsel and accountants with
respect to accounting and tax matters as provided to Oppenheimer by the
respective managements, including, without limitation, the accounting for the
Transaction as a purchase. We express no opinion as to what the value of the
National Patent Common Stock actually will be when issued to the holders of the
General Physics Common Stock pursuant to the Transaction or the price at which
the National Patent Common Stock will trade subsequent to the Transaction.
Our Opinion is directed only to the fairness from a financial point of view
of the consideration to be received by the holders of the General Physics Common
Stock (other than National Patent). Oppenheimer neither made nor obtained any
independent evaluations or appraisals of the assets or liabilities of General
Physics or National Patent nor solicited any third-party indications of interest
for the acquisition of all or any part of the General Physics Common Stock.
Our Opinion is based upon analyses of the foregoing factors in light of our
assessments of general economic, financial and market conditions as of the date
hereof that can be evaluated by us as of such date.
Oppenheimer, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales, and distributions of listed and
unlisted securities and private placements. Oppenheimer has been engaged to
render financial advisory services to the Special Committee of the Board of
Directors of General Physics in connection with the Transaction and to prepare
and deliver this opinion letter, and will receive a fee for its services.
Oppenheimer may actively trade the securities of General Physics and National
Patent for its own account or for its customers and accordingly may at any time
hold a long or short position in such securities.
B-2
<PAGE> 251
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof the consideration to be received in the Transaction by holders of
General Physics Common Stock is fair, from a financial point of view, to the
holders of the General Physics Common Stock (other than National Patent).
This Opinion is for the exclusive use of the Special Committee of the Board
of Directors of General Physics and other members of the Board of Directors of
General Physics and may not be relied upon by any other person or entity. It is
our understanding that this Opinion will be contained in a Joint Proxy
Statement/ Prospectus that will be filed with the Securities and Exchange
Commission and distributed to the shareholders of General Physics and National
Patent. Neither this Opinion nor the services provided by Oppenheimer in
connection herewith may be publicly disclosed or referred to in any manner by
General Physics without the prior written approval of Oppenheimer.
Very truly yours,
[OPPENHEIMER & CO., INC. SIGNATURE]
-----------------------------------
Oppenheimer & Co., Inc.
B-3
<PAGE> 252
ANNEX C -- CHARTER AMENDMENTS
FOREIGN OWNERSHIP CHARTER AMENDMENT
The text of the proposed Foreign Ownership Charter Amendment reads as
follows:
"THIRTEENTH: The Corporation and/or its subsidiaries shall have the right
to redeem shares of Common Stock issued on or after [date of amendment]
beneficially owned by foreign persons and/or require such stockholders to
dispose of their interest in shares of Common Stock in the following
circumstances:
The Corporation and/or its subsidiaries has entered into certain
subcontracts with contractors who have entered into contracts with the United
States Department of Energy ("DOE") and have entered into certain contracts
directly with the United States Department of Defense ("DoD") which involved
classified information. In the event that the DOE or the DoD (or any successor
agency) threatens termination of any contract as a result, directly or
indirectly, of the beneficial ownership of 5% or more of the Corporation's
Common Stock by any person, then the Corporation, in the sole and absolute
discretion of its Board of Directors, shall have the unqualified right and power
to (a) redeem, upon not less than five (5) days prior written notice to such
person, at a price per share equal to the average of the reported closing bid
and asked prices thereof as reported on the American Stock Exchange (or such
other stock exchange, if any, on which shares of Common Stock of the Corporation
are primarily traded) on the last business day prior to the date of redemption
established in the notice, all or any portion of the shares of Common Stock of
the Corporation owned by such person issued on or after [date of amendment] or
(b) require such person to promptly dispose of such person's interest in all or
any portion of such shares of Common Stock owned by such stockholder. Because
any damages will be inadequate to protect the Corporation in the event the
stockholder does not comply with the provisions of this Article THIRTEENTH, the
Corporation shall be entitled to injunctive relief to enforce the foregoing
provisions."
AUTHORIZED SHARES CHARTER AMENDMENT
The text of the proposed Authorized Shares Charter Amendment reads as
follows:
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is thirty-seven million eight hundred
thousand (37,800,000) shares of which twenty-five million (25,000,000) are to be
Common Stock of the par value of One Cent ($.01) per share (hereinafter called
the "Common Stock"); of which two million eight hundred thousand (2,800,000)
shares are to be Class B Capital Stock with a par value of One Cent ($.01) per
share (hereinafter called the "Class B Capital Stock"); and of which ten million
(10,000,000) shares are to be Preferred Stock with a par value of One Cent
($.01) per share (hereinafter called the "Preferred Stock"), to be issued in
such series and with such terms and conditions as the Board of Directors may
determine."
C-1
<PAGE> 253
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended, grants
each corporation organized thereunder certain powers to indemnify its officers
and directors against liability for certain of their acts. Article ELEVEN of
National Patent's Certificate of Incorporation and Article III, Section 15 of
the by-laws of National Patent, provide that National Patent shall, to the full
extent permitted by law or to the extent that a court of competent jurisdiction
shall deem proper or permissible under the circumstances, whichever is greater,
indemnify all directors, officers, incorporators, employees, or agents of
National Patent.
