Wright Investors Service Holdings, Inc. - Quarter Report: 2007 September (Form 10-Q)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o  Accelerated filer  o  Non-accelerated filer  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

As of November 1, 2007, there were 16,629,429 shares of the registrant’s common stock, $0.01 par value, outstanding.

 

---

---

1

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

			Page No.
	Part I. Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations-
	Three Months and Nine Months Ended
	September 30, 2007 and 2006 (Unaudited)		3
	Condensed Consolidated Statements of Comprehensive Loss-
	Three Months and Nine Months Ended
	September 30, 2007 and 2006 (Unaudited)		4
	Condensed Consolidated Balance Sheets -
	September 30, 2007 (Unaudited) and December 31, 2006		5
	Condensed Consolidated Statements of Cash Flows -
	Nine Months Ended September 30, 2007
	and 2006 (Unaudited)		6
	Condensed Consolidated Statement of Stockholders Equity		7
	Nine Months Ended September 30, 2007 (Unaudited)
	Notes to Condensed Consolidated Financial Statements		8
Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		37
Item 4.	Controls and Procedures		37
	Part II. Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 6.	Exhibits		39
Signatures			40

2

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Sales		$	35,205			$	30,125			$	105,270			$	92,491
Cost of sales			28,691				25,265				86,876				76,884
Gross margin			6,514				4,860				18,394				15,607
Selling, general and administrative   expenses			(6,076	)			(4,679	)			(17,047	)			(14,474	)
Operating  profit			438				181				1,347				1,133
Interest expense			(448	)			(391	)			(1,280	)			(1,234	)
Gain on exchange of Valera for Indevus shares											17,031
Investment and other income (loss), net			(963	)			180				(1,732	)			(2	)
Income (loss) before income taxes and minority interest			(973	)			(30	)			15,366				(103	)
Income tax expense			(236	)			(54	)			(1,296	)			(400	)
Income (loss) before minority interest			(1,209	)			(84	)			14,070				(503	)
Minority interest			(142	)			(11	)			(578	)			(147	)
Net income (loss)		$	(1,351	)		$	(95	)		$	13,492			$	(650	)
Net income (loss) per share
Basic		$	(0.08	)		$	(0.01	)		$	0.76			$	(0.04	)
Diluted		$	(0.08	)		$	(0.01	)		$	0.76			$	(0.04	)

See accompanying notes to consolidated financial statements.

3

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 (in thousands)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income (loss)		$	(1,351	)		$	(95	)		$	13,492			$	(650	)
Other comprehensive income (loss), before tax:
Net unrealized gain (loss) on available-for-sale-securities			(19	)			(314	)			(908	)			4,110
Reclassification adjustment principally for gain on exchange of Valera securities recognized in merger included in net income											(4,598	)
Reclassification adjustment for realized losses on Indevus included in net income			768								1,023
Reclassification adjustment for impairment of investment in Millenium Cell included in net income (loss)			266								266
Net unrealized loss on interest rate swap, net of minority interest			(75	)			(95	)			(120	)			(29	)
Comprehensive income (loss) before tax			(411	)			(504	)			9,155				3,431
Income tax  benefit related to items of other comprehensive income (loss)			30				37				47				11
Comprehensive income (loss)		$	(381	)		$	(467	)		$	9,202			$	3,442

 

See accompanying notes to consolidated financial statements.

