FORM 10K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7234
NATIONAL PATENT DEVELOPMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-1926739
(State of Incorporation) (I.R.S. Employer
Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(212) 826-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered:
Common Stock, $.01 Par Value American Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 1, 1996, the aggregate market value of the
outstanding shares of the Registrant's Common Stock, par value
$.01 per share, held by non-affiliates was approximately
$59,058,090 based on the closing price of the Common Stock on the
American Stock Exchange on March 1, 1996. None of the Class B
Capital Stock, par value $.01 per share, was held by
non-affiliates.
<PAGE>
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the most recent
practicable date.
Class Outstanding at March 1, 1996
Common Stock,
par value $.01 per share 6,959,554 shares
Class B Capital Stock,
par value $.01 per share 62,500 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for
its 1996 Annual Meeting of Stockholders is incorporated by
reference into Part III hereof.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations is hereby
amended and restated in its entirety as follows:
RESULTS OF OPERATIONS
Overview
At December 31, 1994 the Company 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, the Company
exchanged (see Note 11(a) to the consolidated financial
statements) or repurchased the majority of the Bonds. At
December 31, 1995 there was a total of $1,998,000 of the above
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 GTS Duratek,
Inc. (Duratek) in January 1995 (See Note 3 to the consolidated
financial statements). The reduction in the Company's long-term
debt and short-term borrowings has led to a corresponding
decrease in interest expense at the corporate level. In
addition, the Company has the potential to improve its liquidity
in 1996, as a result of the Company's Duratek, affiliate filing a
registration statement with the Securities and Exchange
Commission, in March 1996, relating to a proposed offering in
which the Company will sell 1,000,000 shares of Duratek common
stock (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, the
Company sold 1,667,000 and 500,000 shares, respectively of
Duratek common stock, resulting in the recognition of a
$3,768,000 gain. As a result of the first sale of the Duratek
common stock, the Company's ownership in Duratek fell below 50%,
and commencing in January 1995, the Company accounted for its
investment in Duratek, which totaled $4,121,000 at December 31,
1995, on the equity basis (see Note 3 to the consolidated
financial statements). In addition, the Company recorded an
unrealized gain totaling $3,183,000 on the transfer of 250,000
shares of Duratek common stock from long-term investments to
trading securities. During the third quarter of 1995, the
Company realized a $5,912,000 gain as a result of the issuance of
common stock by Interferon Sciences, Inc. (ISI), a 22% owned
affiliate, and the initial public offering by GSE Systems,
Inc.(GSES), a 26% controlled affiliate. The $5,912,000 gain was
comprised of a $3,137,000 gain realized primarily on the issuance
of 1,725,000 shares of common stock (including the over-allotment
option) at $14.00 per share by GSES in July 1995 and a $2,775,000
gain realized primarily as a result of the issuance of 12,000,000
shares of common stock by ISI at $1.20 per share in August and
September 1995. The Company also realized Investment and other
income, net of $1,129,000 in 1995 compared to a net expense of
$1,808,000 in 1994. The improvement is due to several factors
including a foreign currency transaction loss of $1,066,000 in
1
<PAGE>
1995 compared to a foreign currency transaction loss of
$2,124,000 realized in 1994, related to the Company's decision
not to hedge its Swiss denominated debt, and reduced losses
incurred on investments in 20% to 50% owned affiliates. These
improvements were partially offset by a $785,000 loss recognized
due to the permanent impairment of an available-for-sale
security. In 1995, the Company also incurred reduced interest
expense as a result of reduced long-term debt at the corporate
level. Operating profits improved for the year ended December
31, 1995 within the Optical Plastics and Physical Science
Groups, and decreased marginally within the Distribution Group
and within American Drug Company, the Company's 54% owned
subsidiary, which is not part of an operating segment. The
Optical Plastics Group, which is MXL Industries,Inc. (MXL), the
Company'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 Corporation (GP), a 51% owned
subsidiary, experienced improved operating results due to the
results of GP being included in the consolidated results of
operations for the full year(see Note 2 to the consolidated
financial statements). GP provides a wide range of training,
engineering, environmental and technical support services to
commercial nuclear and fossil power utilities, the United States
Departments of Defense and Energy, Fortune 500 companies and
other commercial and governmental customers. The Distribution
Group, which is the Five Star Group, Inc. (Five Star), the
Company's distributor of home decorating, hardware and finishing
products, 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 the Company'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
the Company'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 the Company's consolidated results of
operations through September 1993, when the Company'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 the Company realized a $3,795,000 gain from the transfer
in an Exchange Offer of a portion of the Company'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 above losses in
2
<PAGE>
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 GP, 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
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, the Company had
reduced sales within the Physical Science and Distribution
Groups, partially offset by increased sales achieved by the
Optical Plastics Group. In 1994, the Company 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 GP
since September 1994 (see Note 2 to the consolidated financial
statements). The increased sales of $15,444,000 in 1994 were the
result of consolidating the sales of GP 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
3
<PAGE>
Consolidated gross margin was $26,974,000 or 14% in 1993,
$32,559,000 or 16% in 1994 and $28,322,000 or 15% of net 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 the Company's ownership in Duratek
falling below 50% in January 1995, and the Company accounting for
Duratek on the equity basis from that time, partially offset by
GP being included in the consolidated results since September
1994. Duratek achieved a gross margin of $7,111,000 in 1994 but
zero was included in consolidated gross margin for 1995 for
Duratek, which has been accounted for on the equity method since
January 1995. The reduced gross margin percentage is the result
of historically lower gross margins earned by GP due to the
nature of its business. In both 1995 and 1994, GP has increased
its gross margin percentage through its continuing efforts to
reduce overhead costs as a percent of revenue, as well as the
achievement of higher direct labor utilization. In 1994, the
increased gross margin was attributable to both GP and Duratek.
