Wright Investors Service Holdings, Inc. - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended June 30, 2008
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|
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or
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|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _____ to
_____
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Commission
File Number: 000-50587
NATIONAL
PATENT DEVELOPMENT CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
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13-4005439
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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10 East 40th Street, Suite 3110, New York,
NY
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10016
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(Address
of principal executive offices)
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(Zip
code)
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(646)
742-1600
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(Registrant's
telephone number, including area
code)
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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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer
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o |
Accelerated
filer
|
o | |
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Non-accelerated
filer
(Do
not check if a smaller reporting company)
|
o |
Smaller
reporting company
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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
August 13, 2008, there were
17,576,190
shares of the registrant’s common stock, $0.01 par value,
outstanding.
NATIONAL PATENT DEVELOPMENT
CORPORATION AND SUBSIDIARIES
TABLE
OF CONTENTS
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Page
No.
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|||||
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Part
I. Financial
Information
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|||||
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Item
1.
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|||||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
| 6 | |||||
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Item
2.
|
|||||
| 24 | |||||
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Item
3.
|
36 | ||||
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Item
4.
|
36 | ||||
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Part
II. Other
Information
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|||||
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Item
2.
|
37 | ||||
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Item
6.
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38 | ||||
| 40 | |||||
PART
I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in
thousands, except per share data)
|
Three months
ended
|
Six
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
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Sales
|
$ | 31,429 | $ | 35,926 | $ | 62,898 | $ | 65,788 | ||||||||
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Cost
of sales
|
25,979 | 29,671 | 52,272 | 54,804 | ||||||||||||
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Gross
margin
|
5,450 | 6,255 | 10,626 | 10,984 | ||||||||||||
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Selling,
general and administrative expenses
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(5,804 | ) | (5,820 | ) | (11,189 | ) | (10,032 | ) | ||||||||
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Charge
related to resignation of Chairman of Five Star
|
(1,096 | ) | ||||||||||||||
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Operating
profit (loss)
|
(356 | ) | 435 | (1,659 | ) | 952 | ||||||||||
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Interest
expense
|
(388 | ) | (453 | ) | (690 | ) | (732 | ) | ||||||||
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Gain
on exchange of Valera for Indevus shares
|
0 | 17,031 | 0 | 17,031 | ||||||||||||
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Investment
and other income (loss)
|
58 | (842 | ) | 151 | (782 | ) | ||||||||||
|
Income
(loss) from continuing operations before income tax expense and minority
interest
|
(686 | ) | 16,171 | (2,198 | ) | 16,469 | ||||||||||
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Income
tax expense
|
(12 | ) | (700 | ) | (25 | ) | (1,060 | ) | ||||||||
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Income
(loss) from continuing operations before minority interest
|
(698 | ) | 15,471 | (2,223 | ) | 15,409 | ||||||||||
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Minority
interest
|
(24 | ) | ( 241 | ) | (11 | ) | (436 | ) | ||||||||
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Income
(loss) from continuing operations
|
(722 | ) | 15,230 | (2,234 | ) | 14,973 | ||||||||||
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Income
(loss) from discontinued operations, net of taxes, including an $87 gain
on sale of assets in 2008
|
294 | 40 | 429 | (130 | ) | |||||||||||
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Net
Income (loss)
|
$ | ( 428 | ) | $ | 15,270 | $ | ( 1,805 | ) | $ | 14,843 | ||||||
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Basic
net income(loss) per share:
|
||||||||||||||||
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Continuing
operations
|
$ | (0.05 | ) | $ | 0.85 | $ | (0.14 | ) | $ | 0.84 | ||||||
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Discontinued
operations
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0.02 | 0.00 | 0.03 | (0.01 | ) | |||||||||||
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Net
(loss) income per share
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$ | ( 0.03 | ) | $ | 0.85 | $ | ( 0.11 | ) | $ | 0.83 | ||||||
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Diluted
net income (loss) per share:
|
||||||||||||||||
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Continuing
operations
|
$ | (0.05 | ) | $ | 0.85 | $ | (0.14 | ) | $ | 0.84 | ||||||
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Discontinued
operations
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0.02 | 0.00 | 0.03 | (0.01 | ) | |||||||||||
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Net
(loss) income per share
|
$ | ( 0.03 | ) | $ | 0.85 | $ | ( 0.11 | ) | $ | 0.83 | ||||||
See
accompanying notes to consolidated condensed financial statements.
1
NATIONAL PATENT DEVELOPMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in
thousands)
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
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2008
|
2007
|
2008
|
2007
|
|||||||||||||
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Net
income (loss)
|
$ | (428 | ) | $ | 15,270 | $ | (1,805 | ) | $ | 14,843 | ||||||
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Other
comprehensive income (loss), before tax:
|
||||||||||||||||
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Net
unrealized gain (loss) on available-for-sale-securities
(a)
|
(36 | ) | (796 | ) | (102 | ) | (618 | ) | ||||||||
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Reclassification
adjustment principally for gain on exchange of Valera securities
recognized in merger included in net income
|
(4,614 | ) | (4,614 | ) | ||||||||||||
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Net
unrealized gain (loss) on interest rate swap,
net
of minority interest
|
73 | 2 | 7 | (46 | ) | |||||||||||
|
Comprehensive
income (loss) before tax
|
(391 | ) | 9,862 | (1,900 | ) | 9,565 | ||||||||||
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Income
tax (expense) benefit related to
items
of other comprehensive income (loss)
|
(29 | ) | 3 | 3 | 18 | |||||||||||
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Comprehensive
income (loss)
|
$ | (420 | ) | $ | 9,865 | $ | (1,897 | ) | $ | 9,583 | ||||||
(a) Includes
gains of $65 for the three months ended June 30, 2007 and $231 for the six
months ended June 30, 2007 of Valera to date of merger and loss of $763 for the
three and six months ended June 30, 2007 of Indevus from date of
merger.
See
accompanying notes to consolidated condensed financial statements.
2
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(in
thousands)
|
June
30,
2008
|
December
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
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Assets
|
||||||||
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Current
assets
|
||||||||
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Cash
and cash equivalents
|
$ | 13,181 | $ | 15,698 | ||||
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Accounts
receivable, less allowance
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||||||||
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for
doubtful accounts of $209 and $412
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16,855 | 12,755 | ||||||
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Inventories
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29,204 | 27,720 | ||||||
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Prepaid
expenses and other current assets
|
447 | 1,326 | ||||||
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Deferred
tax asset
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470 | 470 | ||||||
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Total
current assets
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60,157 | 57,969 | ||||||
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Marketable
securities available for sale
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7 | 109 | ||||||
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Property,
plant and equipment, net
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913 | 3,534 | ||||||
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Goodwill
|
96 | |||||||
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Deferred
tax asset
|
87 | |||||||
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Other
assets
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3,368 | 3,293 | ||||||
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Total
assets
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$ | 64,628 | $ | 64,905 | ||||
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Liabilities
and stockholders’ equity
|
||||||||
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Current
liabilities
|
||||||||
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Current
maturities of long-term debt
|
$ | $ | 257 | |||||
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Short
term borrowings
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24,931 | 19,928 | ||||||
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Accounts
payable and accrued expenses
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13,800 | 13,530 | ||||||
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Total
current liabilities
|
38,731 | 33,715 | ||||||
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Long-term
debt less current maturities
|
1,441 | |||||||
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Deferred
tax liability
|
279 | 279 | ||||||
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Minority
interest
|
1,717 | 2,902 | ||||||
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Common
stock subject to exchange rights
|
493 | |||||||
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Stockholders’
equity
|
||||||||
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Common
stock
|
181 | 180 | ||||||
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Additional
paid-in capital
|
27,564 | 26,825 | ||||||
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Retained
earnings
|
740 | 2,545 | ||||||
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Treasury
stock, at cost
|
(4,475 | ) | (3,458 | ) | ||||
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Accumulated
other comprehensive loss
|
(109 | ) | (17 | ) | ||||
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Total
stockholders’ equity
|
23,901 | 26,075 | ||||||
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Total
liabilities and stockholders’ equity
|
$ | 64,628 | $ | 64,905 | ||||
See
accompanying notes to 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,
|
||||||||
|
2008
|
2007
|
|||||||
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Cash
flows from operations:
|
||||||||
|
Net
income (loss)
|
$ | (1,805 | ) | $ | 14,843 | |||
|
Adjustments
to reconcile net income (loss) to
|
||||||||
|
net
cash used in operating activities:
|
||||||||
|
Depreciation
and amortization
|
398 | 368 | ||||||
|
Minority
interest
|
(3 | ) | 436 | |||||
|
Gain
on sale of MXL
|
(87 | ) | ||||||
|
Expenses
paid in common stock
|
29 | 31 | ||||||
|
Deferred
income taxes
|
(87 | ) | 345 | |||||
| Stock based compensation | 1,214 | 248 | ||||||
|
Gain
on issuance of stock by subsidiary
|
(1 | ) | ||||||
|
Gain
on exchange of Valera for Indevus shares
|
(17,031 | ) | ||||||
|
Loss
on sales of Indevus shares
|
236 | |||||||
|
Changes
in other operating items, net of effect of acquisition of
Right-Way and disposition of MXL
|
||||||||
|
Accounts
receivable
|
(5,233 | ) | (9,849 | ) | ||||
|
Inventory
|
(2,492 | ) | (2,907 | ) | ||||
|
Prepaid
expenses and other assets, net of cash sold
|
458 | 215 | ||||||
|
Accounts
payable and accrued expenses
|
638 |
9,470
|
||||||
|
Net
cash used in operations
|
(6,970 | ) | (3,596 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Additions
to property, plant and equipment, net
|
(458 | ) | (849 | ) | ||||
|
Acquisition
of additional interest in Five Star
|
(1,523 | ) | (106 | ) | ||||
|
Net
proceeds from sale of assets of MXL
|
4,661 | |||||||
|
Acquisition
of Right-Way by Five Star
|
(3,399 | ) | ||||||
|
Investment
in MXL
|
(275 | ) | ||||||
|
Repayment
of receivable from GP Strategies
|
|
325 | ||||||
|
Net
cash provided by (used in) investing
activities
|
2,405 | (4,029 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from sale of common stock
|
480 | |||||||
|
Purchase
of treasury stock
|
(1,017 | ) | (220 | ) | ||||
|
Settlement
of option
|
(240 | ) | ||||||
|
Proceeds
from short-term borrowings, net
|
5,003 | 6,598 | ||||||
|
(Repayment
of) proceeds from long-term debt
|
(1,698 | ) | 344 | |||||
|
Net
cash provided by financing activities
|
2,048
|
7,202 | ||||||
|
Net
decrease in cash and cash equivalents
|
(2,517 | ) | (423 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
15,698 | 4,485 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 13,181 | $ | 4,062 | ||||
|
Cash
paid for:
|
||||||||
|
Interest
|
$ | 859 | $ | 897 | ||||
|
Taxes
|
$ | 25 | $ | 18 | ||||
|
Non
cash investing activities:
|
||||||||
|
Acquisition
of stock of Indevus in exchange for stock of Valera in a merger
transaction
|
$ | 14,960 | ||||||
See
accompanying notes to the consolidated condensed financial
statements.