4

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

		September 30,				December 31,
		2007				2006
Assets		(unaudited)
Current assets
Cash and cash equivalents		$	17,026			$	4,485
Accounts receivable, less allowance
for doubtful accounts of  $529 and $566			17,669				11,939
Receivable from GP Strategies Corporation							251
Inventories			25,840				22,535
Prepaid expenses and other current assets			471				724
Deferred tax asset			597				791
Total current assets			61,603				40,725
Property, plant and equipment, net			3,403				2,925
Investment in Valera including available for sale securities of $4,823 at December 31, 2006							5,955
Other marketable securities available for sale			226				343
Deferred tax asset			193
Other assets			3,686				3,286
Total assets		$	69,111			$	53,234
Liabilities and stockholders’ equity
Current liabilities
Current maturities of long-term debt		$	257			$	151
Short term borrowings			19,974				18,414
Accounts payable and accrued expenses			16,112				9,978
Payable to GP Strategies Corporation		74
Total current liabilities			36,417				28,543
Long-term debt less current maturities			1,506				1,332
Deferred tax liability			279				279
Other liabilities		1				247
Total liabilities			38,203				30,401
Minority interest			2,960				1,696
Common stock subject to exchange rights			498
Stockholders’ equity
Common Stock			180				178
Additional paid-in capital			26,120				25,990
Retained earnings (deficit)			4,315				(9,177	)
Accumulated other comprehensive income			44				4,334
Treasury stock			(3,209	)			(188	)
Total stockholders’ equity			27,450				21,137
Total liabilities and stockholders’ equity		$	69,111			$	53,234

See accompanying notes to consolidated financial statements.

5

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

		Nine Months Ended
		September 30,
		2007				2006
Cash flows from operations:
Net income (loss)		$	13,492			$	(650	)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization			557				440
Minority interest			578				147
Expenses paid in common stock			45				55
Stock based compensation			426
Impairment of Investment			266
Gain on exchange of Valera for Indevus shares			(17,031	)
Services provided by GP Strategies applied to repayment of     receivable							666
Deferred income taxes							228
Loss on sale of Indevus shares			1,023
Gain on issuance of stock by subsidiary			(1	)
Changes in other operating items net of effect of acquisition of     Right-Way			504				1,363
Net cash (used in) provided by operations			(141	)			2,249
Cash flows from investing activities:
Additions to property, plant and equipment, net			(1,035	)			(269	)
Acquisition of Right-Way by Five Star			(3,399	)
Acquisition of additional interest in Five Star			(106	)
Proceeds from sale of investments			17,598
Repayment of receivable from GP Strategies			325
Net cash provided by (used in) investing activities			13,383				(269	)
Cash flows from financing activities:
Proceeds from sale of common stock			480
Purchase of treasury stock			(3,021	)
(Repayment of)  proceeds from short-term borrowings			1,560				(1,944	)
Proceeds from long-term debt			355
Repayment of long-term debt			(75	)			(266	)
Net cash used in financing activities			(701	)			(2,210	)
Net increase (decrease)  in cash and cash equivalents			12,541				(230	)
Cash and cash equivalents at beginning of period			4,485				5,115
Cash and cash equivalents at end of period		$	17,026			$	4,885

See accompanying notes to the condensed consolidated financial statements.

6

---

NATIONAL PATENT DEVELOPMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2007

(in thousands, except shares and per share data)

 

		Common Stock $(.01 par value)				Additional paid-in capital				Retained earnings (deficit)				Treasury stock, at cost				Accumulated other comprehensive income (loss)				Total stockholders’ equity
Balance at December 31, 2006		$	178			$	25,990			$	(9,177	)		$	(188	)		$	4,334			$	21,137
Proceeds from sale of 200,000 shares of common stock			2				478																480
Reclassification adjustment principally for gain on exchange of Valera securities recognized in merger included in net income																			(4,598	)			(4,598	)
Reclassification adjustment for realized losses on Indevus included  in net income																			1,023				1,023
Impairment of investment in Millenium Cell Inc.																			266				266
Net unrealized gain on available for sale securities																			(908	)			(908	)
Net unrealized gain on interest   rate swap, net of tax and  minority interest																			(73	)			(73	)
Net income											13,492												13,492
Common stock subject to exchange rights							(498	)															(498	)
Equity based compensation expense							105																105
Purchase of 1,423,725 shares of   treasury Stock															(3,021	)							(3,021	)
Issuance of 14,298 shares of common stock to MXL   Retirement and Savings Plan							35																35
Issuance of 4,123 shares of common stock to directors							10																10
Balance at September 30, 2007		$	180			$	26,120			$	4,315			$	(3,209	)		$	44			$	27,450

See accompanying notes to the condensed consolidated financial statements.

