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 September 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 November 14, 2005:
Common Stock 17,816,370 shares
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations-
Three Months and Nine months Ended
September 30, 2005 and 2004 (Unaudited) 1
Condensed Consolidated Statements of Comprehensive Loss-
Three Months and Nine months Ended
September 30, 2005 and 2004 (Unaudited) 2
Condensed Consolidated Balance Sheets -
September 30, 2005 (Unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Cash Flows -
Three Months and Nine months Ended
September 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
4
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 Nine months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Sales $28,940 $28,738 $90,686 $87,463
Cost of sales 24,992 23,783 76,087 72,338
------- ------- ------- -------
Gross margin 3,948 4,955 14,599 15,125
Selling, general and administrative
expenses (5,091) (5,180) (15,873) (14,939)
--------- --------- ---------- ----------
Operating profit (loss) (1,143) (225) (1,274) 186
Interest expense (396) (279) (1,223) (760)
Investment and other income (loss) 27 111 298 (1,133)
------- -------- -------- ------------
Loss before income taxes and minority
interest (1,512) (393) (2,199) (1,707)
Income tax (expense) benefit 478 (110) 107 (252)
-------- ---------- -------- ---------
Loss before minority interest (1,034) (503) (2,092) (1,959)
Minority interest 249 (45) 92 (252)
--------- ---------- -------- ---------
Net loss $ (785) $ (548) $ (2,000) $ (2,211)
========= ========= =========== ===========
Net loss per share
Basic and diluted $ (0.04) $ (0.03) $ (0.11) $ (0.12)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
1
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
Three Months Ended Nine months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Net loss $ (785) $ (548) $ (2,000) $ (2,211)
Other comprehensive income (loss), before
tax:
Net unrealized gain (loss) on
available-for-sale-securities 116 (678) 679 (1,088)
Reclassification adjustment for (gain) loss
on securities sold included in net loss (7) - (159) 173
Reclassification adjustment for impairment
loss on securities included in net loss - - - 1,081
Net unrealized gain (loss) on interest rate
swap,
net of minority interest 100 (148) 158 (36)
-------- ---------- -------- -----------
Comprehensive income (loss) before tax (576) (1,374) (1,322) (2,081)
Income tax (expense) benefit related to
items of other comprehensive loss (41) 61 (66) (99)
--------- ----------- ------- -----------
Comprehensive loss $ (617) $ (1,313) $ (1,388) $ (2,180)
======= ========= ========= =========
See accompanying notes to consolidated financial statements.
2
NATIONAL PATENT DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2005 2004
---- ----
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 5,799 $ 2,087
Accounts receivable, less allowance
for doubtful accounts of $444 and $306 15,039 11,410
Receivable from GP Strategies Corporation - 5,000
Inventories 25,016 30,698
Prepaid expenses and other current assets 1,173 530
Property held for sale - 1,595
---------- --------
Total current assets 47,027 51,320
Marketable securities available for sale 744 1,416
Property, plant and equipment, net 3,232 2,876
Investment in Valera 1,590 1,590
Other assets 3,516 3,272
--------- ---------
Total assets $56,109 $60,474
======= =======
Liabilities and stockholder's equity
Current liabilities
Current maturities of long-term debt $ 360 $ 1,967
Short term borrowings 21,972 18,784
Accounts payable and accrued expenses, including due to
affiliates of $265 and $0, respectively 12,350 15,386
Mortgage collateralized by property held for sale - 1,155
---------- --------
Total current liabilities 34,682 37,292
Long-term debt less current maturities 1,131 1,395
Other liabilities 262 258
--------- --------
Total liabilities 36,075 38,945
Minority interest 1,730 1,769
Stockholder's equity
Common Stock 178 178
Additional paid-in capital 24,694 24,761
Accumulated deficit (6,843) (4,843)
Accumulated other comprehensive income (loss) 275 (336)
----------- -----------
Total stockholder's equity 18,304 19,760
---------- --------
Total liabilities and stockholder's equity $56,109 $60,474
======= =======
See accompanying notes to consolidated financial statements.