4
NATIONAL PATENT DEVELOPMENT
CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX
MONTHS ENDED JUNE 30, 2008
(Unaudited)
(in
thousands, except shares and per share data)
|
Common
Stock
$(0.01
par
value)
|
Additional
paid-in
capital
|
Retained
earnings
|
Treasury
stock,
at cost
|
Accumulated
other
comprehensive
income
(loss)
|
Total
stockholders’
equity
|
|||||||||||||||||||
|
Balance
at December 31, 2007
|
$ | 180 | $ | 26,825 | $ | 2,545 | $ | (3,458 | ) | $ | (17 | ) | $ | 26,075 | ||||||||||
|
Net
unrealized loss on available
for
sale securities
|
(102 | ) | (102 | ) | ||||||||||||||||||||
|
Net
unrealized loss on interest
rate
swap, net of tax and minority interest
|
10 | 10 | ||||||||||||||||||||||
|
Net
loss
|
(1,805 | ) | (1,805 | ) | ||||||||||||||||||||
|
Equity
based compensation expense
|
458 | 458 | ||||||||||||||||||||||
|
Settlement
of option to acquire
shares
of Five Star
|
(240 | ) | (240 | ) | ||||||||||||||||||||
|
Purchase
of 416,500 shares of
treasury
Stock
|
(1,017 | ) | (1,017 | ) | ||||||||||||||||||||
|
Reclassification
of common stock
subject
to exchange rights
|
493 | 493 | ||||||||||||||||||||||
|
Issuance
of 8,314 shares of
common
stock to MXL Retirement
and
Savings Plan
|
1 | 22 | 23 | |||||||||||||||||||||
|
Issuance
of 2,557 shares of
common
stock to directors
|
6 | 6 | ||||||||||||||||||||||
|
Balance
at June 30, 2008
|
$ | 181 | $ | 27,564 | $ | 740 | $ | (4,475 | ) | $ | (109 | ) | $ | 23,901 | ||||||||||
See
accompanying notes to the consolidated condensed financial
statements.
5
NATIONAL PATENT DEVELOPMENT
CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
1. Basis
of presentation and summary of significant accounting policies
Basis
of presentation
The
accompanying condensed consolidated financial statements for the three months
and six months ended June 30, 2008 and 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 8 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, 2007 as presented in our
Annual Report on Form 10-K for the year ended December 31, 2007 filed with the
Securities and Exchange Commission (the “SEC”) on March 31, 2008. 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 2008 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”), through its 75% owned subsidiary, Five Star Products, Inc. (“Five
Star”), is engaged in the wholesale distribution of home decorating, hardware
and finishing products. Five Star serves independent retail dealers in 12 states
in the Northeast. Products distributed include paint sundry items, interior and
exterior stains, brushes, rollers, caulking compounds and hardware products. As
of July 21, 2008, the Company owned approximately 82% of Five Star’s common
stock due to the conversion of a convertible note of Five Star (see Note
2). The Company also owns certain other assets, including real
estate. On June 19, 2008, the Company sold substantially all the
operating assets and certain liabilities of its optical plastics molding and
precision coating business, MXL Industries, Inc. (see Note 3). The
results for MXL Industries Inc. have been accounted for as a discontinued
operation for all periods presented.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measurement of fair value
and expands disclosures about fair value measurements. SFAS No. 157 clarifies
that fair value should be based on assumptions that market participants will use
when pricing an asset or liability and establishes a fair value hierarchy of
three levels that prioritize the information used to develop those
assumptions. The provisions of SFAS No. 157 became effective for the Company
beginning January 1, 2008. Generally, the provisions of this statement are to be
applied prospectively. The Company adopted SFAS No. 157 in the first quarter of
2008. The adoption of SFAS No. 157 did not have a material effect on the
Company’s consolidated financial statements.
In February 2008, the FASB
issued FASB Staff Position 157-2 “Partial Deferral of the Effective Date of
Statement 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157
for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008.
The Company does not expect adoption of SFAS 157 for nonfinancial assets and
liabilities on January 1, 2009 to have a material effect on the Company’s
consolidated financial statements.
6
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. This statement provides
companies with an option to report selected financial assets and liabilities at
fair value. Although, this statement became effective for the Company beginning
January 1, 2008, the Company did not elect to value any financial assets and
liabilities at fair value.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin (“ARB”) No. 51” (“SFAS 160”). SFAS 160 requires that
ownership interests in subsidiaries held by parties other than the parent, and
the amount of consolidated net income, be clearly identified, labeled, and
presented in the consolidated financial statements within equity, but separate
from the parent’s equity. It also requires once a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value. Sufficient disclosures are required to clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008, and is to be applied retrospectively
for all periods presented. Accordingly, upon the adoption of SFAS No.
160, the Company’s financial statements will be reclassified to reflect the
minority interest in Five Star in accordance with this statement.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations”.
SFAS No. 141(R), replaces SFAS No. 141, “Business Combinations”, and
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree, and any
goodwill acquired in a business combination. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of a business combination. SFAS No. 141(R) is to be
applied prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The impact that the adoption of SFAS No. 141(R)
will have on the Company’s financial statements is not presently determinable,
since it is dependant on future acquisitions, if any.
7
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133”. SFAS No. 161 gives financial statement users better information about
the reporting entity's hedges by providing for qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged positions. The standard
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged,
but not required. The Company does not anticipate that the adoption of SFAS No.
161 will have a material effect on the Company’s consolidated financial
statements.
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 from customers. The Company places its cash
investments with high quality financial institutions and limits the amount
of credit exposure to any one institution.
2. Tender
Offer for shares of Five Star common stock
On June
26, 2008, the Company, Five Star and NPDV Acquisition Corp., a wholly
owned subsidiary of the Company, (“NPDV”) entered into a Tender Offer and Merger
Agreement (the “Tender Offer Agreement”). Pursuant to the Tender
Offer Agreement, on July 24, 2008, NPDV commenced a tender offer to acquire all
the outstanding shares of Five Star common stock not held by the Company or NPDV
at a purchase price of $0.40 per share (the “Offer Price”), net to the seller in
cash, without interest thereon and less any required withholding taxes (the
“Offer”).
The Offer
is scheduled to remain open until 12:00 midnight, New York City time on August
26, 2008, subject to extension pursuant to the terms set forth in the Tender
Offer Agreement or unless NPDV provides a subsequent offering
period. The Offer is subject to customary conditions.
Pursuant
to the Tender Offer Agreement, following the consummation of the Offer, and
subject to the satisfaction or waiver of certain conditions set forth in the
Tender Offer Agreement, NPDV will merge with and into Five Star (the “Merger”)
with Five Star continuing as the surviving corporation, wholly-owned by the
Company. Each share of Five Star common stock outstanding
immediately prior to the effective time of the Merger
(other than shares held by National Patent, Five Star or NPDV, all of which will
be cancelled and retired and will cease to exist, and shares held by
stockholders of Five Star who validly exercise their appraisal rights under
Delaware law), will be converted in the Merger into the right to receive the
price paid pursuant to the Offer, in cash.
8
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
The
parties have agreed that if, following the consummation of the Offer, NPDV
acquires in the aggregate at least 90% of the outstanding shares Five Star
common stock, the Merger will be completed without a meeting of Five Star’s
stockholders, in accordance with Delaware’s short-form merger
statute.
Pursuant
to the Tender Offer Agreement, Five Star granted to the Company and NPDV an
irrevocable option to purchase, for the Offer Price, a number of shares of Five
Star common stock that, when added to the number of shares owned by NPDV
immediately prior to the exercise of the option, constitutes one share Five Star
common stock more than 90% of the number of shares Five Star common stock that
will be outstanding immediately after the issuance, subject to availability of
authorized shares of Five Star common stock. The option is only
exercisable if NPDV owns at least 87.5% of the issued and outstanding shares of
Five Star common stock after consummation of the Offer.
Under the
Tender Offer Agreement, if NPDV owns less than 87.5% of the issued and
outstanding shares of Company common stock after consummation of the Offer, (i)
the Company will (A) call, give notice of, convene and hold a special meeting of
Company stockholders for the purposes of considering and taking action upon the
adoption of the Tender Offer Agreement, (B) prepare and file with the SEC a
preliminary proxy or information statement relating to the terms and conditions
of the Merger and obtain and furnish the information required by the SEC to be
included therein, and (C) cause a definitive proxy or information statement to
be mailed to Five Star stockholders at the earliest practicable date, and (ii)
NPDV will vote all of its shares of Five Star common stock in favor of the
Merger. As a result, approval of the Merger would be assured, and NPDV would be
merged with and into Five Star subsequent to Five Star’s receipt of stockholder
approval of the transaction.
In
addition, concurrently with the execution of the Tender Offer Agreement, the
Company and five Star entered into letter agreements (which will terminate if
the Merger is not consummated by December 31, 2008) with certain executive
officers, employees and directors of five Star, certain of whom are also
directors and executive officers of the of the Company (collectively
the “Letter Agreements”) pursuant to which each such person will receive cash
compensation in exchange for the termination of their right to receive both
vested and unvested options to purchase shares of Five Star common stock and
unvested and unissued shares of Five Star restricted
stock, promptly following the completion of the Merger (or such earlier date as
selected by Five Star).
Prior to the commencement
of the Offer, in accordance with the Tender Offer Agreement, (i) the Company
transferred to NPDV (A) all of the shares of Five Star common stock held by the
Company and (B) a convertible note made by the Five Star’s wholly-owned
subsidiary, Five Star Group, Inc., in favor of a wholly-owned subsidiary of the
Company, and (ii) NPDV converted such note into an aggregate of 7,000,000 shares
of Five Star common stock.