GP realized increased gross margin due to higher revenues,
reduced overhead and higher direct labor utilization. Duratek
realized increased gross margin in 1994 as a result of increased
sales as well as higher margins achieved on both technology and
services contracts.
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.
4
<PAGE>
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 ALFERONR N Injection during
1993. As a result of the Exchange Offer in 1993, through which
the Company's interest in ISI fell below 50%, ISI is currently
being accounted for on the equity basis.
Investment and other income (expense), net
Investment and other income (expense) was $3,379,000 in 1993 and
$(1,808,000) in 1994 and $1,129,000 in 1995, respectively. 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 the Company's decision not to hedge its Swiss
denominated debt, and reduced losses incurred on investments in
20% to 50% owned affiliates. Although the Company is exposed to
foreign currency transaction losses as a result of its Swiss
denominated indebtedness, the Company considers its risk of loss
to be acceptable due in part to the reduced amount of such
indebtedness at December 31, 1995, as well as during the first
quarter of 1996. Accordingly, the Company has not hedged such
risk at December 31, 1995 and will review this policy on a
continuing basis. 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. The Company realized a foreign currency
transaction loss of $2,124,000 in 1994, as compared to a net
foreign currency transaction gain of $901,000 realized in 1993,
related to the Company's decision not to hedge its Swiss
denominated debt. In addition, the Company recognized increased
losses on investments in 20% to 50% owned affiliates as a result
of the Company's share of ISI's loss, which was $4,409,000, being
included in Investment and other income (expense), net for the
year ended December 31, 1994. In 1993, the results of ISI were
consolidated with the Company for the first nine months of the
year, until the Company's ownership fell below 50%. The results
of operations for ISI have been accounted for on the equity
method since the fourth quarter of 1993, and the Company
recognized a $1,599,000 loss in 1993 related to its equity
investment in ISI. The above losses were partially offset by
increased gains realized on the sale of certain investments in
1994.
The increase in investments and advances of $9,852,000 was
principally the result of the deconsolidation of Duratek in which
the Company's investment was $4,121,000 at December 31, 1995 and
the recognition of a gain of $3,137,000 as a result of the
issuance of common stock by GSES. At December 31, 1995, the
Company's investments and advances of $21,452,000 were primarily
its investments in Duratek, ISI and GSES, which were $4,121,000,
$3,761,000 and $8,944,000, respectively.
Selling, general, and administrative expenses
5
<PAGE>
Selling, general and administrative expenses (SG&A) 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 of $3,985,000 within the Physical Science
Group primarily due to Duratek, which incurred SG&A of $5,926,000
in 1994, being accounted for on the equity basis since January
1995, partially offset by increased SG&A of $1,941,000 incurred
by GP largely due to the recording of an approximately $1,015,000
reserve related to potentially uncollectible revenue recorded in
years prior to 1993. In the process of reviewing the results of
a previous audit by the Defense Contract Audit Agency, GP
determined that, based upon the information then available, it
was not probable that the government would approve payment of a
rate differential related to overruns in certain cost-plus-fixed-
fee contracts which were completed prior to 1993. Since the rate
differential had been recognized as revenue over a series of
prior years, GP set up a reserve in the third quarter of 1995
against the estimated amount of the rate differential believed
likely to be noncollectible. In addition the Distribution Group
incurred reduced SG&A of $773,000 in 1995 as a result of Five
Star's reduced sales commissions paid due to reduced sales, as
well as the success of its continuing effort to consolidate and
streamline its organization. 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 the Company's 54% owned subsidiary
which exports American made generic and prescription drugs and
over-the-counter healthcare products in both Russia and the
Commonwealth of Independent States. The increased general &
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
The Company's research and development activities are conducted
both internally and under various types of arrangements at
outside facilities. Research and development costs were
$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 the consolidated
financial statements), the Company's ownership in ISI fell below
50%, and the Company began accounting for ISI on the equity
method from that time. In 1994 and 1995, research and
development costs were incurred at the Company's Hydro Med
Sciences division relating to the Hydron polymer.
6
<PAGE>
Interest expense
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 the
Company's continuing successful effort to reduce its interest
expense at the corporate level due to reduced interest on the
Company's Swiss Debt obligations due to the Exchange Offers in
1993, 1994 and 1995 (see Note 11(a)(b)(c) to the consolidated
financial statements), as well as the Company's practice of
repurchasing Swiss Debt from time to time.