3
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months Ended
September 30,
2005 2004
---- ----
Cash flows from operations:
Net loss $ (2,000) $(2,211)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 461 537
Minority interest (91) 252
Net (gain) loss on marketable securities (159) 131
Allocation of expenses and taxes from GP Strategies - 1,881
Loss on disposal of fixed assets 276 -
Impairment charge of securities - 1,081
Changes in other operating items (1,699) (2,727)
-------- -----------
Net cash used in operations (3,212) (1,056)
Cash flows from investing activities:
Additions to property, plant and equipment, net (1,012) (349)
Proceeds from sale of investments 1,351 1,014
Proceeds from sale of fixed assets 1,514 -
Acquisition of minority interest in Five Star Products
pursuant to the tender offer - (657)
Advances to GP Strategies - (984)
--------- -------
Net cash provided by (used in) investing activities 1,853 (976)
Cash flows from financing activities:
Distribution to GP Strategies (91) (1,049)
Contribution from GP Strategies - 1,875
Payment of receivable from GP Strategies 5,000 -
Proceeds from short-term borrowings 3,188 2,741
Repayment of long-term debt (3,026) (304)
--------- -------
Net cash provided by financing activities 5,071 3,263
-------- -------
Net increase (decrease) in cash and cash equivalents 3,712 1,231
Cash and cash equivalents at beginning of period 2,087 602
---------- ------
Cash and cash equivalents at end of period $5,799 $ 1,833
======== =======
See accompanying notes to the condensed consolidated financial statements.
4
NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Unaudited)
12 (Continued)
1. Basis of presentation and summary of significant accounting policies
Basis of presentation
The accompanying Condensed Consolidated Balance Sheet as of September 30, 2005
and the Condensed Consolidated Statements of Operations and Cash Flows for the
three months and nine months ended September 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
$1,356,000 and $1,306,000 and $3,913,000 and $3,464,000, for the three months
and nine months ended September 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,
5
"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
nine months ended September 30, 2005 the Company recognized a loss of $14,000
and $3,000, respectively, as part of other income, for the changes in the fair
value of the interest rate collar. During the quarter ended and nine months
ended September 30, 2004 the Company recognized a gain of $61,000 and $4,000,
respectively, 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
$23,000 and $19,000 at September 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.
6
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 nine months
ended September 30, 2005 and 2004 (in thousands, except per share amounts):
Three Months Ended Nine months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Net loss - As reported $ (785) $ (548) $ (2,000) $ (2,211)
Compensation expense, net of tax
Five Star stock options (2) (2) (5) (6)
------- ---------- ------- ---------
Pro forma net loss (787) $ (550) $ (2,005) $ (2,217)
Basic and diluted loss per share
As reported $ (.04) $ (.03) $ (.11) $ (.12)
Pro forma net loss per share $ (.04) $ (.03) $ (.11) $ (.12)
3. Per share data
Basic and diluted loss per share for the three months and nine months ended
September 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 nine months ended September 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.
7
Loss per share for the three months and nine months ended September 30, 2005 and
2004 are as follows (in thousands, except per share amounts):
Three Months Ended Nine months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Basic and Diluted EPS
Net loss $ (785) $ (548) $ (2,000) $ (2,211)
Weighted average shares
outstanding, basic and diluted 17,810 17,799 17,804 17,799
Basic and diluted loss per share $ (.04) $ (.03) $ (.11) $ (.12)
4. Long-term debt
Long-term debt
Long-term debt is comprised of the following (in thousands):
September 30, December 31,
2005 2004
------- -------
MXL Pennsylvania Mortgage (a) $1,230 $1,305
AOtec Debt and Notes (b) 246 421
Valera stock acquisition debt (see Note 9(a)) - 1,590
Capital lease obligations 15 46
---------- ---------
1,491 3,362
Less current maturities (360) (1,967)
--------- --------
$1,131 $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
8
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. On July
7, 2005 MXL negotiated a reduction of $275,000 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. The AOtec Notes
amounting to $100,000 and $550,000 as of September 30, 2005 and December 31,
2004, respectively, are classified as short term borrowings on the Company's
Consolidated Balance Sheets and are not included in the table above. The
reduction of $275,000 was accounted for as a purchase price adjustment, with the
purchased inventory still on hand reduced by $131,000, machinery and equipment
reduced by $61,000 and reversal of a write-down of $83,000 for AOtec equipment
previously written-off.