9
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
Based on
the recommendation of a special committee consisting of an independent director
of Five Star and upon the receipt by such special committee and the board of
directors of an opinion from an independent financial advisor as to the
fairness, from a financial point of view, of the consideration to be received by
the stockholders of Five Star other than the Company and its subsidiaries in the
Offer and the Merger, the board of directors of Five Star has unanimously
approved the Tender Offer Agreement, the Offer and the Merger. The
board of directors of each of the Company and NPDV has also unanimously approved
the Tender Offer Agreement, the Offer and the Merger.
3. Discontinued
Operation- Sale of Assets of MXL Industries
On June
19, 2008, pursuant to the terms of an Asset Purchase Agreement, dated as of June
16, 2008, by and among the Company, MXL Industries, Inc., a wholly-owned
subsidiary of the Company (the “Seller”), MXL Operations, Inc. (“Operations”),
MXL Leasing, LP (“Leasing”) and MXL Realty, LP (“Realty” and, collectively with
Operations and Leasing, the “Buyers”), Buyers purchased substantially all the
assets and assumed certain liabilities of Seller’s optical plastics molding and
precision coating. As consideration the Seller received approximately
$5,200,000 in cash, of which approximately $2,200,000 was utilized to fully pay
bank debt of MXL . The sale resulted in a gain of $87,000 net
of $143,000 of related expenses.
The
Seller also made an aggregate capital contribution to the Buyers of $275,000,
allocated to each of Operations, Leasing and Realty in a manner so that as of
the effective time of the transaction, the Seller has a 19.9% interest in the
total capital of each of Leasing and Realty and a 40.95% non-voting interest in
the total capital of Operations. Operations has the right to issue
additional shares in 2008 which, if issued, would reduce the Seller’s interest
on a pro rata basis to a minimum of 19.9%. It is the intent of the management of
Operations to invest additional capital by the end of 2008, which would reduce
the Company’s interest in Operations to 19.9% by the end of
2008. Investors in the Buyers include certain senior managers of the
MXL Business.
The
results for MXL have been accounted for as a discontinued operation for all
periods presented.
10
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
The
summary comparative result of the discontinued operation is as follows (in
thousands):
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Sales
|
$ | 1,714 | $ | 2,207 | $ | 4,053 | $ | 4,277 | ||||||||
|
Income
(loss) from discontinued operation
|
$ | 239 | $ | 40 | $ | 375 | $ | (130 | ) | |||||||
|
Provision
for income taxes
|
(32 | ) | (33 | ) | ||||||||||||
|
Gain
on sale of MXL net of taxes
|
87 | 87 | ||||||||||||||
|
Net
income (loss) from discontinued operation
|
$ | 294 | $ | 40 | $ | 429 | $ | (130 | ) | |||||||
Assets
and liabilities of the discontinued operation at December 31, 2007 are
summarized as follows (in thousands):
|
Current
assets
|
$ | 2,924 | ||
|
Non
current assets
|
2,609 | |||
|
Current
liabilities
|
1,444 | |||
|
Non
current liabilities
|
1,709 | |||
11
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
4. Per share data
Income
(loss) per share for the three months and six months ended June 30, 2008 and
2007 are calculated as follows (in thousands, except per share
amounts):
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Basic
EPS
|
||||||||||||||||
|
Net
income (loss)
|
$ | (428 | ) | $ | 15,270 | $ | (1,805 | ) | $ | 14,843 | ||||||
|
Weighted
average shares
|
||||||||||||||||
|
outstanding
|
16,264 | 17,877 | 16,328 | 17,812 | ||||||||||||
|
Basic (loss) income
per share:
|
||||||||||||||||
|
Continuing
operations
|
$ | (0.05 | ) | $ | 0.85 | $ | (0.14 | ) | $ | 0.84 | ||||||
|
Discontinued
operations
|
0.02 |
-
|
0.03 | (0.01 | ) | |||||||||||
|
Total
(loss ) income per share
|
$ | (0.03 | ) | $ | 0.85 | $ | (0.11 | ) | $ | 0.83 | ||||||
|
Diluted
EPS
|
||||||||||||||||
|
Net
(loss) income
|
$ | (428 | ) | $ | 15,270 | $ | (1,805 | ) | $ | 14,843 | ||||||
|
Weighted
average shares outstanding
|
16,264 | 17,877 | 16,328 | 17,812 | ||||||||||||
|
Dilutive
effect of stock options
|
-
|
67 |
-
|
24 | ||||||||||||
|
Dilutive
weighted average shares outstanding
|
16,264 | 17,944 | 16,328 | 17,835 | ||||||||||||
|
Diluted (loss) income
per share:
|
||||||||||||||||
|
Continuing
operations
|
$ | (0.05 | ) | $ | 0.85 | $ | (0.14 | ) | $ | 0.84 | ||||||
|
Discontinued
operations
|
0.02 | 0.0 | 0.03 | (0.01 | ) | |||||||||||
|
Total
(loss ) income per share
|
$ | (0.03 | ) | $ | 0.85 | $ | (0.11 | ) | $ | 0.83 | ||||||
Outstanding
warrants to acquire 1,423,886 common shares of the Company issued in December
2004 were not included in the diluted computation, as their effect would be
anti-dilutive (see Note 15 (a)). In addition, the effect on the
diluted computation of outstanding options of Five Star and the convertible note
of Five Star held by the Company (see Note 2) was anti-dilutive and accordingly
did not affect such computation. Further, options to acquire
3,350,000 shares of the Company’s common shares were not included in the 2008
diluted computation as their effect would be anti -dilutive.
5. 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 then outstanding
shares of common stock from time to time either in open market or privately
negotiated transactions. At June 30, 2008, the Company had repurchased 1,744,962
shares of its common
stock for $3,995,000 under the repurchase plan (excluding the purchase from Mr.
S. Leslie Flegel in March 2008 which was not under such plan; see
Note 13).
12
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
6. Acquisition
of Right-Way Dealer Warehouse
On April
5, 2007, Five Star acquired substantially all the assets of Right-Way Dealer
Warehouse, Inc. (“Right-Way”) for approximately $3,200,000 in cash and the
assumption of liabilities in the approximate amount of $50,000. Transaction
costs of approximately $200,000 were incurred by Five Star in connection with
this transaction. The assets consisted primarily of approximately $1,186,000 of
accounts receivable at fair value and approximately $2,213,000 of inventory at
fair value. The acquisition included all of Right-Way’s Brooklyn Cash &
Carry business and operations. Five Star acquired the assets of
Right-Way in order to increase its presence and market share in its current
geographic area.
The
results of operations of Right-Way are included in the consolidated financial
statements from the date of acquisition. The following unaudited pro
forma consolidated amounts give effect to the acquisition of Right-Way as if it
had occurred on January 1, 2007. Right-Way had filed for reorganization under
Chapter 11 of the United States Bankruptcy Code prior to the acquisition by Five
Star. The pro forma results of operations have been prepared for
comparative purposes only and are not necessarily indicative of the operating
results that would have been achieved had the acquisition been consummated as of
the above date, nor are they necessarily indicative of future operating
results.
|
(in
thousands, except per share data)
|
Six
months ended
June
30,
2007
|
|||
|
Sales
|
$ | 74,399 | ||
|
Income
from continuing operations
|
14,163 | |||
|
Net
income
|
14,033 | |||
|
Earnings per
share
|
||||
|
Basic
and fully diluted
|
||||
|
Continuing
operations
|
$ | 0.80 | ||
|
Discontinued
operations
|
(0.01 | ) | ||
|
Net
income
|
$ | 0.79 | ||
13
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
7. 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, which at the time was the Company’s sole
stockholder, 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 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 (the “2003
Plan Amendment”) 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 2003 Plan Amendment was approved in December 2007 at the
Company’s 2007 Annual Stockholders Meeting.
In March
2007, the Company granted an aggregate of 3,200,000 nonqualified stock options
to officers and directors under the 2003 Plan, of which 632,830 were granted
under the terms of the 2003 Plan as had then been approved by the Company’s
stockholders and the remainder were granted subject to stockholder approval of
the 2003 Plan Amendment. The Company determined the estimated
aggregate fair value of the 632,830 options that were not subject to stockholder
approval on the date of grant and upon stockholder approval , which
under SFAS 123R is considered the date of grant, determined the estimated
aggregate fair value of the remaining 2,567,170 options. On July 30, 2007, the
Company granted an aggregate of 150,000 non-qualified stock options under the
2003 Plan. The stock options granted on July 30, 2007 were not
subject to stockholder approval of the 2003 Plan Amendment.
On July 30, 2007, the
Board of Directors adopted the National Patent Development Corporation 2007
Incentive Stock Plan (the “2007 NPDC Plan”), subject to stockholder
approval. The 2007 NPDC Plan was approved by the Company’s
stockholders in December 2007 at the Company’s 2007 Annual Stockholders
Meeting. As of June 30, 2008, no
awards have been granted under the 2007 NPDC Plan. The number of
shares of common stock reserved and available for awards under the 2007 NPDC
Stock Plan (subject to certain adjustments as provided therein) is
7,500,000.
14
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
A summary
of the Company’s stock option activity as of June 30, 2008, and changes during
the six months then ended, is presented below:
|
Stock
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||
|
Options
outstanding at January 1, 2008
|
3,350,000
|
$
|
2.49
|
8.9
|
$
|
768,000
*
|
|||
|
Options
outstanding at June 30, 2008
|
3,350,000
|
2.49
|
8.8
|
$
|
0
*
|
||||
|
Options
exercisable at June 30, 2008
|
1,067,000
|
$
|
2.45
|
8.8
|
$
|
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.
|
The
weighted average grant-date fair value of the options granted during year ended
December 31, 2007 was $0.82 per share. No options were granted during
the six months ended June 30, 2008.
As of
June 30, 2008, there was $1,520,000 of total unrecognized compensation cost
related to non-vested options. This cost is expected to be recognized over the
vesting periods of the options, which on a weighted-average basis is
approximately 1.6 years.
Five
Star Stock Option Plan
Five Star
adopted the Five Star Products, Inc. 1994 Stock Option Plan, effective August 5,
1994 (the “1994 Plan”). The 1994 Plan, as amended on January 1, 2002, provides
for 4,000,000 shares of common stock to be reserved for issuance, subject to
adjustment in the event of stock splits, stock dividends, recapitalizations,
reclassifications or other capital adjustments. Unless designated as “incentive
stock options” intended to qualify under Section 422 of the Internal Revenue
Code, options granted under the 1994 Plan are intended to be nonqualified
options. Although certain outstanding options have been granted under the 1994
Plan, options may no longer be granted under the plan.
