Wright Investors Service Holdings, Inc. - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ________ to _______
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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(IRS
Employer Identification Number)
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903
Murray Road, PO Box 1960,
East Hanover, NJ 07936
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(Address
of Principal Executive Offices, including Zip Code)
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(973)
428-4600
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, $0.01 Par Value
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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):
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Large
accelerated filer
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o
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Accelerated
filer
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o
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Non-accelerated
filer
(Do
not check if a smaller reporting company)
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o
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Smaller
reporting company
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x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes x No o
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the price at which the common stock
was last sold, or the average bid and asked price of such common stock, as of
the last business day of the registrant’s most recently completed second
quarter, is $22,817,000.
As of
March 13, 2010, 17,565,508 shares of the registrant’s common stock were
outstanding.
Portions
of the registrant’s definitive Proxy Statement for its 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
report.
TABLE
OF CONTENTS
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Page
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PART
I
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2
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5
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9
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9
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9
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9
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PART
II
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9
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10
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10
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19
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20
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47
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47
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48
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PART
III
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48
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48
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49
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PART
IV
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51
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52
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i
Cautionary
Statement Regarding Forward-Looking Statements
This
Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), 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. The words
“may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,”
“could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,”
as well as other similar words and expressions of the future, are intended to
identify forward-looking statements.
These
forward-looking statements generally relate to our plans, objectives and
expectations for future events and include statements about our expectations,
beliefs, plans, objectives, intentions, assumptions and other statements that
are not historical facts. These statements are based upon our
opinions and estimates as of the date they are made. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, such forward-looking statements are subject to known and unknown
risks and uncertainties that may be beyond our control, which could cause actual
results, performance and achievements to differ materially from results,
performance and achievements projected, expected, expressed or implied by the
forward-looking statements. 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. You are cautioned not to unduly
rely on such forward-looking statements when evaluating the information
presented in this report.
Factors
that may cause actual results to differ from historical results or those results
expressed or implied, include, but are not limited to, those listed below under
Item 1A. “Risk Factors”, which include, without limitation, the risk
that:
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if we do not develop or acquire sufficient
interests in one or more operating businesses by mid-January 2011,
we may be required to register under the Investment Company Act of 1940,
as amended (the “Investment Company
Act”),
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any
such required Investment Company Act registration could make it
impractical for us to continue our business as contemplated and could have
a material adverse effect on our business,
and
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our
current status as a “shell company” (as defined in Exchange Act Rule
12b-2) may make investments in our securities less attractive to
investors.
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If these
or other significant risks and uncertainties occur, or if our estimates or
underlying assumptions prove inaccurate, actual results could differ
materially. You are urged to consider all such risks and
uncertainties. In light of the uncertainty inherent in such forward-looking
statements, you should not consider their inclusion to be a representation that
such forward-looking matters will be achieved.
Additional
information concerning the factors that could cause actual results to differ
materially from those in the forward-looking statements is contained in Item 1.
“Business”, Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, and elsewhere in this Annual Report on Form 10-K and
in our other filings with the Securities and Exchange Commission (the
“SEC”). We undertake no obligation to publicly revise any
forward-looking statements or cautionary factors, except as required by
law.
1
PART
I
General
Development of Business
National
Patent Development Corporation (the “Company”, “we” or “us”) was incorporated on
March 10, 1998 as a wholly-owned subsidiary of GP Strategies Corporation (“GP
Strategies”) and in November 2004, the Company’s common stock was spun-off to
holders of record of GP Strategies common stock and GP Strategies Class B
capital stock. The Company common stock is quoted on the OTC Bulletin
Board and is traded under the symbol “NPDV.OB”.
Historically,
the Company owned a home improvement distribution business through its then
wholly-owned subsidiary Five Star Products, Inc. (“Five Star Products”) and
approximately 1,000 acres of undeveloped real property located in Pawling, New
York. The Company also owned, and continues to own, certain
non-strategic assets, primarily consisting of certain real estate, an investment
in the optical plastics molding and precision coating businesses of MXL
Industries, and contingent rights in products under development by Endo
Pharmaceuticals, Inc. (each as described herein), with a substantial portion of
its assets consisting of cash and cash equivalents.
On
January 15, 2010, we completed the sale (the “Five Star Sale”) to
The Merit Group, Inc. (“Merit”) of all of the issued and outstanding
stock (the “Five Star Stock”) of our wholly-owned subsidiary, Five Star
Products, the holding company and sole stockholder of Five Star Group, Inc.
(“Five Star Group”), for cash pursuant to the terms and subject to the
conditions of the Stock Purchase Agreement between the Company and Merit, dated
as of November 24, 2009 (the “Five Star Stock Purchase
Agreement”). As used herein, references to “Five Star” refer to Five
Star Products or Five Star Group, or both, as the context requires.
On
October 20, 2009, NPDC Holdings, Inc., which was then a wholly-owned subsidiary
of the Company, closed a transaction with respect to the sale of approximately
1,000 acres of real property located in the Town of Pawling, County of Dutchess,
New York, to Little Whaley Holdings, LLC, a New York limited liability company,
for a purchase price of $12,500,000 in cash. We realized a pre tax gain of
approximately $9,600,000 on such sale.
On June
26, 2008, pursuant to the terms of a tender offer and merger agreement (the
“Tender Offer Agreement”), among the Company, Five Star and NPDV Acquisition
Corp., a newly-formed wholly owned subsidiary of the Company (“NPDV”), 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, net to the seller in cash, without interest thereon and less any required
withholding taxes. The tender offer (the “Tender Offer”) closed on
August 26, 2008, and on August 28, 2008, NPDV merged with and into Five Star,
with Five Star continuing as the surviving corporation, wholly-owned by the
Company (the “NPDV-Five Star Merger”).
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, MXL Operations, Inc. (“MXL
Operations”), MXL Leasing, LP (“MXL Leasing”) and MXL Realty, LP (“MXL Realty”
and, collectively with MXL Operations and MXL Leasing, the “MXL Buyers”), the
MXL Buyers purchased substantially all the assets and assumed certain
liabilities of the optical plastics molding and precision coating businesses of
MXL Industries (the “MXL Business”). As consideration, MXL Industries
received approximately $5,200,000 in cash, of which approximately $2,200,000 was
utilized to fully pay bank debt of MXL Industries. The sale resulted
in a gain of $87,000, net of $143,000 of related expenses. MXL
Industries also made an aggregate investment in the MXL Buyers of $275,000, so
that the Company has a 19.9% interest in MXL Operations.
2
Nature
of Our Business Following the Five Star Sale
Upon the
consummation of the Five Star Sale, we became a “shell company”, as defined in
Rule 12b-2 of the Exchange Act. Because we are a shell company, our
stockholders are unable to utilize Rule 144 of the Securities Act (“Rule 144”)
to sell “restricted stock” as defined in Rule 144 or to otherwise use Rule 144
to sell our securities, and we are ineligible to utilize registration statements
on Form S-3 or Form S-8 for so long as we remain a shell company and for 12
months thereafter. As a consequence, among other things, the
offering, issuance and sale of our securities is likely to be more expensive and
time consuming and may make our securities less attractive to
investors. See “Item 1A. Risk Factors – As a result of the sale of
Five Star, we are a shell company under the federal securities
laws”.
We are
evaluating and exploring available strategic options for the investment of the
Company’s cash and cash equivalent assets in one or more operating
businesses. While we have focused our development or acquisition
efforts on sectors in which our management has expertise, we do not wish to
limit ourselves to, or to foreclose any opportunities in, any particular
industry or sector. The goal of our
investment strategy is to develop or acquire businesses in order to
generate value for our stockholders. Our Board of Directors has
resolved to develop or acquire interests in one or
more operating businesses such that by mid-January 2011, we are primarily
engaged in a business other than investing, reinvesting, owning, holding or
trading in securities for purposes of the Investment Company
Act. Until such time as the liquid assets of the Company are so
deployed into operating businesses, we intend to continue to invest such assets
in high-grade, short-term investments (such as cash and cash equivalents)
consistent with the preservation of principal, maintenance of liquidity and
avoidance of speculation.
Although
our Board of Directors believes that we are not engaged primarily in the
business of investing, reinvesting, or trading in securities, and we do not hold
ourselves out as being primarily engaged in those activities, once the closing
of the Five Star Sale occurred, we appeared to come within the technical
definition of an “investment company” under section 3(a)(1)(C) of the Investment
Company Act. We have operated on the assumption, therefore, that we
fall within the scope of section 3(a)(1)(C) because the value of our investment
securities (as defined in the Investment Company Act) is more than 40% of our
total assets (exclusive of government securities and cash and certain cash
equivalents). Under the Investment Company Act, if we do not develop
or acquire sufficient interests in one or more
operating businesses by mid-January 2011, we may be required to register
under the Investment Company Act.
Endo
Pharmaceuticals
Endo
Pharmaceuticals Holding Inc. (“Endo”) is a specialty pharmaceutical company
engaged in the research, development, sale and marketing of branded and generic
prescription pharmaceuticals used to treat and manage pain, overactive bladder,
prostate cancer and the early onset of puberty in children, or central
precocious puberty.
Effective
April 18, 2007 (the “Indevus 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 Pharmaceuticals, Inc. (“Indevus”), a biopharmaceutical
company engaging in the acquisition, development, and commercialization of
products to treat urological, gynecological, and men’s health
conditions. The transaction was effected pursuant to the terms and
conditions of an Agreement and Plan of Merger, dated as of December 11, 2006
(the “Valera Merger Agreement”). As a result of the transaction, the 2,070,670
shares of Valera common stock held by the Company immediately preceding the
Indevus Effective Time were converted into an aggregate of 2,347,518 shares of
Indevus common stock as of the Indevus Effective Time. These shares
of Indevus common stock were sold by the Company in 2007.
3
Following
the Indevus Effective Time and prior to March 23, 2009, the Company was entitled
to two additional contingent tranches of shares of Indevus common stock (the
“Contingent Rights”), to the extent of the achievement of certain milestones
with respect to specific product candidates, namely FDA approval of certain drug
applications (collectively, the “Drug Applications”). If each of the contingent
milestones were to have been achieved, the Company would have received up to
$5,176,675 worth of Indevus common stock on the date the milestone was met, at
which date additional gain would have been recognized.
On March
23, 2009, Indevus filed a Current Report on Form 8-K with the SEC announcing the
completion of an Agreement and Plan of Merger with Endo Pharmaceuticals Holdings
Inc., a Delaware corporation (“Endo”), and BTB Purchaser Inc., a Delaware
corporation and wholly-owned subsidiary of Endo, pursuant to which Endo acquired
all of the issued and outstanding shares of the common stock, par value $0.001
per share, of Indevus (the “Endo Merger”). As a part of the Endo
Merger, the Contingent Rights were converted into the right to receive a cash
payment contingent upon FDA approval of the Drug Applications. The
Company retains rights to receive certain cash payments based on FDA approval of
certain drug applications. Specifically, the Company has contingent
rights to receive from Endo the following cash payments: (i) upon FDA approval
of the uteral stent drug application (the “Uteral Stent”) on or before specified
dates in 2012 - between $2,685,000 and $2,327,000, depending upon the terms
contained in the FDA approval and (ii) upon FDA approval of the VP003
(Octreotide implant) drug application (“VP003”) on or before specified dates in
2012 - between $4,028,000 and $3,491,000, depending upon the terms contained in
the FDA approval. In February
2010, Endo recorded a non-cash impairment charge due to heightened
regulatory uncertainties related to their Aveed TM product, and reduced the
corresponding contingent payment due to former Indevus shareholders due to the
decreased probability that they will be obligated to make the contingent
consideration payments related to the Uteral Stent.
Two
parties related to the Company at the time of the original transaction in which
the Company received the Contingent Rights, Bedford Oak Partners (which was at
the time and is now a related party) and Mr. Jerome I. Feldman (who was then an
officer of the Company and is no longer a related party), received an aggregate
of 50% of the 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 the future
right to participate in an aggregate of 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. As a result of the consummation of the Endo Merger
Agreement and the conversion of the Contingent Rights described above, the two
parties would receive the following portions of the Company’s cash payments set
forth above: (i) upon FDA approval of the uteral stent, between $262,000 and
$227,000, and (ii) upon FDA approval of VP003 (Octreotide implant), between
$393,000 and $341,000.
4
MXL
Operations
The
Company operated a molder and precision coater of optical plastics business
through its wholly-owned subsidiary MXL Industries until June 19, 2008, when MXL
Industries disposed of substantially all of its assets and transferred certain
liabilities (see Note 2 to the Consolidated Financial Statements) and on the
same date the Company purchased an interest of 19.9% in the business that was
sold. The disposed operations specialize in manufacturing polycarbonate
parts requiring adherence to strict optical quality specifications, and in the
application of abrasion and fog resistant coatings to those parts. Polycarbonate
is the most impact resistant plastic utilized in optical quality molded parts.
Products include shields, face masks, security domes, and non-optical plastic
products, produced for over 50 clients in the safety, recreation, security, and
military industries.
Connecticut
Property
The
Company has interests in land and certain flowage rights in undeveloped property
in Killingly, Connecticut with a carrying value of approximately $355,000 which
is reflected in the consolidated balance sheets and, which management believes
is less than fair value.
Employees
The
Company employed a total of 198 employees as of December 31, 2009, of which 194
were full-time employees. As of February 1, 2010, which was
subsequent to the closing of the Five Star Sale, the Company employed a total of
four employees, of which three were full-time employees.
Risks
Related to our Business
If
we do not develop or acquire sufficient interests
in one or more operating businesses by mid-January 2011, we may be
required to register under the Investment Company Act.
Although
our Board of Directors believes that we are not engaged primarily in the
business of investing, reinvesting, or trading in securities, and we do not hold
ourselves out as being primarily engaged in those activities, we appear to fall
within the scope of section 3(a)(1)(C) of the Investment Company Act because the
value of our investment securities (as defined in the Investment Company Act) is
more than 40% of our total assets (exclusive of government securities and cash
and certain cash equivalents).
A company
that falls within the scope of section 3(a)(1)(C) of the Investment Company Act
can avoid being regulated as an investment company if it can rely on certain of
the exclusions under the Investment Company Act. One such exclusion
that management believes applies is Rule 3a-2 under the Investment Company Act
and similar SEC principles and guidance, which allow a 3(a)(1)(C) investment
company (as a “transient investment company”) a grace period of one year from
the date of classification (in our case, the date of stockholder approval of the
sale, which was January 14, 2010), to avoid registration under the Investment
Company Act so long as it does not intend to engage primarily in the business of
investing, reinvesting, owning, holding or trading in securities.
As a
“transient investment company”, our Board of Directors has resolved and
determined that we not engage in the business of investing, reinvesting, owning,
holding or trading in securities. Instead, the Board has directed
that we seek to develop or acquire interests in
one or more operating businesses such that by mid-January 2011, we are
primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities for purposes of the Investment Company
Act. We cannot assure that we will successfully develop, or identify
a suitable acquisition opportunity of, an operating business or businesses, or
that if we do develop such a business or businesses or identify such an
opportunity, any such acquisition will close on a timely basis, or at
all. There can be no assurance that we will be able to complete such
development or acquisition by the applicable deadline, or at all.
5
If
we were required to register as an “investment company” under the Investment
Company Act, applicable restrictions could make it impractical for us to
continue its business as contemplated and could have a material adverse effect
on our business.
The
Investment Company Act and the rules thereunder contain detailed requirements
for the organization and operation of investment companies. If we
were required to register under the Investment Company Act, applicable
restrictions and other requirements could make it impractical for us to continue
its business as contemplated and could have a material adverse effect on our
business. In the event that we were to be required to register as an
investment company under the Investment Company Act, we would be forced to
comply with substantive requirements under the Act, including:
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limitations
on our ability to borrow;
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limitations
on our capital structure;
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limitations
on the issuance of debt and equity
securities,
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restrictions
on acquisitions of interests in partner
companies;
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prohibitions
on transactions with affiliates;
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prohibitions
on the issuance of equity-based compensation and other limitations on our
ability to compensate key
employees;
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certain
governance requirements;
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restrictions
on specific investments; and
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reporting,
record-keeping, voting and proxy disclosure
requirements.
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In the
event that we were required to register under the Investment Company Act,
compliance costs and burdens upon us may increase and the additional
requirements may constrain our ability to conduct our business, which may
adversely affect our results of operations or financial condition.
As a result of the sale of Five Star, we are a shell
company under the federal securities laws.
Upon the
sale of Five Star, we have no or nominal operations. Pursuant to Rule 405 of the
Securities Act and Exchange Act Rule 12b-2, a shell company is defined as a
registrant that has no or nominal operations, and either:
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no
or nominal assets;
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assets
consisting solely of cash and cash equivalents;
or
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assets
consisting of any amount of cash and cash equivalents and nominal other
assets.