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 August 1, 2005, provides for a
$35,000,000 revolving credit facility, which allows Five Star to borrow based
upon a formula of up to 65% of eligible inventory and 85% of eligible accounts
receivable, as defined therein. The interest rates under the Loan Agreement
consist of LIBOR plus a credit spread of 1.5% (5.36% at September 30, 2005) for
borrowings not to exceed $15,000,000 and the prime rate (6.75% at September 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 September 30, 2005 and December 31,
2004, approximately $20,923,000 and $18,234,000 was outstanding under the Loan
Agreement and approximately $2,359,000 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. For the three months
ended September 30, 2005 Five Star was not in compliance with the covenant that
required a certain minimum fixed charge coverage ratio, however, for the period,
the Company received a waiver of default from the Lender.
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
9
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
fair value of the interest rate swap amounted to $352,000 and $105,000 at
September 30, 2005 and December 31, 2004, respectively, and is included in other
assets in the accompanying balance sheets.
On June 17, 2004, Five Star also entered into a derivative interest rate collar
transaction during the period from July 1, 2004 through June 30, 2008 on
notional principal of $12,000,000. The transaction consists of an interest rate
floor of 2.25%, whereas if LIBOR is below 2.25%, the Lender will pay to Five
Star the difference between LIBOR and 2.25%, on the same notional principal
amount. The transaction also consists of an interest rate cap of 5.75%, whereas
if LIBOR is above 5.75%, Five Star will pay to the Lender the difference between
LIBOR and 5.75%, on the same notional principal amount.
MXL short-term borrowings
On March 1, 2005, MXL obtained a Line of Credit Loan (the "MXL Line") from M&T
Bank with a one year term, maturing on March 1, 2006. 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 September 30, 2005, $950,000 was outstanding under the MXL Line and
$50,000 was available to be borrowed.
6. Inventories
Inventories are comprised of the following (in thousands):
September 30, 2005 December 31, 2004
------------------ -----------------
Raw materials $ 505 $ 753
Work in process 328 277
Finished goods 24,183 29,668
------- --------
$25,016 $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
10
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.
The following tables set forth the sales and operating income (loss) of each of
the Company's operating segments (in thousands):
Three Months Ended Nine months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Sales
Five Star $26,899 $26,678 $84,717 $80,971
MXL 2,041 2,060 5,969 6,492
--------- --------- --------- ----------
$28,940 $28,738 $90,686 $87,463
Three Months Ended Nine months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Segment operating income
(loss)
Five Star $ (722) $ 477 $ 937 $1,953
MXL 83 (319) (623) (741)
-------- -------- --------- ---------
$ (639) $158 $ 314 $1,212
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 Nine months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Segment operating income (loss) $(639) $ 158 $314 $ 1,212
Corporate and other general and
administrative expenses (504) (383) (1,588) (1,026)
Interest expense (396) (279) (1,223) (760)
Investment and other income (loss) 27 111 298 (1,133)
------- -------- ---------- ----------
Loss before income tax
expense and minority interests $(1,512) $(393) $ (2,199) $(1,707)
11
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
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 $656,000 for the six months ended June 30, 2005.
12
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
$82,000 for the 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.
Sale of MXL's Illinois facility
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 net proceeds
of $1,466,000, less applicable taxes, commissions and other closing costs.