On March
1, 2007, the Board of Directors of Five Star adopted the Five Star Products,
Inc. 2007 Incentive Stock Plan (the “2007 FS Plan”), which was approved by the
stockholders of Five Star in December 2007. Under the 2007 FS Plan, Five Star
may grant awards of non-qualified stock options, incentive stock options,
restricted stock, stock units, performance shares, performance units, and other
incentives payable in cash or in shares of Five Star 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 FS
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.
15
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
On March
2, April 5 and July 17, 2007, Five Star granted options under the 2007 Plan to
purchase an aggregate of 250,000, 200,000 and 125,000 shares of Five Star common
stock with exercise prices of $0.38, $0.75 and $0.78 per share, respectively, to
certain executives of Five Star and its subsidiaries. The options vest if Five
Star meets certain EBITDA targets for each of the three consecutive years
beginning with the fiscal year ended December 31, 2007 or in aggregate for the
three year period ending December 31, 2010 and are contingent upon continued
employment with Five Star or its subsidiaries.
Additionally,
on March 2, 2007 Five Star modified the EBITDA target for 400,000 options
granted to an executive officer of Five Star in October 2006, for
which no compensation expenses was recognized in the fiscal year ended December
31, 2006 as achievement of performance criteria was determined to be less than
probable. Five Star estimated the aggregate fair value of the March 2, April 5
and July 17, 2007 options to be $185,000, $97,000 and $62,000, respectively,
based on the Black-Scholes valuation model. It was determined in March 2008 that
the 2007 performance criterion was met for the year ended December 31, 2007 and
therefore aggregate compensation expense of $24,000 was recognized with respect
to these performance based options for the three months ended March
31, 2008. Five Star and the Company estimates that achievement of 2008
performance target is less then probable and therefore no compensation expenses
were recognized with respect to the portion of the above grants which will vest
based on achievement of the 2008 target.
As of
June 30, 2008, there was $235,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements of Five Star. This
cost is expected to be recognized in the period the options are cancelled in
connection with the Merger (see Note 2).
16
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
Activity
relating to stock options granted by Five Star:
|
Number
of
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Terms
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||
|
Options
outstanding at January 1, 2008
|
975,000
|
$
|
0.51
|
9.2
|
$
|
201,500
|
(*)
|
|||
|
Options
outstanding at June 30, 2008
|
975,000
|
$
|
0.51
|
8.7
|
$
|
39,000
|
||||
|
Options
vested and expected to vest
|
975,000
|
$
|
0.51
|
8.7
|
$
|
39,000
|
||||
|
Options
exercisable at June 30, 2008
|
325,000
|
$
|
0.51
|
8.7
|
$
|
12,900
|
||||
|
*
|
The
intrinsic value of stock options is the amount by which the market value
of the underlying stock exceeds the exercise price of the
option.
|
On March
2, 2007, Five Star granted to its President and Chief Executive Officer,
1,000,000 shares of Five Star restricted stock, valued at $0.38 per share
(representing an aggregate value of $380,000), vesting upon the achievement by
Five Star of certain EBITDA targets for the fiscal year ended December 31, 2007
and the following two successive years, or in the aggregate for such three-year
period, contingent upon his continued employment with the Company and Five
Star. In March 2008, Five Star determined that achievement of the
2007 performance criterion was met; therefore compensation expense of $21,000
was recognized by Five Star for the three months ended March 31, 2008 and
restrictions on 333,000 shares of Five Star restricted stock lapsed. At March
31, 2008 $253,000 remains to be charged over the lesser of the remaining 23
months or the term of employment, provided certain adjusted EBITDA targets are
met. However at March 31, 2008, Five Star determined that the
achievement of 2008 performance target is less than probable and therefore no
compensation expense was recognized with respect to the portion of the grant
that vests based on the achievement of the 2008 performance
target. The remaining unrecognized compensation expense will be
recorded in the period, in which rights to receive unvested restricted stock
terminated in connection with the Merger (see Note 2).
As a
result of the Letter Agreements (see Note 2) all the above Five Star options and
the remaining unvested and unissued shares of Five Star restricted stock will
terminate following the completion of the Merger (or some earlier
date as selected by Five Star) in exchange for cash compensation of
approximately $182,000. Any excess of the repurchase price over the
fair value of the awards repurchased will be recognized as additional
compensation expense.
17
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
8. MXL
debt
On
December 31, 2007 MXL’s long –term debt totaled $1,698,000, or $1,441,000, net
of current maturities of $257,000. On June 19, 2008, the long-term
debt of approximately $1,575,000 was fully repaid to the banks from the
proceeds from the MXL sale. See Note 3.
On
December 31, 2007, MXL’s short-term borrowing totaled $625.000. On
June 19, 2008, the then outstanding balance of approximately $625,000 was
fully repaid to M&T Bank from the proceeds from the MXL sale. See Note
3.
9. Short-term
borrowings
Five
Star short-term borrowings
On June
27, 2008, Five Star entered into a Restated and Amended Loan and Security
Agreement (the “Amended Loan Agreement”), with Bank of America, N.A. (“Bank of
America”). The Amended Loan Agreement extends the maturity date of that
certain Loan and Security Agreement, dated as of June 20, 2003, entered into by
Five Star and Bank of America (through its predecessor Fleet Capital
Corporation), as amended (the “2003 Loan Agreement”), to June 30, 2011. The
2003 Loan Agreement, as amended by the Amended Loan Agreement, is referred to
herein as the “Loan Agreement”.
The
Amended Loan Agreement provides Five Star with a $35,000,000 revolving credit
facility (“Revolving Credit Facility”), subject to a $3,500,000 sub-limit for
letters of credit. The Revolving Credit Facility allows Five Star to
borrow up to (a) 85% of eligible receivables plus (b) the greater of (i) the
lesser of $20,000,000 or 65% (to be reduced by 1% per quarter commencing July 1,
2008) of eligible inventory, , or (ii) the lesser of $20,000,000 or 85% of the
appraised net orderly liquidation value of eligible inventory minus (c) the
amount of outstanding letter of credit obligations, as those terms are defined
therein. All obligations under the Revolving Credit Facility are
collateralized by first priority liens on all of Five Star’s existing and future
assets. In connection with the Amended Loan Agreement, on June 27,
2008, Five Star executed the Restated and Amended Promissory Note, dated as of
June 26, 2008, payable to Bank of America in the principal amount of $35,000,000
(the “Promissory Note”). The Promissory Note restates and replaces a
certain $35,000,000 Revolving Note, dated as of June 1, 2005, made by Five Star
in favor of Bank of America. The principal amount under the
Promissory Note is due and payable on June 30, 2011.
Loans
made to Five Star under the Revolving Credit Facility bear interest at a per
annum rate based on the Prime Rate of Bank of America plus 0.5%, or at a per
annum rate based on LIBOR plus 200 basis points, at Five Star’s
election. The LIBOR and Prime Rate margins may be adjusted in the
event that Five Star Group achieves and maintains certain performance
benchmarks. At June 30, 2008 and December 31, 2007, approximately $24,931,000
and $19,303,000 was outstanding under the Loan Agreement and approximately
$7,044,000 and $5,579,000 was available to be borrowed,
respectively. Substantially all of Five Star’s assets are pledged as
collateral for these borrowings. Under the Amended 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.
18
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
In
connection with the March 25, 2008 resignation of Mr. Flegel as director and
Chairman of the Board of Five Star, and as a director of the Company and the
related agreement among Five Star, the Company and Mr. Flegel dated March 25,
2008 (see Note 13), Bank of America amended the covenants related to the 2003
Loan Agreement in March 2008 to exclude non-cash charges related to any equity
instruments (common stock, options and warrants) issued to any employee,
director, or consultant from the covenant calculations.
In
connection with the 2003 Loan Agreement, Five Star also entered into a
derivative transaction with Bank of America. The derivative
transaction is an interest rate swap and has been designated as a cash flow
hedge. Effective June 30, 2008 through June 30, 2011, Five Star will
pay a fixed interest rate of 3.62% to Bank of America on notional principal of
$20,000,000. In return, Bank of America 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
3.62%. The fair value of the interest rate swap amounted to $65,000
at June 30, 2008 and is included in other assets in the accompanying balance
sheets.
10. Inventories
Inventories
are comprised of the following (in thousands):
|
June
30, 2008
|
December
31, 2007
|
|||||||
|
Raw
materials
|
$ | $ | 410 | |||||
|
Work
in process
|
141 | |||||||
|
Finished
goods
|
29,204 | 27,169 | ||||||
| $ | 29,204 | $ | 27,720 | |||||
11. Investment
in Indevus Pharmaceuticals, Inc.
Indevus
Pharmaceuticals, Inc. (“Indevus”) is a biopharmaceutical company that engages in
the acquisition, development, and commercialization of products to treat
urological, gynecological, and men’s health conditions.
19
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
Effective
April 18, 2007 (the “Effective Time”), all of the outstanding common stock of
Valera Pharmaceuticals, Inc. (“Valera”), a Delaware corporation in which the
Company had owned 2,070,670 shares of common stock at such time, 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”) and 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 resulting from the exchange of
shares. On May 3, 2007, Indevus announced that it had received
FDA approval for Supprelin-LA. Therefore, in May 2007, as a result of
contingent rights received in the Merger Agreement, the Company received,
291,964 shares of Indevus common stock, and recognized an additional pre-tax
gain of $2,070,670. During the year ended December 31, 2007,
the Company sold all 2,639,482 shares of Indevus common stock held by the
Company on the open market, for total net proceeds of $17,598,000.
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 are
entitled to participate in 50% of the profits earned on 19.51% of shares of
Indevus common stock received by the Company upon conversion of the contingent
stock rights, described above, if any, at such time as such shares are sold by
the Company (see Note 12 (a)). The Company paid $922,000 to the related parties
towards their profit share, upon sale of Indevus. . During
the quarter and six months ended June 30, 2007, the Company sold 291,964 shares
of Indevus on the open market, for net proceeds of $1,822,000 (settled in July
2007) and realized a loss of $236,000 in Investment and other income (loss) in
the June 30, 2007.
