UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSAUNT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 333-118568
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NATIONAL PATENT DEVELOPMENT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-4005439
- ------------------------------------ -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
777 Westchester Avenue, White Plains, NY 10604
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(914) 249-9700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Exchange Act). Yes No X
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of August 8, 2005:
Common Stock 17,809,791 shares
1
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations-
Three Months and Six Months Ended
June 30, 2005 and 2004 (Unaudited) 1
Condensed Consolidated Statements of Comprehensive Loss-
Three Months and Six Months Ended
June 30, 2005 and 2004 (Unaudited) 2
Condensed Consolidated Balance Sheets -
June 30, 2005 (Unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Cash Flows -
Three Months and Six Months Ended
June 30, 2005 and 2004 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 20
Item 4. Controls and Procedures 20
Part II. Other Information
Item 6. Exhibits 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Sales $31,669 $29,604 $61,746 $58,725
Cost of sales 25,567 24,199 51,095 48,555
------- ------- ------- -------
Gross margin 6,102 5,405 10,651 10,170
Selling, general and administrative
expenses (5,538) (5,067) (10,648) (9,736)
Loss on write-down of Illinois
property (134) (5,067) (134) (9,736)
-------- -------- ------- --------
Operating profit (loss) 430 338 (131) 434
Interest expense (455) (276) (827) (481)
Investment and other income (loss) 108 (1,172) 271 (1,267)
-------- -------------- -------- --------------
Income (loss) before income taxes and
minority interest 83 (1,110) (687) (1,314)
Income tax expense (328) (168) (371) (142)
---------- --------- ---------- ---------
Loss before minority interest (245) (1,278) (1,058) (1,456)
Minority interest (150) (88) (157) (207)
----------- -------- ----------- ---------
Net loss $ (395) $ (1,366) $ (1,215) $ (1,663)
========= =========== =========== ===========
Net loss per share
Basic and diluted $ (0.02) $ (0.08) $ (0.07) $ (0.09)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net loss $ (395) $ (1,366) $ (1,215) $ (1,663)
Other comprehensive income (loss), before
tax:
Net unrealized gain (loss) on
available-for-sale-securities (206) 75 563 (411)
Reclassification adjustment for (gain) loss
on securities sold included in net loss - 33 (152) 173
Reclassification adjustment for impairment
loss on securities included in net loss - 1,081 - 1,081
Net unrealized gain (loss) on interest rate
swap,
net of minority interest (93) 274 58 112
--------- ----------- ------- -----------
Comprehensive income (loss) before tax (694) 97 (746) (708)
Income tax (expense) benefit related to
---
items of other comprehensive loss 38 (223) (25) (160)
------- ----- ------- --------
Comprehensive loss $ (656) $ (126) $ (771) $ (868)
======= ======== ======= ========
See accompanying notes to consolidated financial statements.
4
NATIONAL PATENT DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2005 2004
---- ----
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 5,986 $ 2,087
Accounts receivable, less allowance
for doubtful accounts of $413 and $306 17,731 11,410
Receivable from GP Strategies Corporation - 5,000
Inventories 26,940 30,698
Prepaid expenses and other current assets 588 530
Property held for sale 1,461 1,595
-------- --------
Total current assets 52,706 51,320
Marketable securities available for sale 977 1,416
Property, plant and equipment, net 3,276 2,876
Investment in Valera 1,590 1,590
Other assets 3,361 3,272
--------- ---------
Total assets $61,910 $60,474
======= =======
Liabilities and stockholder's equity
Current liabilities
Current maturities of long-term debt $ 367 $ 1,967
Short term borrowings 26,244 18,784
Accounts payable and accrued expenses, including due to
affiliates of $432 and $0, respectively 11,849 15,386
Mortgage collateralized by property held for sale 1,139 1,155
-------- --------
Total current liabilities 39,599 37,292
Long-term debt less current maturities 1,218 1,395
Other liabilities 249 258
--------- --------
Total liabilities 41,066 38,945
Minority interest 1,946 1,769
Stockholder's equity
Common Stock 178 178
Additional paid-in capital 24,670 24,761
Accumulated deficit (6,058) (4,843)
Accumulated other comprehensive income (loss) 108 (336)
----------- -----------
Total stockholder's equity 18,898 19,760
---------- --------
Total liabilities and stockholder's equity $61,910 $60,474
======= =======
See accompanying notes to consolidated financial statements.
5
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2005 2004
---- ----
Cash flows from operations:
Net loss $ (1,215) $ (1,663)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 338 353
Minority interest 157 207
Net (gain) loss on marketable securities (152) 131
Allocation of expenses and taxes from GP Strategies - 1,295
Loss on sale of fixed assets 76 -
Loss on write-down of Illinois property 134 -
Impairment charge of securities
- 1,081
Changes in other operating items (6,203) (5,575)
-------- -----------
Net cash used in operations (6,865) (4,171)
Cash flows from investing activities:
Additions to property, plant and equipment, net (862) (254)
Proceeds from sale of investments 1,002 1,014
Proceeds from sale of fixed assets 48 -
Acquisition of minority interest in Five Star Products
pursuant to the
tender offer - (657)
Advances to GP Strategies - (959)
--------- -------
Net cash provided by (used in) investing activities 188 (856)
Cash flows from financing activities:
Distribution to GP Strategies (91) (684)
Repayment of receivable from GP Strategies 5,000 -
Proceeds from short-term borrowings 7,460 5,491
Repayment of long-term debt (1,793) (197)
----------- -------
Net cash provided by financing activities 10,576 4,610
-------- -------
Net increase (decrease) in cash and cash equivalents 3,899 (417)
Cash and cash equivalents at beginning of period 2,087 602
---------- ------
Cash and cash equivalents at end of period $5,986 $ 185
======== =====
See accompanying notes to the condensed consolidated financial statements.