7

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)    

1.           Basis of presentation and summary of significant accounting policies

Basis of presentation

The accompanying Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2007 and 2006, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months and nine months ended September 30, 2007 and 2006, the Condensed Consolidated Balance Sheet as of September 30, 2007, the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 and the Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2007 have not been audited, but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2006 as presented in our Annual Report on Form 10-K.  In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation.  The results for the 2007 interim periods are not necessarily indicative of results to be expected for the entire year.

Description of business. National Patent Development Corporation (the “Company” or “National Patent Development”), through its wholly owned subsidiary, MXL Industries, Inc. (“MXL”), manufactures polycarbonate parts requiring strict adherence to optical quality specifications, and in the application of abrasion and fog resistant coating to these parts.  Products include shields and face masks and non-optical plastic products.

The Company’s 57% owned subsidiary, Five Star Products, Inc. (“Five Star”), is engaged in the wholesale distribution of home decorating, hardware and finishing products.  It serves over 3,500 independent retail dealers in twelve states in the Northeast.  Products distributed include paint sundry items, interior and exterior stains, brushes, rollers, caulking compounds and hardware products.  In January 2007, the Company purchased 305,137 shares of Five Star common stock, which represented 2% of the then outstanding Five Star common stock, for $106,000.

 

On April 5, 2007, Five Star acquired substantially all the assets of Right-Way Dealer Warehouse, Inc. ("Right-Way") including all of Right-Way's Brooklyn Cash & Carry business and operations, which sells paint sundries and hardware supplies to local retail stores (see Note 14).

Revenue recognition.  Revenue on product sales is recognized at the point in time when the product has been shipped, title and risk of loss has been transferred to the customer, and the following conditions are met: persuasive evidence of an arrangement exists, the price is fixed and determinable, and collectibility of the resulting receivable is reasonably assured.  Allowances for estimated returns and allowances are recognized when sales are recorded.

Shipping and handling costs.  Shipping and handling costs are included as a part of selling, general and administrative expense.   These costs amounted to $1,380,000, $4,139,000, $1,273,000 and $3,818,000, for the three months and nine months ended September 30, 2007 and 2006, respectively.

(Continued)

8

---

       NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)

 

Inventories.  Inventories are valued at the lower of cost or market, using the first-in, first-out method.

Derivatives and hedging activities.  The interest rate swap and interest rate collar entered into by Five Star in connection with its Loan and Security Agreement (see Note 7) is being accounted for under SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be recognized in the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Changes in the fair value of the interest rate swap, which has been designated as a cash flow hedge, were recognized in other comprehensive income.  Changes in the fair value of the interest rate collar are recognized in earnings.  For the three and nine months ended September 30, 2007, the Company recognized a gain of $1,000 and $5,000, respectively, and for the three and nine months ended September 30, 2006 the Company recognized a gain of $27,000 and $11,000, respectively, as part of other income, for the changes in the fair value of the interest rate collar.

 

2.   Accounting for uncertainty in income taxes - FASB interpretation No. 48 

In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (hereinafter “FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The adoption of FIN 48 in the first quarter of 2007 did not have any effect on the Company’s consolidated financial statements. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statute of limitations for assessment of federal, state & local income taxes by the taxing authorities is open for years 2004 to 2006.

3.           Treasury Stock

On December 15, 2006, the Company’s Board of Directors authorized the Company to repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding shares of common stock from time to time either in open market or privately negotiated transactions.  Through September 30, 2007, the Company had repurchased 1,423,725 shares of its common stock for $3,209,000.

(Continued)

9

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)
     

4.           Incentive stock plans and stock based compensation.

The Company and Five Star have stock-based compensation plans for employees and non-employee members of their respective Boards of Directors. The plans provide for discretionary grants of stock options, restricted stock shares, and other stock-based awards. The Company’s plan is administered by the Compensation Committee of the Board of Directors, consisting of non-employee directors, and the Five Star plan is administered by Five Star’s entire Board of Directors.