12. Related
party transactions
(a) On
November 12, 2004, the Company entered into an agreement to borrow approximately
$1,022,000 from Bedford Oak Partners, which is controlled by Harvey P. Eisen,
Chairman, Chief Executive Officer and a director of the Company, and
approximately $568,000 from Jerome I. Feldman, who was at the time Chairman and
Chief Executive Officer of the Company, which was utilized to exercise an option
held by the Company to purchase Series B Convertible Preferred shares of
Valera. The loans bore interest at 6% per annum, matured on October
31, 2009, and were secured by all shares of Valera owned by the Company,
including the purchased shares. On January 11, 2005, the
Company prepaid the loans and all accrued interest in full. As further
consideration for making these loans, Bedford Oak Partners and Mr. Feldman
became entitled to a portion of the consideration received by the Company on the
sale of certain Valera shares.
As a result of the
acquisition of Valera by Indevus (see Note 11) this obligation presently relates
to the sale of Indevus shares by the Company. From June 2007 through and
including September 12, 2007, the Company sold, in a series of open market
transactions, all of the 2,639,482 shares of Indevus common stock held by the
Company for an aggregate of approximately $17,598,000, net of commissions and
brokerage fees. The November 12, 2004 agreement among the Company, Bedford
Oak Partners and Mr. Feldman provides for Bedford Oak Partners and Mr. Feldman
to (i) receive 50% of any amount in excess of $3.47 per share which is received
by the Company upon the sale of Indevus
common stock and (ii) participate in 50% of the profits earned on 19.51% of
shares of Indevus common stock received by the Company upon conversion of the
contingent stock rights, described below, if any, at such time as such shares
are sold by the Company. The aggregate amount paid in 2007 towards
the profit sharing was $922,000 of which $581,000 and $603,000 was charged to
Investment and other income (loss) for the three and six months ended June 30,
2007, respectively.
20
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
The
Company continues to hold contingent stock rights for certain products in
development by Indevus that will become convertible into shares of Indevus
common stock to the extent specific milestones with respect to each product are
achieved. If the remaining milestones are achieved, the Company will
receive $2,070,670 and $3,106,005, respectively, worth of shares of Indevus
common stock upon conversion of such contingent stock rights.
(b) Concurrently
with its spin-off from GP Strategies, the Company and GP Strategies entered into
a management agreement under which certain of the Company’s executive officers
who were also executive officers of GP Strategies were paid by GP Strategies
subject to reimbursement by the Company. Additionally, GP Strategies provided
support with respect to corporate federal and state income taxes, corporate
legal services, corporate secretarial administrative support, and executive
management consulting. The agreement terminated on November 24,
2007.
Expenses
incurred by the Company under this agreement were $135,000 and $335,000 for the
quarter and six months ended June 30, 2007, respectively, representing
approximately 80% of the cost of the compensation and benefits required to be
provided by GPS to Jerome Feldman, who served as the Company’s Chief Executive
Officer until May 31, 2007.
13. Stockholders
equity
(a) Mr. Flegel
was named a director of the Company on March 2, 2007 and on March 1, 2007 was
appointed as Chairman and elected as a director of Five
Star. Effective March 2, 2007, Mr. Flegel entered into a three-year
agreement with Five Star (the “FS Agreement”) which provides for an annual fee
of $100,000 and reimbursement (i) for all travel expenses incurred in connection
with his performance of services for Five Star and (ii) beginning in November
2007, for up to $125,000 per year of the cost of maintaining an office. In
addition, pursuant to the FS Agreement, Mr. Flegel was issued 2,000,000 shares
of Five Star common stock, all of which are fully vested and not subject to
forfeiture. The 2,000,000 shares were valued at $720,000 based on the
closing price of Five Star’s common stock on March 2, 2007. Such amount was to
be charged to compensation expense over the term of the FS Agreement. At
December 31, 2007, the unrecognized compensation was $520,000 of which $240,000
was included in Prepaid expenses and other current assets and $280,000 was
included in Other assets. In addition, the Company recognized a gain of $1,000
on the reduction in ownership interest of Five Star at the time of
issuance.
21
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
On March
2, 2007, the Company and Mr. Flegel entered into an agreement pursuant to which
the Company sold to Mr. Flegel 200,000 shares of Company common stock for
$480,000 ($2.40 per share). The agreement gave Mr. Flegel the right
to exchange any or all of the 200,000 shares of the Company’s common stock into
shares of Five Star common stock held by the Company at the fixed rate of six
shares of Five Star common stock for each share of Company common stock. The
value of the option to convert the shares of Company common stock held by Mr.
Flegel into shares of Five Star common stock which amounted to
$264,000, has been valued using a Black Sholes formula and recognized as
compensation expense by Five Star over the three year term of the FS Agreement.
In addition, as the exchange rights if exercised would require the Company to
effectively surrender net assets to redeem common stock, the Company accounted
for the issuance of the 200,000 shares of Company common stock as temporary
equity at an amount equivalent to the carrying value of Five Star’s equity that
could be acquired by the holder of such shares ($493,000 at December 31,
2007).
On March
25, 2008, Mr. Flegel resigned as director and Chairman of the Board of Five
Star, and as a director of the Company, effective immediately. In connection
with Mr. Flegel’s resignation, Five Star, the Company and Mr. Flegel entered
into an agreement, dated March 25, 2008, pursuant to which Mr. Flegel sold to
the Company (i) 200,000 shares of Company common stock,
which was exchangeable into 1,200,000 shares of Five Star common stock owned by
the Company, at $3.60 per share, which equates to $0.60 per share of Five Star
common stock had Mr. Flegel exercised his right to exchange these shares
of Company common stock into shares of Five Star common stock and
(ii) 1,698,336, shares of Five Star common stock at $0.60 per
share. In addition, Mr. Flegel’s children and grandchildren agreed to
sell to the Company an additional 301,664 shares Five Star’s Common Stock at
$0.60 per share. The market value of the Company’s common stock on March
25, 2008 was $2.40 per share. The excess cash paid of $1.20 per
share over the market value on the 200,000 shares of Company common stock
purchased from Mr. Flegel, or $240,000, was deemed to be the settlement of
the option to exchange Company common stock for Five Star common stock and was
charged to Additional paid in capital. Five Star recorded a compensation charge
of $1,096,000 in the first quarter of 2008 (included in Charge related to the
resignation of the Chairman of the Board of Five Star) related to the above
transactions, including the unrecognized value of the 2,000,000 shares of Five
Star common stock issued and the option to convert the 200,000 shares of Company
common stock discussed above. In addition, the expense included
$440,000, which represents the excess of the purchase price over the quoted
market price of the 2,000,000 shares of Five Star common stock on the date of
the agreement to acquire such shares.
Bank
of America amended the covenants related to the 2003 Loan Agreement in March
2008 to exclude non-cash charges related to any equity instruments (common
stock, options and warrants) issued to any employee, director, or consultant
from the covenant calculations (see Note 9).
The
agreement also contained one-year non-compete, standstill and non-solicitation
provisions. In addition, the three year FS Agreement was terminated upon his
resignation.
22
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to
Consolidated Condensed Financial Statements
Three and
six months ended June 30, 2008 and 2007
(unaudited)
(b) As
of December 31, 2007, warrants were outstanding to acquire 1,423,886 shares of
the Company’s common stock at $3.57 per share. The warrants expire on August 14,
2008. See Note 15 (a).
14. Income
taxes
As the
result of the resignation of S. Leslie Flegel, former director and Chairman of
the Board of Five Star and former director of the Company (see Note 13(a)) a
compensation expense of $1,096,000 was recorded of which $704,000 did not result
in a tax benefit.
15. Subsequent
events
(a) On
August 11, 2008, the Company, The Gabelli Small Cap Growth Fund, The Gabelli
Equity Income Fund, The Gabelli ABC Fund and The Gabelli Convertible and Income
Securities Fund Inc. (collectively, the “Warrantholders”), holders of warrants
to purchase an aggregate of 1,423,886 shares of the Company’s common stock,
dated as of December 3, 2004 (the “Warrants”), amended the Warrants
to (i) extend the expiration date of the Warrants from August 14, 2008 to August
15, 2008 and (ii) reduce the exercise price of the Warrants from $3.57 per share
to $2.50 per share. On August 13, 2008 the Warrantholders exercised
the warrants and the Company issued and sold 1,423,886 shares of its common
stock to the Warrantholders for cash consideration of $2.50 per share, or an
aggregate of $3,560,000.
(b) On
August 13, 2008,the Company’s Board of Directors authorized an
increase of two million shares, or approximately 11% of its outstanding shares
of common stock, to its stock buyback program which was originally authorized in
December of 2006 (see Note 5). The original program authorized the
repurchase of up to two million shares, of which 1,744,962 shares have been
repurchased and 255,038 remain available for
repurchase.
23
NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary
Statement Regarding Forward-Looking Statements
This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). The Private Securities
Litigation Reform Act of 1995 provides a “safe harbor” for forward looking
statements. Forward-looking statements are not statements of historical facts,
but rather reflect our current expectations concerning future events and
results. We use words such as “expects”, “intends”, “believes”, “may”, “will”
and “anticipates” to indicate forward-looking statements.
Factors
that may cause actual results to differ from those results expressed or implied,
include, but are not limited to, those listed under “Risk Factors” in our Annual
Reports on Form 10-K filed with the Securities and Exchange Commission (the
“SEC”); an unexpected decline in revenue and/or net income derived by the
Company’s majority-owned subsidiary, Five Star Products, Inc. (“Five Star”), due
to the loss of business from significant customers or otherwise. In addition,
Five Star is subject to the intense competition in the do-it -yourself
industry.
We
caution that these risk factors may not be exhaustive. We operate in a
continually changing business environment, and new risk factors emerge from time
to time. We cannot predict these new risk factors, nor can we assess the effect,
if any, of the new risk factors on our business or the extent to which any
factor or combination of factors may cause actual results to differ from those
expressed or implied by these forward-looking statements.
If any
one or more of these expectations and assumptions proves incorrect, actual
results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us, whether as a
result of new information, future events or otherwise. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this report.
General
Overview
The Company operates in
one segment; Five Star. The Company also owns certain other non-core
assets, including an investment in MXL Operations Inc. (“Operations”), certain
contingent stock rights in Indevus Pharmaceuticals, Inc. (Indevus) and certain
real estate in Pawling, New York and Killingly, Connecticut. The
Company monitors Indevus for progress in achieving certain milestones related to
contingent stock rights. In the year ended December 31, 2007, the
Company
sold 2,639,482 shares of Indevus stock, which represents all of the shares of
Indevus common stock held by the Company in 2007. The Company
may receive two contingent tranches of Indevus common stock, to the extent
certain milestones with respect to specific product candidates are achieved. If
each of the contingent milestones is achieved, the Company will receive
$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 (see
Notes 11 to the Consolidated Condensed Financial
Statements).
