UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 1997 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 or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 West 57th Street, New York, NY 10019 (Address of principal executive offices) (Zip code) (212) 826-8500 (Registrant's telephone number, including area code) 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 Number of shares outstanding of each of issuer's classes of common stock as of August 8, 1997: Common Stock 10,751,482 shares Class B Capital 62,500 shares NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS Page No. Part I. Financial Information Consolidated Condensed Balance Sheets - June 30, 1997 and December 31, 1996 1 Consolidated Condensed Statements of Operations - Three Months and Six Months Ended June 30, 1997 and 1996 3 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996 4 Notes to Consolidated Condensed Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Qualification Relating to Financial Information 11 Part II. Other Information 15 Signatures 16 PART I. FINANCIAL INFORMATION NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands) June 30, December 31, 1997 1996 ASSETS (unaudited) * Current assets Cash and cash equivalents $ 11,351 $ 22,677 Marketable securities 2,024 3,250 Accounts and other receivables 50,542 40,633 Inventories 24,126 23,193 Costs and estimated earnings in excess of billings on uncompleted contracts 8,280 9,466 Prepaid expenses and other current assets 3,057 3,462 --------- ---------- Total current assets 99,380 102,681 --------- --------- Investments and advances 26,232 25,108 --------- ---------- Property, plant and equipment, at cost 37,133 36,045 Less accumulated depreciation (28,309) (26,767) --------- --------- 8,824 9,278 --------- ---------- Intangible assets, net of amortization of $30,681 and $29,577 54,513 34,476 --------- ---------- Deferred tax asset 1,301 843 --------- ---------- Other assets 3,409 3,641 --------- ---------- $193,659 $176,027 ======== ======== * The Consolidated Condensed Balance Sheet as of December 31, 1996 has been summarized from the Company's audited Consolidated Balance Sheet as of that date. See accompanying notes to the consolidated condensed financial statements. -1- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) (in thousands) June 30, December 31, 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) * Current liabilities: Current maturities of long-term debt and notes payable $ 162 $ 9,309 Short-term borrowings 31,337 20,281 Accounts payable and accrued expenses 28,123 22,879 Billings in excess of costs and estimated earnings on uncompleted contracts 7,369 8,521 ---------- --------- Total current liabilities 66,991 60,990 --------- --------- Long-term debt less current maturities 5,732 10,807 ---------- --------- Minority interests and other 2 10,201 ---------- --------- Stockholders' equity Common stock 106 75 Class B capital stock 1 1 Capital in excess of par value 157,277 131,388 Deficit (40,112) (40,759) Net unrealized gain on available-for-sale securities 4,262 3,324 Treasury stock, at cost (600) ----------- Total stockholders' equity 120,934 94,029 --------- --------- $193,659 $176,027 ======== ======== * The Consolidated Condensed Balance Sheet as of December 31, 1996 has been summarized from the Company's audited Consolidated Balance sheet as of that date. See accompanying notes to the consolidated condensed financial statements. -2- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Three months Six months ended June 30, ended June 30, ---------------- ---------------- 1997 1996 1997 1996 ------- ------ ------- ------- Sales $ 60,590 $ 51,048 $115,350 $ 99,204 Cost of goods sold 51,397 43,304 97,941 84,368 -------- -------- -------- -------- Gross margin 9,193 7,744 17,409 14,836 Selling, general & administrative expenses (8,153) (7,269) (15,564) (14,180) --------- -------- -------- -------- Operating income 1,040 475 1,845 656 --------- ---------- --------- ---------- Interest (1,177) (1,018) (2,175) (2,019) Investment and other income, net 645 (219) 1,418 1,026 Gain (loss) on trading securities 1,031 (844) 500 Unrealized loss on investments (4,000) (4,000) Gain on disposition of stock of an affiliate 12,200 12,200 Gain on issuance of stock by an affiliate 1,938 1,938 Minority interest (367) 25 (692) ------------ -------- ----------- ------- Income before income taxes 1,539 9,009 269 9,609 Income tax benefit 94 1,794 378 1,277 ---------- --------- --------- -------- Net income $ 1,633 $ 10,803 $ 647 $ 10,886 ======== ======== ======== ======== Net income per share $ .15 $ 1.43 $ .06 $ 1.49 ========== ========== ========= ========== Dividends per share none none none none ========= ========== ======== ======== See accompanying notes to the consolidated condensed financial statements. -3- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six months ended June 30, 1997 1996 Cash flows from operations: Net income $ 647 $10,886 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and amortization 2,646 2,533 Gain on disposition of stock of an affiliate (12,200) Gain on issuance of stock by an affiliate (1,938) Unrealized loss (gain) on trading