Income taxes
Income tax expense (benefit) from operations for 1993, 1994 and
1995 was $(575,000), $749,000 and $1,787,000, respectively.
In 1995, the Company recorded an income tax expense of
$1,787,000. The current income tax provision of $258,000
represents the estimated taxes payable by the Company for the
year ended December 31, 1995. The deferred income tax provision
of $1,529,000 represents the deferred taxes of GP, the Company's
51% owned subsidiary.
In 1994, the Company recorded an income tax expense of $749,000.
The current income tax provision of $283,000 represents the
estimated taxes payable by the Company for the year ended
December 31, 1994. The deferred income tax provision of $466,000
represents the deferred taxes of GP, the Company's 51% owned
subsidiary.
In 1993, the Company recorded an income tax benefit of
$1,043,000, of which $973,000 relates to Federal income taxes, in
continuing operations as a result of the income tax expense
allocated to the extraordinary gain recognized on the early
extinguishment of debt under the provisions of FASB No. 109.
As of December 31, 1995, the Company has approximately
$23,204,000 of consolidated net operating losses available for
Federal income tax purposes.
Accounting developments
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." Statement 121 requires the Company to estimate the
future cash flows expected to result from the use and eventual
disposition of its property, plant and equipment and other long
lived assets, and if the sum of such cash flows is less than the
carrying amount of these assets, to recognize an impairment loss
to the extent, if any, that the carrying amount of the assets
exceeds their fair values. The Company believes that expected
future cash flows derived from these assets will be at least
equal to their carrying values, and that no impairment loss will
be indicated.
7
<PAGE>
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.
Liquidity and capital resources
At December 31, 1995, the Company had cash and cash equivalents
totaling $8,094,000. GP, SGLG, Inc. and ADC had cash and cash
equivalents of $186,000 at December 31, 1995. The minority
interests of these companies are owned by the general public, and
therefore, the assets of these subsidiaries have been dedicated
to the operations of these companies and may not be readily
available for the general corporate purposes of the parent.
The Company has sufficient cash, cash equivalents and marketable
securities and borrowing availability under existing and
potential lines of credit (See Note 9(a) and (d) to the
consolidated financial statements) to satisfy its cash
requirements for its Swiss Franc denominated indebtedness due in
1996, which totaled approximately $1,998,000 at December 31,
1995, and was fully redeemed during the first quarter of 1996.
At December 31, 1995, approximately $4,000,000 was available to
the Company under MXL's and GP's credit agreements. In order for
the Company to meet its long-term cash needs, which include the
repayment of approximately $6,749,000 of 12% Subordinated
Debentures scheduled to mature in 1997, the Company must obtain
additional funds from various sources. The Company has
historically reduced its long-term debt through the issuance of
equity securities in exchange for long-term debt. In addition to
its ability to issue equity securities, the Company believes that
it has sufficient marketable long-term investments, as well as
the ability to obtain additional funds from its operating
subsidiaries and the potential to enter into new credit
arrangements. At December 31, 1995, the Company had classified
250,000 shares of Duratek stock valued at $3,563,000 as
marketable securities, as a result of the transfer from long-term
investments to trading securities. 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. After the
sale of the 1,000,000 shares of Duratek common stock, the Company
will still own 1,948,000 shares of Duratek common stock. The
8
<PAGE>
Company reasonably believes that it will be able to accomplish
some or all of the above transactions in order to fund the
scheduled repayment of the Company's 12% Subordinated Debentures.
For the year ended December 31, 1995, the Company's working
capital increased by $7,126,000 to $32,949,000, reflecting the
effect of decreased current maturities of long-term debt and
short-term borrowings, partially offset by reduced current assets
related to Duratek. Consolidated cash and cash equivalents
decreased by $1,981,000 to $8,094,000 at December 31, 1995.
The decrease in cash and cash equivalents of $1,981,000 in 1995
primarily resulted from the effect of cash used by financing
activities of $8,125,000, partially offset by cash provided by
operations of $1,099,000 and investing activities of $5,045,000.
The cash provided by investing activities was primarily from
proceeds from sale of stock of a subsidiary, partially offset by
additions to property, plant and equipment. Financing activities
consisted primarily of repayments and reductions in short-term
borrowings and repayments of long-term debt, offset by proceeds
from short-term borrowings and long-term debt.
The Company is required to meet certain financial covenants
pursuant to its loan agreements, and is currently in compliance
with these covenants.
The Company's principal manufacturing facilities were constructed
subsequent to 1976 and management does not anticipate having to
replace major facilities in the near term. As of December 31,
1995, the Company has not contractually committed itself for any
other new major capital expenditures.
9
<PAGE>
Item 8. Financial Statements and Supplementary Data are hereby
amended and restated in its entirety as follows:
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF NATIONAL PATENT DEVELOPMENT
CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report 13
Consolidated Balance Sheets - December 31, 1995
and 1994 14
Consolidated Statements of Operations - Years ended
December 31, 1995, 1994, and 1993 16
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1995, 1994,
and 1993 18
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994, and 1993 20
Notes to Consolidated Financial Statements 22
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 52
FINANCIAL STATEMENTS OF GSE SYSTEMS, INC.: *
GSE SYSTEMS, INC. AND SUBSIDIARIES: *
Report of Independent Accountants 55
Consolidated Balance Sheets as of December 31,
1994 and 1995 56
_________
* The financial statements of (1) GSE Systems, Inc. and
Subsidiary ("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.