In addition, Section 102 of the Delaware General Corporation Law permits
corporations, through provisions in their certificates of incorporation, to
limit the monetary liability of directors. Article TWELVE of National Patent's
Certificate of Incorporation provides that no director of National Patent shall
be liable to National Patent or any of its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to National Patent or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper benefit.
National Patent has purchased Director's and Officers' Liability Insurance,
including a Company Reimbursement Policy. Subject to the policy conditions, the
insurance provides coverage for amounts payable by National Patent to its
directors and officers pursuant to National Patent's by-laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger dated as of November 19, 1996 among the
Registrant, General Physics and GPX Acquisition Inc. (included as Annex A to
the Joint Proxy Statement/Prospectus)
2.2 Amendment No. 1, dated as of December 18, 1996, to the Agreement and Plan of
Merger dated as of November 19, 1996 among the Registrant, General Physics and
GPX Acquisition Inc.*
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to the Registrant's Form 10-Q for the
third quarter ended September 30, 1995)
3.2 By-Laws, as amended to date, of the Registrant (incorporated by reference to
Exhibit 3(ii) to the Registrant's Form 10-Q for the first quarter ended March
31, 1995)
</TABLE>
<TABLE>
<S> <C>
5 Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the securities
being registered*
8 Opinion of Morgan, Lewis & Bockius LLP regarding certain federal income tax
consequences relating to the Merger*
10.1 1973 Non-Qualified Stock Option Plan of the Registrant, as amended
(incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992)
10.2 Swiss Public Bond Issue Agreement dated as of February 8, 1985 between the
Registrant and a consortium of Swiss banks (incorporated by reference to
Exhibit C to the Registrant's Form 8-K dated March 8, 1985)
10.3 Swiss Public Bond Issue Agreement dated as of May 9, 1985 between the
Registrant and a consortium of Swiss banks (incorporated by reference to
Exhibit 10.37 to the Registrant's Form 10-K for the year ended December 31,
1985)
</TABLE>
II-1
<PAGE> 254
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<S> <C>
10.4 Swiss Public Bond Issue Agreement dated as of February 28, 1986, between the
Registrant and a consortium of Swiss Banks (incorporated by reference to
Exhibit 10.38 to the Registrant's Form 10-K for the year ended December 31,
1985)
10.5 Registrant's 401(k) Savings Plan, dated January 29, 1992, effective March 1,
1992 (incorporated by reference to Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991)
10.6 Secured Revolving Credit and Term Loan Agreement dated April 29, 1993 by and
among Five Star Group, Inc., National Westminster Bank, USA, United Jersey
Bank/Central, N.A., and National Westminster Bank, N.J., as agent (incorporated
by reference to Exhibit 1 to the Registrant's Form 10-Q for the third quarter
ended September 30, 1993)
10.7 Secured Revolving Credit and Term Loan Agreement dated April 29, 1993 by and
among MXL Industries, Inc., National Westminster Bank, USA, United Jersey
Bank/Central, N.A., and National Westminster Bank, N.J., as agent (incorporated
by reference to Exhibit 2 to the Registrant's Form 10-Q for the third quarter
ended September 30, 1993)
10.8 Amendment to the Loan Agreement dated April 29, 1993 between Five Star Group,
Inc. and NatWest Bank N.A., (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the third quarter ended September 30, 1995)
10.9 Amendment and Supplement to the Loan Agreement dated April 29, 1993 between MXL
Industries, Inc. and NatWest Bank N.A., dated October 23, 1995 (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-Q for the third quarter
ended September 30, 1995)
10.10 Amendment to Loan Agreement dated April 29, 1993 by and among MXL Industries,
Inc., Mellon Bank and Fleet Bank, National Association, dated September 30,
1996 (successor in interest to NatWest Bank, N.A.) (incorporated by reference
to Exhibit 1 to the Registration Form 10-Q for the third quarter ended
September 30, 1996)
10.11 Amendment to Loan Agreement dated April 29, 1993 by and among Five Star Group,
Inc., Mellon Bank and Fleet Bank, National Association (successor in interest
to NatWest Bank, N.A.), dated September 30, 1996 (incorporated by reference to
Exhibit 2 to the Registrant's Form 10-Q for the third quarter ended September
30, 1996)
10.12 Stock Purchase Agreement, dated as of January 24, 1995, by and among Carlyle
International Partners III, L.P., C/S International Partners, Carlyle-GTSD
Partners, L.P., Carlyle-GTSD Partners II, L.P., GTS Duratek, Inc. and the
Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Form
8-K dated January 24, 1995)
10.13 Stockholders Agreement, dated as of January 24, 1995, by and among GTS Duratek,
Inc., Carlyle Partners II, L.P., Carlyle International Partners III, L.P., C/S
International Partners, Carlyle-GTS Partners, L.P. and the Registrant
(incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K dated
January 24, 1995)
10.14 Registration Rights Agreement dated as of January 24, 1995 by and among GTS
Duratek, Inc., Carlyle Partners II, L.P., Carlyle International Partners III,
L.P., C/S International Partners, Carlyle-GTS Partners, L.P. and the Registrant
(incorporated by reference to Exhibit 4.3 to the Registrant's Form 8-K dated
January 24, 1995)
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the
Registrant's Annual Report on Form 10-K for the year end December 31, 1995)
23.1 Consent of Independent Auditors*
23.2 Consent of Independent Accountants*
23.3 Consent of Morgan, Lewis & Bockius LLP (included in Item 5)
23.4 Consent of Financial Advisor*
99.1 Form of proxy for the Special Meeting of Stockholders of National Patent*
99.2 Form of proxy for the Special Meeting of Stockholders of General Physics*
</TABLE>
- ---------------
* Filed herewith.