securities 844 (500) Unrealized loss on investments 4,000 Deferred income taxes (700) (2,386) Changes in other operating items (8,067) (6,561) -------- -------- Net cash used for operations (4,630) (6,166) -------- --------- Cash flows from investing activities: Proceeds from sale of stock of an affiliate 330 17,700 Additions to property, plant & equipment (1,088) (1,801) Additions to intangible assets, net (3,051) (408) Reduction of investments and other assets, net 606 1,860 -------- ------- Net cash (used for ) provided by investing activities (3,203) 17,351 ------- ------- Cash flows from financing activities: Net proceeds from short-term borrowings 4,581 3,646 Proceeds from issuance of long-term debt 400 Reduction of long-term debt (7,474) (2,732) Exercise of common stock options and warrants 7 Repurchase of treasury stock (600) Proceeds from issuance of common stock 2,552 ------- -------- Net cash provided by (used for) financing activities (3,493) 3,873 ------- ------- Net increase (decrease) in cash and cash equivalents (11,326) 15,058 Cash and cash equivalents at the beginning of the periods 22,677 8,094 -------- -------- Cash and cash equivalents at the end of the periods $11,351 $23,152 ======= ======= -4- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) (in thousands) Six months ended June 30, 1997 1996 Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest $ 2,542 $ 2,274 ========= ======== Income taxes $ 597 $ 445 ========== ========= Supplemental schedule of non-cash transactions: Issuance of common stock related to the acquisition of General Physics Corporation $ (25,228) Additions to intangible assets 15,154 Reduction of minority interest 10,074 See accompanying notes to the consolidated condensed financial statements. -5- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Inventories Inventories are valued at the lower of cost or market, principally using the first-in, first-out (FIFO) method. Inventories consisting of material, labor, and overhead are classified as follows (in thousands): June 30, December 31, 1997 1996 Raw materials $ 708 $ 793 Work in process 251 210 Finished goods 23,167 22,190 ------- ------- $24,126 $23,193 ======= ======= 2. Long-term debt Long-term debt consists of the following (in thousands): June 30, December 31, 1997 1996 8% Swiss bonds due 2000 $ 2,026 $ 2,189 5% Convertible bonds due 1999 1,805 1,755 12% Subordinated debentures due 1997 6,732 Term loans with banks 6,722 7% Convertible note 1,000 1,000 Other 1,063 1,718 ------- -------- 5,894 20,116 Less current maturities 162 9,309 ------- -------- $ 5,732 $ 10,807 ======= ======= -6- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. Revolving credit agreement On March 26, 1997, the Company and its wholly-owned subsidiaries, GP and MXL Industries, Inc. (MXL), entered into a three year secured $25,000,000 Revolving Credit Agreement, with a syndicate of three banks. The Agreement replaces the MXL Loan Agreement, the GP Revolving Credit Agreement and the Company's Term Loan Agreement. The Agreement bears interest at the prime rate or 1.75% over LIBOR. The borrowing formula is based upon eligible accounts receivable of GP and MXL, as well as various corporate assets. Under the Agreement, the full $25,000,000 of the Revolving Credit Agreement would be available to the Company and/or GP and/or MXL. At June 30,1997, the amount outstanding was approximately $11,886,000. 4. General Physics Corporation On January 24, 1997, the Company acquired the remaining 5,047,623 shares (48% of the outstanding shares) of GP that it did not already own, in exchange for .60 shares of National Patent common stock for each share of GP. The transaction has been accounted for as a purchase of a minority interest. The Company issued an aggregate of 3,028,574 shares of its common stock, valued at $25,228,000 in the transaction. The value of the Company's common stock issued in this transaction has been reflected in Stockholders' equity as an increase to Common stock and Capital in excess of par value. GP provides engineering, environmental, training, analytical, and technical support services to commercial nuclear and fossil power utilities, the U.S. Departments of Defense and Energy, Fortune 500 companies, and other commercial and governmental customers. 5. Treasury stock On May 9, 1997, the Company announced that its Board of Directors had authorized the purchase of up to approximately 7% or 750,000 shares of the Company's common stock. Through June 30, 1997, the Company purchased 80,100 shares of its common stock at a cost of $600,000. -7- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company realized income before income taxes of $1,539,000 and $269,000 for the quarter and six months ended June 30, 1997, as compared with income of $9,009,000 and $9,609,000 for the corresponding periods of 1996. The change in the Company's results is due to several factors. In April 1996, the Company sold 1,000,000 shares of the Company's GTS Duratek, Inc. (Duratek) common stock, realized proceeds of $17,700,000 and recognized a gain of $12,200,000. This gain was partially offset by a $4,000,000 loss recognized on the Company's investments in