 

Company Stock Option Plan

 

On November 3, 2003, GP Strategies Corporation (“GPS”), which at the time was the Company’s parent, adopted an Incentive Stock Plan (the “2003 Plan”) under which 1,750,000 shares of the Company’s common stock are available for grant to employees, directors and outside service providers.  The 2003 Plan permits awards of incentive stock options, nonqualified stock options, restricted stock, stock units, performance shares, performance units and other incentives payable in cash or in shares of the Company’s common stock.  The term of any option granted under the 2003 Plan will not exceed ten years from the date of grant and, in the case of incentive stock options granted to a 10% or greater holder in the total voting stock of the Company, three years from the date of grant.  The exercise price of any option will not be less than the fair market value of the Common Stock on the date of grant or, in the case of incentive stock options granted to a 10% or greater holder in the total voting stock, 110% of such fair market value.

On March 1, 2007 the Company’s Board of Directors approved and adopted an amendment, subject to stockholder approval (the “Amendment”), to the 2003 Plan increasing the aggregate number of shares of Company common stock issuable under the 2003 Plan from 1,750,000 shares to 3,500,000 shares (subject to adjustment as provided in the 2003 Plan), and increasing the per person annual limitation in the 2003 Plan from 250,000 shares to 2,500,000 shares.  The Company expects to submit the Amendment to the Company's stockholders for approval at the Company's 2007 Annual Stockholders Meeting.

 

In March 2007, the Company granted an aggregate of 3,200,000 nonqualified stock options under the 2003 Plan (including the options referred to in Note 13(a) and (b)), of which 632,830 were granted under the terms of the 2003 Plan as presently approved by the Company’s stockholders and the remainder were granted subject to shareholder approval of the amendments referred to below.  The Company determined the estimated aggregate fair value of the 632,830 options which are not subject to shareholder approval on the date of grant to be $673,000 based on the Black-Scholes valuation model using the following assumptions: expected volatility of 49.27%, dividend yield of 0%, risk free interest of 4.5% and an expected life of 4 years.  Upon shareholder approval (see below), the Company will determine the estimated aggregate fair value of the remaining 2,567,170 options based upon the closing price of the Company’s common stock on that date using the Black-Scholes valuation model.

(Continued)

10

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)
 

On July 30, 2007 the Company granted an aggregate of 150,000 non-qualified stock options under the 2003 Plan. The Company determined the estimated aggregate fair value of the 150,000 options on the date of grant to be $169,000 based on the Black-Scholes valuation model using the following assumptions: expected volatility of 46.95%, dividend yield of 0%, risk free interest rate of 4.6% and an expected life of 4 years.

 

On July 30, 2007 the Board of Directors adopted the National Patent Development Corporation 2007 Incentive Stock Plan (the ‘2007 Stock Plan”), subject to shareholder approval.  The Company expects to submit the 2007 NPDC Plan to the Company's stockholders for approval at the Company's 2007 Annual Stockholders Meeting.  As of September 30, 2007 no awards have been granted under the 2007 Stock Plan.

 

The 2007 Stock Plan provides that the Compensation Committee of the Board of Directors may grant to those individuals who are eligible under the terms of the 2007 Stock Plan incentive stock options, nonqualified stock options, performance shares, stock appreciation rights, restricted stock and other incentives payable in cash or in shares of common stock.  Such grants may be made to employees, officers and directors of the Company or its subsidiaries as well as to consultants, agents, advisors and independent contractors of the Company or its subsidiaries for certain bona fide services rendered.  The number of shares of common stock to be reserved and available for awards under the 2007 Stock Plan (subject to certain adjustments as provided therein) is 7,500,000.