II-2
<PAGE> 255
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the undersigned registrant pursuant to the foregoing provisions, or
otherwise, the undersigned registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the undersigned registrant of expenses incurred or paid by a
director, officer or controlling person of the undersigned registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the undersigned registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 256
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 19th day of December, 1996.
NATIONAL PATENT DEVELOPMENT
CORPORATION
By *
-------------------------------------
Jerome I. Feldman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby appoints each of Lawrence M. Gordon,
and Scott N. Greenberg, as his attorney-in-fact to sign on his/her behalf
individually and in the capacity stated below and to file all supplements,
amendments and post-effective amendments to this Registration Statement, and any
and all instruments or documents filed as a part of or in connection with this
Registration Statement or any amendment or supplement thereto, and any such
attorney-in-fact may make such changes and additions to this Registration
Statement as such attorney-in-fact may deem necessary or appropriate.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- ------------------
<C> <S> <C>
* President, Chief December 19, 1996
- ----------------------------------------------- Executive Officer and
Jerome I. Feldman Director (Principal
Executive Officer)
* Executive Vice President, December 19, 1996
- ----------------------------------------------- Treasurer and Director
Martin M. Pollak
* Vice President, Chief December 19, 1996
- ----------------------------------------------- Financial Officer and
Scott N. Greenberg Director (Principal
Financial and Accounting
Officer)
* Director December 19, 1996
- -----------------------------------------------
Ogden R. Reid
* Director December 19, 1996
- -----------------------------------------------
Roald Hoffman
* Director December 19, 1996
- -----------------------------------------------
Paul A. Gould
* Director December 19, 1996
- -----------------------------------------------
Herbert R. Silverman
*By /s/ LAWRENCE M. GORDON*
-------------------------------------------
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 257
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this Report.
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NO.
- ----------- ------------------------------------------------------------------------ ----------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of November 19, 1996 among the
Registrant, General Physics and GPX Acquisition Inc. (included as Annex
A to the Joint Proxy Statement/Prospectus)..............................
2.2 Amendment No. 1, dated as of December 18, 1996, to the Agreement and
Plan of Merger dated as of November 19, 1996 among the Registrant,
General Physics and GPX Acquisition Inc.*...............................
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to the Registrant's Form 10-Q
for the third quarter ended September 30, 1995).........................
3.2 By-Laws, as amended to date, of the Registrant (incorporated by
reference to Exhibit 3(ii) to the Registrant's Form 10-Q for the first
quarter ended March 31, 1995)...........................................
5 Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
securities being registered*............................................
8 Opinion of Morgan, Lewis & Bockius LLP regarding certain federal income
tax consequences relating to the Merger*................................
10.1 1973 Non-Qualified Stock Option Plan of the Registrant, as amended
(incorporated by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992)...............
10.2 Swiss Public Bond Issue Agreement dated as of February 8, 1985 between
the Registrant and a consortium of Swiss banks (incorporated by
reference to Exhibit C to the Registrant's Form 8-K dated March 8,
1985)...................................................................
10.3 Swiss Public Bond Issue Agreement dated as of May 9, 1985 between the
Registrant and a consortium of Swiss banks (incorporated by reference to
Exhibit 10.37 to the Registrant's Form 10-K for the year ended December
31, 1985)...............................................................
10.4 Swiss Public Bond Issue Agreement dated as of February 28, 1986, between
the Registrant and a consortium of Swiss Banks (incorporated by
reference to Exhibit 10.38 to the Registrant's Form 10-K for the year
ended December 31, 1985)................................................
10.5 Registrant's 401(k) Savings Plan, dated January 29, 1992, effective
March 1, 1992 (incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991)...................................................................
10.6 Secured Revolving Credit and Term Loan Agreement dated April 29, 1993 by
and among Five Star Group, Inc., National Westminster Bank, USA, United
Jersey Bank/Central, N.A., and National Westminster Bank, N.J., as agent
(incorporated by reference to Exhibit 1 to the Registrant's Form 10-Q
for the third quarter ended September 30, 1993).........................
10.7 Secured Revolving Credit and Term Loan Agreement dated April 29, 1993 by
and among MXL Industries, Inc., National Westminster Bank, USA, United
Jersey Bank/Central, N.A., and National Westminster Bank, N.J., as agent
(incorporated by reference to Exhibit 2 to the Registrant's Form 10-Q
for the third quarter ended September 30, 1993).........................