Subsequent to the sale, MXL repaid the mortgage and interest on the facility of
approximately $1,155,000 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. For the three
months and nine months ended September 30, 2005, the Company incurred additional
losses on the sale of the facility of $6,000 and $140,000, respectively, based
upon the final proceeds from the sale of the Illinois facility, net of
commissions, taxes and other closing costs.
13
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.
14
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 of home
decorating, hardware, and finishing products to independent retailers. Five Star
offers products from leading manufacturers in the home improvement industry and
distributes those products to retail dealers, which include lumber yards, "do-it
yourself" centers, hardware stores and paint stores. Five Star has grown to be
one of the largest independent distributors in the Northeast United States by
providing a complete line of competitively priced products, timely delivery and
attractive pricing and financing terms to its customers.
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.
15
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 September 30, 2005 compared to the three months ended
September 30, 2004
For the three months ended September 30, 2005, the Company had a loss before
income tax expense and minority interest of $1,512,000 compared to a loss before
income tax expense and minority interest of $393,000 for the three months ended
September 30, 2004. The increase in the loss is a result of weaker segment
operating income, which decreased by $797,000, increased corporate and other
general and administrative expenses of $121,000 and increased interest expense
of $117,000 and decreased investment and other income of $84,000.
16
Sales
Three months
ended September 30,
2005 2004
---- ----
Five Star $26,899,000 $26,678,000
MXL 2,041,000 2,060,000
------------- --------------
$28,940,000 $28,738,000
The increase in Five Star sales of $221,000 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 $19,000 was mainly a result of decreased revenues
from MXL's Massachusetts facility, which MXL exited in the first quarter of
2005. 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
Three months ended
September 30,
-----------------------------------------------------
-------------- --------- ----------------- ----------
2005 % 2004 %
------- - ------- -
Five Star $3,429,000 12.7 $4,744,000 17.8
MXL 519,000 25.4 211,000 10.2
----------- ------ ------------ ----
$3,948,000 13.6 $4,955,000 17.2
---------- ---- ---------- ----
Five Star's gross margin of $3,429,000, or 12.7% of net sales, for the quarter
ended September 30, 2005 decreased by $1,315,000, or 28%, when compared to
$4,744,000, or 17.8% of net sales, for the quarter ended September 30, 2004. The
decrease in gross margin and gross margin percentage for the quarter ended
September 30, 2005 was a result of an unfavorable shift in the product mix sold,
increased price-based competition, an increase in pricing by vendors, as well as
some resistance to price increases by customers.
MXL's gross margin of $519,000, or 25.4% of sales, for the quarter ended
September 30, 2005 increased by $308,000 or 145% when compared to gross profit
of $211,000, or 10.2% of sales, for the quarter ended September 30, 2004, mainly
due to a more favorable product mix sold.
Selling, general, and administrative expenses
For the three months ended September 30, 2005, selling, general and
administrative expenses decreased by $89,000 from $5,180,000 for the three
months ended September 30, 2004 to $5,091,000. Five Star's decrease of $116,000
17
in selling, general and administrative expenses was primarily attributable to a
decrease in salesmen commissions and office salaries, while MXL's $94,000
decrease was primarily attributable to decreases in employee salaries and
benefits, and rental expense. The decrease in segment selling, general and
administrative expenses was partially offset by increased general and
administrative expenses of $121,000 at the National Patent Development corporate
level, mainly due to the Company incurring its own expenses for the three months
ended September 30, 2005, whereas for the three months ended September 30, 2004
the Company was being allocated GP Strategies corporate selling, general and
administrative expenses.
Investment and other income (loss), net.
The Company recognized investment and other income of $27,000 for the three
months ended September 30, 2005 mainly due to interest and investment income. In
addition, during the quarter, the Company recognized a gain of $40,000 on the
sale of Millennium Cell, Inc. common stock and a loss on the sale of Avenue
Entertainment Group, Inc common stock of $33,000.