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6
Following
the Five Star Sale, our consolidated balance sheet has consisted primarily of
cash and cash equivalents. Accordingly, we are a shell company. Applicable
securities rules prohibit shell companies from using a Form S-8 registration
statement to register securities pursuant to employee compensation plans and
from utilizing Form S-3 for the registration of securities for so long as we are
a shell company and for 12 months thereafter.
Additionally,
Form 8-K requires shell companies to provide more detailed disclosure upon
completion of a transaction that causes it to cease being a shell company. To
the extent that we acquire a business in the future, we must file a current
report on Form 8-K containing the financial and other information required in a
registration statement on Form 10 within four business days following completion
of such a transaction.
To assist
the SEC in the identification of shell companies, we are also required to check
a box on our quarterly reports on Form 10-Q and our annual reports on Form 10-K
that identifies us as a shell company. To the extent that we are required to
comply with additional disclosure requirements because we are a shell company,
we may be delayed in executing any mergers or acquiring other assets that would
cause us to cease being a shell company. In addition, under Rule 144 of the
Securities Act, a holder of restricted securities of a “shell company” is not
allowed to resell securities of the company in reliance upon Rule 144 for so
long as the company is a shell company and for 12 months
thereafter.
Preclusion
from any prospective purchase using the exemptions from registration afforded by
Rule 144 may make it more difficult for us to sell equity securities in the
future and the inability to utilize registration statements on Forms S-8 and S-3
is likely to increase our cost to register securities in the
future. Additionally, the loss of the use of Rule 144 and Forms S-3
and S-8 may make investments in our securities less attractive to investors and
may make the offering and sale of our securities to employees, directors and
others under compensatory arrangements more expensive and less attractive to
recipients.
Until
we select a particular industry or target business with which to complete a
business combination, you will be unable to ascertain the merits or risks of the
industry or business in which we may ultimately operate.
We intend
to develop or acquire interests in one or more
operating businesses, such that we become primarily engaged in a business
other than investing, reinvesting, owning, holding or trading in securities for
purposes of the Investment Company Act. While we have focused our
development or acquisition efforts on sectors in which our management has
expertise, we do not wish to limit ourselves to, or to foreclose any
opportunities in, any particular industry or sector. The goal of our investment strategy is to develop or
acquire businesses in order to generate value for our
stockholders. Accordingly, there is no
current basis for you to evaluate the possible merits or risks of the particular
industry in which we may ultimately operate or the target business or businesses
with which we may ultimately enter a business combination. Although
we will evaluate the risks inherent in a particular target business, we cannot
assure you that all of the significant risks present in that target business
will be properly assessed. Even if we properly assess those risks, some of them
may be outside of our control or ability to affect. Depending upon
the form of such transaction, stockholders may not be entitled to vote on the
transaction.
Resources
will be expended in researching potential acquisitions that might not be
consummated.
The
investigation of target businesses and the negotiation, drafting and execution
of relevant agreements, disclosure documents, and other instruments will require
substantial management time and attention in addition to costs for accountants,
attorneys and others. If a decision is made not to complete a specific business
combination, the costs incurred up to that point for the proposed transaction
likely would not be recoverable. Furthermore, even if an agreement is reached
relating to a specific target business, we may fail to consummate the business
combination for any number of reasons including those beyond our
control.
7
There
can be no guarantee that we will quickly identify a potential target business or
complete a business combination.
The
process to identify potential acquisition targets, to investigate and evaluate
the future business prospects thereof and to negotiate an acceptable purchase
agreement with one or more target companies can be time consuming and costly. We
may incur operating losses, resulting from payroll, rent and other overhead and
professional fees, while we are searching for a business to develop or
acquire.
We
may be treated as a personal holding company or subject to the accumulated
earnings tax, which could adversely affect our operating results and financial
condition.
We may
realize substantial “personal holding company income” within the meaning of
Section 543 of the Internal Revenue Code of 1986, as amended, from investment of
the proceeds of the Five Star Sale. This could be significant if it
were determined that we were a “personal holding company” for federal income tax
purposes. We have not determined whether our stock ownership could
make us a personal holding company within the meaning of these
rules.
In the
event that we or any of our subsidiaries were determined to be a personal
holding company, we or the subsidiary could be liable for additional taxes, and
possibly interest and penalties, based on the undistributed personal holding
company income and the tax rate in effect at that time, unless we decide to
fully abate the tax by the payment of a dividend (such a dividend would not
eliminate interest and penalties). We are unable to quantify the
amount of tax that we could be liable for or the dividend that we could elect to
pay for future periods, because such amounts, if any, would be based upon the
application of the personal holding company income rules to the results of our
future operations.
If we or
any of our subsidiaries were to pay personal holding company tax (and possibly
interest and penalties), this could significantly increase our consolidated tax
expense and adversely affect our operating results. In addition, if tax rates
increase in the future, the amount of any personal holding company tax we or any
of our subsidiaries may have to pay could increase significantly, further
impairing our operating results. In that regard, the personal holding company
tax rate, which is currently 15%, is scheduled to return to ordinary income tax
rates for tax years beginning on or after January 1, 2011. If we were deemed to
be a personal holding company and, instead of paying the personal holding
company tax, we elected to pay a dividend to our stockholders in an amount equal
to all or a significant part of our undistributed personal holding company
income, we could consume a significant amount of cash resources and be unable to
retain or generate working capital. This could adversely affect our financial
condition. As a result, if we pay such a dividend, we may decide to seek
additional financing, although that financing might not be available to us when
and as required on commercially reasonable terms.
If we or
our subsidiaries were determined not to be personal holding companies, we could
still possibly be subject to the accumulated earnings tax if we were found to be
a “mere holding company” or to have accumulated earnings beyond the reasonable
needs of the business. The accumulated earnings tax rate is currently
15% but is scheduled to increase to ordinary income tax rates in taxable years
beginning on or after January 1, 2011. As discussed above with
respect to the personal holding company tax, the amount of any accumulated
earnings tax we might have to pay could impair our operating results or, if we
declared dividends in amounts sufficient to avoid the accumulated earnings tax,
deplete our cash resources.
8
Following
the Five Star Sale, we have no revenue from operations; therefore, our existing
assets may be diminished and ultimately depleted by our corporate overhead and
other expenses.
Following
the Five Star Sale, we have no revenue from operations and have been
experiencing significant negative cash flow. Expenditures related to corporate
overhead generated and other related items are expensed. Until such
time as we develop or acquire an operating business or businesses that generate
revenue, we will continue to deplete our existing assets.
Risks
Related to Our Stock
We
have agreed to restrictions and adopted policies that could have possible
anti-takeover effects and reduce the value of our stock.
Several
provisions of our Certificate of Incorporation and Bylaws could deter or delay
unsolicited changes in control of the Company. These include limiting the
stockholders’ powers to amend the Bylaws or remove directors, and prohibiting
the stockholders from increasing the size of the Board of Directors or acting by
written consent instead of at a stockholders’ meeting. Our Board of Directors
has the authority, without further action by the stockholders to fix the rights
and preferences of and issue preferred stock. These provisions and others that
could be adopted in the future could deter unsolicited takeovers or delay or
prevent changes in control or management of the Company including transactions
in which stockholders might otherwise receive a premium for their shares over
then current market prices. These provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests.
Not
applicable.
None.
None.
PART
II
The
following table presents the high and low bid and asked prices for the Company’s
common stock for 2009 and 2008. The Company’s common stock, $0.01 par
value, is quoted on the OTC Bulletin Board. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
9
|
Quarter
|
High
|
Low
|
|||
|
2009
|
First
|
$1.30 | $1.10 | ||
|
Second
|
$1.38 | $0.99 | |||
|
Third
|
$1.58 | $1.10 | |||
|
Fourth
|
$1.69 | $1.32 | |||
|
2008
|
First
|
$2.38 | $2.33 | ||
|
Second
|
$2.28 | $2.25 | |||
|
Third
|
$2.12 | $2.05 | |||
|
Fourth
|
$1.44 | $1.35 |
The
number of stockholders of record of the Company’s common stock as of March 19,
2010 was 1,032 and the closing price on the OTC Bulletin Board of such common
stock on that date was $1.21 per share.
The
Company did not declare or pay any cash dividends on its common stock in 2009 or
2008. The Company currently intends to retain future earnings to finance the
growth and development of its business and does not intend to pay cash dividends
in the foreseeable future.
Issuer
Purchases of Equity Securities
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 stockholder value.
On August
13, 2008, the Company’s Board of Directors authorized an increase of 2,000,000
shares, or approximately 11% of the Company’s then-outstanding shares of common
stock, to the Company’s stock repurchase program originally adopted in December
2006. Immediately prior to this increase, a total of 255,038 shares
remained available for repurchase under this repurchase program.
There
were no common stock repurchases made by or on behalf of the Company during the
fourth quarter ended December 31, 2009. At December 31, 2009 a total of
2,208,679 shares remained available for purchase.
Not
required.
General
Overview
On
January 15, 2010, we completed the Five Star Sale, in which we sold to Merit all
of the issued and outstanding shares of Five Star for cash pursuant to the terms
and subject to the conditions of the Five Star Stock Purchase Agreement (see
Note 3 to the Consolidated Financial Statements). See “Item 1.
Business – General Development of Business”.
Five
Star’s results of operations for 2009 have been accounted for as a discontinued
operations in the consolidated statements of operations and its 2008 results of
operations have been reclassified as discontinued operations to be consistent
with the current year presentation (see Note 2 to the Consolidated Financial
Statements). In addition, discontinued operations in 2008 include the result of
MXL Industries, Inc. until substantially all of whose operating assets were sold
on June 19, 2008 (see Note 6 to the Consolidated Financial Statements). Assets
and liabilities of Five Star have been classified as held for sale in the
consolidated balance sheet at December 31, 2009 and the 2008 consolidated
balance sheet has been reclassified to present the assets and liabilities of
Five Star separately as held for sale.
10
Five
Star Sale
The Five
Star Stock Purchase Agreement provided for an aggregate purchase price (the
“Purchase Price”) for the Five Star Stock of $33,124,000, subject to
certain adjustments to reflect (i)(A) dollar for dollar decreases in the event
that Five Star’s outstanding revolving indebtedness under its loan agreement
with Bank of America (the “Revolving Indebtedness”) decreased from the amount
outstanding at March 31, 2009 compared to the amount outstanding on the date of
the closing of the Five Star Sale (the “Closing Date”) or increases if such
indebtedness increased (excluding increases or decreases due to income tax
payments or refunds) (the “Cash Flow Adjustment”) and (B) increases dollar for
dollar if Five Star had positive net results from March 31, 2009 to the Closing
Date, or decreases if it had negative net results (the “Net Results Adjustment”)
and (ii) a potential downward adjustment based on the value of certain
designated inventory held by Five Star Group, less the value received for such
inventory after the Closing Date (the “Inventory Adjustment”), to the
extent such Inventory Adjustment post-closing exceeds $400,000 but is equal to
or less than $1,000,000.
At the
closing of the Five Star Sale (the “Five Star Closing”), (i) the Cash Flow
Adjustment reduced the Purchase Price by $5,611,000, (ii) $15,173,000 of
the Purchase Price was used to repay the Revolving Indebtedness (including
related fees and expenses); (iii) $900,000 of the Purchase Price was placed in
escrow - $300,000 of which is held by the Escrow Agent to provide for indemnity
payments which we may be required to pay to Merit as described below (the
“Indemnity Escrow Deposit”) and $600,000 of which is held by the Escrow Agent to
provide for payment of Inventory Adjustments (the “Inventory Escrow Deposit”);
and (iv) $970,000 of the Purchase Price was retained by Merit to fund severance
payments to employees of Five Star. $10,465,000 of the Purchase Price
was remitted to the Company at the Five Star Closing.
The
Purchase Price is subject to post-closing adjustments as a result of the Net
Results Adjustment and the Inventory Adjustment. In February, 2010, the Company
notified Merit that the Purchase Price should be increased by approximately
$188,000 based on the Company’s calculation of the Net Results Adjustment.
On March 1, 2010, Merit notified the Company that based on their calculation of
the Net Results Adjustment, the Purchase Price should be reduced by
approximately $3,400,000. The Company does not agree with Merit’s
calculation. Pursuant to the Stock Purchase Agreement, the dispute may be
submitted to binding arbitration by either Merit or the Company. The
Company believes that its position in the dispute with Merit is meritorious, but
is currently unable to determine the outcome of any resolution of this
matter. In addition, the Company believes that the estimated range of net
proceeds of the Five Star Sale previously disclosed by the Company in its
definitive proxy statement relating to the Five Star Sale filed with the SEC on
December 15, 2009 ($8.5 million to $9.5 million) will not be materially affected
by the outcome of this disagreement.
The
proceeds of the Five Star Sale will also be reduced by transaction costs, taxes,
one half of the rent and other sums, if any, due under the warehouse lease for
Five Star’s Connecticut location from the later of March 31, 2010 or when Five
Star ceases to use the warehouse, through September 30, 2010, if any, costs
relating to the satisfaction of certain obligations under state environmental
laws in New Jersey and Connecticut, if any, as well as the post-closing
adjustments due Merit pursuant to the Five Star Stock Purchase Agreement and the
payment of amounts to indemnify Merit as provided in the Five Star Stock
Purchase Agreement, if any.
11
Upon the
consummation of the Five Star Sale, we became a “shell company”, as defined in
Rule 12b-2 of the Exchange Act. Because we are a shell company, our
stockholders are unable to utilize Rule 144 to sell “restricted stock” as
defined in Rule 144 or to otherwise use Rule 144 to sell our securities, and we
are ineligible to utilize registration statements on Form S-3 or Form S-8 for so
long as we remain a shell company and for 12 months thereafter. As a
consequence, among other things, the offering, issuance and sale of our
securities is likely to be more expensive and time consuming and may make our
securities less attractive to investors. See “Item 1. Business –
Nature of Our Business Following the Five Star Sale”, and “Item 1A. Risk Factors
– As a result of the sale of Five Star, we are a shell company under the federal
securities laws”.
Our Board
of Directors is considering strategic uses for the Five Star Sale proceeds
including, without limitation, using such funds, together with other funds of
the Company, to develop or acquire interests in one or more operating
businesses. While we have focused our development or acquisition
efforts on sectors in which our management has expertise, we do not wish to
limit ourselves to, or to foreclose any opportunities in, any particular
industry or sector. Prior to this use, the Five Star Sale proceeds
have been, and we anticipate will continue to be, invested in high-grade,
short-term investments (such as cash and cash equivalents) consistent with the
preservation of principal, maintenance of liquidity and avoidance of
speculation, until such time as we need to utilize such funds, or any portion
thereof, for the purposes described above. We have not distributed,
and do not anticipate distributing, the proceeds of the Five Star Sale to our
stockholders.
Although
our Board of Directors believes that we are not engaged primarily in the
business of investing, reinvesting, or trading in securities, and we do not hold
ourselves out as being primarily engaged in those activities, once the closing
of the Five Star Sale occurred we appeared to come within the technical
definition of an “investment company” under section 3(a)(1)(C) of the Investment
Company Act. We have operated on the assumption, therefore, that we
fall within the scope of section 3(a)(1)(C) because the value of our investment
securities (as defined in the Investment Company Act) is more than 40% of our
total assets (exclusive of government securities and cash and certain cash
equivalents). Under the Investment Company Act, if we do not develop
or acquire sufficient interests in one or more
operating businesses by mid-January 2011, we may be required to register
under the Investment Company Act. See “Item 1A. Risk Factors - If we
do not develop or acquire sufficient interests in one or more operating
businesses by mid-January 2011, we may be required to register under the
Investment Company Act.”
An
investment company that falls within the scope of section 3(a)(1)(C) of the
Investment Company Act can avoid being regulated as an investment company if it
can rely on certain of the exclusions under the Investment Company
Act. One such exclusion that management believes applies is Rule 3a-2
under the Investment Company Act and similar SEC principles and guidance, which
allow a 3(a)(1)(C) investment company (as a “transient investment company”) a
grace period of one year from the date of classification (in our case, the date
of stockholder approval of the Five Star Sale, which was January 14, 2010), to
avoid registration under the Investment Company Act so long as it does not
intend to engage primarily in the business of investing, reinvesting, owning,
holding or trading in securities.