6
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 2005 and 2004
(Unaudited)
1. Basis of presentation and summary of significant accounting policies
Basis of presentation
The accompanying Condensed Consolidated Balance Sheet as of June 30, 2005 and
the Condensed Consolidated Statements of Operations and Cash Flows for the three
months and six months ended June 30, 2005 and 2004 have not been audited, but
have been prepared in conformity with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. These financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 2004 as presented in our Annual
Report on Form 10-K. In the opinion of management, this interim information
includes all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation. The results for the 2005 interim periods are
not necessarily indicative of results to be expected for the entire year.
Description of business. National Patent Development Corporation (the "Company"
or "National Patent Development "), through its wholly owned subsidiary, MXL
Industries, Inc. ("MXL"), manufactures polycarbonate parts requiring strict
adherence to optical quality specifications, and in the application of abrasion
and fog resistant coating to these parts. Products include shields and face
masks and non-optical plastic products. The Company's 64% owned subsidiary, Five
Star Products, Inc. ("Five Star"), is engaged in the wholesale distribution of
home decorating, hardware and finishing products. It serves over 3,500
independent retail dealers in twelve states in the Northeast. Products
distributed include paint sundry items, interior and exterior stains, brushes,
rollers, caulking compounds and hardware products
Revenue recognition. Revenue on product sales is recognized at the point in time
when the product has been shipped, title and risk of loss has been transferred
to the customer, and the following conditions are met: persuasive evidence of an
arrangement exists, the price is fixed and determinable, and collectibility of
the resulting receivable is reasonably assured. Allowances for estimated returns
and allowances are recognized when sales are recorded.
Shipping and handling costs. Shipping and handling costs are included as a part
of selling, general and administrative expense. These cost amounted to
$1,329,000 and $1,237,000 and $2,557,000 and $2,361,000, for the three months
and six months ended June 30, 2005 and 2004, respectively.
Inventories. Inventories are valued at the lower of cost or market, using the
first-in, first-out method.
Derivatives and hedging activities. The interest rate swap and interest rate
collar entered into by the Five Star in connection with its Loan and Security
Agreement (see Note 5) is being accounted for under SFAS No. 133, as amended,
7
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires all derivatives to be recognized in the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative is a cash flow hedge, changes in the fair value of the
derivative are recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value is immediately recognized in earnings. Changes in the fair value of the
interest rate swap, which has been designated as a cash flow hedge, were
recognized in other comprehensive income. Changes in the fair value of the
interest rate collar are recognized in earnings. During the quarter ended and
six months ended June 30, 2005 the Company recognized a gain of $34,000 and
$9,000, respectively, as part of other income, for the changes in the fair value
of the interest rate collar. During the quarter ended and six months ended June
30, 2004 the Company recognized a loss of $57,000 as part of other income, for
the changes in the fair value of the interest rate collar. The fair value of the
interest rate collar amounted to $10,000 and $19,000 at June 30, 2005 and
December 31, 2004 and is included in other liabilities in the accompanying
balance sheets.
Recent accounting pronouncements. During December 2004, the Financial Accounting
Standards Board ("FASB") issued a new standard entitled Statement of Financial
Accounting Standards ("SFAS") 123R, Share-Based Payment, which would revise SFAS
No. 123, Accounting for Stock Based Compensation, and amend SFAS No. 95,
Statement of Cash Flows. Among other items, the new standard would require the
expensing, in the financial statements, of stock options issued by the Company.
The new standard will be effective January 1, 2006, for calendar year companies.
The Company is currently evaluating the method of adoption of SFAS No. 123R,
including the valuation methods and assumptions that underlie the valuation of
the awards. As permitted under SFAS No. 123 the Company currently accounts for
share-based payments to employees using Accounting Principles Board ("APB")
Opinion No. 25 intrinsic value method, and as such, recognizes no compensation
cost for employee stock options. Accordingly the adoption of SFAS No. 123R fair
value method could have a significant impact on the Company's results of
operations, although it will have no impact on the Company's overall financial
position. The impact of adoption of SFAS No. 123R cannot be predicted at this
time, because it will depend on levels of share-based payments in the future.
However had the Company adopted SFAS No. 123R in prior periods, the impact of
that statement would have approximated the impact of SFAS No. 123 as described
in the disclosure of pro forma net income and earnings per share shown in Note 2
under "Stock based compensation"
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment to
ARB No. 43, Chapter 4 (FAS 151). FAS 151 amends Accounting Research Bulleting
No. 43, to clarify that abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage) should be recognized as current
period charges. In addition, FAS 151 requires that allocation of fixed
production overhead to inventory be based on the normal capacity of the
production facilities. The Company is required to adopt FAS 151 beginning
January 1, 2006. The Company is currently assessing the impact that FAS 151 will
have on its results of operations, financial position or cash flows.
8
2. Stock based compensation.
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for options to acquire
GP Strategies Corporation ("GP Strategies") common stock granted to MXL
employees under the GP Strategies stock option plan. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. The difference between the
quoted market price as of the date of the grant and the contractual purchase
price of shares is charged to operations over the vesting period. SFAS No. 123,
"Accounting for Stock-Based Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
Pro forma net loss and loss per share disclosures as if compensation expense was
recorded based on the fair value of options granted under the Five Star
Products, Inc. 1994 Five Star Plan have been presented in accordance with the
provisions of SFAS No. 123, is as follows for the three months and six months
ended June 30, 2005 and 2004 (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net loss - As reported $ (395) $ (1,366) $ (1,215) $ (1,663)
Compensation expense, net of tax
Five Star stock options (1) (2) (2) (3) (4)
------- ---------- ------- ---------
Pro forma net loss (397) $ (1,338) $ (1,218) $ (1,667)
Basic and diluted loss per share
As reported $ (.02) $ (.08) $ (.07) $ (.09)
Pro forma net loss per share $ (.02) $ (.08) $ (.07) $ (.09)
(1) Expense relates to option grants made by Five Star prior to the acquisition
of a controlling interest in Five Star by the Company.