The Company recognized investment and other income of $111,000 the three months
ended September 30, 2004 mainly due a gain of $61,000 for the change in the fair
value of Five Star's interest rate collar, in addition to interest and
investment income.
Income taxes
For the three months ended September 30, 2005 and 2004, the Company recorded an
income tax benefit of $478,000 and an income tax expense of $110,000,
respectively, which represents the Company's applicable federal, state and local
tax expense for the periods.
Nine months ended September 30, 2005 compared to the nine months ended September
30, 2004
For the nine months ended September 30, 2005, the Company had a loss before
income tax expense and minority interest of $2,199,000 compared to a loss before
income tax expense and minority interest of $1,707,000 for the nine months ended
September 30, 2004. The decrease in pre-tax income is a result of weaker segment
operating income, which decreased by $898,000, increased corporate and other
general and administrative expenses of $562,000 and increased interest expense
of $463,000; offset by increased investment and other income of $1,431,000.
Sales
Nine months
ended September 30,
2005 2004
---- ----
Five Star $84,717,000 $ 80,971,000
MXL 5,969,000 6,492,000
------------- ------------
$90,686,000 $87,463,000
The increase in Five Star sales of $3,746,000 was a result of increased sales
18
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 $523,000 was primarily a result of was a result of
supplier and tooling problems, which caused delays in production and pushed
certain sales toward the end of 2005, as well as decreased revenues from MXL's
Massachusetts facility, which MXL exited in the first quarter of 2005. 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
Nine months ended
June 30,
------------------------------------------------------
--------------- --------- ----------------- ----------
2005 % 2004 %
-------- - ------- -
Five Star $13,437,000 15.9 $14,153,000 17.5
MXL 1,162,000 19.5 972,000 15.0
------------ ------ ------------ ----
$14,599,000 16.1 $15,125,000 17.3
----------- ---- ----------- ----
Five Star's gross margin of $13,437,000, or 15.9% of net sales, for the nine
months ended September 30, 2005 decreased by $716,000, or 5%, when compared to
$14,153,00, or 17.5% of net sales, for the nine months ended September 30, 2004.
The decrease in gross margin and gross margin percentage for the nine months
ended September 30, 2005 was a result of an unfavorable shift in the product mix
sold, increased price-based competition, an increase in pricing by vendors, as
well as some resistance to price increases by customers.
MXL's gross margin of $1,162,000, or 19.5% of sales, for the nine months ended
September 30, 2005 increased by $190,000 or 20% when compared to gross profit of
$972,000, or 15.0% of sales, for the quarter ended September 30, 2004, mainly
due to a more favorable shift in the product mix sold, in particular for the
third quarter of 2005.
Selling, general, and administrative expenses
For the nine months ended September 30, 2005, selling, general and
administrative expenses increased by $934,000 from $14,939,000 for the nine
months ended September 30, 2004 to $15,873,000 partially due to increased
general and administrative expenses of $562,000 at the National Patent
Development corporate level. Five Star's selling, general and administrative
expenses increased by $300,000 primarily attributable to increases in salesmen
commissions, in delivery expenses and in medical expenses. MXL's selling,
general and administrative expenses increased by $72,000 primarily due to
increased travel, product development, and loss on sale of fixed assets; offset
by decreases in facility costs and employee benefits.
19
Loss on sale of the Illinois facility
For the nine months ended September 30, 2005 the Company incurred a loss of
$140,000, based upon the final proceeds from the sale of the Illinois facility,
net of commissions, taxes and other closing costs. This loss in included as part
of selling, general and administrative expenses on the consolidated statement of
operation for the period.
Investment and other income (loss), net.
National Patent Development recognized investment and other income of $298,000
the nine months ended September 30, 2005 mainly due a gain on sale of Millennium
Cell, Inc. common stock of $192,000, as well as interest and investment income;
partly offset by a loss on the sale of Avenue Entertainment Group, Inc common
stock of $33,000.