10
<PAGE>
Consolidated Statements of Operations for the
period April 14, 1994 through December 31,
1994 and for the year ended December 31, 1995 58
Consolidated Statements of Stockholders' Equity
(Deficit) for the period April 14, 1994
through December 31, 1994 and for the year
ended December 31, 1995 59
Consolidated Statements of Cash Flows for the
period April 14, 1994 through December 31,
1994 and for the year ended December 31, 1995 60
Notes to Consolidated Financial Statements 61
SIMULATION SYSTEMS & SERVICES TECHNOLOGIES
COMPANY AND MSHI, INC.: *
Report of Independent Accountants 79
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 80
Consolidated Statements of Stockholder's 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 81
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 though April 13, 1994 82
Notes to Consolidated Financial Statements 84
GP INTERNATIONAL ENGINEERING & SIMULATION, INC.: *
Report of Independent Accountants 91
_________
* The financial statements of (1) GSE Systems, Inc. and
Subsidiary ("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.
11
<PAGE>
Statements of Operations for the year ended December
31, 1993 and for the period January 1, 1994
through April 13, 1994 92
Statements of Stockholder's Equity (Deficit) for
the year ended December 31, 1993 and for the
period January 1, 1994 through April 13, 1994 93
Statements of Cash Flows for the year ended December
31, 1993 and for the period January 1, 1994
through April 13, 1994 94
Notes to Consolidated Financial Statements 95
EUROSIM AB: *
Report of Independent Accountants 100
Statements of Operations for the year ended December
31, 1993 and for the period January 1, 1994
through April 13, 1994 101
Statements of Stockholder's Equity for the year ended
December 31, 1993 and for the period January 1,
1994 through April 13, 1994 102
Statements of Cash Flows for the year ended December
31, 1993 and for the period January 1, 1994
through April 13, 1994 103
Notes to Financial Statements 104
_________
* The financial statements of (1) GSE Systems, Inc. and
Subsidiary ("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.
12
<PAGE>
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
13
<PAGE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1995 1994
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
14
<PAGE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
December 31, 1995 1994
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
* 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.
15
<PAGE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 1995 1994 1993
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 for
operating losses 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)
16
<PAGE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(in thousands, except shares and par value per share)
Years ended December 31, 1995 1994 1993
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)
See accompanying notes to consolidated financial statements.
* 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).
17
<PAGE>
<TABLE>
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)
Net
unrealized
Class B Capital in gain (loss) on Minimum Total
Common capital excess available- pension stock-
stock stock of par for-sales liability holders'
($.01 Par) ($.01 Par) value Deficit securities adjustment equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 40 * $1 * $96,833* $(33,051) $63,823
Exercise of stock options
and warrants 412 412
Net loss (5,977) (5,977)
Conversion of 12% Debentures 82 82
Issuance of stock in connection
with Swiss Bonds 7 8,713 8,720
Issuance and sale of common stock 1 377 378
Balance at December 31, 1993 48 1 106,417 (39,028) 67,438
Implementation of SFAS 115 1,157 1,157
Exercise of stock options and
warrants 99 99
Issuance of stock in connection
with Swiss Bonds 10 9,985 9,995
Transfer from common stock issued
subject to repurchase obligation 1 2,731 2,732
Conversion of 12% Debentures 35 35
Distribution of shares in a
subsidiary (152) (152)
Issuance and sale of common stock 1 771 772
Net unrealized loss on
available-for-sales securities (2,940) (2,940)
Net loss (13,971) (13,971)
</TABLE>
18
<PAGE>
<TABLE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Years ended December 31, 1995, 1994, and 1993
(in thousands, except shares, par value per share and per share amounts)
Net
unrealized
Class B Capital in gain (loss) on Minimum Total
Common capital excess available- pension stock-
stock stock of par for-sales liability holders'
($.01 Par) ($.01 Par) value Deficit securities adjustment equity
<S> <C> <C> <C> <C> <C> <C> <C>
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
* 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.
</TABLE>
19
<PAGE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1995 1994 1993
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 affiates (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)
20
<PAGE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1995 1994 1993
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
21
<PAGE>
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Years ended December 31, 1995 1994 1993
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
See accompanying notes to consolidated financial statements.
21
<PAGE>
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
22
<PAGE>
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.
Property, plant and equipment. Property, plant and equipment are
carried at cost. Major additions and improvements are
capitalized while maintenance and repairs which do not extend the
lives of the assets are expensed currently. Gain or loss on the
disposition of property, plant and equipment is recognized in
operations when realized.