3. Per share data
Basic and diluted loss per share for the three months and six months ended June
30, 2004 is based upon the 17,798,585 common shares of National Patent
Development issued in 2004 and distributed in the spin-off, which are treated as
outstanding for the period. Basic and diluted loss per share for the three
months and six months ended June 30, 2005 is based upon the actual number of
National Patent Development shares outstanding for the period. Outstanding
warrants to acquire 1,423,887 common shares issued in December 2004 were not
included in the 2005 diluted computation, as their effect would be
anti-dilutive.
9
Loss per share for the three months and six months ended June 30, 2005 and 2004
are as follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Basic and Diluted EPS
Net loss $ (395) $ (1,366) $ (1,215) $ (1,663)
Weighted average shares
outstanding, basic and diluted 17,803 17,799 17,801 17,799
Basic and diluted loss per share $ (.02) $ (.08) $ (.07) $ (.09)
4. Long-term debt
Long-term debt
Long-term debt is comprised of the following (in thousands):
June 30, December 31,
2005 2004
------- -------
MXL Pennsylvania Mortgage (a) $1,255 $1,305
AOtec Debt and Notes (b) 305 421
Valera stock acquisition debt (see Note 9(a)) - 1,590
Capital lease obligations 25 46
-------- --
1,585 3,362
------- -------
Less current maturities (367) (1,967)
--------- --------
$1,218 $1,395
(a) On March 8, 2001, MXL mortgaged its real estate and fixtures on its property
in Pennsylvania for $1,680,000. The loan requires monthly repayments of $8,333
plus interest at 2.5% above the one month LIBOR rate and matures on March 8,
2011, when the remaining amount outstanding of approximately $680,000 is due in
full. The loan is guaranteed by GP Strategies.
(b) In September 2003, MXL purchased machinery, equipment and inventory from
AOtec LLC ("AOtec"), located in the Massachusetts area, for $1,100,000, subject
to adjustment. In connection with this purchase, the Company valued the
machinery and equipment at approximately $900,000, the inventory at
approximately $350,000 and recorded an accrued expense of $150,000. MXL paid
$100,000 of the purchase price in cash and issued three notes, in the amount of
$450,000, $275,000 and $275,000 each, due October 1, 2003, August 5, 2004 and
August 5, 2005, respectively (collectively, the "AOtec Notes"). The AOtec Notes
bear interest on the unpaid principal amount at the rate of 4% per annum. On
October 1, 2003, MXL borrowed $700,000 from a bank under an agreement to finance
10
the purchase price (the "AOtec Debt") and used a portion of the proceeds to pay
the $450,000 note. The AOtec Debt bears interest at the rate of 5.89 % per
annum, is payable monthly for three-years and is secured by the machinery and
equipment purchased from AOtec. GP Strategies guaranteed the AOtec Debt. The
AOtec Notes amounting to $550,000 as of June 30, 2005 and December 31, 2004 are
classified as short term borrowings on the Company's Consolidated Balance Sheets
and are not included in the table above. On July 7, 2005 MXL negotiated a
reduction in the amounts due under the AOtec Notes with maturity dates of August
5, 2004 and 2005, resulting from a dispute over the purchase price. According to
the contract of sale, the payments due pursuant to the AOtec Notes were subject
to an offset and withholding by MXL. MXL paid $175,000 to AOtec on July 7, 2005
and will pay an additional $100,000 in equal installments of $25,000 over the
subsequent four quarters to settle the previously outstanding $550,000 in AOtec
Notes.
5. Short term borrowings
Five Star short-term borrowings
In 2003, Five Star obtained a Loan and Security Agreement (the "Loan Agreement")
with Bank of America Business Capital (formerly Fleet Capital Corporation) (the
"Lender"). The Loan Agreement has a five-year term, with a maturity date of June
30, 2008. The Loan Agreement, as amended on June 1, 2005, provides for a
$35,000,000 revolving credit facility, which allows Five Star to borrow based
upon a formula of up to 60% of eligible inventory and 80% of eligible accounts
receivable, as defined therein. The interest rates under the Loan Agreement
consist of LIBOR plus a credit spread of 2% (5.34% at June 30, 2005) for
borrowings not to exceed $15,000,000 and the prime rate (6% at June 30, 2005)
for borrowings in excess of the above-mentioned LIBOR-based borrowings. The
credit spreads can be reduced in the event that Five Star achieves and maintains
certain performance benchmarks. At June 30, 2005 and December 31, 2004,
approximately $24,944,000 and $18,234,000 was outstanding under the Loan
Agreement and approximately $650,000 and $434,000 was available to be borrowed,
respectively. Substantially all of Five Star's assets are pledged as collateral
for these borrowings. Under the Loan Agreement Five Star is subject to covenants
requiring minimum net worth, limitations on losses, if any, and minimum or
maximum values for certain financial ratios. As of June 30, 2005 Five Star was
in compliance with all required covenants.
In connection with the Loan Agreement, Five Star also entered into a derivative
transaction with the Lender. The derivative transaction is an interest rate swap
and has been designated as a cash flow hedge. Effective July 1, 2004 through
June 30, 2008, Five Star will pay a fixed interest rate of 3.38% to the Lender
on notional principal of $12,000,000. In return, the Lender will pay to Five
Star a floating rate, namely, LIBOR, on the same notional principal amount. The
credit spread under the new Loan Agreement is not included in, and will be paid
in addition to this fixed interest rate of 3.38%. The fair value of the interest
rate swap amounted to $196,000 and $105,000 at June 30, 2005 and December 31,
2004, respectively, and is included in other assets in the accompanying balance
sheets.
11
On June 17, 2004, Five Star also entered into a derivative interest rate collar
transaction during the period from July 1, 2004 through June 30, 2008 on
notional principal of $12,000,000. The transaction consists of an interest rate
floor of 2.25%, whereas if LIBOR is below 2.25%, the Lender will pay to Five
Star the difference between LIBOR and 2.25%, on the same notional principal
amount. The transaction also consists of an interest rate cap of 5.75%, whereas
if LIBOR is above 5.75%, Five Star will pay to the Lender the difference between
LIBOR and 5.75%, on the same notional principal amount.