 

A summary of the Company’s stock option activity as of September 30, 2007, and changes during the nine months then ended, which includes option activity described above,  is presented below:

 

		Stock Options				Weighted Average Exercise Price				Weighted Average Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2007
Granted			782,830			$	2.49
Exercised
Forfeited or expired
Outstanding  and expected to vest at September 30, 2007			782,830				2.49				4.4			$	0	*
Exercisable at September 30, 2007

_________________ 

*The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

 

(Continued)

11

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)
 

Five Star Stock Option Plan

 

On January 1, 1994, Five Star's Board of Directors adopted the Five Star Products, Inc. 1994 Stock Option Plan  (the “1994 Five Star Plan”), which became effective when approved by the Five Star stockholders on August 5, 1994.  On January 1, 2002, the Board of Directors amended the 1994 Five Star Plan increasing the total number of shares of common stock available for issuance under the plan to 4,000,000, subject to adjustment.  Options could be granted under the 1994 Five Star plan to any director, officer or other key employee of Five Star and its subsidiaries, and to consultants and other individuals providing services to Five Star.  Although there remain outstanding options which have been granted under 1994 Five Star Plan, no further options may be granted under this Plan.

On March 1, 2007, the Board of Directors of Five Star adopted the Five Star Products, Inc. 2007 Incentive Stock Plan (the “2007 Five Star Plan”), subject to the approval of the stockholders of Five Star.  Five Star expects to submit the 2007 Five Star Plan to its stockholders for approval at the Five Star 2007 Annual Stockholders Meeting.  Based upon the Company’s intent to vote its shares of Five Star in favor of the 2007 Five Star Plan, which will assure its approval, the financial effect of all options and restricted stock issued under the 2007 Five Star Plan are reflected as if shareholder approval had been obtained prior to the date of grant. Under the 2007 Five Star Plan, Five Star may grant awards of non-qualified stock options, incentive stock options (if the 2007 Five Star Plan is submitted to and approved by stockholders of Five Star prior to February 28, 2008), restricted stock, stock units, performance shares, performance units, and other incentives payable in cash or in shares of Five Star’s common stock to officers, employees or members of the Board of Directors of Five Star and its subsidiaries. Five Star is authorized to grant an aggregate of 2,500,000 shares of Five Star Common Stock under the 2007 Five Star Plan.  Five Star may issue new shares or use shares held in treasury to deliver shares for equity grants or upon exercise of non-qualified stock options.

 

On March 2, 2007, subject to shareholder approval of the 2007 Five Star Plan, Five Star granted options under the 2007 Five Star Plan to purchase 250,000 shares of Five Star’s common stock to two employees and increased the exercise price and EBITDA target of 400,000 options granted to an employee on October 18, 2006. The exercise price of the 650,000 options was equal to $0.38, the average of the closing bid and asked prices of the common stock on March 2, 2007. The options will vest if Five Star meets certain EBITDA targets over the next three years provided that the option holders continue to be employees of Five Star.   Five Star determined the estimated aggregate fair value of these options on the date of grant to be $185,000 based on the Black-Scholes valuation model.  On July 17, 2007, subject to shareholder approval of the 2007 Five Star Plan, Five Star granted options under the 2007 Five Star Plan to purchase 125,000 shares of Five Star’s common stock to an officer. The exercise price of the 125,000 options was equal to $0.78, the average of the closing bid and asked prices of the common stock on July 17, 2007. The options will vest if Five Star meets certain EBITDA targets over the next three years provided that the option holders continue to be employees of Five Star.   Five Star determined the estimated aggregate fair value of these options on the date of grant to be $62,000 based on the Black-Scholes valuation model.  Achievement of performance criteria was determined as probable at March 2, 2007 and July 17, 2007, and therefore, compensation expense of $27,000 and $56,000 was recognized during the quarter and nine months ended September 30, 2007.

(Continued)

12

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)
    

 

On April 5, 2007, in connection with an employment agreement entered into with the principal of Right-Way Dealer Warehouse, Inc. (see Note 14), Five Star granted him an option to purchase 200,000 shares of Five Star common stock under the 2007 Five Star Plan, subject to shareholder approval. The options will vest if Five Star meets certain EBITDA targets over the next three years proved that the option holder continues to be employed by Five Star Group. At June 30, 2007, Five Star determined that it was probable it would meet 2007 EBITDA targets and accordingly recorded a charge of $8,000 and $16,000, respectively, for the three and nine months ended September 30, 2007.