Depreciation. The Company provides for depreciation of property,
plant and equipment primarily on a straight-line basis over the
following estimated useful lives:
CLASS OF ASSETS USEFUL LIFE
Buildings and improvements 5 to 40 years
Machinery, equipment and furniture
and fixtures 3 to 20 years
Leasehold improvements Shorter of asset life
or term of lease
Intangible assets. The excess of cost over the fair value of net
assets of businesses acquired is recorded as goodwill and is
amortized on a straight-line basis generally over periods ranging
from 5 to 40 years. The Company capitalizes costs incurred to
obtain and maintain patents and licenses. Patent costs are
amortized over the lesser of 17 years or the remaining lives of
the patents, and license costs over the lives of the licenses.
The Company also capitalizes costs incurred to obtain long-term
debt financing. Such costs are amortized on an effective yield
basis over the terms of the related debt and such amortization is
classified as interest expense in the Consolidated Statements of
Operations.
23
<PAGE>
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.
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.
23
<PAGE>
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
$34,000,000 and consisted of (a) $10,000,000 in cash, (b)
3,500,000 shares of GP common stock, (c) GP's 6% Senior
Subordinated Debentures due 2004 in the aggregate principal
amount of $15,000,000 ($1,500,000 of which was paid into escrow),
(valued at $10,700,000 after a $4,300,000 discount), (d) warrants
to purchase an aggregate of 1,000,000 shares of GP common stock
at $6.00 per share, and (e) warrants to purchase an aggregate of
475,664 shares of GP common stock at $7.00 per share. In
addition, GP entered into a lease with SGLG of certain fixed
assets of SGLG for a period of 10 years for an aggregate rent of
$2,000,000, payable in equal quarterly installments of $50,000.
The Company did not recognize a gain or loss on this transaction.
The cash portion of the purchase price for the SGLG
operations and assets was derived from funds borrowed by GP under
a $20,000,000 revolving credit facility secured by liens on the
assets of GP, GPSTFSG, GPES and Inventory Management Corporation,
all wholly-owned subsidiaries of GP (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
24
<PAGE>
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 operations of SGLG were included in the
consolidated accounts of the Company for the years ended December
31, 1995, 1994 and 1993.
25
<PAGE>
The following information shows on a pro forma basis, the
results of operations for the Company as if the above transaction
had occurred as of January 1, 1993 (in thousands):
Year ended December 31,
1994 1993
(unaudited)
Revenues $239,416 $251,187
Loss before discontinued
operation and extraordinary item (11,238) (6,132)
Net loss (13,812) (5,260)
Loss per share before discontinued
operation and extraordinary item (.13) (.09)
Loss per share (.16) (.08)
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,
26
<PAGE>
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 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):
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
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 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
27
<PAGE>
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):
1995 1994
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)
Condensed financial information for ISI is as follows as of
December 31, 1995 and 1994 and for the years then ended (in
thousands):
1995 1994
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)
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.
28
<PAGE>
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.
Condensed financial information for GSES is as follows as of
December 31, 1995 and for the year then ended (in thousands):
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
7. Inventories
Inventories, consisting of material, labor and overhead, are
classified as follows (in thousands):
December 31, 1995 1994
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
29
<PAGE>
8. Property, plant and equipment
Property, plant and equipment consists of the following
(in thousands):
December 31, 1995 1994
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
9. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1995 1994
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
(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")
30
<PAGE>
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.
(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.
31
<PAGE>
(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):
December 31, 1995 1994
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
32
<PAGE>
11. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1995 1994
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
(*) 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,
33
<PAGE>
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.
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
34
<PAGE>
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) 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.
35
<PAGE>
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 CaridexR system. Under the terms of the settlement
agreement, the Company agreed to pay Ryder amongst other things,
$300,000 per year (in cash or common stock of the Company) for a
ten year period commencing January 15, 1988, the present value of
which is discounted at 10%, and included in long-term debt.
(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
36
<PAGE>
the last installment shall be $1,250,000. The Company has used a
portion of the proceeds in July 1995 to repay and refinance
certain of its Swiss denominated long-term debt due in 1995 and
1996. The Term Loan is secured by certain assets of the Company
and requires the Company to meet certain financial covenants.
Aggregate annual maturities of long-term debt outstanding at
December 31, 1995 for each of the next five years are as follows
(in thousands):
1996 $4,167
1997 9,269
1998 2,160
1999 4,158
2000 3,646
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.
37
<PAGE>
13. Employee benefit plans
The Company had a Defined Benefit Pension Plan (the Plan) for
employees of certain divisions and subsidiaries. Benefits were
based primarily on years of service and a fixed rate of benefits
per year of service. Contributions were intended to provide not
only for benefits attributed to service to date but also for
those expected to be earned in the future.
Effective December 31, 1991, the Plan benefits were frozen.
Accrued vested benefits will be paid to terminated participants
in the form of a lump sum distribution in cases where the accrued
vested benefit is less than $3,500. Terminated participants can
elect a lump sum distribution if the accrued vested benefit is
greater than $3,500 but less than $7,500.