As a
“transient investment company” our Board of Directors has resolved and
determined that we not engage in the business of investing, reinvesting, owning,
holding or trading in securities. Instead, the Board has directed
that we seek to develop or acquire interests in
one or more operating businesses such that by mid-January 2011 we are
primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities for purposes of the Investment Company
Act. There can be no assurance that we will be able to complete such
acquisitions by the applicable deadline.
12
We are
evaluating and exploring available strategic options for the investment of the
Company’s cash and cash equivalent assets in one or more operating
business. While we have focused our development or acquisition
efforts on sectors in which our management has expertise, we do not wish to
limit ourselves to, or to foreclose any opportunities in, any particular
industry or sector. The goal of our
investment strategy is to develop or acquire businesses in order to
generate value for our stockholders. Our Board of Directors has
resolved to develop or acquire interests in one or
more operating businesses such that by mid-January 2011, we are primarily
engaged in a business other than investing, reinvesting, owning, holding or
trading in securities for purposes of the Investment Company
Act. Until such time as the liquid assets of the Company are so
deployed into operating businesses, we intend to continue to invest such assets
in high-grade, short-term investments (such as cash and cash equivalents)
consistent with the preservation of principal, maintenance of liquidity and
avoidance of speculation. We cannot assure that we will successfully
develop, or identify a suitable acquisition opportunity of, an operating
business or businesses, or that if we do develop such a business or businesses
or identify such an opportunity, any such development or acquisition will close
on a timely basis, or at all.
Five
Star Leases
Five Star
leases a warehouse facility in New Jersey totaling 236,000 square feet, a
warehouse facility in Connecticut totaling 98,000 square feet, and a 300 square
foot sales office in New York. GP Strategies and the Company guaranteed the
leases for the New Jersey and Connecticut warehouses, having annual rentals of
approximately $1,825,000 and $325,000 respectively and expiring in the third
quarter of 2010. In March 2009, the landlord of the Connecticut
facility released GP Strategies from its guarantee, and accepted the guarantee
from the Company. GP Strategies will be released from any further liability
beyond September 30, 2010 provided that prior to August 31, 2010, GP Strategies
delivers to the New Jersey landlord a letter of credit for $128,000 effective
through September 30, 2011. On January 15, 2010 the Company completed
the sale to Merit of all the issued and outstanding stock of Five Star. Merit
has extended the New Jersey lease through January 2011 and has agreed under the
terms of the Stock Purchase Agreement to use its best efforts to have the New
Jersey landlord release GP Strategies and the Company of guarantees on any
future extensions effective after September 30, 2011.
Other
Assets
On
October 20, 2009, NPDC Holdings, Inc., which was then a wholly-owned subsidiary
of National Patent, closed a transaction with respect to the sale of
approximately 1,000 acres of real property located in the Town of Pawling,
County of Dutchess, New York, to Little Whaley Holdings, LLC, a New York limited
liability company, for a purchase price of $12,500,000 in cash. We realized a
pre tax gain of approximately $9,600,000
The
Company owns certain non-strategic assets, including an investment in MXL
Operations Inc., certain contingent stock rights in products under development
by Endo and interests in land and flowage rights in undeveloped property in
Killingly, Connecticut. For the year ended December 31, 2007 and
through June 2008, MXL Operations operated as a separate operating segment (see
Note 2 to the Consolidated Financial Statements). The Company
monitors Endo for progress in achieving the milestones related to contingent
stock rights.
A
Current Report on Form 8-K was filed by Indevus with the SEC on March 23, 2009
disclosing that Endo had acquired all of the issued and outstanding shares of
Indevus common stock at such time. Notwithstanding the consummation
of such transaction, the Company retains rights to receive certain cash payments
based on FDA approval of certain drug applications. Specifically, the
Company has a contingent right to receive from Endo the following cash payments:
(i) upon FDA approval of the uteral stent drug application on or before
specified dates in 2012, of between $2,685,000 and $2,327,000 depending on the
terms contained in the FDA approval and (ii) upon FDA approval of
VP003(Octreotide implant) drug application on or before specified dates in 2012,
of between $4,028,000 and $3,491,000 depending on the terms contained in the FDA
approval. A Current Report on Form 8-K was filed by Endo on February
22, 2010 disclosing that Endo had recorded a non-cash impairment charge due to
heightened regulatory uncertainties related to their Aveed TM product, and
reduced the corresponding contingent payment due to former Indevus shareholders
due to the decreased probability that they will be obligated to make the
contingent consideration payments related to the Uteral Stent. See
“Item 1. Business- Endo Pharmaceuticals” and Note 8 to the Consolidated
Financial Statements.
13
On June
19, 2008, pursuant to the terms of the MXL Agreement, by and among the Company,
MXL Industries, a wholly-owned subsidiary of the Company, as the Seller, MXL
Operations, MXL Leasing, and MXL Realty, the MXL Buyers (MXL Realty, MXL
Operations and MXL Leasing, collectively) purchased substantially all the assets
and assumed certain liabilities (except the “Excluded Liabilities,” as defined
in the MXL Agreement) of the MXL Business (the Seller’s optical plastics molding
and precision coating business). As consideration, the 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 “Item 1.
Business – General Development of the Business” and Note 2 to the Consolidated
Financial Statements.
MXL
Industries also made an aggregate capital contribution to the MXL Buyers of
$275,000, allocated to each of MXL Operations, MXL Leasing and MXL Realty in a
manner so that the Seller has a 19.9% interest in the total capital of each of
MXL Leasing and MXL Realty and MXL Operations.
Tender
Offer
On June
26, 2008, pursuant to the terms of the Tender Offer Agreement among the Company,
Five Star and NPDV, a newly-formed wholly owned subsidiary of the Company, 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, net to the seller in cash, without interest thereon and less any required
withholding taxes. The Tender Offer closed on August 26, 2008, and on
August 28, 2008, the NPDV-Five Star Merger, in which NPDV merged with and into
Five Star, with Five Star continuing as the surviving corporation, wholly-owned
by the Company, was effected. The Company paid approximately
$1,028,000 for the tendered shares, $661,000 for the remaining shares to be
tendered and incurred expenses related to the NPDV-Five Star Merger of
approximately $642,000. See “Item 1. Business – General Development
of the Business” and Note 5 to the Consolidated Financial
Statements.
Management
discussion of critical accounting policies
The
following discussion and analysis of the financial condition and results of
operations are based on the consolidated financial statements and notes to
consolidated financial statements contained in this report that have been
prepared in accordance with the rules and regulations of the SEC and include all
the disclosures normally required in annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosures of contingent assets and
liabilities. We base these estimates on historical results and various other
assumptions believed to be reasonable, all of which form the basis for making
estimates concerning the carrying values of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates.
Certain
of our accounting policies require higher degrees of judgment than others in
their application. These include valuation of accounts receivable,
vendors’ allowance, impairment of long-lived assets and accounting for income
taxes which are summarized below.
14
Inventories
Inventories
related to discontinued operations are valued at the lower of cost, using the
first-in, first-out method, or market. 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. See Note 2 to the Consolidated Financial
Statements.
Valuation
of accounts receivable.
Provisions
for doubtful accounts are made based on consideration of the Company’s
historical loss experience, judgments about customer credit risk, and the need
to adjust for current economic conditions. See Note 2 to the Consolidated
Financial Statements.
Impairment
of long-lived tangible assets
Long-lived
tangible assets with finite lives are tested for impairment 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 the carrying amount is not considered to be recoverable,
the impairment to be recognized is measured by determining the amount by which
the carrying amount 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. See Note 2 to the Consolidated Financial
Statements.
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 has interests in land and flowage rights in undeveloped property
in Killingly, Connecticut with a carrying value of $355,000, which is
reflected in the consolidated balance sheets and which management believes is
less than fair value.
Vendor
allowances.
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.
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. 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. A valuation allowance is provided when it is more likely than
not that some portion of deferred tax assets will not be realized.
15
Derivatives and
hedging activities
Five Star
has entered into derivative financial instruments in order to manage exposures
resulting from fluctuations in interest rates. The interest rate swap entered
into by Five Star in connection with its loan agreement (see Note 2 to the
Consolidated Financial Statements) is being recognized in the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a cash flow hedge, changes in the
fair value of the derivative are recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of
a derivative’s change in fair value is immediately recognized in earnings.
Changes in the fair value of the interest rate swap, which has been
designated as a cash flow hedge, were recognized in other comprehensive
income.
Year
ended December 31, 2009 compared to the year ended December 31,
2008
As a
result of the Stock Purchase Agreement between the Company and Merit dated
November 24, 2009, the results for Five Star have been treated as a discontinued
operation. On January 15, 2010, the Company completed the sale of all the issued
and outstanding stock of Five Star. In addition, discontinued
operations in 2008 includes the result of MXL, substantially all of whose
operating assets were sold on June 19, 2008.
For the
year ended December 31, 2009, the Company had income from continuing operations
before income taxes of $6,626,000 compared to a loss from continuing operations
before income taxes of $3,462,000 for the year ended December 31,
2008. The improved operating results are primarily the result of the
Gain on sale of land of $9,668,000, as well as reduced General and
administrative expenses partially offset by reduced Investment and other
income.
General
and administrative expenses
For the
year ended December 31, 2009, general and administrative expenses (G&A) were
$3,057,000 as compared to $3,524,000 for the year ended December 31,
2008. The decreased G&A at the corporate level was primarily due
to reduced facility and personnel costs in the 2009 period.
Gain
on sale of Land
On
October 20, 2009, NPDC Holdings, Inc., which was then a wholly-owned subsidiary
of National Patent, closed a transaction with respect to the sale of
approximately 1,000 acres of real property located in the Town of Pawling,
County of Dutchess, New York, to Little Whaley Holdings, LLC, a New York limited
liability company, for a purchase price of $12,500,000 in cash. The Company
realized a pre tax gain of $9,668,000 in the year ended December 31,
2009.
Investment
and other income
The
Company recognized Investment and other income of $15,000 for the year ended
December 31, 2009 as compared to Investment and other income of $62,000 for
the year ended December 31, 2008, The change in Investment and other income is
mainly due to; (i) reduced interest income of $185,000 due to lower interest
rates, and (ii) an impairment charge of $138,000 related to the
Company’s investment in Millenium Cell in 2008.
16
Income
taxes
Income
taxes are provided for based on the asset and liability method of accounting .
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 ASC 740, 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.
For the
years ended December 31, 2009 and 2008, the Company recorded an income tax
(benefit) expense from continuing operations of $1,637,000, and $(644,000),
respectively, which represents the Company’s applicable federal, state and local
tax (benefit) expense for the periods. For the year ended December 31,
2009, the provision for income taxes differed from the tax computed at the
federal statutory income tax rate primarily due to state and local income taxes,
non-deductible expenses, and a decrease in the valuation allowance mainly due to
the utilization of net operating loss carryforwards by the
Company. For the year ended December 31, 2008, the provision
for income taxes differed from the tax computed at the federal statutory income
tax rate primarily due to state and local income taxes, non-deductible expenses,
and an increase in the valuation allowance with respect to losses incurred by
the Company. In connection with the increase in ownership of Five
Star from less than 80% to 100% during 2008, the excess of the financial
reporting basis over tax basis in Five Star was no longer considered to be a
taxable temporary difference and accordingly, a related $279,000 deferred income
tax liability was reflected as an income tax benefit in 2008. For
the years ended December 31, 2009 and 2008, an income tax (expense) benefit of
$(197,000) and $111,000, respectively, were recorded as part of discontinued
operations related to tax on the operations of Five Star and MXL
Industries.
Financial
condition
At
December 31, 2009, the Company had $23,006,000 of cash at the corporate
level. In addition, as a result of sale by the Company of all the
issued and outstanding stock of Five Star to Merit on January 15, 2010, the
Company received $10,465,000, before expenses, at the closing.
Liquidity
and Capital Resources
At
December 31, 2009, the Company had cash and cash equivalents totaling
$23,006,000. The Company believes that such cash will be sufficient to fund
the Company’s working capital requirements for at least the next 12
months.
Recent
accounting pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting
Standards Codification (“Codification”), which became the single source of
authoritative nongovernmental U.S. generally accepted accounting principles
(GAAP), superseding existing rules and related literature issued by the FASB,
American Institute of Certified Public Accountants (“AICPA”) and Emerging Issues
task Force (“EITF”). The Codification also eliminates the previous US GAAP
hierarchy and establishes one level of authoritative GAAP. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other literature is
considered non-authoritative. The Codification, which has not changed
GAAP, was effective for interim and annual periods ending after September 15,
2009. The Company adopted the Codification for the quarter ended
September 30, 2009. Other than the manner in which new accounting
guidance is referenced, the adoption of the Codification had no impact on the
Company’s consolidated financial statements.
17
In May
2009, the FASB issued guidance which establishes general standards of accounting
for the disclosure of events that occur after the balance sheet date, but before
financial statements are issued. The guidance, as amended in February 2010,
requires that subsequent events be evaluated through the date the financial
statements are issued.
In August
2009, the FASB issued amended guidance on the measurement of liabilities at fair
value. The guidance provides clarification that in circumstances in
which a quoted market price in an active market for an identical liability is
not available, the fair value of a liability be measured using one or more of
the valuation techniques that uses the quoted price of an identical liability
when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets. If none of this
information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles. This guidance is
effective for the first reporting period (including interim periods) after
issuance. The Company adopted this guidance in the quarter ended
September 30, 2009. The adoption did not have any effect on the Company’s
consolidated financial statements.
In March
2008, the FASB issued new disclosure requirements regarding derivative
instruments and hedging activities. These requirements give 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. These requirements are effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company adopted the requirements effective January 1, 2009. See
Note 7 to the Consolidated Financial Statements.
In
December 2007, the FASB issued new guidance on noncontrolling interests in
consolidated financial statements. This guidance requires that ownership
interests in subsidiaries held by parties other than the parent, be clearly
identified, labeled, and presented in the consolidated financial statements
within equity, but separate from the parent’s equity. It also requires that 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. This guidance is effective for fiscal years beginning after
December 15, 2008, and is to be applied retrospectively for all periods
presented.
The
Company adopted the guidance effective January 1, 2009 and retrospectively
adjusted its 2008 financial statements to reclassify the noncurrent in interest
in Five Star as part of stockholders’ equity. In addition, net loss for 2008 has
been retrospectively adjusted to exclude the noncontrolling interest’s share of
Five Star’s net income. Five Star became wholly-owned subsidiary in August 2008
(see Note 5 to the Consolidated Financial Statements).
In
December 2007, the FASB issued new accounting guidance related to the accounting
for business combinations and related disclosures. This guidance 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. It also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of a business combination. The
guidance 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 guidance, which
was adopted effective January 1, 2009 did not have any effect on the Company’s
consolidated financial statements.
18
In
February 2007, the FASB issued guidance on the fair value option for reporting
financial assets and financial liabilities. The guidance provides
companies with an option to report selected financial assets and liabilities at
fair value. Although effective for the Company beginning January 1, 2008, the
Company did not elect to value any financial assets and liabilities at fair
value.
In
February 2008, the FASB issued amended guidance to delay the fair value
measurement and expanded disclosures about fair value measurements 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), until fiscal years beginning after November 15,
2008. Effective January 1, 2009, the Company adopted the guidance
related to fair value measurements for nonfinancial assets and nonfinancial
liabilities and the adoption of such guidance did not have any effect on the
Company’s consolidated financial statements.
Contractual
Obligations and Commitments
Five Star
leases a warehouse facility in New Jersey totaling 236,000 square feet, a
warehouse facility in Connecticut totaling 98,000 square feet, and a 300 square
foot sales office in New York.
GP
Strategies and the Company have guaranteed the leases for Five Star’s New Jersey
and Connecticut warehouses, totaling approximately $1,825,000 and $325,000 per
year, respectively through the third quarter of 2010. GP Strategies’ guarantee
of such leases was in effect when Five Star was a wholly-owned subsidiary of GP
Strategies. In March 2009, the landlord of the Connecticut facility released GP
Strategies from its guarantee, and accepted the guarantee from the
Company. GP Strategies will be released from any further liability
beyond September 30, 2010 provided that prior to August 31, 2010, GP delivers to
the New Jersey landlord a letter of credit for $128,000 effective through
September 30, 2011. On January 15, 2010 the Company completed the sale to Merit
of all the issued and outstanding stock of Five Star. Merit has
extended the New Jersey lease through January 2011 and has agreed under the
terms of the Five Star Stock Purchase Agreement to use its best efforts to have
the New Jersey landlord release GP Strategies and the Company of guarantees on
any future extensions effective after September 30, 2011.
Not
required.