MXL short-term borrowings
On March 1, 2005, MXL obtained a Line of Credit Loan (the "MXL Line") from M&T
Bank with a one year term, maturing on March 1, 2006. The MXL Line provides for
a $1,000,000 revolving credit facility, which is secured by MXL's eligible
accounts receivable, inventory and a secondary claim on the Lancaster, PA
property. The interest rates under the MXL Line consist of LIBOR plus a credit
spread of 3% or the prime rate plus a credit spread of 0.25%. The MXL Line is
subject to an unused commitment fee of 0.25% of the average daily unused balance
of the line payable quarterly. National Patent Development has guaranteed the
MXL Line. At June 30, 2005, $750,000 was outstanding under the MXL Line and $0
was available to be borrowed.
6. Inventories
Inventories are comprised of the following (in thousands):
June 30, 2005 December 31, 2004
------------- -----------------
Raw materials $ 699 $ 753
Work in process 334 277
Finished goods 25,907 29,668
------- --------
$26,940 $30,698
======= =======
7. Business segments
The operations of the Company currently consist of the following two business
segments, by which the Company is managed.
The MXL Segment, formerly called the Optical Plastics Segment, manufactures
precision coated and molded optical plastic products. MXL is a specialist in the
manufacture of polycarbonate parts requiring adherence to strict optical quality
specifications, and in the application of abrasion and fog resistant coatings to
those parts.
The Five Star Segment, formerly called the Home Improvement Distribution
Segment, distributes paint sundry items, interior and exterior stains, brushes,
rollers, caulking compounds and hardware products on a regional basis.
12
The following tables set forth the sales and operating income (loss) of each of
the Company's operating segments (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Sales
Five Star $29,579 $27,302 $57,818 $ 54,293
MXL 2,090 2,302 3,928 4,432
--------- ---------- --------- ----------
$31,669 $29,604 $61,746 $ 58,725
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Segment operating income
(loss)
Five Star $ 1,181 $ 799 $ 1,659 $ 1,499
MXL (202) (118) (706) (422)
----------- ---------- --------- ----------
$ 979 $ 681 $ 953 $ 1,077
A reconciliation of the segment operating income (loss) to loss before income
tax (expense) benefit and minority interests in the condensed consolidated
statements of operations is shown below (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Segment operating income $979 $ 681 $953 $ 1,077
Corporate and other general and
administrative expenses (549) (343) (1,084) (643)
Interest expense (455) (276) (827) (481)
Investment and other income (loss) 108 (1,172) 271 (1,267)
-------- ------------ ---------- -----------
Income (loss) before income tax
expense and minority interests $83 $ (1,110) $ (687) $ (1,314)
8. Capital contribution
On July 30, 2004, GP Strategies agreed to make an additional capital
contribution to National Patent Development, in an amount equal to the first $5
million of any proceeds (net of litigation expenses and taxes incurred, if any),
and 50% of any proceeds (net of litigation expenses and taxes incurred, if any)
in excess of $15 million, received with respect to its claims in connection with
the Learning Technologies acquisition. GP Strategies has received $13.7 million
13
of net proceeds from such claims and, pursuant to such agreement, in January
2005 GP Strategies made a $5 million additional capital contribution to National
Patent Development.
9. 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, a director of the Company, and approximately $568,000 from
Jerome I. Feldman, who is Chairman and Chief Executive Officer of the Company,
to exercise the option to purchase Series B Convertible Preferred shares of
Valera. The loans bore interest at 6% per annum, matured on October 31, 2009,
and were secured by all shares of Valera owned by the Company, including the
purchased shares. The loans were required to be prepaid out of the proceeds
received from the sale of the purchased shares or from any additional capital
contribution received by the Company from GP Strategies out of proceeds received
by GP Strategies from its claims relating to the Learning Technologies
acquisition described in Note 8 above. Bedford Oak Partners and Jerome I.
Feldman are entitled to receive 50% of any profit received by the Company from
the sale of the Valera purchased shares. As described in Note 8 above, GP
Strategies made a $5 million additional capital contribution to the Company. On
January 11, 2005, the Company prepaid the loans, including accrued interest of
approximately $16,000, to Bedford Oak Partners and Jerome I. Feldman out of the
proceeds from the claims relating to the Learning Technologies acquisition.
b) Certain of the Company's executive officers are also executive officers of GP
Strategies and will remain on GP Strategies' payroll. The executive officers do
not receive any salary from the Company; however, they provide the Company with
management services under a management agreement between GP Strategies and the
Company. Services under the agreement relate to corporate federal and state
income taxes, corporate legal services, corporate secretarial administrative
support, and executive management consulting. The term of the agreement extends
for three years from the date of the spin-off, or through November 24, 2007, and
may be terminated by either the Company or GP Strategies on or after July 30,
2006 with 180 days prior written notice. Prior to July 1, 2005 GP Strategies
charged the Company a management fee to cover an allocable portion of the
compensation of these officers, based on the time they spent providing services
to the Company, in addition to an allocable portion of certain other corporate
expenses. Such fees amounted to $341,000 and $656,000 for the three months and
six months ended June 30, 2005, respectively.
14
Effective July 1, 2005 GP Strategies and the Company amended the above
management agreement. Pursuant to the amendment, the Company will pay GP
Strategies an annual fee of not less than $970,000 as compensation for these
services, payable in equal monthly installments. The fee includes $698,000 for
the period July 1, 2005 through June 30, 2006, representing approximately 80% of
the cost of the compensation and benefits required to be provided by GP
Strategies to Jerome Feldman, who serves as the Company's Chief Executive
Officer. Such fee shall be increased by 80% of any increase of the cost of the
compensation and benefits required to be provided by GP Strategies to Mr.