24
On June
19, 2008, pursuant to the terms of an Asset Purchase Agreement, dated as of June
16, 2008 (the “MXL Agreement”), by and among the Company, MXL Industries, Inc.,
a wholly-owned subsidiary of the Company (“the Seller”), MXL Operations, Inc.
(“Operations”), MXL Leasing, LP (“Leasing”) and MXL Realty, LP (“Realty” and,
collectively with Operations and Leasing, “the Buyers”), the Buyers purchased
substantially all the assets and assumed certain liabilities (except the
“Excluded Liabilities,” as defined in the MXL Agreement) of Seller’s optical
plastics molding and precision coating business (the “MXL
Business”). As consideration, Seller received approximately
$5,200,000 in cash, of which approximately $2,200,000 was utilized to fully pay
the bank debt relating to the MXL Business. See Note 3 to the Consolidated
Condensed Financial Statements.
The
Seller also made an aggregate capital contribution to the Buyers of $275,000,
allocated to each of Operations, Leasing and Realty in a manner so that the
Seller has a 19.9% interest in the total capital of each of Leasing and Realty
and a 40.95% interest in the total capital of Operations. Operations
has the right to issue additional shares which, if issued, would reduce Seller’s
interest in each of the Buyers on a pro rata basis to a minimum of
19.9%.
The
primary business of MXL is the manufacture of polycarbonate parts requiring
adherence to strict optical quality specifications, and the application of
abrasion and fog resistant coatings to those parts. MXL also designs
and constructs injection molds for a variety of
applications.
Five
Star Overview
Five Star
is a publicly held company that is a distributor in the United States of home
decorating, hardware, and finishing products. Five Star offers
products from leading manufacturers in the home improvement industry and
distributes those products to retail dealers, which include lumber yards, “do-it
yourself” centers, hardware stores and paint stores. Five Star has
grown to be one of the largest independent distributors in the Northeast United
States by providing a complete line of competitively priced products, timely
delivery and attractive pricing and financing terms to its
customers.
Five Star operates in the
Home Improvement market. Five Star faces intense competition from
large national distributors, smaller regional distributors, and manufacturers
that bypass the distributor and sell directly to the retail
outlet. The principal means of competition for Five Star are its
strategically placed distribution centers and its extensive inventory of
quality, name-brand products. In addition, Five Star’s customers face
stiff competition from Home Depot and Lowe’s, which purchase directly from
manufacturers. Management of Five Star believes that, the independent retailers
that are Five Star’s customers remain a viable alternative to Home Depot and
Lowe’s, due to the shopping preferences of and the retailer’s geographic
convenience for some
consumers.
25
On April
5, 2007, Five Star acquired substantially all the assets (except “Excluded
Assets” as defined) and assumed the Assumed Liabilities (as defined) of
Right-Way Dealer Warehouse, Inc. (“Right-Way”) pursuant to the terms of a
definitive asset purchase agreement, dated as of March 13, 2007 (the
“Agreement”), with Right-Way for approximately $3,200,000 in cash and the
assumption of liabilities in the approximate amount of $50,000 (the ‘Right-Way
Transaction”). Transaction costs of $200,000 were incurred by Five Star in
connection with the Right-Way Transaction. The assets consisted
primarily of approximately $1,186,000 of accounts receivable at fair value and
approximately $2,213,000 of inventory at fair value. The acquisition included
all of Right-Way’s Brooklyn Cash & Carry business and operations which sells
paint sundry and hardware supplies to local retail stores.
Upon
closing of the Right-Way Transaction, Five Star leased a warehouse at which the
Right-Way Brooklyn Cash & Carry business is conducted from an affiliate of
the principal of Right-Way, with an option to purchase the
warehouse. See Note 6 to the Consolidated Condensed Financial
Statements.
To
further expand, Five Star is considering strategies intended to grow its revenue
base in the Northeast and Mid-Atlantic States through internal initiatives and
to acquire complementary distributors outside its current geographic
area. There is no assurance that these growth plans can be executed
and, if executed, will be successful from an operational or financial
standpoint. These plans could require capital in excess of the funds
presently available to Five Star.
Management
discussion of critical accounting policies
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires us 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. Our estimates, judgments and assumptions are
continually evaluated based on available information and
experience. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those
estimates.
Certain
of our accounting policies require higher degrees of judgment than others in
their application. These include valuation of accounts receivable,
accounting for investments, and impairment of long-lived assets which are
summarized below.
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 collectability of the resulting receivable
is reasonably assured. Allowances for estimated returns and
allowances are recognized when sales are recorded.
26
Stock
based compensation
The
Company accounts for stock based compensation pursuant to Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”). Under SFAS 123R, compensation cost is recognized over the vesting period
based on the fair value of the award at the grant date.
Valuation
of accounts receivable
Provisions
for allowance for doubtful accounts are made based on historical loss experience
adjusted for specific credit risks. Measurement of such losses
requires consideration of the Company’s historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
Impairment
of long-lived tangible assets
Impairment
of long-lived tangible assets with finite lives results in a charge to
operations whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by determining the amount
by which the carrying amount of the assets exceeds the fair value of the
asset. Assets to be disposed of are reported at the lower of their
carrying amount or fair value less cost of sale.
The
measurement of the future net cash flows to be generated is subject to
management’s reasonable expectations with respect to the Company’s future
operations and future economic conditions which may affect those cash
flows.
The
Company holds the Pawling Property, which is undeveloped land in Pawling, New
York with a carrying amount of approximately $2.5, million which management
believes is less than its fair value, less cost of sale and property in East
Killingly, Connecticut with a carrying amount of approximately $0.4
million.
Accounting for
investments
The
Company’s investment in marketable securities are classified as
available-for-sale and recorded at their market value with unrealized gains and
losses recorded as a separate component of stockholders’ equity. A
decline in market value of any available-for-sale security below cost that is
deemed to be other than temporary, results in an impairment loss, which is
charged to earnings.
Determination
of whether an investment is impaired and whether an impairment is other than
temporary requires management to evaluate evidence as to whether an investment’s
carrying amount is recoverable within a reasonable period of time considering
factors which include the length of time that an investment’s market value is
below its carrying amount and the ability of the investee to sustain an earnings
capacity that would justify the carrying amount of the investment.
27
Vendor
allowances
The
Company accounts for vendor allowances under the guidance provided by EITF
Issue No. 02-16, “Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor,” and EITF Issue No.
03-10, “Application of EITF Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers.” Vendor allowances reduce the
carrying cost of inventory unless they are specifically identified as a
reimbursement for promotional programs and/or other services provided. Any
such allowances received in excess of the actual cost incurred also reduce
the carrying cost of inventory.
Income
taxes
Income
taxes are provided for based on the asset and liability method of accounting
pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes” and FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”.
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Operating
Highlights
Three
months ended June 30, 2008 compared to the three months ended June 30,
2007
For the
three months ended June 30, 2008, the Company had a loss from continuing
operations before income tax expense and minority interest of $(686,000)
compared to income from continuing operations before income tax expense and
minority interest of $16,171,000 for the three months ended June 30,
2007. The change in pre-tax income (loss) from continuing
operations is primarily the result of the following: (i) a net gain of
$17,031,000 recognized on the merger of Valera and Indevus in the three months
ended June 30, 2007 (see Note 11 to the Condensed
Consolidated Financial Statements); (ii) reduced operating income of
$852,000, for Five Star for the three months ended June 30, 2008 ; (iii) a
charge of $587,000 representing the unrealized profit which would be paid to
related parties upon sale of Indevus available for sale shares in the three
months ended June 30, 2007,and (iv) a realized loss of $316,000 on the sale of
291,964 Indevus shares in June 2007.
28
Sales
For the
three months ended June 30, 2008 sales, which are comprised solely of the sales
of Five Star, were $31,429,000, a decrease of $4,497,000, or 12.5% from
June 30, 2007 sales of $35,926,000. The decrease in sales by Five
Star for the quarter ended June 30, 2008 as compared to the prior year period
was the result of (i) reduced sales of exterior products due to (a) adverse
weather conditions in May 2008, (b) Cabot drop ship sales that occurred in the
second quarter of the 2007 fiscal year being shipped in the first quarter of
2008 due to a change in the program by Cabot and (c) overall softness in the
exterior business and (ii) reduced sales out of the Five Star’s New Jersey and
Connecticut warehouses due to an overall weakness in the economy and a weakness
in the economy in Five Star’s marketplace.
Gross
margin
Gross
margin was $5,450,000, or 17.3% of net sales, for the quarter ended June 30,
2008, as compared to $6,255,000, or 17.4% of net sales, for the quarter ended
June 30, 2007. The decrease in gross margin dollars for the quarter ended June
30, 2008 of $805,000 was the result of reduced Five Star sales for the
periods.
Selling,
general, and administrative expenses
For the
three months ended June 30, 2008, selling, general and administrative (SG&A)
expenses decreased by $16,000 from $5,820,000 for the three months ended June
30, 2007 to $5,804,000 for the three months ended June 30, 2008 due to reduced
SG&A expenses at the corporate level of $63,000, which was due to reduced
professional fees and personnel expenses, offset by increased SG&A expenses
incurred by Five Star of $47,000. The increased SG&A expenses
incurred by Five Star were primarily due to $226,000 of costs incurred related
to the tender offer announced on June 26, 2008 and commenced by NPDV on July 24,
2008 to acquire all the outstanding shares of Five Star common stock not held by
the Company or NPDV at a purchase price of $0.40 per share (the “Offer”) (see
Note 2 to the Consolidated Condensed Financial Statements) offset by reduced
sales commissions and related selling expenses of $102,000 due to reduced
sales.
Gain
on exchange of Valera for Indevus shares
For the
quarter ended June 30, 2007 the Company recognized a gain of $17,031,000
recognized as a result of the merger of Valera Pharmaceuticals, Inc. (Valera),
in which the Company had an approximately 14% interest and Indevus, in which the
Company had an approximately 3% interest. The gain includes the receipt of the
first of three contingent tranches of consideration, valued at $2,070,000
received in May 2007. The Merger Agreement between Valera and Indevus was
treated as a tax free merger under Internal Revenue Code Section
368.