19
INDEX
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial
Statements of National Patent Development Corporation and
Subsidiaries
|
Page
|
|
|
21
|
|
|
22
|
|
|
23
|
|
|
24
|
|
|
25
|
|
|
26
|
|
|
27
|
|
20
The Board
of Directors and Stockholders of
National
Patent Development Corporation:
We have
audited the accompanying consolidated balance sheets of National
Patent Development Corporation (the “Company”) as of December 31, 2009 and
2008 and the related consolidated statements of operations, comprehensive
income (loss), cash flows and changes in stockholders’ equity for the years
then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits include consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of National
Patent Development Corporation as of December 31, 2009 and 2008, and the
consolidated results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in
the United States of America.
As
discussed in Note 1 to the financial statements, on January 15, 2010,
the Company completed the sale of Five Star Products, Inc.,
its remaining operating subsidiary.
EISNER
LLP
New York,
New York
March 29,
2010
21
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
General
and administrative expenses
|
$
|
(3,057
|
)
|
$
|
(3,524
|
)
|
||
|
Operating loss
|
(3,057
|
)
|
(3,524
|
)
|
||||
|
Gain
on sale of land
|
9,668
|
-
|
||||||
|
Investment
and other income, net
|
15
|
62
|
||||||
|
Income
(loss ) from continuing operations before income taxes
|
6,626
|
(3,462
|
)
|
|||||
|
Income
tax (expense) benefit
|
(1,637
|
)
|
644
|
|||||
|
Income
(loss ) from continuing operations
|
4,989
|
(2,818
|
)
|
|||||
|
Loss
from discontinued operations
|
(222
|
)
|
(542
|
)
|
||||
|
Net income
(loss)
|
4,767
|
(3,360
|
)
|
|||||
|
Less:
net income of subsidiary attributable to noncontrolling
interest
|
(34)
|
|||||||
|
Net
income (loss) attributable to National Patent Development
Corporation
|
$
|
4,767
|
$
|
(3,394)
|
||||
|
Basic
and diluted net income (loss) per share attributable to National
Patent
Development Corporation
shareholders:
|
||||||||
|
Continuing
operations
|
$
|
0.28
|
$
|
(0.
17
|
)
|
|||
|
Discontinued
operations
|
(0.01
|
)
|
(0.03
|
)
|
||||
|
Net
income (loss)
|
$
|
0.
27
|
$
|
(0.20
|
)
|
|||
See
accompanying notes to consolidated financial statements.
22
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in
thousands)
|
Year Ended December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net income
(loss)
|
$
|
4,767
|
$
|
(3,360
|
)
|
|||
|
Other
comprehensive income (loss), before tax:
|
||||||||
|
Net
unrealized loss on available-for-sale-securities
|
-
|
(102
|
)
|
|||||
|
Reclassification
adjustment for loss on impairment of investment in Millenium Cell included
in net loss
|
-
|
138
|
||||||
|
Net
unrealized income (loss) on interest rate swap
|
308
|
(1,134
|
)
|
|||||
|
Comprehensive income
(loss) before tax
|
5,075
|
(4,458
|
)
|
|||||
|
Income
tax (expense) benefit related to items of other comprehensive income
(loss)
|
(123)
|
434
|
||||||
|
Comprehensive income
(loss)
|
4,952
|
(4,024
|
)
|
|||||
|
Comprehensive
income attributable to noncontrolling interest
|
-
|
(20
|
) | |||||
|
Comprehensive
income (loss) attributable to National Patent Development
Corporation
|
$
|
4,952
|
$
|
(4,044
|
)
|
|||
See
accompanying notes to consolidated financial statements.
23
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share data)
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
23,006
|
$
|
13,021
|
||||
|
Assets
held for sale
|
30,812
|
34,073
|
||||||
|
Deferred
tax asset
|
667
|
132
|
||||||
|
Prepaid
expenses and other current assets
|
901
|
188
|
||||||
|
Total
current assets
|
55,386
|
47,414
|
||||||
|
Property,
plant and equipment, net
|
18
|
28
|
||||||
|
Non-current
assets held for sale
|
-
|
1,527
|
||||||
|
Deferred
tax asset
|
1,537
|
|||||||
|
Investments
in undeveloped land
|
355
|
2,900
|
||||||
|
Other
assets
|
282
|
265
|
||||||
|
Total
assets
|
$
|
56,041
|
$
|
53,671
|
||||
|
Liabilities
and stockholders’ equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Liabilities
related to assets held for sale
|
$
|
22,112
|
$
|
26,227
|
||||
|
Income
taxes payable
|
964
|
-
|
||||||
|
Accounts
payable and accrued expenses
|
1,132
|
384
|
||||||
|
Total
current liabilities
|
24,208
|
26,611
|
||||||
|
Non
current liability related to assets held for sale
|
-
|
1,111
|
||||||
|
Commitments
and contingencies (Notes 8 and
17)
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Preferred
stock, par value $0.01 per share, authorized 10,000,000
shares;
issued
none
|
-
|
-
|
||||||
|
Common
stock, par value $0.01 per share, authorized 30,000,000
shares;
issued
18,125,809 shares in 2009 and 18,105,148 shares in 2008
|
181
|
181
|
||||||
|
Additional
paid-in capital
|
29,574
|
28,642
|
||||||
|
Retained
earnings (deficit)
|
3,918
|
(849
|
)
|
|||||
|
Treasury
stock, at cost (564,569 shares in 2009
and 2008)
|
(1,358
|
)
|
(1,358
|
)
|
||||
|
Accumulated
other comprehensive loss
|
(482
|
)
|
(667
|
)
|
||||
|
Total
stockholders’ equity
|
31,833
|
25,949
|
||||||
|
Total
liabilities and stockholders’ equity
|
$
|
56,041
|
$
|
53,671
|
||||
See
accompanying notes to consolidated financial statements.
24
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year
ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
4,767
|
$
|
(3,360
|
)
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
|
Depreciation
and amortization
|
421
|
656
|
||||||
|
Gain
on sale of MXL assets
|
-
|
(87
|
)
|
|||||
|
Impairment
of investment
|
-
|
138
|
||||||
|
Expenses
paid in common stock
|
27
|
52
|
||||||
|
Stock
based compensation
|
905
|
2,160
|
||||||
|
Provision
for doubtful accounts
|
64
|
278
|
||||||
|
Gain
on sale of land
|
(9,668
|
)
|
-
|
|||||
|
Deferred
income taxes
|
879
|
(1,027
|
)
|
|||||
|
Changes
in other operating items:
|
||||||||
|
Accounts
and other receivables
|
778
|
1,530
|
||||||
|
Inventories
|
3,066
|
3,667
|
||||||
|
Prepaid
expenses and other assets
|
(185
|
)
|
(308
|
)
|
||||
|
Income
taxes payable
|
964
|
-
|
||||||
|
Accounts
payable and accrued expenses
|
(282)
|
(4,940
|
)
|
|||||
|
Net
cash provided by (used in) operating activities
|
1,736
|
(1,241
|
)
|
|||||
|
Cash
flows from investing activities:
|
||||||||
|
Acquisitions
of property, plant and equipment
|
(65
|
)
|
(672
|
)
|
||||
|
Acquisition
of minority interest in Five Star
|
-
|
(3,854
|
)
|
|||||
|
Net
proceeds from sales of assets of MXL
|
-
|
4,661
|
||||||
|
Investment
in MXL
|
-
|
(275
|
)
|
|||||
|
Net
proceeds from sale of land
|
12,196
|
-
|
||||||
|
Net
cash provided by (used in) investing activities
|
12,131
|
(140
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||
|
Purchase
of treasury stock
|
|
-
|
(1,115
|
)
|
||||
|
Proceeds
from exercise of common stock warrants
|
-
|
3,560
|
||||||
|
Repayment
of short-term borrowings
|
(3,888
|
)
|
(1,553
|
)
|
||||
|
Settlement
of and repurchase of Five Star options
|
-
|
(422
|
)
|
|||||
|
Repayment
of long-term debt
|
-
|
(1,698
|
)
|
|||||
|
Net
cash used in financing activities
|
(3,888
|
)
|
(1,228
|
)
|
||||
|
Net increase
(decrease) in cash and cash equivalents
|
9,979
|
(2,609
|
)
|
|||||
|
Cash
and cash equivalents at beginning of period
|
13,089
|
15,698
|
||||||
|
Cash
and cash equivalents at end of period, including assets held for
sale
|
23,068
|
13,089
|
||||||
|
Cash
and cash equivalents included in assets held for sale
|
(62
|
) |
(68
|
)
|
||||
|
Cash
and cash equivalents at end of period
|
$
|
23,006
|
$
|
13,021
|
||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid (refund received) during the period for:
|
||||||||
|
Interest
|
$
|
1,668
|
$
|
1,543
|
||||
|
Income
taxes
|
(107
|
)
|
564
|
See
accompanying notes to consolidated financial statements.
25
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009 AND 2008
(in
thousands, except per share data)
| NPDC share of equity | ||||||||||||||||||||||||||||||||
|
Common
stock
|
Additional
paid-in
|
Retained
earnings
|
Treasury
stock,
at
|
Accumulated
other
comprehensive
|
Noncontrolling
|
Total
Stock-
holders’
|
||||||||||||||||||||||||||
|
shares
|
amount
|
capital
|
(deficit)
|
cost
|
income
(loss)
|
interest
|
equity
|
|||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
18,086,006 | $ | 180 | $ | 26,825 | $ | 2,545 | $ | (3,458 | ) | $ | (17 | ) | $ | 2,902 | $ | 28,977 | |||||||||||||||
|
Net
unrealized loss on available
for
sale securities
|
(102 | ) | (102 | ) | ||||||||||||||||||||||||||||
|
Reclassification
adjustment related
to
loss on impairment of available
for
sale securities included in net
loss
|
138 | 138 | ||||||||||||||||||||||||||||||
|
Net
unrealized loss on interest rate
swap,
net of tax of $472
|
(686 | ) | (14 | ) | (700 | ) | ||||||||||||||||||||||||||
|
Net
loss
|
(3,394 | ) | 34 | (3,360 | ) | |||||||||||||||||||||||||||
|
Equity
based compensation expense
|
1,318 | 126 | 1,444 | |||||||||||||||||||||||||||||
|
Repurchased
equity options of Five
Star
|
(150 | ) | (32 | ) | (182 | ) | ||||||||||||||||||||||||||
|
Acquisition
of additional interest in
Five
Star
|
(3,016 | ) | (3,016 | ) | ||||||||||||||||||||||||||||
|
Settlement
of option to acquire
shares
of Five Star
|
(240 | ) | (240 | ) | ||||||||||||||||||||||||||||
|
Issuance
of 1,423,886 treasury
shares
upon exercise of warrants
|
351 | 3,209 | 3,560 | |||||||||||||||||||||||||||||
|
Purchase
of 462,859 shares of
Treasury
Stock
|
(1,115 | ) | (1,115 | ) | ||||||||||||||||||||||||||||
|
Issuance
of 2,866 shares of treasury
stock
to directors
|
6 | 6 | ||||||||||||||||||||||||||||||
|
Reclassification
of common stock
subject
to exchange rights
|
493 | 493 | ||||||||||||||||||||||||||||||
|
Issuance
of common stock to
MXL
Retirement
and Savings Plan
|
10,260 | 1 | 24 | 25 | ||||||||||||||||||||||||||||
|
Issuance
of common stock to
directors
|
8,882 | 21 | 21 | |||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
18,105,148 | $ | 181 | $ | 28,642 | $ | (849 | ) | $ | (1,358 | ) | $ | (667 | ) | $ | - | $ | 25,949 | ||||||||||||||
|
Net
unrealized gain on interest rate
swap,
net of tax of $123
|
185 | 185 | ||||||||||||||||||||||||||||||
|
Net
income
|
4,767 | 4,767 | ||||||||||||||||||||||||||||||
|
Equity
based compensation expense
|
905 | 905 | ||||||||||||||||||||||||||||||
|
Issuance
of common stock to
directors
|
20,661 | 27 | 27 | |||||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
18,125,809 | $ | 181 | $ | 29,574 | $ | 3,918 | $ | (1,358 | ) | $ | (482 | ) | $ | - | $ | 31,833 | |||||||||||||||
See
accompanying notes to consolidated financial statements
26
Notes
to Consolidated Financial Statements
1. Description
of activities
National
Patent Development Corporation (the “Company” or “National Patent”) at December
31, 2009 was engaged in the home improvement distribution business through its
indirect wholly-owned subsidiary, Five Star Group, Inc. (“Five Star”), and also
owned certain other non-strategic assets.
On
January 15, 2010, after approval of its stockholders on January 14, 2010,
National Patent completed the sale to The Merit Group, Inc. (“Merit”)
of all of the issued and outstanding stock of National Patent’s wholly-owned
subsidiary, Five Star Products, Inc., the holding company and sole stockholder
of Five Star, for cash pursuant to the terms and subject
to the conditions of an agreement dated as of November 24, 2009 (see Note
3).
Upon the
consummation of the sale, the Company became a “shell company”, as defined in
Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
Although
National Patent’s Board of Directors believes that it is not engaged primarily
in the business of investing, reinvesting, or trading in securities, and
National Patent does not hold itself out as being primarily engaged in those
activities, once the closing of the sale occurred, National Patent appeared to
come within the technical definition of an “investment company” under section
3(a)(1)(C) of the Investment Company Act. National Patent has
operated on the assumption, therefore, that it falls within the scope of section
3(a)(1)(C) because the value of its investment securities (as defined in the
Investment Company Act) is more than 40% of its total assets (exclusive of
government securities and cash and certain cash equivalents). Under
the Investment Company Act, if National Patent does not develop or acquire
sufficient interests in one or more operating
businesses by mid-January 2011, National Patent may be required to
register under the Investment Company Act.
An
investment company that falls within the scope of section 3(a)(1)(C) of the
Investment Company Act can avoid being regulated as an investment company if it
can rely on certain of the exclusions under the Investment Company
Act. One such exclusion that management believes applies is Rule 3a-2
under the Investment Company Act and similar SEC principles and guidance, which
allow a 3(a)(1)(C) investment company (as a “transient investment company”) a
grace period of one year from the date of classification (in our case, the date
of stockholder approval of the Five Star sale, which was January 14, 2010), to
avoid registration under the Investment Company Act so long as it does not
intend to engage primarily in the business of investing, reinvesting, owning,
holding or trading in securities.
As a
“transient investment company”, National Patent’s Board of Directors has
resolved and determined that National Patent not engage in the business of
investing, reinvesting, owning, holding or trading in
securities. Instead, National Patent’s Board has directed that
National Patent seek to develop or acquire interests in one or more operating businesses
such that by mid-January 2011, National Patent is primarily engaged in a
business other than investing, reinvesting, owning, holding or trading in
securities for purposes of the Investment Company Act. There can be
no assurance that National Patent will be able to complete such acquisitions by
the applicable deadline.
27
National
Patent is evaluating and exploring available strategic options for the
investment of the Company’s cash and cash equivalent assets in one or more
operating businesses. While National Patent has focused its
development or acquisition efforts on sectors in which its management has
expertise, it does not wish to limit itself to, or to foreclose any
opportunities in, any particular industry or sector. The goal of National Patent’s investment strategy is to
develop or acquire businesses in order to generate value for National
Patent’s stockholders. National Patent’s Board of Directors has
resolved to develop or acquire interests in one or
more operating businesses such that by mid-January 2011, National Patent
is primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities for purposes of the Investment Company
Act. Until such time as the liquid assets of the Company are so
deployed into operating businesses, National Patent intends to continue to
invest such assets in high-grade, short-term investments (such as cash and cash
equivalents) consistent with the preservation of principal, maintenance of
liquidity and avoidance of speculation. National Patent cannot assure
that it will successfully develop, or identify a suitable acquisition
opportunity of an operating business or businesses, or that if National Patent
does develop such a business or businesses or identify such an opportunity, any
such development or acquisition will close on a timely basis, or at
all.
2. Discontinued
Operation
Five
Star’s results of operations for 2009 have been accounted for as a discontinued
operation in the accompanying consolidated statements of operations and its 2008
results of operations have been reclassified as discontinued operations to be
consistent with the current year presentation. In addition, discontinued
operations in 2008 includes the result of MXL Industries, Inc. (“MXL”)
substantially all of whose operating assets were sold on June 19, 2008 (see Note
6). Assets and liabilities of Five Star have been classified as held for sale in
the accompanying consolidated balance sheet at December 31, 2009 and the 2008
consolidated balance sheet has been reclassified to present the assets and
liabilities of Five Star separately as held for sale.