</TABLE>
<PAGE> 258
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NO.
- ----------- ------------------------------------------------------------------------ ----------
<S> <C> <C>
10.8 Amendment to the Loan Agreement dated April 29, 1993 between Five Star
Group, Inc. and NatWest Bank N.A., (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q for the third quarter ended September
30, 1995)...............................................................
10.9 Amendment and Supplement to the Loan Agreement dated April 29, 1993
between MXL Industries, Inc. and NatWest Bank N.A., dated October 23,
1995 (incorporated by reference to Exhibit 10.2 to the Registrant's Form
10-Q for the third quarter ended September 30, 1995)....................
10.10 Amendment to Loan Agreement dated April 29, 1993 by and among MXL
Industries, Inc., Mellon Bank and Fleet Bank, National Association,
dated September 30, 1996 (successor in interest to NatWest Bank, N.A.)
(incorporated by reference to Exhibit 1 to the Registration Form 10-Q
for the third quarter ended September 30, 1996).........................
10.11 Amendment to Loan Agreement dated April 29, 1993 by and among Five Star
Group, Inc., Mellon Bank and Fleet Bank, National Association (successor
in interest to NatWest Bank, N.A.), dated September 30, 1996
(incorporated by reference to Exhibit 2 to the Registrant's Form 10-Q
for the third quarter ended September 30, 1996).........................
10.12 Stock Purchase Agreement, dated as of January 24, 1995, by and among
Carlyle International Partners III, L.P., C/S International Partners,
Carlyle-GTSD Partners, L.P., Carlyle-GTSD Partners II, L.P., GTS
Duratek, Inc. and the Registrant (incorporated by reference to Exhibit
4.1 to the Registrant's Form 8-K dated January 24, 1995)................
10.13 Stockholders Agreement, dated as of January 24, 1995, by and among GTS
Duratek, Inc., Carlyle Partners II, L.P., Carlyle International Partners
III, L.P., C/S International Partners, Carlyle-GTS Partners, L.P. and
the Registrant (incorporated by reference to Exhibit 4.2 to the
Registrant's Form 8-K dated January 24, 1995)...........................
10.14 Registration Rights Agreement dated as of January 24, 1995 by and among
GTS Duratek, Inc., Carlyle Partners II, L.P., Carlyle International
Partners III, L.P., C/S International Partners, Carlyle-GTS Partners,
L.P. and the Registrant (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 8-K dated January 24, 1995)...........................
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21
to the Registrant's Annual Report on Form 10-K for the year end December
31, 1995)...............................................................
23.1 Consent of Independent Auditors*........................................
23.2 Consent of Independent Accountants*.....................................
23.3 Consent of Morgan, Lewis & Bockius LLP (included in Item 5).............
23.4 Consent of Financial Advisor*...........................................
99.1 Form of proxy for the Special Meeting of Stockholders of National
Patent*.................................................................
99.2 Form of proxy for the Special Meeting of Stockholders of General
Physics*................................................................
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 2.2
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 1 (the "Agreement") dated as of December 18, 1996 among
General Physics Corporation, a Delaware corporation ("General Physics"),
National Patent Development Corporation, a Delaware corporation ("Parent"), and
GPX Acquisition Inc., a Delaware corporation ("Newco").
W I T N E S S E T H :
WHEREAS, the Company has achieved an agreement in principle to settle
the action styled Dunlop v. Pollak, Civil Action No. 15237-NC (the "Cause of
Action"), pending before the Court of Chancery of the State of Delaware in and
for New Castle County (the "Settlement"), the terms of which will be set forth
in a Memorandum of Understanding among counsel thereto (the "Memorandum of
Understanding");
WHEREAS, the Settlement provides for the amendment of certain
provisions of the Agreement and Plan of Merger, dated as of November 19, 1996
(the "Merger Agreement"), among General Physics, Newco and Parent, providing
for, among other things, (i) the merger of Newco with and into General Physics
and (ii) the issuance of the Common Stock of the Parent (capitalized terms not
otherwise defined in this Agreement are used as defined in the Merger
Agreement);
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements contained in this
Agreement, the parties hereto agree as follows:
ARTICLE 1
AMENDMENTS; WAIVERS
SECTION 1.1. AMENDMENTS. Subject to Section 1.3 hereof, the Merger
Agreement is hereby amended as set forth in this Section 1.1. References to
Sections in this Agreement refer to Sections in the Merger Agreement unless
otherwise indicated.