 

A summary of Five Star’s stock option activity as of June 30, 2007, and changes during the nine months then ended, which includes option activity described above,  is presented below:

 

 

		Stock Options				Weighted Average Exercise Price				Weighted Average Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2007			1,050,000			$	0.16
Granted			575,000				0.43
Exercised			(200,000	)			0.16
Forfeited or Expired			(450,000	)			0.14
Outstanding and expected to vest at September 30, 2007			975,000				0.51				3.6			$	176,000	*
Exercisable at September 30, 2007			0				0				0

__________________ 

*The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

 

During the nine month period ended September 30, 2007, 400,000 options outstanding as of January 1, 2007 were modified.

 

(Continued)

13

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)
 

On March 2, 2007, subject to Five Star shareholder approval, Five Star granted 1,000,000 shares of restricted stock to its chief executive officer (see Note 12(b)) valued at $0.38 per share under the 2007 Five Star Plan. This restricted stock will vest if Five Star meets certain EBITDA targets over the next three years provided that he continues to be employed by Five Star or the Company. At March 2, 2007, Five Star determined that achievement of the performance criteria was probable and therefore compensation expense of $31,000 and $73,000 was recognized during the quarter and nine months ended September 30, 2007.

 

5.           Per share data

 

Income (loss) per share for the three months and nine months ended September 30, 2007 and 2006 are calculated as follows (in thousands, except per share amounts):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Basic EPS
Net income (loss)		$	(1,351	)		$	(95	)		$	13,492			$	(650	)
Weighted average shares
outstanding			17,576				17,848				17,711				17,836
Basic earnings (loss) per share		$	(.08	)		$	(.01	)		$	.76			$	(.04	)
Diluted EPS
Net income (loss)		$	(1,351	)		$	(95	)		$	13,492			$	(650	)
Weighted average			17,576				17,848				17,711				17,836
shares outstanding
Dilutive effect of stock options			--				--				21				--
Diluted weighted average shares outstanding			17,576				17,848				17,732				17,836
Diluted earnings (loss) per share		$	(.08	)		$	(.01	)		$	.76			$	(.04	)

 

Outstanding warrants to acquire 1,423,887 common shares issued in December 2004 were not included in the diluted computation, as their effect would be anti-dilutive.  In addition, the effect on the diluted computation of outstanding options and the convertible note of Five Star (see Note 13(d)) was anti-dilutive and accordingly did not effect such computation.

 

(Continued)

14

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)

 

6.           Long-term debt

 

Long-term debt

Long-term debt is comprised of the following (in thousands):

		September 30,				December 31,
		2007				2006
MXL Pennsylvania Mortgage (a)		$	1,030			$	1,105
MXL term loan (b)			733				377
Capital lease obligations			-				1
			1,763				1,483
Less current maturities			(257	)			(151	)
		$	1,506			$	1,332

a)

The loan, which is collateralized by real estate and fixtures, requires monthly repayments of $8,333 plus interest at 2.5% above the one month LIBOR rate and matures on March 8, 2011, when the remaining amount outstanding of approximately $680,000 is due in full.  The loan is guaranteed by GP Strategies Corporation (“GPS”), formerly the parent entity of MXL and the Company, under an agreement entered into concurrently with GPS’s spin-off of these entities.  If GPS defaults under the terms of the guarantee the bank would have the right to accelerate MXL’s payments under the loan.

b)

On November 27, 2006,  MXL entered into a 5 year $785,000 Term Loan for the financing of machinery and equipment at 2.5% above the one month LIBOR rate, or 0.25% above the bank’s prime lending rate, as applicable.  From November 2006 through May 2007, the Bank may disburse funds to MXL, and MXL will pay on a monthly basis, all accrued interest due the Bank.  In May 2007, the balance borrowed converted to a five year Term Loan, with monthly payments of principal and accrued interest through May 2012. The Term Loan is guaranteed by the Company and collateralized by MXL’s Lancaster, PA property.