In the event that the accrued vested benefit exceeds the $7,500
payable limit as outlined in the Plan, payment will be deferred
until a terminated vested participant reaches age 65 or elects
early retirement, at age 60 or later. The pension expense
amounted to $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):
December 31, 1995 1994 1993
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
38
<PAGE>
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:
Percent
1995 1994 1993
Discount rate 7.25 8.25 7.5
Long-term rate of return
on assets 10.0 10.0 10.0
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.
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.
39
<PAGE>
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):
Years ended December 31, 1995 1994 1993
Continuing operations $ 5,819 $ (10,648) $ (7,424)
Discontinued operation (2,941) (2,574) (947)
The components of income tax expense (benefit) from continuing
operations are as follows (in thousands):
Years ended December 31, 1995 1994 1993
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)
The difference between the provision for income taxes computed at
the statutory rate and the reported amount of tax expense
attributable to consolidated earnings from continuing operations
is as follows:
December 31, 1995 1994 1993
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)%
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.
40
<PAGE>
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.
The tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities that are
included in the net deferred tax assets are summarized as
follows:
December 31, 1995 1994
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
41
<PAGE>
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
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 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
42
<PAGE>
($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):
1995 1994
Current assets $ 250 $ 3,284
Current liabilities 120 1,247
Property and equipment 100 1,155
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.
43
<PAGE>
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.
(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:
Common Stock Class B Capital Stock
Options and warrants Price Range Number Price Range Number
outstanding per share of shares per share of shares
December 31, 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
Terminatd 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
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.
44
<PAGE>
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.
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):
45
<PAGE>
Years ended December 31, 1995 1994 1993
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 (4,561) (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)
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.
46
<PAGE>
Additional information relating to the Company's business
segments is as follows (in thousands):
December 31, 1995 1994 1993
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
Years ended December 31, 1995 1994 1993
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
Years ended December 31, 1995 1994 1993
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
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.
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.
47
<PAGE>
The estimated fair value for the Company's major long-term debt
components are as follows (in thousands):
December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
amount fair value amount fair value
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
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.
48
<PAGE>
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 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):
Gross
Unrealized
Cost Holding Losses Fair Value
Available-for-sale:
Equity Securities
December 31, 1995 $2,210 $(1,440) $ 770
December 31, 1994 9,186 (1,783) 7,403
The gains and losses realized on available-for-sale
securities sold were as follows (in thousands):
Sales Realized
Cost Proceeds gain (loss)
December 31, 1994:
Realized loss $1,850 $1,514 $ (336)
Realized gain 461 1,260 799
Net realized
gain $2,311 $2,774 $ 463
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
49
<PAGE>
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.
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):
Real Machinery &
property equipment Total
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
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
50
<PAGE>
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.
51
<PAGE>
<TABLE>
National Patent Supplementary Data
Development Corporation
and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share data)
three months ended
March 31,June 30, Sept. 30,Dec. 31,March 31,June 30, Sept. 30,Dec. 31,
1995 1995 1995 1995 1994 1994 1994 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $46,552 $48,416 $47,551 $42,506 $44,530 $51,430 $51,653 $57,161
Gross margin 7,270 7,832 8,107 5,113 8,012 9,514 7,911 7,122
Income (loss) before
discontinued operation
and extraordinary
item 946 (910) 3,081 915 (2,217) (2,059) (2,174) (4,947)
Net income (loss) 447 (1,542) 1,979 128 (2,460) (2,343) (2,424) (6,744)
Earnings (loss) per share: *
Before discontinued
operation and
extraordinary item .15 (.14) .45 .14 (.46) (.42) (.38) (.84)
Net income (loss) .07 (.23) .29 .02 (.51) (.47) (.42) (1.17)
* All periods have been restated to reflect the effect of the one-for-four reverse stock split.
</TABLE>
52
<PAGE>
GSE SYSTEMS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
GSE Systems, Inc. and Subsidiaries
Report of Independent Accountants 55
Consolidated Balance Sheets as
of December 31, 1994 and 1995 56
Consolidated Statements of Operations
for the period April 14, 1994 through December 31,
1994 and for the year ended December 31, 1995 57
Consolidated Statements of Stockholders' Equity
(Deficit) for the period April 14, 1994 through
December 31, 1994 and for the year ended
December 31, 1995 58
Consolidated Statements of Cash Flows for the
period April 14, 1994 through December 31, 1994
and for the year ended December 31, 1995 60
Notes to Consolidated Financial Statements 61
Simulation, Systems & Services Technologies Company and MSHI, Inc.
Reports of Independent Accountants 79
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 80
Consolidated Statements of Stockholder's 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 81
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 82
Notes to Consolidated Financial Statements 84
GP International Engineering & Simulation, Inc.
Report of Independent Accountants 91
Statements of Operations for the year ended
December 31, 1993 and for the period January
1, 1994 through April 13, 1994 92
Statements of Stockholder's Equity (Deficit)
for the year ended December 31, 1993 and for the
period January 1, 1994 through April 13, 1994 93
Statements of Cash Flows for the year ended
December 31, 1993 and for the period January 1,
1994 through April 13, 1994 94
Notes to Consolidated Financial Statements 95
53
<PAGE>
EuroSim AB
Report of Independent Accountants 100
Statements of Operations for the year ended
December 31, 1993 and for the period January
1, 1994 through April 13, 1994 101
Statements of Stockholder's Equity for the year
ended December 31, 1993 and for the period
January 1, 1994 through April 13, 1994 102
Statements of Cash Flows for the year ended
December 31, 1993 and for the period January 1,
1994 through April 13, 1994 103
Notes to Financial Statements 104
54
<PAGE>
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
55
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
December 31, December 31,
1994 1995
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)
56
<PAGE>
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
The accompanying notes are an integral part of these consolidated financial
statements.