28
At
December 31, 2009 and 2008 Five Star’s assets and liabilities held for sale were
as follows (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
62
|
$
|
68
|
||||
|
Accounts
and other receivables, less allowance for doubtful accounts of $407
and
$420 (a)
|
8,972
|
9,812
|
||||||
|
Inventories
– finished goods
|
19,979
|
23,045
|
||||||
|
Prepaid
expenses and other current assets
|
618
|
1,148
|
||||||
|
Property,
plant and equipment, net (b)
|
666
|
-
|
||||||
|
Intangible
assets, net
|
471
|
-
|
||||||
|
Other
assets
|
44
|
-
|
||||||
|
30,812
|
34,073
|
|||||||
|
Non-current
assets
|
||||||||
|
Property,
plant and equipment, net (b)
|
-
|
884
|
||||||
|
Intangible
assets, net
|
-
|
599
|
||||||
|
Other
assets
|
-
|
44
|
||||||
|
-
|
1,527
|
|||||||
|
Current
liabilities
|
||||||||
|
Short
term borrowings (Note 7)
|
14,487
|
18,375
|
||||||
|
Accounts
payable and accrued expenses (c)
|
6,822
|
7,852
|
||||||
|
Liability
related to interest rate swap (Note 7)
|
803
|
-
|
||||||
|
22,112
|
26,227
|
|||||||
|
Non-current
liabilities
|
||||||||
|
Liability
related to interest rate swap (Note 7)
|
1,111
|
|||||||
|
Net
assets held for sale
|
$
|
8,700
|
$
|
8,262
|
||||
(a) The
following is a summary of the allowance for doubtful accounts related to
accounts receivable of discontinued operations for the years ended December
31, 2009 and 2008 (in thousands):
|
2009
|
2008
|
|||||||
|
Balance
at beginning of year
|
$
|
420
|
$
|
412
|
||||
|
Provision
for doubtful accounts
|
64
|
279
|
||||||
|
Elimination
of MXL allowance in connection with sale of its assets
|
-
|
(192
|
)
|
|||||
|
Uncollectible
accounts written off, net of recoveries
|
(77
|
)
|
(79
|
)
|
||||
|
Balance
at end of year
|
$
|
407
|
$
|
420
|
||||
(b)
Property, plant and equipment of Five Star consists of the following (in
thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Leasehold
improvements
|
$
|
440
|
$
|
429
|
||||
|
Machinery
and equipment
|
1,080
|
1,041
|
||||||
|
Furniture
and fixtures
|
920
|
905
|
||||||
|
2,440
|
2,375
|
|||||||
|
Accumulated
depreciation
|
(1,774
|
)
|
(1,491
|
)
|
||||
|
$
|
666
|
$
|
884
|
|||||
29
Depreciation
expense for the years ended December 31, 2009 and 2008 amounted to $283,000 and
$335,000, respectively.
(c)
Accounts payable and accrued expenses of Five Star are comprised of the
following (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accounts
payable
|
$
|
4,965
|
$
|
5,225
|
||||
|
Accrued
expenses and other
|
841
|
1,552
|
||||||
|
Deferred
revenue
|
1,016
|
1,075
|
||||||
|
$
|
6,822
|
$
|
7,852
|
|||||
For the
years ended December 31, 2009 and 2008 the components of income from
discontinued operations were as follows (in thousands):
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Five
Star
|
||||||||
|
Sales
|
$
|
99,483
|
$
|
115,461
|
||||
|
Cost
of sales
|
83,184
|
95,133
|
||||||
|
Gross
margin
|
16,299
|
20,328
|
||||||
|
Selling,
general and administrative expenses
|
14,858
|
19,012
|
||||||
|
Charge
related to resignation of Chairman of Five Star (Note 19
(a)
|
-
|
1,096
|
||||||
|
Operating income
|
1,441
|
220
|
||||||
|
Interest
expense
|
(1,494
|
)
|
(1,366
|
)
|
||||
|
Other
income
|
28
|
31
|
||||||
|
Loss
from discontinued operation before income taxes
|
(25
|
)
|
(1,115
|
)
|
||||
|
Income
tax benefit (expense)
|
(197
|
)
|
111
|
|||||
|
Loss
from discontinued operation
|
(222
|
)
|
(1,004
|
)
|
||||
|
MXL
(1)
|
||||||||
|
Income
from discontinued operations, including an $87 net gain on sale of
assets
|
-
|
462
|
||||||
|
Loss
from discontinued operations
|
$
|
(222
|
)
|
$
|
(542
|
)
|
||
(1) Sales of
MXL amounted to $4,052 in 2008.
30
3. Sale
of Five Star
On
January 15, 2010 (the “Closing Date”), National Patent completed the sale to
Merit of all of the issued and outstanding stock of Five Star for cash pursuant
to the terms and subject to the conditions of a Stock Purchase
Agreement.
The Stock
Purchase Agreement provided for an aggregate purchase price (the “Purchase
Price”) for the stock of $33,124,000, subject to certain adjustments to
reflect (i)(A) changes in the outstanding balance of Five Star’s revolving
indebtedness under its loan agreement with Bank of America (the “Revolving
Indebtedness”) from the amount outstanding at March 31, 2009 compared to the
amount outstanding on the Closing Date (the “Cash Flow Adjustment”) and (B)
increases dollar for dollar if Five Star had positive net results, as defined,
from March 31, 2009 to the Closing Date, or decreases if it had negative net
results, as defined, during such period (the “Net Results Adjustment”) and (ii)
a potential downward adjustment based on the value of certain designated
inventory held by Five Star, less the value received for such inventory after
the Closing Date (the “Inventory Adjustment”), to the extent such Inventory
Adjustment post-closing exceeds $400,000 but is equal to or less than
$1,000,000.
At the
Closing Date (i) the Cash Flow Adjustment reduced the Purchase Price by
$5,611,000, (ii) $15,178,000 of the Purchase Price was used to repay the
Revolving Indebtedness (including related fees and expenses of $384,000); (iii)
$900,000 of the Purchase Price was placed in escrow - $300,000 of which is held
by the Escrow Agent to provide for indemnity payments which National Patent may
be required to pay to Merit as described below and $600,000 of which is held by
the Escrow Agent to provide for payment of the Inventory Adjustment; and (iv)
$970,000 of the Purchase Price was retained by Merit to fund severance payments
to employees of Five Star. The $10,465,000 balance of the Purchase
Price was remitted to National Patent at the Closing Date. Additionally, the
Purchase Price is subject to post-closing adjustments as a result of the Net
Results Adjustment and the Inventory Adjustment as discussed above.
The
proceeds of the sale will also be reduced by transaction costs, taxes, one half
of the rent and other sums, if any, due under the warehouse lease for Five
Star’s Connecticut location from the later of March 31, 2010 or when Five Star
ceases to use the warehouse, through September 30, 2010, if any, costs relating
to the satisfaction of certain obligations under state environmental laws in New
Jersey and Connecticut, if any, and the payment of amounts to indemnify Merit as
provided in the Stock Purchase Agreement, if any. At December 31, 2009,
transactions costs related to the sale amounted to approximately $707,000, which
are included in prepaid expenses and other current assets in the accompanying
consolidated balance sheet.
In
February, 2010, the Company notified Merit that the Purchase Price should be
increased by approximately $188,000 based on the Company’s calculation of the
Net Results Adjustment. On March 1, 2010, Merit notified the Company that
based on their calculation of the Net Results Adjustment, the Purchase Price
should be reduced by approximately $3,400,000.
The
Company does not agree with Merit’s calculation. Pursuant to the Stock
Purchase Agreement, the dispute may be submitted to binding arbitration by
either Merit or the Company. The Company believes that its position in the
dispute with Merit is meritorious, but is currently unable to determine the
outcome of any resolution of this matter.
31
4. Summary
of significant accounting policies
Principles of consolidation.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principals 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 revenue and expenses during the reported period. Actual
results could differ from these estimates.
Cash
equivalents
Cash equivalents
consist of investment in Treasury money market funds.
Inventories
Inventories
related to discontinued operations are valued at the lower of cost, using the
first-in, first-out method, or market. 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. See Note 2.
Revenue
recognition
Revenue
on product sales, related to discontinued operations, 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 discounts are
recognized when sales are recorded. See Note 2.
Shipping
and handling costs
Shipping
and handling costs, related to discontinued operations, which are included
as a part of selling, general and administrative expense included therein
(see Note 2), amounted to $5,110,000 and $5,403,000 for the years ended December
31, 2009 and 2008, respectively.
Employees’ stock based
compensation.
The
Company recognizes employees’ stock based compensation cost over the vesting
period of an award, based on the fair value at the grant
date.
Valuation
of accounts receivable
Provisions
for doubtful accounts are made based on consideration of the Company’s
historical loss experience, judgments about customer credit risk, and the need
to adjust for current economic conditions. See Note 2.
32
Property, plant
and equipment
Property,
plant and equipment are carried at cost, net of allowance for depreciation.
Major additions and improvements are capitalized while maintenance
and repairs which do not extend the lives of the assets are expensed as
incurred. Gain or loss on the disposition of property, plant and equipment
is recognized in operations when realized. Depreciation is provided on a
straight-line basis over estimated useful lives of 5 to 40 years for
buildings and improvements and 3 to 7 years for machinery, equipment and
furniture and fixtures. See Note 2.
Impairment
of long-lived tangible assets
Long-lived
tangible assets with finite lives are tested for impairment 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 the carrying amount is not considered to be recoverable,
the impairment to be recognized is measured by determining the amount by which
the carrying amount 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. See Note 2.
Income
taxes
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. 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.
Fair value of
financial instruments.
The
carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximate estimated fair values because of short
maturities. The carrying value of short term borrowings approximates estimated
fair value because borrowings accrue interest which fluctuates with changes
in LIBOR or prime.
Marketable
securities are carried at fair value based upon quoted market prices.
Derivative instruments are carried at fair value representing the
amount the Company would receive or pay to terminate the
derivative.
Derivatives and
hedging activities
Five Star
has entered into derivative financial instruments in order to manage exposures
resulting from fluctuations in interest rates. The interest rate swap entered
into by Five Star in connection with its loan agreement (see Note 7) is being
recognized in the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative
is a cash flow hedge, changes in the fair value of the derivative
are recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative’s change in
fair value is immediately recognized in earnings. Changes in the fair value
of the interest rate swap, which has been designated as a cash flow hedge,
were recognized in other comprehensive income.
33
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting
Standards Codification (“Codification”), which became the single source of
authoritative nongovernmental U.S. generally accepted accounting principles
(GAAP), superseding existing rules and related literature issued by the FASB,
American Institute of Certified Public Accountants (“AICPA”) and Emerging Issues
task Force (“EITF”). The Codification also eliminates the previous GAAP
hierarchy and establishes one level of authoritative GAAP. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other literature is
considered non-authoritative. The Codification, which has not changed
GAAP, was effective for interim and annual periods ending after September 15,
2009. The Company adopted the Codification for the quarter ended
September 30, 2009. Other than the manner in which new accounting
guidance is referenced, the adoption of the Codification had no impact on the
Company’s consolidated financial statements.
In May
2009, the FASB issued guidance which establishes general standards of accounting
for the disclosure of events that occur after the balance sheet date, but before
financial statements are issued. The guidance, as amended in February 2010,
requires that subsequent events be evaluated through the date the financial
statements are issued.
In August
2009, the FASB issued amended guidance on the measurement of liabilities at fair
value. The guidance provides clarification that in circumstances in
which a quoted market price in an active market for an identical liability is
not available, the fair value of a liability be measured using one or more of
the valuation techniques that uses the quoted price of an identical liability
when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets. If none of this
information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles. This guidance is
effective for the first reporting period (including interim periods) after
issuance. The Company adopted this guidance in the quarter ended
September 30, 2009. The adoption did not have any effect on the Company’s
consolidated financial statements.
In March
2008, the FASB issued new disclosure requirements regarding derivative
instruments and hedging activities. These requirements give 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. These requirements are effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company adopted the requirements effective January 1, 2009. See
Note 7.
In December 2007, the FASB issued new guidance on
noncontrolling interests in consolidated financial statements. This guidance
requires that ownership interests in subsidiaries held by parties other than the
parent, be clearly identified, labeled, and presented in the consolidated
financial statements within equity, but separate from the parent’s equity. It
also requires that 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. This guidance is effective for fiscal years
beginning after December 15, 2008, and is to be applied retrospectively for all
periods presented. The Company adopted the guidance effective January 1,
2009 and retrospectively adjusted its 2008 financial statements to reclassify
the noncontrolling interest in Five Star as part of stockholders’ equity. In
addition, net loss for 2008 has been retrospectively adjusted to exclude the
noncontrolling interest’s share of Five Star’s net income. Five Star became a
wholly-owned subsidiary in August 2008 (see Note 5).
34
In
December 2007, the FASB issued new accounting guidance related to the accounting
for business combinations and related disclosures. This guidance 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. It also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of a business combination. The
guidance 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 guidance, which
was adopted effective January 1, 2009 did not have any effect on the Company’s
consolidated financial statements.
In
February 2007, the FASB issued guidance on the fair value option for reporting
financial assets and financial liabilities. The guidance provides
companies with an option to report selected financial assets and liabilities at
fair value. Although effective for the Company beginning January 1, 2008, the
Company did not elect to value any financial assets and liabilities at fair
value.
In
February 2008, the FASB issued amended guidance to delay the fair value
measurement and expanded disclosures about fair value measurements 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), until fiscal years beginning after November 15,
2008. Effective January 1, 2009, the Company adopted the guidance
related to fair value measurements for nonfinancial assets and nonfinancial
liabilities and the adoption of such guidance did not have any effect on the
Company’s consolidated financial statements.
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.
Income (loss) per
share
Income
(loss) per share attributable to National Patent Development Corporation
stockholders for the year ended December 31, 2009 and 2008 is calculated as
follows (in thousands, except per share amounts):
|
Year
Ended
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Basic
and diluted EPS
|
||||||||
|
Income
(loss) from continuing
operations
|
$
|
4,989
|
$
|
(2,818
|
)
|
|||
|
Loss
from discontinued
operation
|
(222
|
)
|
(576
|
)
|
||||
|
Net
income
(loss)
|
$
|
4,767
|
$
|
(3,394
|
)
|
|||
|
Weighted
average shares outstanding
|
17,553
|
16,784
|
||||||
|
Continuing
operations
|
$
|
0.28
|
$
|
(0.17
|
)
|
|||
|
Discontinued
operations
|
(0.01
|
)
|
(0.03
|
)
|
||||
|
Net
earnings (loss) per
share
|
$
|
0.27
|
$
|
(0.20
|
)
|
|||
Options
for 3,350,000 common shares were not included in the diluted computation in 2009
and 2008, as their effect would be anti-dilutive. For 2009, the effect would be
anti-dilutive, because the exercise price of the options were greater then the
average market price of the Company’s common shares during the year. For 2008,
no options were included because the Company has a loss from continuing
operations.
35
Accumulated other
comprehensive loss
The
components of accumulated other comprehensive loss are as follows (in
thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
unrealized loss on interest rate swap
|
$
|
(803
|
)
|
$
|
(1,111
|
)
|
||
|
Income
tax benefit
|
321
|
444
|
||||||
|
Accumulated
other comprehensive loss, net of tax
|
$
|
(482
|
)
|
$
|
(667
|
)
|
||
5. Acquisition
of minority interest in Five Star
On June
26, 2008, the Company, Five Star and NPDV Acquisition Corp., a newly-formed
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, net to the seller in
cash, without interest thereon and less any required withholding taxes (the
“Tender Offer”).
The
Tender Offer expired on August 26, 2008, and on August 28, 2008, NPDV merged
with and into Five Star (the “NPDV-Five Star 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 NPDV-Five Star Merger (other than shares held by the Company, Five
Star or NPDV, all of which were cancelled and retired and ceased to exist), were
converted in the NPDV-Five Star Merger into the right to receive the price paid
pursuant to the Tender Offer, in cash. The Company paid approximately $1,028,000
for the tendered shares, $661,000 for the remaining outstanding shares pursuant
to the merger and incurred expenses related to the NPDV-Five Star Merger of
approximately $642,000. The total purchase price for the 17.7%
minority interest was $2,331,000. The excess ($642,000) of purchase price over
the book value of the minority interest has been recorded as customer lists.
This intangible asset is being amortized over a five year
period. Amortization expense for the years ended December 31, 2009
and 2008 was $128,000 and $43,000, respectively and is included in discontinued
operations (see Note 2).
In
addition, concurrently with the execution of the Tender Offer Agreement, the
Company and Five Star entered into letter agreements with certain executive
officers, employees and directors of Five Star, certain of whom are also
directors and executive officers of the Company (collectively the “Letter
Agreements”), pursuant to which such persons received cash payments of
approximately $182,000, in exchange for the termination of their vested and
unvested options to purchase shares of Five Star common stock and unvested
shares of Five Star restricted stock promptly following the completion of the
NPDV-Five Star Merger, which was recorded as a charge to Additional paid-in
capital.