Feldman; in addition, the Company shall remain liable for paying to GP
Strategies 80% of the cost of the compensation and benefits required to be
provided by GP Strategies to Mr. Feldman if the management agreement expires, is
terminated, or is otherwise not extended through May 31, 2007. The Company also
occupies a portion of corporate office space leased by GP Strategies. The
Company compensates GP Strategies approximately an additional $205,000 annually
for use of this space. GP Strategies' lease extends through December 31, 2006.
The Company had entered into a separate management agreement with GP Strategies
pursuant to which the Company provided certain general corporate services to GP
Strategies. Under this management agreement, the Company charged GP Strategies a
management fee to cover an allocable portion of corporate overhead related to
services performed for GP Strategies and its subsidiaries. Such fees amounted to
$39,000 and $82,000 for the three months and six months ended June 30, 2005.
Effective as of July 1, 2005 the Company and GP Strategies terminated the
management agreement whereby the Company provided general corporate services to
GP Strategies.
10. Subsequent events
On July 28, 2005 MXL sold its Illinois facility, comprised of land and 55,000
square feet of warehouse and office space in Downer's Grove, IL for proceeds of
$1,600,000, less applicable taxes, commissions and other closing costs.
Subsequent to the sale, MXL repaid the mortgage on the facility of approximately
$1,139,000 and leased back 10,000 square feet of the facility for two years with
an option for an additional year with annual rent of approximately $80,000. In
the fourth quarter of 2004, the Company incurred a loss of $872,000 to record
the Illinois facility at fair value, based upon the expected net proceeds from
the sale of the Illinois facility. In the second quarter of 2005, the Company
incurred an additional loss of $134,000 to record the Illinois facility at fair
value, based upon the expected net proceeds from the sale of the Illinois
facility, revised for commissions, taxes and other closing costs.
15
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Overview
The Company operates in two segments: MXL, which was formerly called the Optical
Plastics segment, and Five Star, which was formerly called the Home Improvement
Distribution segment. The Company also owns certain other non-core assets,
including an investment in a publicly held company, Millennium Cell; an
approximately 17.7% interest in a private company, Valera Pharmaceuticals; and
certain real estate. National Patent Development monitors Millennium Cell for
progress in the commercialization of Millennium Cell's emerging technology and
monitors Valera Pharmaceuticals for progress in the FDA approval process.
MXL Overview
The primary business of MXL is the manufacture of polycarbonate parts requiring
adherence to strict optical quality specifications, and the application of
abrasion and fog resistant coatings to those parts. MXL also designs and
constructs injection molds for a variety of applications. Some of the products
that MXL produces include:
o facemasks and shields for recreation purposes and industrial safety
companies,
o precision optical systems, including medical optics, military eye wear
and
custom molded and decorated products, and
o tools, including optical injection mold tools and standard injection
mold tools.
MXL's manufactures and sells its products to various commercial and government
customers, who utilize MXL's parts to manufacture products that will be
ultimately delivered to the end-user. MXL's government customers include various
offices of the Department of Defense, while MXL's commercial customers are
primarily in the recreation, safety, and security industries. Some of MXL's
consumer based products are considered to be at the high-end of their respective
markets. As a result, sales of MXL's products may decline together with a
decline in discretionary consumer spending; therefore a key performance
indicator that the Company's management uses to manage the business is the level
of discretionary spending in key markets, specifically the United States and
Japan. Other key performance measures used by the Company's management to run
the business include:
o consumer confidence indices in key markets,
o sales levels of complementary items in the recreational vehicle market, such
as motorcycles, RV's and snowmobiles,
o levels of defense spending, and
o new OSHA safety standards.
16
MXL believes that the principal strengths of its business are its
state-of-the-art injection molding equipment, advanced production technology,
high quality standards, and on time deliveries. However, due to the focused
nature of the market, MXL has a limited customer base and tends to be adversely
affected by a loss in business from its significant customers. As a result of
losses of business from certain of its key customers, MXL sales and operating
profits for the past three years have shown a declining trend, reflecting a loss
in market share. To reverse the declining sales trend, a new management team
with significant sales and marketing experience has been established in 2004. To
further grow, MXL not only intends to regain market share in its existing
market, but to leverage its expertise as a molder and coater of optical quality
products by expanding into other markets and products. However, due to the
spin-off, MXL may have less financial resources at its disposal with which to
support and grow the business, as National Patent Development will have a
smaller market capitalization and less access to capital markets than GP
Strategies.
Five Star Overview
Five Star is a publicly held company that is a leading distributor in the United
States of home decorating, hardware, and finishing products. Five Star offers
products from leading manufacturers in the home improvement industry and
distributes those products to retail dealers, which include lumber yards, "do-it
yourself" centers, hardware stores and paint stores. Five Star has grown to be
one of the largest independent distributors in the Northeast United Stated by
providing a complete line of competitively priced products, timely delivery and
attractive pricing and financing terms to its customers.
The following key factors affect Five Star's financial and operation
performance:
o its ability to negotiate the lowest prices from its suppliers,
o its ability to increase revenue by obtaining new customers, while
maintaining a level fixed cost structure by utilizing its existing
warehouses,
o the housing market in general,
o consumers' confidence in the economy,
o consumers' willingness to invest in their homes, and o weather
conditions that are conducive to home improvement projects.
The following key performance measures are utilized by the Company's
management to run Five Star's business:
o new U.S. housing starts,
o sales of existing homes,
o sales of high margin products to its customers,
o purchases from each vendor, and
o performance benchmarks used by Home Depot and Lowe's, such as number of
stores and square footage, as well as financial benchmarks.