57
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Period
April 14 through Year Ended
December 31, December 31,
1994 1995
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
The accompanying notes are an integral part of these consolidated
financial statements.
58
<PAGE>
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>
Common Stock Additional Retained Earnings (Deficit) 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, 4/14/94 -- $ -- $ -- $ 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
The accompanying notes are an integral part of the consolidated financial
statements
</TABLE>
59
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Period
April 14 through Year Ended
December 31, December 31,
1994 1995
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
The accompanying notes are an integral part of these consolidated
financial statements.
60
<PAGE>
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
61
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 relating to cash held in escrow to collateralize bid bonds
issued for prospective new contracts.
Supplemental disclosures of cash flow information (in thousands):
For the Period
April 14 through Year Ended
December 31, December 31,
1994 1995
Cash paid for:
Interest $ 381 $ 880
Income taxes $ 11 $ 767
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):
For the Period
April 14 through Year Ended
December 31, December 31,
1994 1995
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
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):
December 31,
1994 1995
Raw materials $ 992 $1,524
Service parts 845 769
Total $1,837 $2,293
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.
62
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
63
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
64
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
65
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
payment of $750,000, that will be amortized over fifteen years.
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.
66
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Twelve Months Twelve Months
Ended Ended
December 31, December 31,
1994 1995
(in thousands, except per share data)
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
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.
67
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Fair values of financial instruments
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
<TABLE>
December 31, 1994 December 31, 1995
Carrying Fair Notional/ Carrying Fair Notional/
Amount Value Contract Value Amount Value Contract Value
<S> <C> <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.
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
68
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10%). All contract receivables are considered to be collectible within twelve
months. The components of contract receivables are as follows (in thousands):
December 31,
1994 1995
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
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.
6. Property and equipment
Property and equipment consists of the following (in thousands):
December 31,
1994 1995
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
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.
69
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Software development costs
Software development cost, net, consists of the following (in thousands):
December 31,
1994 1995
Capitalized software development costs $ 2,354 $ 4,018
Accumulated amortization (1,626) (2,097)
Software development costs, net $ 728 $ 1,921
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):
December 31, 1994 December 31, 1995
Other Other
Goodwill Intangibles Total Goodwill Intangibles Total
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
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.
9. Accrued expenses
Accrued expenses consist of the following (in thousands):
December 31,
1994 1995
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
70
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Notes payable and financing arrangements
Notes payable and financing arrangements consisted of the following (in
thousands):
December 31,
1994 1995
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
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 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.
71
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
11. Income taxes
The consolidated income before income tax, by domestic and foreign sources,
is as follows (in thousands):
72
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period
April 14 through Year Ended
December 31, 1994 December 31, 1995
Domestic $ 305 $ 3,540
Foreign 1,273 1,849
Total $ 1,578 $ 5,389
Provision for income taxes is as follows (in thousands):
For the Period
April 14 through Year Ended
December 31, 1994 December 31, 1995
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
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:
For the Period
April 14 through Year Ended
December 31, 1994 December 31, 1995
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%
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
73
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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):
December 31,
1994 1995
Deferred Tax Deferred Tax
Asset/(Liability) Asset/(Liability)
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
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.
74
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
75
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
1996 $ 3,928
1997 2,667
1998 2,344
1999 1,908
2000 1,861
Thereafter 1,846
$ 14,554
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.
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.)
76
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 operations and
identifiable assets for the Company's United States, European and Asian
operations are as follows (in thousands).
For the Period April 14 through December 31, 1994
United States Europe Eliminations Consolidated
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
Year Ended December 31, 1995
United States Europe Asia Eliminations Consolidated
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
77
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
For the Period
April 14 through Year Ended
December 31, December 31,
1994 1995
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%
19. Summary of quarterly financial data (unaudited)
Three months ended
March 31, June 30, Sept. 30, Dec. 31, Total
1995 1995 1995 1995 1995
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
Three months ended
March 31, June 30, Sept. 30, Dec. 31, Total
1995 1995 1995 1995 1995
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 income2 $ 478 $ 375 $ 331 $ 385 $ 1,569
Earnings per
common share $ 0.19 $ 0.15 $ 0.12 $ 0.14 $ 0.60
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.
78
<PAGE>
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
79
<PAGE>
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)
Eight month Four month For the period
period ended Period ended January 1, 1994
August 31, December 31, to April 13,
1993 1993 1994
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
The accompanying notes are an integral part of these financial statements.
80
<PAGE>
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)
Common Additional Retained
Stock Paid-in-Capital Earnings
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
The accompanying notes are an integral part of these financial statements.