Further,
the termination of the agreements related to the options and shares resulted in
$489,000 of previously unrecognized compensation cost related to unvested
share-based compensation arrangements of Five Star which was charged to
discontinued operations in 2008.
36
Prior to
the commencement of the Tender 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 (representing a 57% interest) and (B) a
convertible note issued by Five Star’s wholly-owned subsidiary, and (ii) NPDV
converted such note into an aggregate of 7,000,000 shares of Five Star common
stock, increasing the Company’s indirect ownership interest in Five Star to
82.3%.
6. 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 (“MXL Industries” or the “Seller”), MXL Operations,
Inc. (“MXL Operations”), MXL Leasing, LP (“MXL Leasing”) and MXL Realty, LP
(“MXL Realty” and, collectively with MXL Operations and MXL Leasing, the “MXL
Buyers”), the MXL Buyers purchased substantially all the assets and assumed
certain liabilities of Seller’s optical plastics molding and precision coating
businesses (the “MXL Business”). 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 Industries. The sale resulted
in a gain of $87,000, net of $143,000 of related expenses.
The
Seller also made an aggregate investment in the MXL Buyers of $275,000,
allocated to each of MXL Operations, MXL Leasing and MXL 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 MXL Leasing and MXL Realty and a 40.95%
non-voting interest in the total capital of MXL Operations. MXL
Operations issued additional shares before December 31, 2008 which reduced the
Seller’s interest in MXL Operations to 19.9%. The Company accounts for the
investment in MXL Operations, MXL Leasing and MXL Realty under the cost method
from the date of sale.
Investors
in the MXL Buyers include certain senior managers of the MXL
Business.
The
results for MXL Industries have been accounted for as a discontinued operation
(see Note 2).
7. Short-term
borrowings of Five Star
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”), until June 30,
2011. The 2003 Loan Agreement, as amended by the Amended Loan Agreement, is
referred to herein as the “Loan Agreement”.
The Loan
Agreement provided 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 allowed 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. At December 31, 2009, Five Star was allowed to borrow 53.6%
of eligible inventory. All obligations under the Revolving Credit Facility were
collateralized by first priority liens on all of Five Star’s existing and future
assets.
37
Loans
made to Five Star under the Revolving Credit Facility bore interest at a per
annum rate based on the Base Rate of Bank of America, as defined, plus 2.25%, as
modified, or at a per annum rate based on LIBOR plus 325 basis points, as
modified, at Five Star’s election. The LIBOR and Base Rate
margins were subject to adjustment based on certain performance
benchmarks.
At
December 31, 2009 and December 31, 2008, approximately $14,487,000 and
$18,375,000 was outstanding under the Loan Agreement (see Note 2) and
approximately $1,807,000 and $3,677,000 was available to be borrowed,
respectively. Substantially all of Five Star’s assets are pledged as
collateral for these borrowings.
In
connection with Loan Agreement, on June 30, 2003, Five Star entered an interest
rate swap with the lender which has been designated as cash flow hedge. Under
the swap, effective July 1, 2004 through June 30, 2008, Five Star paid a fixed
interest rate of 3.38% to the Lender on notional principal of $12,000,000. In
return, the Lender paid to Five Star a floating rate, namely, LIBOR, on the same
notional principal amount. The credit spread of 1.5% was paid in addition to the
3.38%.
Effective
June 30, 2008, Five Star entered into an interest rate swap with Bank of
America, which 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 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 a
liability of $803,000 and $1,111,000 at December 31, 2009 and 2008, respectively
(see Note 2). Changes in the fair value of the
interest rate swap were recognized in other comprehensive
income.
On
January 15, 2010, the then outstanding balance of $14,794,000 including accrued
interest, under the Loan Agreement was fully repaid to Bank of America from the
proceeds from the sale of Five Star (see Note 3).
8. Contingent
rights
Effective
April 18, 2007 (the “Indevus 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 Pharmaceuticals, Inc. (“Indevus”), a biopharmaceutical
company engaging in the acquisition, development, and commercialization of
products to treat urological, gynecological, and men’s health
conditions. The transaction was effected pursuant to the terms and
conditions of an Agreement and Plan of Merger, dated as of December 11, 2006
(the “Valera Merger Agreement”). As a result of the transaction, the 2,070,670
shares of Valera common stock held by the Company immediately preceding the
Indevus Effective Time were converted into an aggregate of 2,347,518 shares of
Indevus common stock as of the Indevus Effective Time. These shares
of Indevus common stock were sold by the Company in 2007.
Following
the Indevus Effective Time and prior to March 23, 2009, the Company was entitled
to two additional contingent tranches of shares of Indevus common stock (the
“Contingent Rights”), to the extent of the achievement of certain milestones
with respect to specific product candidates, namely FDA approval of certain drug
applications (collectively, the “Drug Applications”). If each of the contingent
milestones were to have been achieved, the Company would have received up to
$5,176,675 worth of Indevus common stock on the date the milestone was met, at
which date additional gain would have been recognized.
38
On March
23, 2009, Indevus filed a Current Report on Form 8-K with the SEC announcing the
completion of an Agreement and Plan of Merger with Endo Pharmaceuticals Holdings
Inc., a Delaware corporation (“Endo”) and BTB Purchaser Inc., a Delaware
corporation and wholly-owned subsidiary of Endo, pursuant to which Endo acquired
all of the issued and outstanding shares of the common stock, par value $0.001
per share, of Indevus (the “Endo Merger”). As a part of the Endo
Merger, the Contingent Rights were converted into the right to receive a cash
payment contingent upon FDA approval of the Drug Applications. As a
result of the consummation of the Endo Merger, the Company has contingent rights
to receive from Endo the following cash payments: (i) upon FDA approval of the
uteral stent drug application (the “Uteral Stent”) on or before specified dates
in 2012 - between $2,685,000 and $2,327,000, depending upon the terms contained
in the FDA approval and (ii) upon FDA approval of the VP003 (Octreotide implant)
drug application (“VP003”) on or before specified dates in 2012 - between
$4,028,000 and $3,491,000, depending upon the terms contained in the FDA
approval. Two parties related to the Company at the time of the
original transaction in which the Company received the Contingent Rights (one of
which continues to be a related party) would be entitled to receive a portion of
any such cash payments received by the Company (see Note 18(a)). In
February 2010, Endo filed a current report on Form 8-K with the SEC in which
they disclosed that they recorded a non-cash impairment charge due to heightened
regulatory uncertainties related to their Aveed TM product, and reduced the
corresponding liability for contingent payment due to former Indevus
shareholders recorded on their balance sheet due to the decreased probability
that they will be obligated to make the contingent consideration payments
related to the Uteral Stent.
9. Investment
and other income, net
Investment
and other income, net is comprised of the following (in thousands):
|
|
Year
Ended
|
|||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Impairment
of Investment in Millenium Cell
|
$
|
-
|
$
|
(138
|
)
|
|||
|
Interest
income
|
15
|
200
|
||||||
|
$
|
15
|
$
|
62
|
|||||
10. Marketable
securities
Marketable
securities (included in other assets), which are classified as
available-for-sale and carried at market value, is comprised of the Company’s
investment in Millenium Cell Inc. (“Millennium”). Millennium is a publicly
traded emerging technology company engaged in the business of developing
innovative fuel systems for the safe storage, transportation and generation
of hydrogen for use as an energy source. At December 31, 2009 and 2008, the
Company owned 364,771 shares of common stock of Millennium with a market
value of $0 and $7,000, respectively. For the year ended December 31,
2008, the Company considered their investment to be other than temporarily
impaired and accordingly recorded an impairment loss of $138,000 related to such
shares.
11. Property,
plant and equipment
Property,
plant and equipment of National Patent consist of the following (in
thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Furniture
and fixtures
|
$
|
58
|
$
|
56
|
||||
|
Accumulated
depreciation
|
(40
|
)
|
(28
|
)
|
||||
|
$
|
18
|
$
|
28
|
|||||
See Note
2 for details of Five Star’s property, plant and equipment.
39
12. Accounts
payable and accrued expenses
Accounts
payable and accrued expenses of National Patent consist of the
following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accrued
professional fees
|
$ | 895 | $ | 315 | ||||
|
Accounts
payable and other accrued expenses
|
237 | 69 | ||||||
| $ | 1,132 | $ | 384 | |||||
13. Income
taxes
The
components of income tax expense (benefit) are as follows (in
thousands):
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Continuing operations:
|
||||||||
|
Current
|
||||||||
|
Federal
|
$
|
678
|
$
|
172
|
||||
|
State
and local
|
286
|
33
|
||||||
|
Total
current
|
964
|
205
|
||||||
|
Deferred
|
||||||||
|
Federal
|
660
|
(799)
|
||||||
|
State
and local
|
13
|
(50)
|
||||||
|
Total
deferred
|
673
|
(849)
|
||||||
|
Total
income tax expense (benefit)
|
$
|
1,637
|
$
|
(644)
|
||||
|
Discontinued operations:
|
||||||||
|
Current
|
||||||||
|
Federal
|
$
|
(11
|
)
|
$
|
14
|
|||
|
State
and local
|
4
|
4
|
||||||
|
Total
current
|
(7
|
)
|
18
|
|||||
|
Deferred
|
||||||||
|
Federal
|
44
|
(108
|
)
|
|||||
|
State
and local
|
160
|
(21
|
)
|
|||||
|
Total
deferred
|
204
|
(129
|
)
|
|||||
|
Total
income tax expense (benefit)
|
$
|
197
|
$
|
(111
|
)
|
|||
40
The
difference between the expense (benefit) for income taxes computed at
the statutory rate and the reported amount of tax expense (benefit) from
continuing operations is as follows:
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Federal
income tax rate
|
34.0 | % | (34.0 | )% | ||||
|
Benefit
from increase in ownership of Five Star
|
- | 8.3 | ||||||
|
Change
in valuation allowance
|
- | 6.5 | ||||||
|
Utilization
of carry forwards
|
(9.1 | ) | - | |||||
|
Other
|
2.9 | 0.6 | ||||||
|
Effective
tax rate
|
27.8 | % | (18.6 | )% | ||||
The tax
effects of temporary differences between the financial reporting and
tax bases of assets and liabilities from continuing operations are
summarized as follows (in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred tax
assets:
|
||||||||
|
Assets
and liabilities held for sale
|
$
|
997
|
$
|
1,089
|
||||
|
Deferred
transaction costs
|
111
|
-
|
||||||
|
Allowance
for doubtful accounts
|
8
|
-
|
||||||
|
Accrued
liabilities
|
77
|
16
|
||||||
|
Marketable
securities
|
7
|
7
|
||||||
|
Net
operating loss carryforward
|
108
|
2,116
|
||||||
|
Charitable
contributions carryforward
|
-
|
3
|
||||||
|
Equity-based
compensation
|
1,000
|
508
|
||||||
|
Alternative
minimum tax credit carryforward
|
-
|
172
|
||||||
|
Gross deferred tax
assets
|
2,308
|
3,911
|
||||||
|
Less:
valuation allowance
|
(1,641
|
)
|
(2,242
|
)
|
||||
|
Deferred tax assets after
valuation allowance
|
$
|
667
|
$
|
1,669
|
||||
As a
result of an increase in the ownership of Five Star and the ability to file a
consolidated U.S. federal tax return, the excess of the financial reporting
basis over tax basis in Five Star was no longer considered to be a taxable
temporary difference and accordingly, the related deferred tax liability of
$279,000 was eliminated and reflected as a deferred tax benefit in continuing
operations in 2008.
As of
December 31, 2009, the Company has various State net operating loss
carryforwards of approximately $1.7 million, of which approximately $1.6 million
expires in 2016 and approximately $0.1 million expires in
2029. During 2009, the Company utilized all of its federal net
operating loss carryforward and alternative minimum tax credit
carryforward.
A
valuation allowance is provided when it is more likely than not that some
portion of deferred tax assets will not be realized. The valuation allowance
decreased by approximately $600,000 during the year ended December 31, 2009 due
to the utilization of net operating loss carryforwards and other deferred tax
assets, and increased by approximately $400,000 during the year ended December
31, 2008.
41
Effective January 1, 2007, the Company adopted
guidance to clarify the uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. As required by such guidance, the Company
applied the “more-likely-than-not” recognition threshold to all tax positions,
commencing at the adoption date, which resulted in no unrecognized tax benefits
reflected in the accompanying financial statements. Pursuant to such guidance,
the Company has opted to classify interest and penalties that would accrue
according to the provisions of relevant tax law as interest and other expense,
respectively, in the Consolidated Statement of Operations.
The
Company files a consolidated federal income tax return with its subsidiaries.
Prior to July 2008, Five Star was less then 80% owned by the Company and filed
its own consolidated return with its holding company parent. In addition, the
Company and Five Star file separate state and local income tax returns. For
federal income tax purposes, the 2006 through 2009 tax years remain open for
examination by the tax authorities under the normal three year statute of
limitations. For state tax purposes, the 2005 through 2009 tax years remain open
for examination by the tax authorities under a four year statute of
limitations.
14. Capital
Stock
The
Company’s Board of Directors without any vote or action by the holders of common
stock is authorized to issue preferred stock from time to time in one or
more series and to determine the number of shares and to fix the powers,
designations, preferences and relative, participating, optional or other
special rights of any series of preferred stock.
On
December 15, 2006, the Board of Directors authorized the Company
to repurchase up to 2,000,000 shares, or approximately 11%, of its
outstanding shares of common stock from time to time either in open market
or privately negotiated transactions. On August 13, 2008, the Company’s
Board of Directors authorized an increase of 2,000,000 common shares to be
repurchased. At December 31, 2009 and 2008, the Company had repurchased
1,791,321 shares of its common stock and 2,208,679 shares remained available for
repurchase.
15. Incentive
stock plans and stock based compensation
The
Company had initially adopted a stock-based compensation plan for employees and
non-employee members of its Board of Directors in November 2003 (the “2003
Plan”), which was subsequently amended in March 2007 (the “2003 Plan
Amendment”). In December 2007, the Company adopted the National Patent
Development Corporation 2007 Incentive Stock Plan (the “2007 NPDC
Plan”). The plans provide for up to 3,500,000 and 7,500,000 awards
for shares under the 2003 Plan Amendment and 2007 NPDC Plan, respectively in
form of discretionary grants of stock options, restricted stock shares, and
other stock-based awards to employees, directors and outside service providers.
The Company’s plans are administered by the Compensation Committee of the Board
of Directors, which consists solely of non-employee directors. The term of any
option granted under the plans 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
of total voting stock of the Company, three years from the date of
grant. The exercise price of any option granted under the plans may
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 of
total voting stock, 110% of such fair market value.
42
In March
2007, the Company granted an aggregate of 3,200,000 nonqualified stock options
to officers and directors and in July 30, 2007, the Company granted an aggregate
of 150,000 non-qualified stock options under the 2003 Plan. No
options were granted in 2009 or 2008. The Company recorded compensation expense
related to the above option grants of $905,000 and $916,000 for the years ended
December 31, 2009 and 2008, respectively. As of December 31, 2009 no awards were
granted under the 2007 NPDC Plan and the number of shares reserved and available
for award under the 2003 Plan Amendment is 150,000.
Information
with respect to the Company’s outstanding stock options at the beginning and end
of 2009 is presented below. There was no stock option activity under the
plans in 2009.
|
Stock
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Options
outstanding at January 1, 2009
|
3,350,000 | $ | 2.49 | 7.9 | $ | 0 | * | |||||||||
|
Options
outstanding at December 31, 2009
|
3,350,000 | 2.49 | 6.9 | $ | 0 | * | ||||||||||
|
Options
exercisable at December 31, 2009
|
2,366,667 | $ | 2.45 | 6.9 | $ | 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.
|
As of
December 31, 2009, there was $156,000 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 0.2 years.
As a
result of the NPDV-Five Star Merger, all vested and unvested options and
restricted stock granted under the Five Star plan were cancelled for a cash
payment of $182,000 (see Note 5). In 2008, Five Star recognized
compensation expense related to the terminated options and restricted stock of
$589,000.