17
Five Star operates in the Home Improvement market, which has grown in recent
years and for which the Home Improvement Research Institute predicts average
annual industry growth of nearly 5% for the next several years. Nonetheless,
Five Star faces intense competition from large national distributors, smaller
regional distributors, and manufacturers that bypass the distributor and sell
directly to the retail outlet. The principal means of competition for Five Star
are its strategically placed distribution centers and its extensive inventory of
quality, name-brand products. In addition, Five Star's customers face stiff
competition from Home Depot and Lowe's, which purchase directly from
manufacturers. As a result of such competition, while the Home Improvement
market has expanded significantly in recent years, Five Star's revenue has
increased only incrementally, and such revenue would have declined if Five Star
had not entered into new geographic sales territories as described below. In
spite of this, the independent retailers that are Five Star's customers remain a
viable alternative to Home Depot and Lowe's, due to the shopping preferences of
and the retailer's geographic convenience for some consumers.
Five Star has continued to expand its sales territory with an addition, since
2000, of a sales force servicing the Mid-Atlantic States and as far south as
North Carolina, which has generated additional annual revenues of approximately
$10 million. Five Star services this territory from its existing New Jersey
warehouse, enabling Five Star to leverage its fixed costs over a broader revenue
base. To further expand, Five Star will attempt to grow its revenue base in the
Mid-Atlantic States, to acquire complementary distributors and to expand the
distribution of its use of private-label products sold under the "Five Star"
name. However, due to the spin-off, Five Star may have less financial resources
at its disposal with which to support and grow the business, as National Patent
Development will have a smaller market capitalization and less access to capital
markets than GP Strategies.
Operating Highlights
Three months ended June 30, 2005 compared to the three months ended June 30,
2004
For the three months ended June 30, 2005, the Company had income before income
tax expense and minority interest of $83,000 compared to a loss before income
tax expense and minority interest of $1,110,000 for the three months ended June
30, 2004. The increase in pre-tax income is a result of stronger segment
operating income, which increased by $298,000, and increased investment and
other income of $1,280,000; partially offset by increased corporate and other
general and administrative expenses of $206,000 and increased interest expense
of $179,000.
18
Sales
Three months
ended June 30,
2005 2004
---- ----
Five Star $29,579,000 $27,302,000
MXL 2,090,000 2,302,000
----------- --------------
$31,669,000 $29,604,000
The increase in Five Star sales of $2,277,000 was a result of increased sales
volume generated from the Company's annual trade shows; as well as rising prices
due to increased raw material costs for certain of the Company's vendors.
The decrease in MXL sales of $212,000 was a result of supplier and tooling
problems, which caused delays in production and pushed certain sales into the
second half of 2005.
Gross margin
Three months ended
June 30,
----------------------------------------------------
------------- --------- ----------------- ----------
2005 % 2004 %
------ - ------- -
Five Star $5,604,000 18.9 $4,940,000 18.1
MXL 498,000 23.8 465,000 20.2
---------- ------ ------------ ----
$6,102,000 19.3 $5,405,000 18.3
---------- ---- ---------- ----
Five Star's gross margin of $5,604,000, or 18.9% of net sales, for the quarter
ended June 30, 2005 increased by $664,000, or 13%, when compared to $4,940,000,
or 18.1% of net sales, for the quarter ended June 30, 2004. The increase in
gross margin dollars and gross margin percentage for the quarter ended June 30,
2005 was a result of an increase in sales and a favorable shift in the product
mix sold.
MXL's gross margin of $498,000, or 23.8% of sales, for the quarter ended June
30, 2005 increased by $33,000 or 7% when compared to gross profit of $465,000,
or 20.2% of sales, for the quarter ended June 30, 2004, mainly due to a more
favorable product mix.
Selling, general, and administrative expenses
For the three months ended June 30, 2005, selling, general and administrative
expenses increased by $471,000 from $5,067,000 for the three months ended June
30, 2004 to $5,538,000 partially due to increased general and administrative
expenses of $206,000 at the National Patent Development corporate level. In
addition, Five Star's selling, general and administrative expenses increased by
$281,000, which is primarily attributable to increases in salesmen commissions
and in delivery expenses.
19
Loss on write-down of the Illinois facility
In the second quarter of 2005 the Company incurred an additional loss of
$134,000 to record the Illinois facility at fair value, based upon the expected
net proceeds from the sale of the Illinois facility, revised for commissions,
taxes and other closing costs.
Investment and other income (loss), net.
National Patent Development recognized investment and other income of $108,000
for the three months ended June 30, 2005 due interest income, investment income,
and to recognition of a gain for the change in the fair value of the Five Star's
interest rate collar.
National Patent Development recognized investment and other losses of $1,172,000
for the three months ended June 30, 2004 due mainly due an impairment loss due
to a decline in market value considered other-than temporary of $1,081,000 on
National Patent Development investment in Millennium Cell, Inc. stock. In
addition the Company recognized losses on sale of Millennium Cell, Inc. stock
and for the change in the fair value of the Five Star's interest rate collar.
Income taxes
For the three months ended June 30, 2005 and 2004, the Company recorded an
income tax expense of $328,000 and an income tax expense of $168,000,
respectively, which represents the Company's applicable federal, state and local
tax expense for the periods.
Six months ended June 30, 2005 compared to the six months ended June 30, 2004
For the six months ended June 30, 2005, the Company had a loss before income tax
expense and minority interest of $687,000 compared to a loss before income tax
expense and minority interest of $1,314,000 for the six months ended June 30,
2004. The increase in pre-tax income is primarily a result of increased
investment and other income of $1,538,000; partially offset by increased
corporate and other general and administrative expenses of $441,000, increased
interest expense of $346,000, and decreased segment operating income of
$124,000.
Sales
Six months
ended June 30,
2005 2004
---- ----
Five Star $57,818,000 $54,293,000
MXL 3,928,000 4,432,000
------------- --------------
$61,746,000 $58,725,000
The increase in Five Star sales of $3,525,000 was a result of increased sales
volume generated from the Company's annual trade shows; as well as rising prices
due to increased raw material costs for certain of the Company's vendors.