(a) The third sentence of Section 2.1(b) is amended in its entirety and restated
as follows:
"The term "Exchange Ratio" means a ratio equal to 0.54, except
(A) in the event that the Parent Stock Price is less than $9.259, the
Parent may elect at its
<PAGE> 2
Amendment No. 1 to
Agreement and Plan of Merger
option (without any obligation to do so) to increase the Exchange Ratio
to the Adjusted Exchange Ratio pursuant to the following formula:
(9.259 / the Parent Stock Price) x 0.54 = Adjusted Exchange
Ratio
(rounded to the nearest 1/100), provided that the Parent provides
notice of its election of such option (the "Parent Gross-Up Option") to
General Physics no later than the close of business on the second
trading day after the Test Date (such notice to specify the Adjusted
Exchange Ratio) and (B) in the event that the Parent Stock Price is
greater than $10.00, General Physics may elect at its option (without
any obligation to do so) to decrease the Exchange Ratio to the Adjusted
Exchange Ratio pursuant to the following formula:
(10.00 / the Parent Stock Price) x 0.54 = Adjusted Exchange
Ratio
(rounded to the nearest 1/100), provided that General Physics provides
notice of its election of such option (the "GPC Reduction Option") to
the Parent no later than the close of business on the second trading
day after the Test Date (such notice to specify the Adjusted Exchange
Ratio)."
(b) Section 2.1(c) is amended so that the reference to "$5.10" will read
"$5.20." Section 5.6 is amended so that the reference to "$5.10" will read
"$5.20".
(c) The parties agree that Harris Trust Company of New York shall act as the
Exchange Agent under the terms of the Merger Agreement.
(d) (i) Article 5 is amended to add the following:
"Section 5.15. Quarterly Dividends. In the event that the
Closing has not occurred prior to March 31, 1997, General Physics
intends to make its regular quarterly dividend with respect to the
quarter ended March 31, 1997, provided that funds are legally
available therefor and subject to the fiduciary obligations of the
Board of Directors of General Physics."
(ii) The second sentence of Section 9.1 is amended in its entirety and
restated as follows:
"This Section 9.1 shall not limit any covenant or agreement of
the parties which by its terms contemplated performance after the
Effective Time, including without limitation Section 5.7, Section 5.8,
Section 5.15 and the Affiliate Letters delivered pursuant to Section
5.12."
2
<PAGE> 3
Amendment No. 1 to
Agreement and Plan of Merger
(iii) Section 7.3 is amended to insert the words ", Section 5.15" after
the words "Section 5.14" appearing in such Section 7.3.
(e) Section 6.2(d) is amended in its entirety and restated as follows:
"(d) Fairness Opinion. The written opinion of Oppenheimer &
Co, Inc., dated as of the Closing Date, to the effect that the Merger
Consideration to be received by the holders of GPC Common Stock (other
than National Patent) is fair to such holders from a financial point of
view, shall have been delivered on the Test Date and on the Closing
Date."
(f) Section 7.1(j) is amended in its entirety and restated as follows:
"(j) unless General Physics has exercised the GPC Reduction
Option, by the Parent on a date no earlier than the close of business
on the second trading day after the trading day which is five trading
days' prior to the day when the GPC Stockholders Meeting and the NPD
Stockholders Meeting are first scheduled to occur (the "Test Date"),
and no later than the close of business on the fourth trading day after
the Test Date, if, as of the Test Date the Parent Stock Price is
greater than $10.00; or"
(g) Section 7.1(k) is amended in its entirety and restated as follows:
"(k) unless the Parent has exercised the Parent Gross-Up
Option, by General Physics on a date no earlier than the close of
business on the second trading day after the Test Date and no later
than the close of business on the fourth trading day after the Test
Date, if, on the Test Date, the Parent Stock Price is less than
$9.259."
(h) The next-to-last sentence of Section 7.1 is amended in its entirety and
restated as follows:
"This Agreement will terminate without action taken by any
party hereto if (i) on the Test Date the Parent Stock Price is less
than $9.259, (ii) the Parent has not exercised the Parent Gross-Up
Option, and (iii) on a date no earlier than the close of business on
the second trading day after the Test Date and no later than the close
of business on the fourth trading day after the Test Date, the Special
Committee has withdrawn its approval or recommendation of this
Agreement or the Merger, such termination to be effective as of the
date such approval is withdrawn."
3
<PAGE> 4
Amendment No. 1 to
Agreement and Plan of Merger
(m) Section 7.1 is amended to include the following two sentences immediately
after the next-to last sentence of Section 7.1:
"If the Closing has not occurred prior to February 15, 1997,
the Parent will deliver to the Special Committee updated financial
statements for the most recent calendar month to the extent available.
In the event that each of the Special Committee provides a written
statement to the Parent that in its belief and opinion the financial
condition of the Parent on a consolidated basis has materially
deteriorated since the financial condition as reported in the
consolidated financial statements of the Parent as of September 30,
1996, then General Physics has the right to terminate the Agreement."
(n) The last sentence of Section 2.2(f)(ii) is amended to replace the words "GPC
Common Stock" with the words "NPD Common Stock."
SECTION 1.2. CONSENTS TO SETTLEMENT. The Parent and Newco each hereby
consents to the settlement by General Physics, and General Physics hereby
consents to the settlement by the Parent, of the case styled Dunlop v. Pollak
pursuant to the terms set forth in the Memorandum of Understanding. Each party
further consents to the taking of any and all actions by any party as may be
required by the Memorandum of Understanding.