29
Investment and other
income (loss), net
The
Company recognized investment and other income (loss) of $58,000 for the three
months ended June 30, 2008, compared to $(835,000) for the three months ended
June 30, 2007. Investment and other income, net includes
interest income, investment income, and recognition of a gain or loss for the
change in the fair value of the Five Star’s interest rate collar. The
change is primarily attributable to a charge of $587,000 in the second quarter
of 2007, representing the unrealized profit which would be paid to related
parties upon sale of Indevus available for sale shares in 2007 and the loss of
$236,000 on the sale of approximately 11% (291,964 shares) of the Company’s
Indevus common stock in June 2007.
Income
taxes
For the
three months ended June 30, 2008 and 2007, the Company recorded an income tax
expense of $12,000 and $700,000, respectively, which represents the Company’s
applicable federal, state and local tax expense for the periods from continuing
operations. The provision for income taxes differs from the tax
computed at the federal statutory income tax rate due primarily to recording
income tax expense on the income (loss) of Five Star, a 75% owned subsidiary, as
of June 30, 2008, which is not included in the Company’s consolidated return,
state income taxes recorded with respect to the exchange of Valera common stock
for Indevus common stock, and not recording an income tax benefit for the losses
of National Patent.
Income
tax expense of $32,000 was recorded as part of discontinued operations for the
three months ended June 30, 2008, as it relates to tax on the operations of MXL
and the gain related to its sale.
Six
months ended June 30, 2008 compared to the six months ended June 30,
2007
For the
six months ended June 30, 2008 the Company had a loss from continuing operations
before income tax expense and minority interest of $(2,198,000) compared to
income from continuing operations before income tax expense and minority
interest of $16,469,000 for the six months ended June 30, 2007. The
decrease in pre-tax income from continuing operations is primarily a result of
the following: (i) reduced operating income of $2,493,000 for Five
Star for the six months ended June 30, 2008 ; (ii) a net gain of $17,031,000
recognized on the merger of Valera and Indevus in the six months ended June 30,
2007 (see Note 11 to the Consolidated Condensed Financial
Statements); (iii) a charge of $603,000 representing the unrealized profit which
would be paid to related parties upon sale of Indevus available for sale shares
in the six months ended June 30, 2007,and (iv) a realized loss of $316,000 on
the sale of 291,964 Indevus shares in June 2007.
Five
Star’s reduced operating profit for the six months ended June 30,
2008 was primarily attributable to (i) a $1,096,000 non cash compensation
expense related to the termination of the Five Star’s agreement with
Mr. Flegel during the first six months of 2008 (see Note 13 to the Consolidated
Condensed Financial Statements), which is reflected in Charge related to
resignation of Chairman of the Board in the Consolidated Condensed Statement of
Operations, (ii) reduced gross margin due to reduced sales for the
first six months of 2008 as compared to the first six months of 2007
(iii) increased general and administrative expenses primarily due the
acquisition of Right-Way in April 2007 and expenses related to
the Offer incurred in the first six months of 2008 (see Note 2 to the
Consolidated Condensed Financial Statements), and (iv) increased delivery
expenses in the first six months of 2008 as compared to the first six months of
2007 due to increased fuel costs.
30
Sales
The
Company had sales, which are comprised solely of the sales of Five Star, of
$62,898,000 for the six months ended June 30, 2008, as compared to sales of
$65,788,000 for the six months ended June 30, 2007. The decrease in
Five Star sales for the six months ended June 30, 2008 of $2,890,000 was the
result of` reduced sales by Five Star due to an overall weakness in the economy
and the Company’s marketplace, offset by sales generated by Right-Way Brooklyn,
the Five Star’s Cash and Carry facility purchased in April 2007.
Gross
margin
Gross
margin for the six months ended June 30, 2008 was $10,626,000 or 16.9% of net
sales as compared to $10,984,000 or 16.5% of net sales for the six months ended
June 30, 2007.
The
decrease in gross margin dollars for the quarter and six months ended June 30,
2008 of $358,000 was the result of reduced Five Star sales for the period. The
increased gross margin percentage for the six months ended June 30, 2008 was
attributable to Five Star’s improved product mix.
Selling,
general, and administrative expenses
For the
six months ended June 30, 2008, selling, general and administrative expenses
increased by $1,157,000 from $10,032,000 for the six months ended June 30, 2007
to $11,189,000 for the six months ended June 30, 2008, primarily attributable to
increased SG&A expenses incurred by Five Star for the
period. Five Star had increased SG&A expenses of 888,000 for the
six months ended June 30, 2008 as compared to the six months ended June 30, 2007
due to: (i) $226,000 of costs incurred related to the Offer for the 2008 period
(see Note 2 to the Consolidated Condensed Financial Statement’s); (ii) increased
general and administrative expenses of $461,000 for the 20008 period, primarily
due to increased costs incurred due to the operation Right-Way; (iii) increased
delivery costs of $89,000 for the 2008 period due to increased fuel costs; and
(iv) a general increase in operating costs for the 2008 period. In addition,
there were increased expenses at the corporate level primarily due to equity
based compensation expense.
31
Gain
on exchange of Valera for Indevus shares
For the
six months ended June 30, 2007 the Company recognized a gain of $17,031,000
recognized as a result of the merger of Valera, in which the Company had an
approximately 14% interest and Indevus., in which the Company had an
approximately 3% interest. The gain includes the receipt of the first of three
contingent tranches of consideration, valued at $2,070,000 received in May 2007.
The Valera and Indevus merger was treated as a tax free merger under Internal
Revenue Code Section 368.
Investment
and other income (loss), net
The
Company recognized investment and other income of $151,000 for the six months
ended June 30, 2008 as compared to a loss of ($782,000) the six months ended
June 30, 2007. The change in the first six months of 2008 is attributable to a
$603,000 expense representing the unrealized profit which would be paid to
related parties upon sale of shares of common stock of Valera (Indevus)
available for sale during the six months ended June 30, 2007, and a realized
loss of $326,000 on the sale of 291,964 shares of Indevus common stock in June
2007.
Income
taxes
For the
six months ended June 30, 2008 and 2007, the Company recorded an income tax
expense of $25,000 and $1,060,000, respectively, which represents the Company’s
applicable federal, state and local tax expense for the periods from continuing
operations. The provision for income taxes differs from the tax computed
at the federal statutory income tax rate due primarily to recording income tax
expense on the income (loss) of Five Star, a 75% owned subsidiary, as of June
30, 2008which is not included in the Company’s consolidated return, state income
taxes recorded with respect to the exchange of shares of Valera common stock for
shares of Indevus common stock, and not recording an income tax benefit for the
losses of National Patent. In addition, the Company recorded a
discrete tax item during the first quarter of 2008, with respect to $704,000 of
non-cash compensation expense of Five Star, which did not result in a tax
benefit.
Income
tax expense of $33,000 was recorded as part of discontinued operations for the
six months ended June 30, 2008, as it relates to tax on the operations of MXL
and the gain related to its sale.
Financial
condition
The
increase in inventory, accounts receivables and accounts payable at June 30,
2008 as compared to December 31, 2007 are the result of seasonal
fluctuations.
32
Liquidity
and capital resources
At June
30, 2008, the Company had cash and cash equivalents totaling of $13,181,000. The
Company believes that cash, investments on hand and borrowing availability under
existing credit agreements will be sufficient to fund the Company’s working
capital requirements for at least the next twelve months. On August 13, 2008 the
Warrantholders exercised the warrants and the Company issued and sold 1,423,886
shares of its common stock to the Warrantholders for cash consideration of $2.50
per share, or an aggregate of $3,560,000 (see Note 15(a)).
For the
six months ended June 30, 2008, the Company’s working capital decreased by
$2,828,000 to $21,426,000 from $24,254,000 as of December 31, 2007.
The
decrease in cash and cash equivalents of $2,517,000 for the six months ended
June 30, 2008 as compared to December 31, 2007 resulted from net cash used in
operations of $6,970,000, due primarily to a net loss of $1,805,000, an increase
in accounts receivable of $5,233,000, an increase in inventory of $2,492,000,
partially offset by an increase in accounts payable and accrued expenses of
$638,000; net cash provided by investing activities of $2,405,000, primarily due
to net cash proceeds from the sales of certain assets of MXL (see Note 3 to the
Consolidated Condensed Financial Statements). Partially offset by purchases of
Five Star common stock for $1,523,000, which was comprised of $763,000 in open
market purchases and $1,200,000 from S. Leslie Flegel, the former Chairman of
Five Star, of which $440,000 was charged to operations (see Note 13 to the
Consolidated Condensed Financial Statements); and net cash provided by financing
activities of $2,048,000, consisting of proceeds of short term borrowings of
$5,003,000, offset by purchases of treasury stock of $1,017,000 and
repayments of long-term debt of $1,698,000. The significant changes in accounts
receivables, inventory and accounts payable is primarily due to the particulars
of Five Star’s business in the first quarter, including their trade show, spring
dating programs and increased inventory levels for the spring.
On June
27, 2008, Five Star entered into a Restated and Amended Loan and Security
Agreement (the “Amended Loan Agreement”), with Bank of America, N.A. (“Bank of
America”). The Amended Loan Agreement extends the maturity date of that
certain Loan and Security Agreement, dated as of June 20, 2003, entered into by
Five Star and Bank of America (through its predecessor Fleet Capital
Corporation), as amended (the “2003 Loan Agreement”), to June 30,
2011. The 2003 Loan Agreement, as amended by the Amended Loan
Agreement, is referred t herein as the “Loan Agreement’.
The
Amended Loan Agreement provides Five Star with a $35,000,000 revolving credit
facility (“Revolving Credit Facility”), subject to a $3,500,000 sub-limit for
letters of credit. The Revolving Credit Facility allows Five Star to
borrow up to (a) 85% of eligible receivables plus (b) the greater of (i) the
lesser of $20,000,000 or 65% (to be reduced by 1% per quarter commencing July 1,
2008) of eligible inventory, or (ii) the lesser of $20,000,000 or 85% of the
appraised net orderly liquidation value of eligible inventory minus (c) the
amount of outstanding letter of credit obligations, as those terms are defined
therein. All obligations under the Revolving Credit Facility are
secured by first priority liens on all of Five Star’s existing and future
assets. In connection with the Amended Loan Agreement, on June 27,
2008, Five Star executed the Restated and Amended Promissory Note, dated as of
June 26, 2008, payable to Bank of America in the principal amount of $35,000,000
(the “Promissory Note”). The Promissory Note restates and replaces a
certain $35,000,000 Revolving Note, dated as of June 1, 2005, made by Five Star
in favor of Bank of America. The principal amount under the
Promissory Note is due and payable on June 30, 2011.