20
The decrease in MXL sales of $504,000 was primarily a result of was a result of
supplier and tooling problems, which caused delays in production and pushed
certain sales into the second half of 2005, as well as decreased revenues from
MXL's Massachusetts facility. In 2004, MXL exercised an option for an earlier
termination without penalty of the Massachusetts facility lease and exited the
facility in the first quarter of 2005, causing a disruption in production. MXL
relocated the inventory, machinery and equipment purchased from AOtec and
consolidated its injection molding and precision coating operations at its
Lancaster, PA facility.
Gross margin
Six months ended
June 30,
-----------------------------------------------------
-------------- --------- ----------------- ----------
2005 % 2004 %
------- - ------- -
Five Star $10,008,000 17.3 $9,409,000 17.3
MXL 643,000 16.4 761,000 17.2
----------- ------ ------------ ----
$10,651,000 17.2 $10,170,000 17.3
----------- ---- ----------- ----
Five Star's gross margin of $10,008,000, or 17.3% of net sales, for the six
months ended June 30, 2005 increased by $599,000, or 6%, when compared to
$9,409,000, or 17.3% of net sales, for the six months ended June 30, 2004. The
increase in gross margin dollars for the six months ended June 30, 2005 was a
result of an increase in sales.
MXL's gross margin of $643,000, or 16.4% of sales, for the six months ended June
30, 2005 decreased by $118,000 or 16% when compared to gross profit of $761,000,
or 17.2% of sales, for the quarter ended June 30, 2004, mainly due to increases
in labor costs and raw material resin costs, as well as overhead expenses not
recovered due to a decline in sales.
Selling, general, and administrative expenses
For the six months ended June 30, 2005, selling, general and administrative
expenses increased by $912,000 from $9,736,000 for the six months ended June 30,
2004 to $10,648,000 partially due to increased general and administrative
expenses of $441,000 at the National Patent Development corporate level. Five
Star's selling, general and administrative expenses increased by $439,000
primarily attributable to increases in salesmen commissions, in delivery
expenses and in medical expenses; offset by a decrease in legal and professional
fees. MXL's selling, general and administrative expenses increased by $32,000
primarily due to increased travel, research and development, and a loss on sale
of fixed assets; offset by decreases in facility costs and employee benefits.
Loss on write-down of the Illinois facility
In the second quarter of 2005 the Company incurred an additional loss of
$134,000 to record the Illinois facility at fair value, based upon the expected
net proceeds from the sale of the Illinois facility, revised for commissions,
taxes and other closing costs.
21
Investment and other income (loss), net.
National Patent Development recognized investment and other income of $271,000
the six months ended June 30, 2005 mainly due a gain on sale of Millennium Cell,
Inc. common stock of $152,000, as well as interest and investment income
National Patent Development recognized investment and other losses of $1,267,000
for the six months ended June 30, 2004 due mainly due an impairment loss due to
a decline in market value considered other-than temporary of $1,081,000 on
National Patent Development investment in Millennium Cell, Inc. stock. In
addition, the Company recognized losses on sale of Millennium Cell, Inc. stock
and for the change in the fair value of the Five Star's interest rate collar,
offset by a gain on sale of Hemispherx Biopharma, Inc. common stock.
Income taxes
For the six months ended June 30, 2005 and 2004, the Company recorded an income
tax expense of $371,000 and $142,000, respectively, which represents the
Company's applicable federal, state and local tax expense for the periods.
Liquidity and capital resources
At June 30, 2005, the Company had cash and cash equivalents totaling of
$5,986,000. The Company believes that cash generated from operations and
borrowing availability under existing credit agreements will be sufficient to
fund the Company's working capital requirements for at least the next twelve
months.
For the six months ended June 30, 2005, National Patent Development's working
capital decreased by $921,000 to $13,107,000 from $14,028,000 as of December 31,
2004. The working capital decrease was primarily a result of a net loss for the
period.
The increase in cash and cash equivalents of $3,899,000 for the six months ended
June 30, 2005 resulted from the following: (i) net cash used in operations of
$6,865,000, due primarily to a net loss of $1,215,000, an increase in accounts
receivable of $6,321,000, and a decrease in accounts payable and accrued
expenses of $3,537,000; (ii) net cash provided by investing activities of
$188,000, consisting proceeds on sale of investments of $1,002,000 and proceeds
on sales of property, plant and equipment of $48,000, offset by additions to
property, plant and equipment of $862,000; and (iii) net cash provided by
financing activities of $10,576,000, consisting of repayment of a receivable
from GP Strategies of $5,000,000 and proceeds of short term borrowings of
$7,460,000, offset by repayments of long-term debt of $1,793,000 and a
distribution to GP Strategies of $91,000.
On July 3, 2001, MXL entered into a loan in the amount of $1,250,000, secured by
a mortgage covering the real estate and fixtures on its property in Illinois. At
December 31, 2004, $1,155,000 of such loan was outstanding. The loan requires
monthly payments of principal and interest in the amount of $11,046 with
interest at a fixed rate of 8.75% per annum, and matures on June 26, 2006, when
22
the remaining amount outstanding of approximately $1,100,000 is due in full. The
loan is guaranteed by GP Strategies. The proceeds of the loan were used to repay
a portion of the GP Strategies' short-term borrowings under its prior credit
agreement. As of June 30, 2005 and December 31, 2004, the mortgage has been
classified separately in the balance sheet as a current liability, as a result
of the classification of the Illinois property as held for sale. The mortgage
was repaid on July 28, 2005 in conjunction with the sale by MXL of the Illinois
facility.
On September 15, 2003, MXL purchased machinery, equipment and inventory from
AOtec, located in the Massachusetts area, for a purchase price of $1,100,000,
subject to adjustment. On August 1, 2003, MXL paid $100,000 of the purchase
price and issued three notes, in the amounts of $450,000, $275,000 and $275,000,
due October 1, 2003, August 5, 2004 and August 5, 2005, respectively
(collectively, the "AOtec Notes"). The AOtec Notes bear interest on the unpaid
principal amount at the rate of 4% per annum. On October 1, 2003, MXL borrowed
$700,000, or the AOtec Debt, from a bank to finance the purchase price and used
the proceeds to pay the $450,000 Note. The AOtec Debt is payable monthly for
three-years and is secured by the machinery and equipment purchased from AOtec.