16. Other
benefit plans
MXL
Employee Benefit Plan
NPDC
Holdings, Inc. (formerly MXL Industries) maintains a 401(k) Savings Plan, the
MXL Industries, Inc. Retirement and Savings Plan (the “MXL Plan”), for
employees who have completed at least one hour of service coincident with
the first day of each month. The MXL Plan permits pre-tax contributions by
participants. The Company matched up to 50% of the participants’ first 7%
of compensation contributed. The Company also matched participants’
contributions in shares of Company common stock through August 28, 2008, and
subsequent to that date, matched in cash, which totaled $ 7,000 and $2,000 in
2009 and 2008, respectively. During the year ended
December 31, 2008, the Company contributed 10,260 shares of Company’s common
stock with a value of approximately $25,000 as a matching contribution to the
MXL Plan.
Five
Star Employee Benefit Plan
Five Star
maintains a 401(k) Savings Plan (the “Savings Plan”) for employees who have
completed one year of service. The Savings Plan permits pre-tax contributions to
the Savings Plan of 2% to 50% of compensation by participants pursuant to
Section 401(k) of the Internal Revenue Code. Five Star matches 40% of the
participants’ first 6% of compensation contributed, not to exceed an amount
equivalent to 2.4% of that participant’s compensation.
43
The
Savings Plan is administered by a trustee appointed by the Board of Directors of
Five Star and all contributions are held by the trustee and invested at the
participants’ directions in various mutual funds. Five Star’s expense associated
with the Savings Plan was approximately $118,000 and $142,000 for the years
ended December 31, 2009 and 2008, respectively.
17. Commitments
and Contingencies
|
(a)
|
In
connection with its land investments, the Company has certain ownership
interests in several dams and related reservoirs located in the State of
Connecticut. Under relevant Connecticut law, the Company is
responsible for maintaining the safety of these dams. The
Company has been notified by certain landowners adjoining one of the
reservoirs that the water level in the reservoir has decreased; allegedly
causing harm to such landowners. While the Company is currently
investigating the cause of the decline in the water level, it does not
presently know the cause of the decrease in water level or have any
reasonable estimation of the cost of repairs, if any, that may be
required. Further, the Company cannot presently determine the
extent of its legal liability, if any, with respect to the
landowners. The Company has not received any claims with
respect to any of the other reservoirs. The Company cannot
reasonably estimate at this time the costs which may be incurred with
respect to this matter and while these costs could be material to the
Company’s results of operations in the period incurred, based upon the
present state of its knowledge, the Company has no reason to believe that
these costs will be material to its financial position. No
amounts have been provided for this matter in the accompanying financial
statements.
|
|
(b)
|
Five
Star had several noncancellable leases for real property and machinery
and equipment which were assumed by Merit pursuant to the sale of
Five Star. Such leases expire at various dates with, in some cases,
options to extend their terms. As of December 31, 2009, minimum
rentals under long-term operating leases were as follows (in
thousands):
|
|
Real
Property
|
Machinery
&
Equipment
|
Total
|
||||||||||
|
2010
|
2,343 | 367 | 2,710 | |||||||||
|
2011
|
1,657 | 136 | 1,793 | |||||||||
|
2012
|
70 | 70 | ||||||||||
|
Total
|
$ | 4,070 | $ | 503 | $ | 4,573 | ||||||
Several
of the leases contained provisions for rent escalation based primarily
on increases in real estate taxes and operating costs incurred by the
lessor. Rent expense of Five Star which is included in discontinued
operations was approximately $3,980,000, and $3,676,000 for the years ended
December 31, 2009 and 2008, respectively. GP Strategies and the Company have
guaranteed the leases for Five Star’s New Jersey and Connecticut warehouses,
having annual rentals of approximately $1,825,000 and $325,000 per year,
respectively through the third quarter of 2010. GP Strategies’ guarantee of such
leases was in effect when Five Star was a wholly-owned subsidiary of GP
Strategies. In March 2009, the landlord of the Connecticut facility released GP
Strategies from its guarantee, and accepted the guarantee from the
Company. GP Strategies will be released from any further liability
beyond September 30, 2010 on the New Jersey facility provided that prior to
August 31, 2010, GP delivers to the New Jersey landlord a letter of credit for
$128,000 effective through September 30, 2011. Merit has extended the New Jersey
lease through January 2011 and has agreed under the terms of the Stock Purchase
Agreement to use its best efforts have the New Jersey
landlord release GP Strategies and the Company of guarantees on any
future extensions effective after September 30, 2011.
44
|
(c)
|
See
Note 3 in respect to claims related to the sale of Five
Star.
|
18. 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 (see Note 8). In January
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, this obligation related to the sale
of Indevus shares by the Company. The November 12, 2004 agreement also
provides for Bedford Oak Partners and Mr. Feldman 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 Rights, if any, at such time
as such shares are sold by the
Company.
|
|
|
As
a result of the consummation of the merger between Indevus and Endo in
2009, the Company has a contingent right to receive from Endo certain cash
payments. The two related parties would receive the following portions of
the Company’s cash payments upon the occurrence of the following events:
(i) upon FDA approval of the Uteral Stent, between $262,000 and $227,000,
and (ii) upon FDA approval of VP003, between $393,000 and
$341,000.
|
|
(b)
|
On
April 5, 2007, Five Star, in connection with its acquisition of
substantially all the assets of Right-Way Dealer Warehouse (“Right-Way”),
entered into a lease for a warehouse with a company owned by the
former principal of Right-Way who presently serves as an executive of
Five Star. The lease has an initial term of five years with two successive
five-year renewal options and provides for an annual rent of $325,000,
subject to adjustment. Rent expense for the years ended December 31, 2009
and 2008 was $280,000 and $325,000, respectively. Five Star
also has an option to purchase the warehouse at any time during the
initial term of the lease for $7,750,000, subject to 3% annual
adjustment.
|
19. Stockholders
equity
(a) On
March 25, 2008, Chairman of the Board of Five Star, and a director of the
Company resigned effective immediately. In connection with the
resignation, Five Star, the Company and this individual entered into an
agreement, dated March 25, 2008, pursuant to which the individual 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 the
individual 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, the
individual’s children and grandchildren sold to the Company an additional
301,664 shares of Five Star common stock that they had received from the
individual at $0.60 per share. The market value of Company 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 the individual, 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 2008 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. As a result of the repurchase of the 200,000 shares of Company common
stock, which were also convertible into shares of Five Star common stock, the
carrying value of the Company’s shares was reclassified from temporary to
permanent equity.
45
The
agreement also contained one-year non-compete, standstill and non-solicitation
provisions and terminated his three year employment agreement.
|
(b)
|
On
August 11, 2008, the Company, and holders of warrants to purchase an
aggregate of 1,423,886 shares of Company 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, which was in excess of the closing price on August 11,
2008. On August 13, 2008, the holders of warrants exercised the
warrants and the Company issued and sold 1,423,886 shares of treasury
stock to the holders of the warrants for cash consideration of
$2.50 per share, representing an aggregate purchase price of
$3,560,000.
|
|
20.
|
Sale of
land
|
On
October 20, 2009, NPDC Holdings, Inc., a wholly-owned subsidiary of the Company,
sold approximately 1,000 acres of undeveloped real property located in the Town
of Pawling, County of Dutchess, New York with a carrying value of $2,500,000 for
$12,500,000 in cash, resulting in a pre tax gain of $9,668,000, net of related
expenses of $304,000.
46
None.
“Disclosure
controls and procedures” are the controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. These controls and procedures are designed to ensure that
information required to be disclosed by an issuer in its Exchange Act reports is
accumulated and communicated to the issuer’s management, including its principal
executive and financial officers, as appropriate, 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 Company’s disclosure controls and procedures pursuant to
the Exchange Act Rule 13a-15(e) as of December 31, 2009. Based on
such evaluation, the Company’s principal executive officer and principal
financial officer have concluded that the Company’s disclosure controls and
procedures were effective as of such time.
The
Company’s principal executive officer and principal financial officer have also
concluded that there have not been any changes in the Company’s internal control
over financial reporting during the quarter ended December 31, 2009 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f)). The Company’s internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
of the Company, including its principal executive officer and principal
financial officer, assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control
- Integrated Framework.
Based on
their assessment using those criteria, management concluded that, as of December
31, 2009, the Company’s internal control over financial reporting is
effective.
This annual report does not include an
attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report was not
subject to attestation by the Company's registered public accounting firm
pursuant to temporary rules of the SEC that permit the Company to provide only
management's report in this annual report.
47
The
Company’s Annual Meeting of Stockholders (the “Annual Meeting”) was held on
December 28, 2009.
There
were present at the Annual Meeting in person or by proxy stockholders holding an
aggregate of 11,409,504 shares of common stock of a total number of 17,561,240
shares of common stock issued, outstanding and entitled to vote at the Annual
Meeting.
At the
Annual Meeting, the following proposals were submitted to a vote of our
stockholders, and each was approved and adopted by our stockholders, as
indicated below:
Proposals:
1. To
elect six directors to our Board of Directors.
|
Election
of Directors
|
Votes
For
|
Votes
Withheld
|
||
|
Harvey
P. Eisen
|
10,307,006
|
1,102,498
|
||
|
John
C. Belknap
|
10,190,483
|
1,219,021
|
||
|
Talton
R. Embry
|
11,319,768
|
89,736
|
||
|
Lawrence
G. Schafran
|
11,191,325
|
218,179
|
||
|
Scott
N. Greenberg
|
10,311,783
|
1,097,721
|
||
|
James
Schreiber, Esq.
|
11,319,768
|
89,736
|
As
a result, Messrs. Eisen, Belknap, Embry, Schafran, Greenberg and Schreiber were
re-elected as directors of the Company for a one year term expiring at our next
annual meeting of stockholders or until their respective successors have been
duly elected and qualified.
2. To
approve and ratify the appointment of Eisner LLP
as the Company’s independent registered public accounting firm for the
fiscal year ending December 31, 2009.
|
Votes
For
|
Votes
Against
|
Votes
Abstained
|
Broker
Non-Votes
|
|||
|
11,319,640
|
23,130
|
16,734
|
0
|
As a
result, the proposal was approved and adopted by our stockholders.
PART
III
The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2010 Annual Meeting of Stockholders under the captions
“Directors and Executive Officers”, “Corporate Governance”, “Compliance with
Section 16(a) of the Exchange Act”, “Code of Ethics” and “Audit
Committee.”
The
information required by this item is incorporated by reference to the
Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders
under the caption “Executive Compensation.”
48
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2009 with respect to
shares of Company common stock that may be issued under existing equity
compensation plans.
|
Plan
category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
(a)
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
Number
of securities
remaining
available
for future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
(c)
|
|
Equity
compensation
plans
approved by
security
holders (1)
|
3,350,000
|
$2.49
|
7,650,000
|
|
Equity
compensation
plans
not approved by
security
holders
|
―
|
―
|
―
|
|
Total
|
3,350,000
|
$2.49
|
7,650,000
|
|
(1)
|
Consists
of (i) the 2003 Stock Plan, as amended, which was originally adopted by
the Board of Directors and approved by the sole stockholder of the Company
on November 3, 2003 and the amendment thereto, which was approved by the
Board of Directors of the Company on March 1, 2007 and by the stockholders
of the Company on December 20, 2007; and (ii) the 2007 Incentive Stock
Plan, which was approved by the Board of Directors on July 30, 2007 and by
the stockholders of the Company on December 20,
2007.
|
49
Additional
information required by this item is incorporated by reference from the
Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders under the
caption “Stock Ownership of Management and Principal
Stockholders”.
This
information required by this item is incorporated by reference from the
Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders under
the captions “Certain Transactions with Management” and “Director
Independence”.
The
information regarding principal accountant fees and services and the
Company’s pre-approval policies and procedures for audit and
non-audit services provided by the Company’s independent accountants is
incorporated by reference to the Company’s Proxy Statement for its 2010
Annual Meeting of Stockholders under the caption “Principal Accountant Fees
and Services.”
50
PART
IV
(a)(1) The
following financial statements are included in Part II, Item 7. Financial
Statements and Supplementary Data:
|
Page
|
|
|
Financial
Statements of National Patent Development Corporation and
Subsidiaries:
|
|
|
Report
of Independent Registered Public Accounting
Firm
|
21
|
|
Consolidated
Statements of Operations - Years ended December 31,
2009
and
2008
|
22
|
|
Consolidated
Statements of Comprehensive Income (Loss) - Years
ended
December 31, 2009 and
2008
|
23
|
|
Consolidated
Balance Sheets - December 31, 2009 and
2008
|
24
|
|
Consolidated
Statements of Cash Flows - Years ended December 31,
2009
and
2008
|
25
|
|
Consolidated
Statements of Changes in Stockholders’ Equity – Years
ended
December 31, 2009 and
2008
|
26
|
|
Notes
to Consolidated Financial
Statements
|
27
|
|
(a)(2)
|
Schedules
have been omitted because they are not required or are not applicable, or
the required information has been included in the financial statements or
the notes thereto.
|
|
(a)(3)
|
See accompanying Index to Exhibits. |
51
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
NATIONAL
PATENT DEVELOPMENT
CORPORATION
|
||||
|
Date: March
30, 2010
|
By:
|
/s/ HARVEY P. EISEN | ||
|
Name:
|
Harvey
P. Eisen
|
|||
|
Title:
|
Chairman,
President and Chief Executive Officer
(Principal
Executive Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
|
|
/s/
HARVEY P. EISEN
|
Chairman,
President and Chief Executive Officer
|
March
30, 2010
|
|
|
Harvey
P. Eisen
|
(Principal
Executive Officer)
|
||
|
/s/
JOHN C. BELKNAP
|
Vice
President and Director
|
March
30, 2010
|
|
|
John
C. Belknap
|
|||
|
/s/
LAWRENCE G. SCHAFRAN
|
Director
|
March
30, 2010
|
|
|
Lawrence
G. Schafran
|
|||
|
/s/
TALTON R. EMBRY
|
Director
|
March
30 2010
|
|
|
Talton
R. Embry
|
|||
|
/s/
SCOTT N. GREENBERG
|
Director
|
March
30, 2010
|
|
|
Scott
N. Greenberg
|
|||
|
/s/
JAMES SCHREIBER, ESQ.
|
Director
|
March
30, 2010
|
|
|
James
Schreiber, Esq.
|
|||
|
/s/
IRA J. SOBOTKO
|
Vice
President, Chief Financial Officer
|
March
30, 2010
|
|
|
Ira
J. Sobotko
|
(Principal
Financial and Accounting Officer)
|
52
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
||
|
2.1
|
Form
of Distribution Agreement between GP Strategies Corporation and the
Registrant (incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Form S-1, Registration No. 333-118568 filed with the SEC on
August 26, 2004)
|
||
|
2.2
|
Stock
Purchase Agreement, dated November 24, 2009, between the Registrant and
The
Merit
Group, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K filed with the SEC on November 25,
2009)
|
||
|
3
|
(i)
|
Form
of Amended and Restated Certificate of Incorporation of National Patent
Development Corporation (incorporated herein by reference to Exhibit 3.1
to the Registrant’s Form S-1, Registration No. 333-118568 filed with the
SEC on August 26, 2004)
|
|
|
3
|
(ii)
|
Amended
and Restated Bylaws of National Patent Development Corporation
(incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form
S-1, Registration No. 333-118568 filed with the SEC on August 26,
2004)
|
|
|
4.1
|
Form
of certificate representing shares of common stock, par value $0.01 per
share, of National Patent Development Corporation (incorporated herein by
reference to Exhibit 4.1 to the Registrant’s Form S-1, Registration No.
333-118568 filed with the SEC on August 26, 2004)
|
||
|
10.1
|
#
|
National
Patent Development Corporation 2003 Incentive Stock Plan (incorporated
herein by reference to Exhibit 10.8 to the Registrant’s Form S-1,
Registration No. 333-118568 filed with the SEC on August 26,
2004)
|
|
|
10.2
|
Loan
and Security Agreement dated as of June 20, 2003 by and between Five Star
Group, Inc. and Fleet Capital Corporation (incorporated herein by
reference to Exhibit 10.1 to Five Star Products, Inc. Form 10-Q for the
quarter ended June 30, 2003 filed with the SEC on August 14, 2003 (SEC
File No. 000-25869))
|
||
|
10.3
|
First
Modification Agreement dated as of May 28, 2004 by and between Five Star
Group, Inc. as borrower and Fleet Capital Corporation, as Lender
(incorporated herein by reference to Exhibit 10.11 to Five Star Products,
Inc. Form 10-K for the year ended December 31, 2004 filed with the SEC on
March 31, 2005 (SEC File No. 000-25869))
|
||
|
10.4
|
Second
Modification Agreement dated as of March 22, 2005 by and between Five Star
Group, Inc. as borrower and Fleet Capital Corporation, as Lender.