American White Cross, Inc. (AWC), due to AWC filing for protection under Chapter 11 of the United States Bankruptcy Code in July 1996. In addition, in April 1996, Interferon Sciences, Inc. (ISI), the Company's approximately 15% owned affiliate, issued additional shares of common stock, which resulted in the Company recognizing a gain of $1,938,000. For the quarter and six months ended June 30, 1996, the Company's share of loss of an affiliate (ISI) due to the buy back of certain marketing rights was $563,000. For the quarter and six months ended June 30, 1997, the Company recorded a $1,031,000 unrealized gain and a $(844,000) unrealized loss on certain trading marketable securities as compared to a $500,000 gain recorded for the six months ended June 30, 1996. For the quarter and six months ended June 30, 1997, the Company also earned Investment and other income (loss), net of $645,000 and $1,418,000, respectively, compared to $(219,000) and $1,026,000 for the corresponding periods of 1996. The Company had improved operating results for the quarter and six months ended June 30, 1997, primarily due to significantly increased profits achieved by General Physics Corporation (GP) as well as improved operating results within the Five Star Group, Inc. (Five Star). The improved operating results were partially mitigated by reduced operating profits within the Company's Hydro Med Sciences division (HMS) and MXL Industries, Inc. (MXL). -8- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Sales For the quarter ended June 30, 1997, consolidated sales increased by $9,542,000 to $60,590,000 from the $51,048,000 recorded in the corresponding quarter of 1996. For the six months ended June 30, 1997, consolidated sales increased by $16,146,000 to $115,350,000 from $99,204,000 recorded for the six months ended June 30, 1996. The increased sales for the quarter and six months ended June 30, 1997, were the result of increased sales by GP and Five Star, partially offset by reduced sales within the Company's HMS division. The increased sales by GP were the result of increased sales within all of GP's business groups, resulting primarily from the continued growth of GP's revenue generated from commercial clients. For the six months ended June 30, 1997, GP's commercial revenue grew by approximately 30% as compared to the comparable period in 1996. The increased sales by Five Star were the result of significant growth in sales to independent retail stores, primarily as a result of the expansion of Five Star's hardware lines. Gross margin Consolidated gross margin of $9,193,000, or 15%, for the quarter ended June 30, 1997, increased by $1,449,000 when compared to the consolidated gross margin of $7,744,000, or 15%, for the quarter ended June 30, 1996. For the six months ended June 30, 1997, consolidated gross margin of $17,409,000 or 15% of consolidated sales increased by $2,573,000 when compared to $14,836,000 or 15% of consolidated sales earned in the six months ended June 30, 1996. The increased gross margin in 1997 was primarily the result of increased gross margins generated by GP and Five Star due to increased sales. -9- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Selling, general and administrative expenses For the quarter and six months ended June 30, 1997, selling, general and administrative expenses (SG&A) of $8,153,000 and $15,564,000 were $884,000 and $1,384,000 higher than the $7,269,000 and $14,180,000 of SG&A expenses incurred during the quarter and six months ended June 30, 1996. The increase in SG&A for the quarter and six months ended June 30, 1997, was principally the result of increased selling expenses incurred by Five Star during 1997 as a result of increased sales, as well as increased business development costs incurred by GP to further encourage their significant revenue growth during 1997. Investment and other income, net Investment and other income (loss), net of $645,000 and $1,418,000 for the quarter and six months ended June 30, 1997 increased by $864,000 and $392,000, respectively, as compared to $(219,000) and $1,026,000 for the corresponding periods of 1996. The increased investment and other income (loss), net for the quarter and six months ended June 30, 1997, was the result of increased consulting revenue earned by the Company's American Drug Company subsidiary during the periods, and the effect of a $563,000 loss recognized in the quarter and six months ended June 30, 1996, relating to the Company's share of a loss of an affiliate due to the buyback of certain marketing rights. The increases were partially offset by losses of $300,000 and $525,000 recognized for the quarter and six months ended June 30, 1997, on the Company's equity investments compared to income of $375,000 and $150,000 recognized for the corresponding periods in 1996. -10- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Income tax expense For the quarter and six months ended June 30, 1997, the Company had an income tax benefit of $94,000 and $378,000, respectively, compared to $1,794,000 and $1,277,000 for the corresponding periods of 1996. The current income tax provision of $206,000 and $322,000 for the quarter and six