SECTION 1.3. UNILATERAL RESCISSION. Each of the amendments to the
Merger Agreement set forth in Section 1.1 hereof may be rescinded by the Parent
prior to the date of the NPD Special Meeting in the event that the Memorandum of
Understanding becomes null and void pursuant to the terms of Section 8 thereof
because the plaintiff's counsel in the Cause of Action has declared that the
Settlement is not fair and reasonable to the plaintiff. Any such rescission
shall be effective upon written notice from the Parent to General Physics, such
notice to indicate the amendments which are rescinded and to be given in
accordance with the terms of the Merger Agreement. In the event any such
amendments are rescinded, then the terms of the Merger Agreement shall thereupon
revert to their form without giving effect to such rescinded amendments as if
such terms had never been amended.
ARTICLE 2
GENERAL PROVISIONS
SECTION 2.1. AMENDMENT. Subject to the applicable provisions of the
DGCL, at any time prior to the Effective Time, the parties hereto may amend this
Agreement; provided, however, that after approval of the Merger by the
stockholders of General Physics and/or the
4
<PAGE> 5
Amendment No. 1 to
Agreement and Plan of Merger
Parent, no amendment shall be made that by law requires the approval of General
Physics' stockholders or the Parent's stockholders, as the case may be, without
the approval of such stockholders. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties.
SECTION 2.2. NO THIRD-PARTY BENEFICIARIES. This Agreement is not
intended to confer upon any person other than the parties hereto any rights or
remedies.
SECTION 2.3. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware (without regard
to any conflicts of law rules thereof which might apply the laws of any other
jurisdiction).
SECTION 2.4. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, and any such assignment that is not
consented to shall be null and void; provided, that Newco may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to the Parent or to any wholly-owned Subsidiary of the Parent. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
SECTION 2.5. ENFORCEMENT. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or any state court sitting in the City of
Wilmington, Delaware (any such federal or state court, a "Delaware Court"), in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any Delaware Court in the event any dispute arises out
of this Agreement or any of the transactions contemplated by this Agreement and
(b) agrees that it will not attempt to deny or defeat such personal jurisdiction
or venue by motion or other request for leave from any such Delaware Court.
SECTION 2.6. SEVERABILITY. Whenever possible, each provision or portion
of any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and
5
<PAGE> 6
Amendment No. 1 to
Agreement and Plan of Merger
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision or portion of any provision had never been contained herein.
SECTION 2.7. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
Amendment No. 1 to
Agreement and Plan of Merger
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers or other representatives
thereunto duly authorized, all as of the date first written above.
GENERAL PHYSICS CORPORATION
By:_______________________________
Name:
Title:
NATIONAL PATENT DEVELOPMENT
CORPORATION
By:_______________________________
Name:
Title:
GPX ACQUISITION INC.
By:_______________________________
Name:
Title:
[Signature Page to Amendment No. 1]
<PAGE> 1
EXHIBIT 5
Morgan, Lewis & Bockius LLP
Counselors at Law
101 Park Avenue
New York, NY 10178-00600
212-309-6000
Fax: 212-309-6273
December 19, 1996
National Patent Development Corporation
9 West 57th Street
Suite 4170
New York, NY 10019
Re: National Patent Development Corporation Registration Statement on
Form S-4
Ladies and Gentlemen:
We have acted as counsel to National Patent Development Corporation, a
Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended, of a Registration Statement on Form S-4 (No. 333-16777) (the
"Registration Statement") relating to the proposed issuance of shares of Common
Stock, par value $.01 per share, of National Patent (the "Shares") in connection
with the Agreement and Plan of Merger, dated as of November 19, 1996 as amended
by Amendment No. 1, dated as of December 18, 1996 (as so amended, the "Merger
Agreement"), among National Patent, General Physics Corporation, a Delaware
corporation, and GPX Acquisition Inc. ("GPX"), a Delaware corporation.
In so acting, we have examined originals, or copies certified or otherwise
identified to our satisfaction, of such corporate records, documents,
certificates and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below.
We are of the following opinion:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
2. The Shares have been duly authorized and, when issued in accordance
with the terms and conditions of the Merger Agreement, will be validly
issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement.
Very truly yours,
<PAGE> 1
EXHIBIT 8
Morgan, Lewis & Bockius LLP
Counselors at Law
101 Park Avenue
New York, NY 10178-00600
212-309-6000
Fax: 212-309-6273
December 19, 1996
National Patent Development Corporation
9 West 57th Street, Suite 4170
New York, New York 10019
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to National Patent Development Corporation, a
Delaware corporation ("National Patent"), in connection with the preparation of
a Registration Statement on Form S-4 dated December 19, 1996 (the "Registration
Statement"), containing the Joint Proxy Statement of National Patent and General
Physics Corporation/Prospectus of National Patent relating to the merger of GPX
Acquisition Inc., a Delaware corporation and a direct wholly-owned subsidiary of
National Patent ("Newco"), with and into General Physics Corporation, a Delaware
corporation ("General Physics").
Unless otherwise defined herein, capitalized terms used herein have the
respective meanings ascribed to those terms in the Registration Statement.