GP Strategies guaranteed the AOtec Debt. The AOtec Notes, which amounted to
$550,000 on June 30, 2005 in the aggregate following a repayment of $450,000 of
the AOtec Notes in October 2003, are included in short-term borrowings in the
consolidated balance sheets. On July 7, 2005 MXL negotiated a reduction in the
amounts due under the AOtec Notes with maturity dates of August 5, 2004 and
2005, resulting from a dispute over the purchase price. According to the
contract of sale, the payments due pursuant to the AOtec Notes were subject to
an offset and withholding by MXL. MXL paid $175,000 to AOtec on July 7, 2005 and
will pay an additional $100,000 in equal installments of $25,000 over the
subsequent four quarters to settle the previously outstanding $550,000 in AOtec
Notes.
In 2003, Five Star obtained a Loan and Security Agreement (the "Loan Agreement")
with Bank of America Business Capital (formerly Fleet Capital Corporation) (the
"Lender"). The Loan Agreement has a five-year term, with a maturity date of June
30, 2008. The Loan Agreement, as amended on June 1, 2005, provides for a
$35,000,000 revolving credit facility, which allows Five Star to borrow based
upon a formula of up to 60% of eligible inventory and 80% of eligible accounts
receivable, as defined therein. The interest rates under the Loan Agreement
consist of LIBOR plus a credit spread of 2% (5.34% at June 30, 2005) for
borrowings not to exceed $15,000,000 and the prime rate (6% at June 30, 2005)
for borrowings in excess of the above-mentioned LIBOR-based borrowings. The
credit spreads can be reduced in the event that Five Star achieves and maintains
certain performance benchmarks. At June 30, 2005 and December 31, 2004,
approximately $24,944,000 and $18,234,000 was outstanding under the Loan
Agreement and approximately $650,000 and $434,000 was available to be borrowed,
respectively. Substantially all of Five Star's assets are pledged as collateral
for these borrowings. Under the Loan Agreement Five Star is subject to covenants
requiring minimum net worth, limitations on losses, if any, and minimum or
maximum values for certain financial ratios. As of June 30, 2005 Five Star was
in compliance with all required covenants.
23
On March 1, 2005, MXL obtained a Line of Credit Loan (the "MXL Line") from M&T
Bank with a one year term, maturing on March 1, 2006. The MXL Line provides for
a $1,000,000 revolving credit facility, which is secured by MXL's eligible
accounts receivable, inventory and a secondary claim on the Lancaster, PA
property. The interest rates under the MXL Line consist of LIBOR plus a credit
spread of 3% or the prime rate plus a credit spread of 0.25%. The MXL Line is
subject to an unused commitment fee of 0.25% of the average daily unused balance
of the line payable quarterly. National Patent Development has guaranteed the
MXL Line. At June 30, 2005, $750,000 was outstanding under the MXL Line and $0
was available to be borrowed.
Forward-looking statements
The forward-looking statements contained herein reflect National Patent
Development's management's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements, all of which are difficult to
predict and many of which are beyond the control of National Patent Development,
including, but not limited to the risks and uncertainties detailed in National
Patent Development's periodic reports and registration statements filed with the
Securities and Exchange Commission.
24
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We have no material changes to the disclosure on this matter made in our
report on Form 10-K for the fiscal year ended December 31, 2004.
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a-14(c) and
15d-14(c)) as of a date within ninety days before the filing date of
this quarterly report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective as of the
evaluation date, providing them with material timely information
relating to the Company required to be disclosed in the reports the
Company files or submits under the Exchange Act. The Chief Executive
Officer and Chief Financial Officer have also concluded that the
Company's current disclosure controls and procedures are designed, and
are effective as of the evaluation date, to give reasonable assurance
that the information required to be disclosed by the Company in the
reports that it files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission.
b. Changes in internal controls. There have been no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
25
PART II. OTHER INFORMATION
Item 6. Exhibits
a. Exhibits
10.1 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 of
Five Star Products, Inc. Form 10-Q for the quarter
ended June 30, 2005.
10.2 Amended Note in the amount of $2,800,000 dated
June 30, 2005 between the Registrant and Five Star
Products, Inc. Incorporated herein by reference to
Exhibit 10.2 of Five Star Products, Inc. Form 10-Q
for the quarter ended June 30, 2005.
10.3 Amendment, dated July 1, 2005, to the Management
Agreement, dated July 30, 2004, between GP Strategies
Corporation and National Patent Development
Corporation. Incorporated herein by reference to
Exhibit 10.7 of GP Strategies Form 10-Q for the
quarter ended June 30, 2005.
10.4 Termination Agreement, dated June 30, 2005, of
the Management Agreement, dated July 30, 2004,
between National Patent Development Corporation and
GP Strategies Corporation. Incorporated herein by
reference to Exhibit 10.8 of GP Strategies Form 10-Q
for the quarter ended June 30, 2005.
31.1 Certification of Chief Executive Officer of the
Company dated August 15, 2005 pursuant to Securities
and Exchange Act Rule 13d-14(a)/15(d-14(a), as
adopted pursuant to Section 302 and 404 of the
Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer of the
Company dated August 15, 2005 pursuant to Securities
and Exchange Act Rule 13d-14(a)/15(d-14(a), as
adopted pursuant to Section 302 and 404 of the
Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Executive Officer and
Chief Financial Officer of the Company dated August
15, 2005 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
________
-
*Filed herewith
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
NATIONAL PATENT DEVELOPMENT CORPORATION
DATE: August 15, 2005 Jerome I. Feldman
Chairman of the Board and
Chief Executive Officer
DATE: August 15, 2005 Scott N. Greenberg
Chief Financial Officer
27