 

7.           Short term borrowings

Five Star short-term borrowings

In 2003, Five Star obtained a Loan and Security Agreement (the “Loan Agreement”) with Bank of America Business Capital (formerly Fleet Capital Corporation) (the “Lender”).  The Loan Agreement has a five-year term, with a maturity date of June 30, 2008.  The Loan Agreement, as amended on August 1, 2005, provides for a $35,000,000 revolving credit facility, which allows Five Star to borrow based upon a formula of up to 65% of eligible inventory and 85% of eligible accounts receivable, as defined therein.  The interest rates under the Loan Agreement consist of LIBOR plus a credit spread of 1.5% (6.88% at September 30, 2007) for borrowings not to exceed $15,000,000 and the prime rate (7.75% at September 30, 2007) for borrowings in excess of the above-mentioned LIBOR-based borrowings.  The credit spreads can be reduced in the event that Five Star achieves and maintains certain performance benchmarks.  At September 30, 2007 and December 31, 2006, approximately $19,339,000 and $17,664,000 was outstanding under the Loan Agreement and approximately $7,587,000 and $2,929,000 was available to be borrowed, respectively.  Substantially all of Five Star’s assets are pledged as collateral for these borrowings. Under the Loan Agreement, Five Star is subject to covenants requiring minimum net worth, limitations on losses, if any, and minimum or maximum values for certain financial ratios.  As of September 30, 2007, Five Star was in compliance with all required covenants.

(Continued)

15

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)

In connection with the Loan Agreement, Five Star also entered into a derivative transaction with the Lender.  The derivative transaction is an interest rate swap and has been designated as a cash flow hedge.  Effective July 1, 2004 through June 30, 2008, Five Star will pay a fixed interest rate of 3.38% to the Lender on notional principal of $12,000,000.  In return, the Lender will pay to Five Star a floating rate, namely, LIBOR, on the same notional principal amount.  The credit spread under the new Loan Agreement is not included in, and will be paid in addition to this fixed interest rate of 3.38%.  The fair value of the interest rate swap amounted to $142,000 and $320,000 at September 30, 2007 and December 31, 2006, respectively and is included in other assets in the accompanying balance sheets.

On June 17, 2004, Five Star also entered into a derivative interest rate collar transaction during the period from July 1, 2004 through June 30, 2008, on notional principal of $12,000,000.  The transaction consists of an interest rate floor of 2.25%, whereas if LIBOR is below 2.25%, the Lender will pay to Five Star the difference between LIBOR and 2.25%, on the same notional principal amount.  The transaction also consists of an interest rate cap of 5.75%, whereas if LIBOR is above 5.75%, Five Star will pay to the Lender the difference between LIBOR and 5.75%, on the same notional principal amount.

MXL short-term borrowings

On March 1, 2005, MXL obtained a Line of Credit Loan (the “MXL Line”) from M&T Bank with a one year term, maturing on March 1, 2006, which has been extended to June 30, 2008 on the same terms.  The MXL Line provides for a $1,000,000 revolving credit facility, which is secured by MXL’s eligible accounts receivable, inventory and a secondary claim on the Lancaster, PA property. On November 27, 2006 the MXL Line was amended to a $900,000 line of credit.  The interest rates under the MXL Line consist of LIBOR plus a credit spread of 2.5% or the prime rate.  The MXL Line is subject to an unused commitment fee of 0.125% of the average daily unused balance of the line payable quarterly.  The Company has guaranteed the MXL Line up to $785,000. At September 30, 2007 and December 31, 2006, $625,000 and $750,000, respectively, was outstanding under the MXL Line and $275,000 and $150,000, respectively, was available to be borrowed.  The MXL Line contains certain financial covenants which are calculated on an annual basis at December 31.  As of December 31, 2006, MXL was in compliance with all required covenants.