In arriving at the opinion expressed below, we have examined and relied
upon the following documents:
(a) the Registration Statement;
(b) the tax representations letters to us from National Patent and
General Physics; and
(c) the Agreement and Plan of Merger, dated as of November 19, 1996,
and amended as of December 18, 1996, among General Physics, Newco
and National Patent.
<PAGE> 2
National Patent Development Corporation
December 19, 1996
Page 2
We have also read and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such records of General Physics and
National Patent and such certificates and representations of officers and
representatives of General Physics and National Patent and we have made such
investigations of law, as we have deemed appropriate as a basis for the opinion
expressed below. In our examination, we have assumed the authenticity of
original documents, the accuracy of copies and the genuineness of signatures. We
understand and assume that (i) each agreement referred to in clause (c) above or
otherwise referred to in the Registration Statement represents the valid and
binding obligation of the respective parties thereto, enforceable in accordance
with its respective terms, and the entire agreement between the parties with
respect to the subject matter thereof, (ii) the parties to each such agreement
have complied, and will comply, with all of their respective covenants,
agreements and undertakings contained therein and (iii) the transactions
provided for by each such agreement or otherwise referred to in the Registration
Statement were and will be carried out in accordance with their terms.
Our opinion is based upon existing United States federal income tax laws,
regulations, administrative pronouncements and judicial decisions. All such
authorities are subject to change, either prospectively or retroactively. No
assurance can be provided as to the effect of any such change upon our opinion.
The opinion set forth herein has no binding effect on the United States
Internal Revenue Service or the courts of the United States. No assurance can be
given that, if the matter were contested, a court would agree with the opinion
set forth herein.
We have advised National Patent in connection with the description of the
material United States federal income tax consequences to United States holders
that appears in the Registration Statement under the caption "Certain Federal
Income Tax Consequences" and we confirm that such discussion, to the extent that
it relates to matters of United States federal income tax law, is our opinion.
While such description discusses the material anticipated federal income tax
consequences applicable to certain United States holders, it does not purport to
discuss all United States tax consequences and our opinion is limited to those
United States tax consequences specifically discussed therein.
In giving the foregoing opinion, we express no opinion other than as to the
federal income tax law of the United States of America.
<PAGE> 3
National Patent Development Corporation
December 19, 1996
Page 3
We are furnishing this letter in our capacity as counsel to National Patent
and this letter is solely for National Patent's benefit. This letter is not to
be used, circulated, quoted or otherwise referred to for any other purpose,
except as set forth below.
We consent to the reference to our firm under the captions "Legal Matters"
and "Certain Federal Income Tax Consequences" in the Registration Statement and
we consent to the filing of this opinion as an Exhibit to the Registration
Statement.
Very truly yours,
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our reports included and incorporated by reference
herein and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG Peat Marwick LLP
New York, New York
December 19, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and the incorporation by reference in this
Registration Statement on Form S-4 of (1) our report dated March 1, 1996, on our
audits of the consolidated financial statements of GSE Systems, Inc. and
Subsidiaries as of December 31, 1994 and 1995 and for the period April 14, 1994
(date of inception) to December 31, 1994 and for the year ended December 31,
1995, (2) our report dated March 31, 1995 on our audits of the consolidated
financial statements of Simulation, Systems & Services Technologies Company and
its immediate parent company, MSHI, Inc. (formerly a wholly-owned subsidiary of
ManTech International Corporation) for the four month period ended December 31,
1993, and for the period January 1, 1994 through April 13, 1994, and on our
audit of the financial statements of Simulation, Systems & Services Technologies
Company (formerly a wholly-owned subsidiary of Bicoastal Corporation) for the
eight month period ended August 31, 1993, (3) our report dated March 31, 1995 on
our audits of the financial statements of GP International Engineering &
Simulation, Inc., formerly a wholly-owned subsidiary of GPS Technologies, Inc.
(now known as SGLG, Inc.), for the year ended December 31, 1993 and for the
period January 1, 1994 through April 13, 1994, and (4) our report dated April
21, 1995 on our audits of the financial statements of EuroSim AB, formerly a
wholly-owned subsidiary of Vattenfall Engineering AB, for the year ended
December 31, 1993 and for the period from January 1, 1994 through April 13,
1994. We also consent to the reference to our firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Washington, D.C.
December 19, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF FINANCIAL ADVISOR
As financial advisor to the Special Committee of the Board of Directors of
General Physics Corporation, we hereby consent to the use of our fairness
opinion (and to all references to our firm) included in or made a part of this
Joint Proxy Statement/Prospectus on Form S-4 for National Patent Development
Corporation and General Physics Corporation.
Sincerely,
/s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
New York, New York
December 19, 1996
<PAGE> 1
EXHIBIT 99.1
PROXY NATIONAL PATENT DEVELOPMENT CORPORATION PROXY
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 23, 1997
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Revoking any prior appointment, the undersigned, a stockholder of National
Patent Development Corporation ("National Patent"), hereby appoints Jerome I.