81
<PAGE>
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)
Eight months Four Months For the Period
ended Ended January 1, 1994
August 31, December 31, to April 13,
1993 1993 1994
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 activitie (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)
82
<PAGE>
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 (CONTINUED)
(in thousands)
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
The accompanying notes are an integral part of these financial statements.
83
<PAGE>
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES 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.
84
<PAGE>
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(including its immediate parent MSHI, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
85
<PAGE>
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(including its immediate parent MSHI, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
86
<PAGE>
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(including its immediate parent MSHI, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
87
<PAGE>
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(including its immediate parent MSHI, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
6. Income taxes
The provisions (benefit) for income taxes on pre-tax earnings are as follows
(in thousands):
88
<PAGE>
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(including its immediate parent MSHI, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eight months Four months For the period
ended ended January 1, 1994
August 31, December 31, to April 13,
1993 1993 1994
Current tax expense (benefit) $ -- $ (232) $ (498)
Deferred tax expense -- 297 942
Total provision (benefit) $ -- $ 65 $ 444
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:
Eight months Four months For the period
ended ended January 1, 1994
August 31, December 31, to April 13,
1993 1993 1994
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%
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
89
<PAGE>
SIMULATION, SYSTEMS & SERVICES TECHNOLOGIES COMPANY
(including its immediate parent MSHI, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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):
Eight months Four months For the period
ended ended January 1, 1994
August 31, December 31, to April 13,
1993 1993 1994
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
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.
90
<PAGE>
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
91
<PAGE>
GP INTERNATIONAL ENGINEERING & SIMULATION, INC.
(formerly a wholly-owned subsidiary of GPS Technologies, Inc.
(now known as SGLG, Inc.))
STATEMENTS OF OPERATIONS
(in thousands)
For the period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
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 amortizatio 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
The accompanying notes are an integral part of these financial statements.
92
<PAGE>
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)
Common Accumulated
Stock Deficit
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)
The accompanying notes are an integral part of these financial statements.
93
<PAGE>
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)
For the period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
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 $ --
The accompanying notes are an integral part of these financial statements.
94
<PAGE>
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.
95
<PAGE>
GP INTERNATIONAL ENGINEERING & SIMULATION, INC.
(formerly a wholly-owned subsidiary of GPS Technologies, Inc.
(now known as SGLG, Inc.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $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.
96
<PAGE>
GP INTERNATIONAL ENGINEERING & SIMULATION, INC.
(formerly a wholly-owned subsidiary of GPS Technologies, Inc.
(now known as SGLG, Inc.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
97
<PAGE>
GP INTERNATIONAL ENGINEERING & SIMULATION, INC.
(formerly a wholly-owned subsidiary of GPS Technologies, Inc.
(now known as SGLG, Inc.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income taxes
The provisions (benefit) for income taxes were as follows (in thousands):
For the period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
Current provision (benefit) $ (595) $ (1)
Deferred provision (benefit) (193) 122
Total provision (benefit) $ (788) $ 121
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:
For the period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
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%
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.
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.
98
<PAGE>
GP INTERNATIONAL ENGINEERING & SIMULATION, INC.
(formerly a wholly-owned subsidiary of GPS Technologies, Inc.
(now known as SGLG, Inc.))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
For the period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
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
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.
99
<PAGE>
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
100
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering AB)
STATEMENTS OF OPERATIONS
(in thousands)
For the period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
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 311
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
The accompanying notes are an integral part of these financial statements.
101
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering AB)
STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
Additional Foreign
Common Paid-In Translation Retained
Stock Capital Adjustment Earnings
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
The accompanying notes are an integral part of these financial statements.
102
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering AB)
STATEMENTS OF CASH FLOWS
(in thousands)
For the Period
Year Ended January 1, 1994
December 31, through April 13,
1993 1994
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
The accompanying notes are an integral part of these financial statements.
103
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering 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.
104
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering AB)
NOTES TO FINANCIAL STATEMENTS
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.
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,
105
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering AB)
NOTES TO FINANCIAL STATEMENTS
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 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.
106
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering AB)
NOTES TO FINANCIAL STATEMENTS
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):
For the Period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
Current tax expense (benefit) $ 11 $ 122
Deferred tax expense (benefit) (111) --
Total provision (benefit) $ (100) $ 122
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:
For the Period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
Statutory tax rate 28% 28%
Group contribution (32)% --%
Other (3)% --%
Effective tax rate (7)% 28%
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements.
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.
107
<PAGE>
EUROSIM AB
(formerly a wholly-owned subsidiary of Vattenfall Engineering AB)
NOTES TO FINANCIAL STATEMENTS
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):
For the Period
Year Ended January 1, 1994,
December 31, through April 13,
1993 1994
Overhead and general and
administrative expenses $ 232 $ 82
Interest income (expense), net 64 42
Total $ 168 $ 40
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.
108
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL PATENT DEVELOPMENT
CORPORATION
BY: Scott N. Greenberg
Vice President and Chief
Financial Officer
Dated: June 7, 1996
109
<PAGE>