 

(Continued)

16

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)
 

 

8.           Inventories

 

Inventories are comprised of the following (in thousands):

		September 30, 2007				December 31, 2006
Raw materials		$	429			$	393
Work in process			195				149
Finished goods			25,216				21,993
		$	25,840			$	22,535

9.           Investment in Indevus Pharmaceuticals, Inc.  (“Indevus”)

Indevus Pharmaceuticals, Inc., a biopharmaceutical company, engages in the acquisition, development, and commercialization of products to treat urological, gynecological, and men's health conditions.

 

Effective April 18, 2007 (the “Effective Time”), all of the outstanding common stock of Valera Pharmaceuticals, Inc. (“Valera”) was acquired by Indevus pursuant to the terms and conditions of an Agreement and Plan of Merger, dated as of December 11, 2006 (the “Merger Agreement”).  Pursuant to the Merger Agreement, the Company, as a stockholder of Valera through MXL, received 1.1337 shares of Indevus common stock for each share of Valera common stock held by the Company immediately prior to the Effective Time. As a result, at the Effective Time, the 2,070,670 shares of Valera common stock held by the Company were converted into an aggregate of 2,347,518 shares of Indevus common stock.  In April 2007, the Company recognized a pre-tax gain of $14,961,000 on the exchange of shares. The merger was treated as a tax free merger under Internal Revenue Code Section 368.  In addition, for each share of Valera common stock held by the Company immediately prior to the Effective Time, the Company received one contingent stock right for each of three Valera product candidates in development - Supprelin-LA, a ureteral stent and VP003 (Octreotide implant) –convertible into $1.00, $1.00 and $1.50, respectively, worth of Indevus common stock to the extent of the achievement of specific milestones with respect to each product candidate are achieved. Thus, if all contingent milestones are achieved, the Company will receive $2,070,670, $2,070,670 and $3,106,005, respectively, worth of Indevus common stock on the date the milestone is met, at which date additional gain will be recognized. On May 3, 2007, Indevus announced that it had received FDA approval for Supprelin-LA.  Therefore, in May 2007, the Company received the first $2,070,670 worth of Indevus common stock, consisting of 291,964 shares, and recognized an additional pre-tax gain of $2,070,670.   During the quarter and nine months ended September 30, 2007, the Company sold 2,347,518 and 2,639,482 shares, respectively of Indevus on the open market, (which comprised all the Company’s shares of Indevus common stock at this time) for total net proceeds of $17,598,000 and recognized losses of   $787,000 and $1,023,000, respectively, which are included in Investment and other income (loss), net.

 

(Continued)

17

---

NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2007 and 2006
(Unaudited)

Two related parties, Bedford Oak Partners and Mr. Jerome I. Feldman, were entitled to receive 50% of any profit received from the sale on a pro-rata basis, of 458,019 shares of Indevus common stock in excess of $3.47 per share, and 50% of the proceeds from the sale on a pro-rata basis of 56,965 shares of Indevus common stock. The Company paid $922,000 to the related parties towards their profit share, upon sale of the Indevus of which $680,000 is included in Investment and other income (loss), net for the nine months ended September 30, 2007 and $242,000 was charged to a liability accrued for the profit share at December 31, 2006.

 

The original gain on exchange of Valera stock resulted from a tax free reorganization and accordingly was not subject to current federal income tax.  In addition, the deferred income tax liability attributable to the excess statement basis over tax basis in Indevus stock received in the exchange was offset by a reduction of the deferred tax asset valuation allowance.  The gain recognized for federal tax purposes on the sale of Indevus stock was offset by the Company’s net operating and capital loss carryforwards.  Accordingly, no provision for federal income tax is included in the accompanying Statements of Operations related to the gain on the exchange or the sale of the Indevus stock for the nine months ended September 30, 2007.  During the nine months ended September 30, 2007, the Company recorded a provision for state income tax expense of $345,000 related to the gain on the exchange and the sale of the Indevus stock.

10.           Investment and other income (loss), net

Investment and other income (loss), net is comprised of the following (in thousands):