National Patent Development incurred investment and other losses of $1,133,000
the nine months ended September 30, 2004 mainly due an impairment loss of
$1,081,000 on Millennium for the nine months ended September 30, 2004 as the
security was deemed to be other-than-temporarily impaired, losses on sales of
Millennium of $173,000, offset by investment and other income of $78,000 and
gains on sales of Hemispherx Biopharma, Inc of $43,000.
Income taxes
For the nine months ended September 30, 2005 and 2004, the Company recorded an
income tax benefit of $107,000 and income tax expense $252,000, respectively,
which represents the Company's applicable federal, state and local tax expense
for the periods.
Liquidity and capital resources
At September 30, 2005, the Company had cash and cash equivalents totaling of
$5,799,000. 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 nine months ended September 30, 2005, National Patent Development's
working capital decreased by $1,683,000 to $12,345,000 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 $3,712,000 for the nine months
ended September 30, 2005 resulted from the following: (i) net cash used in
operations of $3,212,000, due primarily to a net loss of $2,000,000, an increase
in accounts receivable of $3,629,000, and a decrease in accounts payable and
accrued expenses of $3,036,000, offset by a decrease in inventory of $5,682,000;
(ii) net cash provided by investing activities of $1,853,000, consisting
proceeds on sale of investments of $1,351,000 and proceeds on sales of property,
plant and equipment of $1,514,000, offset by additions to property, plant and
equipment of $1,012,000; and (iii) net cash provided by financing activities of
20
$5,071,000, consisting of repayment of a receivable from GP Strategies of
$5,000,000 and proceeds of short term borrowings of $3,188,000, offset by
repayments of long-term debt of $3,026,000 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
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. The mortgage was repaid on July 28, 2005 in conjunction with the sale
by MXL of the Illinois facility.
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 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. 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. The AOtec Notes amounting to $100,000 and
$550,000 as of September 30, 2005 and December 31, 2004, respectively, are
classified as short term borrowings on the Company's Consolidated Balance
Sheets.
In 2003, Five Star obtained a Loan and Security Agreement (the "Loan Agreement")
with Bank of America Business Capital (formerly Fleet Capital Corporation) (the
"Lender"). The Loan Agreement has a five-year term, with a maturity date of June
30, 2008. The Loan Agreement, as amended on August 1, 2005, provides for a
$35,000,000 revolving credit facility, which allows Five Star to borrow based
upon a formula of up to 65% of eligible inventory and 85% of eligible accounts
receivable, as defined therein. The interest rates under the Loan Agreement
consist of LIBOR plus a credit spread of 1.5% (5.36% at September 30, 2005) for
borrowings not to exceed $15,000,000 and the prime rate (6.75% at September 30,
21
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 September 30, 2005 and December 31,
2004, approximately $20,923,000 and $18,234,000 was outstanding under the Loan
Agreement and approximately $2,359,000 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. For the three months
ended September 30, 2005 Five Star was not in compliance with the covenant that
required a certain minimum fixed charge coverage ratio, however, for the period,
the Company received a waiver of default from the Lender. .
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 September 30, 2005, $950,000 was outstanding under the MXL Line and
$50,000 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.
22
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.
23
PART II. OTHER INFORMATION
Item 6. Exhibits
a. Exhibits
10.1 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 of Five Star Products,
Inc. Form 10-Q for the quarter ended September 30,
2005.
10.2 Release and Settlement Agreement dated as of
July 8, 2005, by and between AOtec, LLC and MXL
Industries, Inc.
10.3 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 of
Five Star Products, Inc. Form 10-Q for the quarter
ended September 30, 2005.
31.1 Certification of Chief Executive Officer of the
Company dated November 14, 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 November 14, 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 November
14, 2005 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
________
-
*Filed herewith
24
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: November 14, 2005 Jerome I. Feldman
Chairman of the Board and
Chief Executive Officer
DATE: November 14, 2005 Scott N. Greenberg
Chief Financial Officer
25