months ended June 30, 1997, represents primarily state and local income taxes. The deferred income tax benefit of approximately $300,000 and $700,000 for the periods results from a reduction in the valuation allowance among other factors. The decrease in the valuation allowance in 1997 was attributable in part to the expected utilization of the Company's net operating loss carryforwards, and to the Company's expectation of generating sufficient taxable income that will allow for the realization of a portion of its deferred tax assets. The benefit recognized in 1996 is the result of the reduction of $2,386,000 in the valuation allowance for deferred tax assets due to management's assessment that it is more likely than not that the Company will realize the benefits of this amount of deferred tax assets, based upon unrealized gains on the Company's investments and other factors, offset by state and local taxes, as well as GP's Federal income tax expense. GP was not included in the Company's Federal income tax return in 1996, but effective January 24, 1997, GP will be included in the Company's consolidated Federal income tax return. -11- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Recent accounting pronouncement In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), was issued. SFAS No. 128 simplifies the standards for computing earnings per share, and makes the United States standards for computing earnings per share more comparable to international standards. SFAS No. 128 requires presentation of "basic" earnings per share (which excludes dilution) and "diluted" earnings per share. The Company does not believe the adoption of SFAS No. 128 in fiscal 1997 will have a material impact on the Company's reported earnings per share. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior period earnings per share presented. Forward-Looking Statements. This report contains certain forward-looking statements reflecting management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to the Company's ability to reverse its history of operating losses; the Company's dependence on its subsidiaries and its investments as its primary source to service outstanding debt and to fund its operations; and the Company's ability to comply with financial covenants in connection with various loan agreements. -12- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had cash and cash equivalents totaling $11,351,000. SGLG, Inc. and American Drug Company had cash and cash equivalents of $159,000 at June 30, 1997. The minority interests of these two 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, marketable long-term investments and borrowing availability under existing and potential lines of credit as well as the ability to obtain additional funds from its operating subsidiaries in order to fund its working capital requirements. On June 30, 1997, the Company repaid in full its 12% Subordinated Debentures totaling $6,697,000. At June 30, 1997, 213,000 shares of Duratek stock valued at $2,024,000 were classified as marketable securities due to the Company's intention to sell the shares in 1997. -13- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES QUALIFICATION RELATING TO FINANCIAL INFORMATION June 30, 1997 The financial information included herein is unaudited. In addition, the financial information does not include all disclosures required under generally accepted accounting principles because certain note information included in the Company's Annual Report has been omitted; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. The results for the 1997 interim period are not necessarily indicative of results to be expected for the entire year. -14- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (b) At the Annual Meeting of Stockholders held on June 4, 1997, the following individuals were elected to serve as directors of the Company for a one-year term, with each individual nominee receiving the following votes from the Common Stock: Director Votes For Votes Withheld Jerome I. Feldman 7,115,947 236,041 Martin M. Pollak 7,116,057 235,931 Scott N. Greenberg 7,119,871 232,116 Ogden R. Reid 7,118,862 233,125 Dr. Roald Hoffmann 7,119,931 232,056 Herbert R. Silverman 7,118,848 233,139 Sheldon L. Glashow 7,119,356 232,631 Bernard M. Kauderer 7,119,855 232,132 John C. McAuliffe 7,119,726 232,261 Gordon Smale 7,119,817 232,170 and each received 625,000 votes for and none withheld from the Class B Capital Stock. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit I. - Copy of Notice and Proxy Statement for Annual Meeting of Shareholders held June 4, 1997, filed with the Securities and Exchange Commission pursuant to Section 14 of the Securities and Exchange Act of 1934 and incorporated herein by reference. (b) Reports on Form 8-K Form 8-K filed on July 17, 1997 reporting events under Items 5 and 7. -15- NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES June 30, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. NATIONAL PATENT DEVELOPMENT CORPORATION DATE: August 14, 1997 BY: Scott N. Greenberg Vice President and Chief Financial Officer DATE: August 14, 1997 BY: Jerome I. Feldman President and Chief Executive Officer