(incorporated herein by reference to Exhibit 10.12 to Five Star Products,
Inc. Form 10-K for the year ended December 31, 2004 filed with the SEC on
March 31, 2005 (SEC File No. 000-25869))
|
||
|
10.5
|
Third
Modification Agreement dated as of June 1, 2005 by and between Five Star
Group, Inc. as borrower and Fleet Capital Corporation, as Lender.
(incorporated herein by reference to Exhibit 10.1 to Five Star Products,
Inc. Form 10-Q for the quarter ended June 30, 2005 filed with the SEC on
August 12, 2005 (SEC File No.
000-25869))
|
||
|
Exhibit
No.
|
Description
|
||
|
10.6
|
Fourth
Modification Agreement dated September 26, 2005, but effective as of
August 1, 2005, by and between Five Star Group, Inc., as borrower and
Fleet Capital Corporation, as Lender (incorporated herein by reference to
Exhibit 10.1 to Five Star Products, Inc. Form 10-Q for the quarter ended
September 30, 2005 filed with the SEC on November 15, 2005 (SEC File No.
000-25869))
|
||
|
10.7
|
Fifth
Modification Agreement dated November 14, 2005 - Waiver of minimum Fixed
Charge Coverage Ratio requirement for the three months ended September 30,
2005 by and between Five Star Group, Inc. as borrower and Fleet Capital
Corporation, as Lender (incorporated herein by reference to Exhibit 10.2
to the Five Star Products Form 10-Q for the third quarter ended September
30, 2005 (SEC File No. 000-25869))
|
||
|
10.8
|
Sixth
Modification Agreement dated March 23, 2006 - Waiver of Fixed Charge
Coverage for the fiscal quarter and fiscal year ending December 31, 2005
by and between Five Star Group, Inc. as borrower and Fleet Capital
Corporation, as Lender (incorporated herein by reference to Exhibit 10.14
to Five Star Products, Inc. Form 10-K for the year ended December 31, 2005
filed with the SEC on March 31, 2006 (SEC File No.
000-25869))
|
||
|
10.9
|
Restated
and Amended Loan and Security Agreement, dated as of June 27, 2008, by and
between Five Star
Group, Inc. and Bank of America, N.A. (incorporated herein by
reference to Exhibit 10.1 to Five Star Products, Inc. Form 8-K filed with
the SEC on July 3, 2008)
|
||
|
10.10
|
Agreement
of Subordination and Assignment, dated as of June 27, 2008, by JL
Distributors, Inc., Five Star Group, Inc., Five Star Products, Inc. and
Bank of America, N.A. (incorporated herein
by reference to Exhibit 10.2 to Five Star Products, Inc. Form 8-K filed
with the SEC on July 3, 2008)
|
||
|
10.11
|
Guaranty and Pledge
Agreement, dated as of June 27, 2008, by Five Star Products, Inc. in favor
of Bank of America, N.A. (incorporated herein by reference to
Exhibit 10.3 to Five Star Products, Inc. Form 8-K filed with the SEC on
July 3, 2008)
|
||
|
10.12
|
Restated
and Amended Promissory Note of Five Star Group, Inc. payable to the order
of Bank of America, N.A., dated as of June 26, 2008 (incorporated herein
by reference to Exhibit 10.4 to Five Star Products, Inc. Form 8-K filed
with the SEC on July 3, 2008)
|
||
|
10.13
|
Amended
Promissory Note in the amount of $2,800,000 dated June 30, 2005, between
the Five Star Products, Inc. and National Patent Development Corporation
(incorporated herein by reference to Exhibit 10.2 to Five Star Products,
Inc. Form 10-Q for the quarter ended June 30, 2005 filed with the SEC on
August 12, 2005 (SEC File No. 000-25869))
|
||
|
10.14
|
Lease
dated as of February 1, 1986 between Vernel Company and Five Star Group,
Inc., as amended on July 25, 1994 (incorporated herein by reference to
Exhibit 10.6 to Five Star Products, Inc. Form 10-K for the year ended
December 31, 1998 filed with the SEC on March 31,
1998)
|
|
Exhibit
No.
|
Description
|
||
|
10.15
|
Letter Amendment,
dated March 24, 2008, and prior amendments, to Lease dated February 1,
1986 between Vernel Company and Five Star Group, Inc. (incorporated
by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2009 filed with the SEC on August 13,
2009)
|
||
|
10.16
|
Lease
dated as of May 4, 1983 between Vornado, Inc., and Five Star Group, Inc.
(incorporated herein by reference to Exhibit 10.7 to Five Star Products,
Inc. Form 10-K for the year ended December 31, 1998 filed with the SEC on
March 31, 1998 (SEC File No. 000-25869))
|
||
|
10.17
|
Seventh
Lease Modification and Extension Agreement, dated June 9, 2009, and prior
modifications and extensions, to Lease dated as of May 4, 1983 between
Vornado, Inc. and Five Star Group, Inc. (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009 filed with the SEC on August 13,
2009)
|
||
|
10.18
|
Letter
Amendment, dated June 23, 2009 to Lease dated February 1, 1986 between
Vernel Company and Five Star Group, Inc. (incorporated by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009, filed with the SEC on November 16,
2009)
|
||
|
10.19
|
Amended
and Restated Investor Rights Agreement dated as of May 30, 2003
by and among Hydro Med Sciences and certain Institutional
Investors (incorporated herein by reference to Exhibit 10.34 to
GP Strategies’ Form 10-K for the year ended December 31, 2003
filed with the SEC on April 14, 2004 (SEC File No.
001-07234))
|
||
|
10.20
|
Amended
and Restated Investor Right of First Refusal and Co-Sale Agreement dated
as of May 30, 2003 by and among Hydro Med Sciences, Inc. and certain
Institutional Investors (incorporated herein by reference to Exhibit 10.35
to the GP Strategies’ Form 10-K for the year ended December 31, 2003 filed
with the SEC on April 14, 2004)
|
||
|
10.21
|
Stock
Purchase Option Agreement dated as of June 30, 2004 by and among GP
Strategies Corporation, National Patent Development Corporation, Valera
Pharmaceuticals Inc. and certain Institutional Investors (incorporated
herein by reference to Exhibit 10.17 to the Registrant’s Form S-1,
Registration No. 333-118568 filed with the SEC on August 26,
2004)
|
||
|
10.22
|
#
|
Note
Purchase Agreement dated as of November 12, 2004 by and between the
Registrant, MXL Industries, Inc., Bedford Oak Partners L.P. and Jerome
Feldman (incorporated herein by reference to Exhibit 10.27 to the
Registrant’s Form 10-K for the year ended December 31, 2004 filed with the
SEC on April 15, 2005 (SEC File No. 000-50587))
|
|
|
10.23
|
#
|
Form
of Indemnification Agreement (incorporated herein by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on
May 15, 2006)
|
|
|
10.24
|
Amended
and Restated Convertible Promissory Note dated June 30, 2005 between Five
Star Products, Inc. and JL Distributors, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed with the SEC on March 7,
2007)
|
|
Exhibit
No.
|
Description
|
||
|
10.25
|
Registration
Rights Agreement, dated as of March 2, 2007, between Five Star Products,
Inc. and JL Distributors, Inc. (incorporated by reference to Exhibit 10.2
to the Registrant’s Current Report on Form 8-K filed with the SEC on March
7, 2007)
|
||
|
10.26
|
#
|
Agreement,
dated as of March 2, 2007, between Five Star Products, Inc. and Leslie
Flegel (incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed with the SEC on March 7,
2007)
|
|
|
10.27
|
#
|
Registration
Rights Agreement, dated as of March 2, 2007, between Five Star Products,
Inc. and Leslie Flegel (incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed with the SEC on March 7,
2007)
|
|
|
10.28
|
#
|
Purchase
Agreement, dated as of March 2, 2007, between National Patent Development
Corporation and Leslie Flegel (incorporated by reference to Exhibit 10.5
to the Registrant’s Current Report on Form 8-K filed with the SEC on March
7, 2007)
|
|
|
10.29
|
#
|
Registration
Rights Agreement, dated as of March 2, 2007, between National Patent
Development Corporation. and Leslie Flegel (incorporated by reference to
Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed with the
SEC on March 7, 2007)
|
|
|
10.30
|
#
|
Restricted
Stock Agreement, dated as of March 2, 2007, between Five Star Products,
Inc. and John Belknap (incorporated by reference to Exhibit 10.7 to the
Registrant’s Current Report on Form 8-K filed with the SEC on March 7,
2007)
|
|
|
10.31
|
#
|
Registration
Rights Agreement, dated as of March 2, 2007, between Five Star Products,
Inc. and John Belknap (incorporated by reference to Exhibit 10.8 to the
Registrant’s Current Report on Form 8-K filed with the SEC on March 7,
2007)
|
|
|
10.32
|
#
|
Non-Qualified
Stock Option Agreement, dated March 1, 2007, between the Registrant and
Harvey P. Eisen (incorporated by reference to Exhibit 10.9 to the Current
Report on Form 8-K filed by the Registrant with the SEC on March 7,
2007)
|
|
|
10.33
|
#
|
Stock
Option Agreement, dated March 1, 2007, between National Patent Development
Corporation and John Belknap (incorporated by reference to Exhibit 10.10
to the Registrant’s Current Report on Form 8-K filed with the SEC on March
7, 2007)
|
|
|
10.34
|
#
|
Stock
Option Agreement, dated March 1, 2007, between National Patent Development
Corporation and Talton Embry (incorporated by reference to Exhibit 10.11
to the Registrant’s Current Report on Form 8-K filed with the SEC on March
7, 2007)
|
|
|
10.35
|
#
|
Stock
Option Agreement, dated March 1, 2007, between National Patent Development
Corporation and Scott Greenberg (incorporated by reference to Exhibit
10.12 to the Registrant’s Current Report on Form 8-K filed with the SEC on
March 7, 2007)
|
|
|
10.36
|
#
|
Stock
Option Agreement, dated March 1, 2007, between National Patent Development
Corporation and Lawrence Schafran (incorporated by reference to Exhibit
10.13 to the Registrant’s Current Report on Form 8-K filed with the SEC on
March 7, 2007)
|
|
Exhibit
No.
|
Description
|
||
|
10.37
|
Asset
Purchase Agreement dated as of March 13, 2007 between Five Star Products,
Inc. and Right-Way Dealer Warehouse, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed with the SEC on March 19, 2007)
|
||
|
10.38
|
Agreement
of Lease, dated as of April 5, 2007, between Kampner Realty, LLC, as
Landlord, and Five Star Products, Inc., as Tenant, for premises located at
1202 Metropolitan Avenue, Brooklyn, NY (incorporated herein by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
the SEC on April 11, 2007)
|
||
|
10.39
|
#
|
Employment
Agreement, dated as of April 5, 2007, between Five Star Group, Inc. and
Ronald Kampner (incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed with the SEC on April 11,
2007)
|
|
|
10.40
|
Amendment
to Agreement of Lease between Kampner Realty, LLC, as Landlord, and Five
Star Products, Inc., as Tenant, for premises located at 1202 Metropolitan
Avenue, Brooklyn, New York, agreed upon and entered into on June 11, 2007
(incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on June 14,
2007)
|
||
|
10.41
|
#
|
Stock
Option Agreement dated as of July 30, 2007 between the Company and Ira J.
Sobotko (incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarter ended September 30, 2007 filed with
the SEC on November 14, 2007)
|
|
|
10.42
|
#
|
Stock
Option Agreement dated as of July 17, 2007 between Five Star Products,
Inc. and Ira J. Sobotko (incorporated herein by reference to Exhibit 10.2
to the Registrant’s Form 10-Q for the quarter ended September 30, 2007
filed with the SEC on November 14, 2007)
|
|
|
10.43
|
#
|
National
Patent Development Corporation 2003 Incentive Stock Plan, as amended
(incorporated by reference to Appendix A to the Registrant’s Proxy
Statement filed by the Registrant with the SEC on November 16,
2007)
|
|
|
10.44
|
#
|
National
Patent Development Corporation 2007 Incentive Stock Plan (incorporated by
reference to Appendix B to the Registrant’s Proxy Statement filed by the
Registrant with the SEC on November 16, 2007)
|
|
|
10.45
|
#
|
Non-Employee
Director Compensation Program (incorporated by reference to Exhibit 99 to
the Registrant’s Current Report on Form 8-K filed with the SEC on November
17, 2009)
|
|
|
10.46
|
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 herein by reference
to Exhibit 10.1 to the Current Report on Form 8-K of Five Star Products,
Inc. filed with the SEC on June 19, 2008)
|
||
|
10.47
|
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 herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on June 19,
2008)
|
|
Exhibit
No.
|
Description
|
||
|
10.48
|
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 herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on June 19,
2008)
|
||
|
10.49
|
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 herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on June 19,
2008)
|
||
|
10.50
|
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 herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on June 19,
2008)
|
||
|
10.51
|
Tender
Offer and Merger Agreement, dated June 26, 2008, among the Company, NPDV
Acquisition Corp. and Five Star Products, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Current Report on Form 8-K of Five Star
Products, Inc. filed with the SEC on June 26, 2008)
|
||
|
10.52
|
#
|
Letter
Agreement, dated June 26, 2008 among Bruce Sherman, Company and Five Star
Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Five Star Products, Inc. filed with the SEC
on June 26, 2008)
|
|
|
10.53
|
#
|
Letter
Agreement, dated June 26, 2008 among Ronald Kampner, Company and Five Star
Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Five Star Products, Inc. filed with the SEC
on June 26, 2008)
|
|
|
10.54
|
#
|
Letter
Agreement, dated June 26, 2008 among Charles Dawson, Company and Five Star
Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Five Star Products, Inc. filed with the SEC
on June 26, 2008)
|
|
|
10.55
|
#
|
Letter
Agreement, dated June 26, 2008 among Joseph Leven, Company and Five Star
Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Five Star Products, Inc. filed with the SEC
on June 26, 2008)
|
|
|
10.56
|
#
|
Letter
Agreement, dated June 26, 2008 among Ira Sobotko, Company and Five Star
Products, Inc. (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Five Star Products, Inc. filed with the SEC
on June 26, 2008)
|
|
|
10.57
|
#
|
Letter
Agreement, dated June 26, 2008 among Mr. John C. Belknap, Company and Five
Star Products, Inc. (incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K of Five Star Products, Inc. filed with the
SEC on June 26, 2008)
|
|
Exhibit
No.
|
Description
|
||
|
10.58
|
Letter
Agreement amending certain warrant certificates, dated as of August 11,
2008, by and among National Patent Development Corporation, The Gabelli
Small Cap Growth Fund, The Gabelli Equity Income Fund, The Gabelli ABC
Fund, and The Gabelli Convertible and Income Securities Fund Inc.
(incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on August 12,
2008)
|
||
|
10.59
|
National
Patent Development Corporation Warrant Certificate, dated as of December
3, 2004, issuing 379,703 warrants to The Gabelli Small Cap Growth Fund
(incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on August 12,
2008)
|
||
|
10.60
|
National
Patent Development Corporation Warrant Certificate, dated as of December
3, 2004, issuing 379,703 warrants to The Gabelli Convertible Securities
and Income Fund Inc. (incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K of Five Star Products, Inc. filed with the
SEC on August 12, 2008)
|
||
|
10.61
|
National
Patent Development Corporation Warrant Certificate, dated as of December
3, 2004, issuing 379,703 warrants to The Gabelli Equity Income Fund
(incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K of Five Star Products, Inc. filed with the SEC on August 12,
2008)
|
||
|
10.62
|
National
Patent Development Corporation Warrant Certificate, dated as of December
3, 2004, issuing 284,777 warrants to The Gabelli ABC Fund (incorporated
herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of
Five Star Products, Inc. filed with the SEC on August 12,
2008)
|
||
|
10.63
|
Contract
of Sale dated as of October 7, 2009 between NPDC Holdings, Inc. and Little
Whaley Holdings LLC (incorporated by reference to Exhibit 10 to the
Registrant’s Current Report on Form 8-K filed with the SEC on October 14,
2009)
|
||
|
14
|
Code
of Ethics Policy (incorporated herein by reference to Exhibit 14.1 to the
Registrant’s Form 10-K for the year ended December 31, 2004 filed with the
SEC on April 15, 2005)
|
||
|
21
|
*
|
Subsidiaries
of the Registrant
|
|
|
31.1
|
*
|
Certification
of the principal executive officer of the Registrant, pursuant to
Securities Exchange Act Rule 13a-14(a)
|
|
|
31.2
|
*
|
Certification
of the principal financial officer of the Registrant, pursuant to
Securities Exchange Act Rule 13a-14(a)
|
|
|
32
|
*
|
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
and the principal financial officer of the
Registrant
|
___________________________
* Filed
herewith.
# Management
contract or compensatory plan or arrangement.