Feldman and Martin M. Pollak, and each of them, attorneys and agents of the
undersigned with full power of substitution, to vote all shares of the Common
Stock of the undersigned in said Company at the Special Meeting of Stockholders
of said Company to be held at the Columbia Hilton, 5485 Twin Knolls Road,
Columbia, Maryland on January 23, 1997 commencing at 2:30 p.m. local time and at
any adjournments thereof, as fully and effectually as the undersigned could do
if personally present and voting, hereby approving, ratifying and confirming all
that said attorneys and agents or their substitutes may lawfully do in place of
the undersigned as indicated below and in their discretion on any other matter
as may properly come before the meeting or any adjournment thereof.
(CONTINUED AND TO BE SIGNED AND DATED ON THE OTHER SIDE)
NATIONAL PATENT DEVELOPMENT CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
(1) APPROVAL OF MERGER AGREEMENT AND FOREIGN OWNERSHIP CHARTER AMENDMENT:
A. Authority to vote this Proxy for or against the approval and
adoption of the Agreement and Plan of Merger, dated as of November 19, 1996
by and between National Patent, General Physics Corporation ("General
Physics") and GPX Acquisition Inc., a wholly owned subsidiary of National
Patent ("GPX") as amended by Amendment No. 1, dated as of December 18, 1996
(as so amended the "Merger Agreement"), providing for, among other things,
the merger of GPX with and into General Physics, which will be the
surviving corporation, and the issuance of National Patent Common Stock to
the holders of General Physics Common Stock, as more fully described in the
Joint Proxy Statement/Prospectus dated December 19, 1996 relating to the
Special Meeting, and
B. Authority to vote this Proxy for or against the approval and
adoption of the amendment to the Restated Certificate of Incorporation of
National Patent, which would permit National Patent to redeem or require
the prompt disposition under certain circumstances of all or any portion of
shares of National Patent Common Stock owned by a foreign stockholder
beneficially owning shares in excess of five percent or more of the
outstanding shares of National Patent Common Stock as more fully described
in the Joint Proxy Statement/Prospectus dated December 19, 1996 relating to
the Special Meeting:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) APPROVAL OF AUTHORIZED SHARES CHARTER AMENDMENT: Authority to vote this
Proxy for or against the approval and adoption of an amendment to the Restated
Certificate of Incorporation of National Patent decreasing the total number of
authorized shares of National Patent Common Stock from 40,000,000 shares to
25,000,000 shares, as more fully described in the Joint Proxy
Statement/Prospectus dated December 19, 1996 relating to the Special Meeting:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 2
EXHIBIT 99.1
(3) Upon any other matters which may properly come before the meeting or
any adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSALS (1), (2) AND (3).
Please sign exactly as name appears
below.
Dated:
--------------------------------------
--------------------------------------
Signature
--------------------------------------
Signature if held jointly
Please mark, sign, date and return the
proxy card promptly using the enclosed
envelope. When shares are held by
joint tenants both should sign. When
signing as attorney, executor,
administrator or trustee, please give
full title as such. If a corporation,
please sign in full corporate name by
President or other authorized officer.
If a partnership, please sign in
partnership name by authorized person.
<PAGE> 1
EXHIBIT 99.2
PROXY PROXY
GENERAL PHYSICS CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 23, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Revoking any prior appointment, the undersigned, a stockholder of General
Physics Corporation, hereby appoints Kenneth L. Crawford and John C. McAuliffe,
and each of them, attorneys and agents of the undersigned with full power of
substitution, to vote all of the shares of the Common Stock of the undersigned
in said Company at the Special Meeting of Stockholders of said Company to be
held at the Columbia Hilton, 5485 Twin Knolls Road, Columbia, Maryland on
January 23, 1997 commencing at 11:00 a.m. local time and at any adjournments
thereof, as fully and effectually as the undersigned could do if personally
present and voting, hereby approving, ratifying and confirming all that said
attorneys and agents or their substitutes may lawfully do in place of the
undersigned as indicated below and in their discretion on any other matter as
may properly come before the meeting or any adjournment thereof.
(CONTINUED AND TO BE SIGNED AND DATED ON THE OTHER SIDE)
GENERAL PHYSICS CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
(1) APPROVAL OF MERGER AGREEMENT: Authority to vote this Proxy for or against
the approval and adoption of the Agreement and Plan of Merger, dated as of
November 19, 1996 among General Physics Corporation, National Patent
Development Corporation and GPX Acquisition Inc. ("GPX"), a wholly owned
subsidiary of National Patent Development Corporation as amended by
Amendment No. 1, dated as of December 18, 1996 (as so amended the "Merger
Agreement"), providing for, among other things, the merger of GPX with and
into General Physics Corporation, which will be the surviving corporation,
as more fully described in the Joint Proxy Statement/Prospectus dated
December 19, 1996 relating to the Special Meeting:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) Upon any other matters which may properly come before the meeting or any
adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSALS (1) AND (2).
Please sign exactly as name
appears hereon.
Dated:
---------------------------,
---------------------------
Signature
---------------------------
Signature if held jointly
Please mark, sign, date and
return the proxy card
promptly using the enclosed
envelope. When shares are
held by joint tenants both
should sign. When signing
as attorney, executor,
administrator or trustee,
please give full title as
such. If a corporation,
please sign in full
corporate name by President
or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