33
Loans
made to Five Star under the Revolving Credit Facility bear interest at a per
annum rate based on the Prime Rate of Bank of America plus 0.5%, or at a per
annum rate based on LIBOR plus 200 basis points, at Five Star’s
election. The LIBOR and Prime Rate margins may be adjusted in the
event that Five Star Group achieves and maintains certain performance
benchmarks. At June 30, 2008 and December 31, 2007, $24,931,000 and $19,303,000
was outstanding under the Loan Agreement and $7,044,000 and $5,579,000 was
available to be borrowed, respectively. Substantially all of Five
Star’s assets are pledged as collateral for these borrowings. Under
the Amended 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.
In
connection with the 2003 Loan Agreement, Five Star also entered into a
derivative transaction with Bank of America. The derivative
transaction is an interest rate swap and has been designated as a cash flow
hedge. Effective June 30, 2008 through June 30, 2011, Five Star will
pay a fixed interest rate of 3.62% to Bank of America on notional principal of
$20,000,000. In return, Bank of America 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
3.62%. The fair value of the interest rate swap amounted to $65,000
at June 30, 2008 and is included in other assets in the accompanying balance
sheets.
In
connection with the March 25, 2008 resignation of Mr. Flegel as director and
Chairman of the Board of Five Star, and as a director of the Company and the
related agreement among Five Star, the Company and Mr. Flegel dated March 25,
2008 (see Note 13), Bank of America amended the covenants related to the 2003
Loan Agreement in March 2008 to exclude non-cash charges related to any equity
instruments (common stock, options and warrants) issued to any employee,
director, or consultant from the covenant calculations.
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 June 30, 2008 Five Star was in compliance with all
required covenants. The following table sets forth the significant debt
covenants at June 30, 2008:
34
|
Covenant
|
Required
|
Calculated
|
||
|
Minimum
tangible net worth
|
$7,000,000
|
$9,610,000
|
||
|
Debt
to tangible net worth
|
<
6
|
2.59
|
||
|
Fixed
charge coverage
|
>1.1
|
2.12
|
||
|
Quarterly
income (loss)
|
No
loss in consecutive quarters
|
$489,000 – first
quarter profit (*)
|
||
|
$98,000 – second
quarter profit
|
* The
Loan Agreement excludes non-cash charges related to any equity instruments
(common stock, options and warrants) issued to any employee, director, or
consultant from the covenant calculations.
Recent
accounting pronouncements
In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133”. SFAS No. 161 gives financial statement users better information about
the reporting entity's hedges by providing for qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged positions. The standard
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged,
but not required. The Company does not anticipate that the adoption of SFAS No.
161 will have a material effect on the Company’s consolidated financial
statements.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measurement fair value and
expands disclosures about fair value measurements. SFAS No. 157 clarifies that
fair value should be based on assumptions that market participants will sue when
pricing an assets or liability and establishes a fair value hierarchy of three
levels that prioritize the information used to develop those
assumptions. The provisions of SFAS No. 157 will become effective for the
Company beginning January 1, 2008. Generally, the provisions of this statement
are to be applied prospectively. The Company adopted SFAS No. 157 in the first
quarter of 2008. The adoption of SFAS No. 157 did not have a material effect on
the Company’s consolidated financial statements.
In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. This statement provides
companies with an option to report selected financial assets and liabilities at
fair value. This statement is effective for fiscal years beginning after
November 15, 2007 with early adoption permitted. SFAS No. 159 did not have any
material effect on the Company’s consolidated financial
statements.
35
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin (“ARB”) No. 51” (“SFAS 160”). SFAS 160 requires that
ownership interests in subsidiaries held by parties other than the parent, and
the amount of consolidated net income, be clearly identified, labeled, and
presented in the consolidated financial statements within equity, but separate
from the parent’s equity. It also requires once a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value. Sufficient disclosures are required to clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008, and is not expected to have a
significant impact on the Company’s results of operations, financial condition
and liquidity.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations”.
SFAS No. 141(R), replaces SFAS No. 141, “Business Combinations”, and
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree, and any
goodwill acquired in a business combination. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of a business combination. SFAS No. 141(R) is to be
applied prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. We have not yet determined the impact that the
adoption of SFAS No. 141(R) will have on its result of operations or financial
position.
Item
3. Quantitative and Qualitative Disclosure About Market
Risk
Not
required.
Item
4. Controls and Procedures
The
Company has established disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms and is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
The
Company’s principal executive officer and principal financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this quarterly report.
Based upon such evaluation, the Company’s principal executive officer and
principal financial officer have concluded that the Company’s disclosure
controls and procedures are effective as of the end of the period covered by
this quarterly report.
The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended June 30, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
36
PART
II. OTHER INFORMATION
Item
2. Unregistered Sales Of Equity Securities and Use of
Proceeds.
The
following table provides common stock repurchases made by or on behalf of the
Company during the second quarter ended June 30, 2008.
Issuer
Purchases of Equity Securities (1)
|
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
Total
Number
of
Shares
Purchased
As
Part of
Publicly
Announced
Plan
or
Program
|
Maximum
Number
of
Shares
That
May
Yet be
Purchased
Under
the Plan
or
Program
|
|
|
Beginning
|
Ending
|
||||
|
April
1, 2008
|
April
30, 2008
|
116,500
|
$2.45
|
116,500
|
255,038
|
|
May
1, 2008
|
May
31, 2008
|
255,038
|
|||
|
June
1, 2008
|
June
30, 2008
|
255,038
|
|||
|
Total
|
116,500
|
116,500
|
|||
|
|
(1)
|
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 on that date, from time to time either
in open market or privately negotiated transactions. The Company undertook
this repurchase program in an effort to increase shareholder
value.
|
37
Item 6.
Exhibits
|
2.1
|
Asset
Purchase Agreement, dated as of June 16, 2008, by and among National
Patent Development Corporation, MXL Industries, Inc., MXL Operations,
Inc., MXL Leasing, LP and MXL Realty, LP (incorporated by reference to 2.1
of the Current Report on Form 8-K filed by National Patent Development
Corporation with the Securities and Exchange Commission on June 23,
2008)
|
|
|
2.2
|
Stockholders
Agreement, dated as of June 16, 2008, by and among MXL Operations, Inc.,
MXL Industries, Inc. and the other stockholders of MXL Operations, Inc.
(incorporated by reference to 2.2 of the Current Report on Form 8-K filed
by National Patent Development Corporation with the Securities and
Exchange Commission on June 23, 2008)
|
|
|
2.3
|
Limited
Partnership Agreement of MXL Leasing, LP, dated as of June 16, 2008, by
and between MXL GP, LLC and the limited partners of MXL Leasing, LP
(incorporated by reference to 2.3 of the Current Report on Form 8-K filed
by National Patent Development Corporation with the Securities and
Exchange Commission on June 23, 2008)
|
|
|
2.4
|
Limited
Partnership Agreement of MXL Realty, LP, dated as of June 16, 2008, by and
between MXL GP, LLC and the limited partners of MXL Realty, LP
(incorporated by reference to 2.4 of the Current Report on Form 8-K filed
by National Patent Development Corporation with the Securities and
Exchange Commission on June 23, 2008)
|
|
|
2.5
|
Put
and Call Option Agreement, dated as of June 16, 2008, by and between MXL
Operations, Inc., MXL Leasing, LP, MXL Realty, LP and MXL Industries, Inc.
(incorporated by reference to 2.5 of the Current Report on Form 8-K filed
by National Patent Development Corporation with the Securities and
Exchange Commission on June 23, 2008)
|
|
|
2.6
|
Tender
Offer and Merger Agreement, dated June 26, 2008, among Five Star Products,
Inc., NPDV Acquisition Corporation and National Patent Development
Corporation (incorporated by reference to Exhibit 2.1 to the Form 8-K
filed by the registrant on June 26, 2008)
|
|
|
10.1
|
Letter
Agreement, dated June 26, 2008 among Bruce Sherman, Five Star Products,
Inc. and National Patent Development Corporation (incorporated by
reference to Exhibit 10.1 to the Form 8-K filed by the registrant on June
26, 2008)
|
|
|
10.2
|
Letter
Agreement, dated June 26, 2008 among Ronald Kampner, Five Star Products,
Inc. and National Patent Development Corporation (incorporated by
reference to Exhibit 10.2 to the Form 8-K filed by the registrant on June
26, 2008)
|
38
|
10.3
|
Letter
Agreement, dated June 26, 2008 among Charles Dawson, Five Star Products,
Inc. and National Patent Development Corporation (incorporated by
reference to Exhibit 10.3 to the Form 8-K filed by the registrant on June
26, 2008)
|
|
|
10.4
|
Letter
Agreement, dated June 26, 2008 among Joseph Leven, Five Star Products,
Inc. and National Patent Development Corporation (incorporated by
reference to Exhibit 10.4 to the Form 8-K filed by the registrant on June
26, 2008)
|
|
|
10.5
|
Letter
Agreement, dated June 26, 2008 among Ira Sobotko, Five Star Products, Inc.
and National Patent Development Corporation (incorporated by reference to
Exhibit 10.5 to the Form 8-K filed by the registrant on June 26,
2008)
|
|
|
10.6
|
Letter
Agreement, dated June 26, 2008 among Mr. John C. Belknap, Five Star
Products, Inc. and National Patent Development Corporation (incorporated
by reference to Exhibit 10.6 to the Form 8-K filed by the registrant on
June 26, 2008)
|
|
|
31.1
|
*
|
Certification
of principal executive officer of the registrant,
pursuant to Securities Exchange Act Rule 13a-14(a)
|
|
31.2
|
*
|
Certification
of principal financial officer of the registrant,
pursuant to Securities Exchange Act Rule 13a-14(a)
|
|
32.1
|
*
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002, signed by the principal executive officer
of the registrant
and the principal financial officer of the registrant
|
______________________
*Filed
herewith
39
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, 2008
|
/s/ HARVEY
P. EISEN
|
||
|
Name:
Harvey P.Eisen
|
|||
|
Title:
Chairman of the Board and Chief
Executive
Officer
|
|||
|
Date: August
14, 2008
|
/s/ IRA
J. SOBOTKO
|
||
|
Name:
Ira J. Sobotko
|
|||
|
Title:
Vice President, Chief Financial
Officer
|
|||
40