UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ________ to _______
Commission file Number: 333-118568
NATIONAL PATENT DEVELOPMENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4005439
- ----------------------------------------- ---------------------------------
(State or Other Jurisdiction of IRS Employer Identification
Incorporation or Organization) Number)
777 Westchester Avenue, White Plains, NY 10604
(Address of Principal Executive Offices, including Zip
Code)
(914) 249-9700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
----------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes x No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes x No
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No x
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant, computed by reference to the price at which
the common stock was last sold, or the average bid and asked price of such
common stock, as of the last business day of the registrant's most recently
completed second quarter, is $18,979,726
As of March 16, 2007, 17,966,070 shares of the registrant's common
stock were outstanding.
Portions of the registrant's definitive Proxy Statement for its 2007
Annual Meeting of Stockholders are incorporated by reference into Part III of
this report.
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................... 1
Item 1A. Risk Factors.......................................................12
Item 1B. Unresolved Staff Comments..........................................14
Item 2. Properties........................................................14
Item 3. Legal Proceedings.................................................15
Item 4. Submission of Matters to a Vote of Security Holders...............15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.................16
Item 6. Selected Financial Data...........................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation....................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........32
Item 8. Financial Statements and Supplementary Data.......................33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................72
Item 9A. Controls and Procedures...........................................72
Item 9B. Other Information.................................................72
PART III
Item 10. Directors, Executive Officers and Corporate Governance.............73
Item 11. Executive Compensation.............................................73
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.........................73
Item 13. Certain Relationships and Related Transactions, and
Director Independence..............................................73
Item 14. Principal Accountant Fees and Services.............................73
PART IV
Item 15. Exhibits and Financial Statement Schedules.........................74
SIGNATURES...................................................................75
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward looking
statements. Forward-looking statements are not statements of historical facts,
but rather reflect our current expectations concerning future events and
results. We use words such as "expects", "intends", "believes", "may", "will"
and "anticipates" to indicate forward-looking statements.
Factors that may cause actual results to differ from those results expressed or
implied, include, but are not limited to, those listed below under "Risk
Factors"; an unexpected decline in revenue and/or net income derived by the
Company's wholly-owned subsidiary, MXL Industries, Inc., or by its
majority-owned subsidiary, Five Star Products, Inc,. due to the loss of business
from significant customers or otherwise. In addition, MXL is dependant on the
availability and pricing of plastic resin, principally polycarbonate, and Five
Star is subject to the intense competition in the do-it -yourself industry.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including, but
not limited to, those factors set forth under Item 1A - Risk Factors and those
other risks and uncertainties detailed in the Company's periodic reports and
registration statements filed with the United States Securities and Exchange
Commission (the "SEC"). We caution that these risk factors may not be
exhaustive. We operate in a continually changing business environment, and new
risk factors emerge from time to time. We cannot predict these new risk factors,
nor can we assess the effect, if any, of the new risk factors on our business or
the extent to which any factor or combination of factors may cause actual
results to differ from those expressed or implied by these forward-looking
statements.
If any one or more of these expectations and assumptions proves incorrect,
actual results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us, whether as a
result of new information, future events or otherwise. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this report.
PART I
Item 1: Business
General Development of Business
National Patent Development Corporation (the "Company", "we" or "us")
was incorporated on March 10, 1998 as a wholly-owned subsidiary of GP Strategies
Corporation ("GP Strategies"). The Company common stock is quoted on the OTC
Bulletin Board and is traded under the symbol NPDV.OB.
1
On July 30, 2004, GP Strategies contributed its ownership interests in
its optical plastics and home improvement distribution businesses, as well as
other non-core assets, to the Company in exchange for common stock of the
Company. The separation of these businesses was accomplished through a pro-rata
distribution (the "Distribution" or "spin-off") of 100% of the outstanding
common stock of the Company to the stockholders of GP Strategies on November 18,
2004, the record date of the Distribution. On November 24, 2004, holders of
record received one share of the Company's common stock for each share of GP
Strategies common stock or Class B capital stock owned.
The Company owns and operates the optical plastics business through its
wholly-owned subsidiary, MXL Industries, Inc. ("MXL"), the home improvement
distribution business through its majority owned subsidiary Five Star Products,
Inc. ("Five Star") and also owns certain other non-core assets, including:
o an investment in Millennium Cell, Inc., a Nasdaq Capital Market listed
company that develops hydrogen battery technology through a patented
chemical process that stores and delivers hydrogen energy to power
portable devices;
o an approximately 14% equity interest in Valera Pharmaceuticals, Inc.,
a Nasdaq Global Market listed specialty pharmaceutical company that
develops, acquires and commercializes products for the treatment of
urological and endocrine conditions, diseases and
o certain real estate.
Company Information Available
The Company makes available free of charge, its annual reports on Form
10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any
amendment to those reports filed or furnished pursuant to the Exchange Act as
soon as reasonably practicable after such material is electronically filed with,
or furnished to, the SEC upon written request to the Company's Secretary in
writing to the following address: National Patent Development Corporation, Attn:
Secretary, 777 Westchester Avenue, White Plains, NY 10604.
MXL Industries
General
Our wholly-owned subsidiary, MXL, is a molder and precision coater of
optical plastics. 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. Polycarbonate
is the most impact resistant plastic utilized in optical quality molded parts.
MXL's products include shields, face masks, security domes, and non-optical
plastic products, produced for over 50 clients in the safety, recreation,
security, and military industries. MXL also produces custom molded and decorated
products manufactured out of acrylic. Additionally, MXL's Illinois operations
had the capability to design and construct injection molds for a variety of
applications (optical and non-optical). In January 2007, MXL decided to close
its Illinois facility in the first quarter of 2007, and ceased operations at the
facility on February 27, 2007.
2
Established almost forty years ago, MXL is a speciality coater of
polycarbonate and acrylic parts. A growing insistence on quality coating results
led MXL to also establish itself as a specialist in the injection molding of
optical quality polycarbonate, thus enabling MXL to control the process from
start to finish. At its Lancaster, PA facility, molding machines are housed in a
climate controlled clean environment designed and built by MXL.
MXL's contracts in the military and commercial arena often require
either vacuum deposited beam-splitter coatings, vacuum deposited anti-reflective
coatings, laser eye protection, or a combination of these technologies in
addition to MXL's historic capabilities of providing difficult and optically
correct molded and coated components. Prior to the acquisition of the equipment
and intellectual property assets from AOtec, MXL was required to enter into
subcontracting arrangements to secure these technologies. The laser eye
protection technology, vacuum deposition processing, and equipment acquired from
AOtec, has enabled MXL to better service purchase orders for precision pilot
visors for next generation military fighter and attack aircraft, which require
beam-splitter coatings, anti-reflective coatings and/or laser eye protection.
MXL has earned a reputation as a toolmaker, molder and coater for
optical quality products in the United States by consistently meeting its
customer's requirements, even in the case of the most difficult designs and
compound curve optics. This expertise has allowed MXL to expand its customer
base beyond the United States to Japan, the United Kingdom, Europe, the Middle
East, Mexico, Canada, Australia and other locales.
MXL's net sales in the regions it does business for the years ended
December 31, 2006, 2005 and 2004, based upon the customers' locations, are as
follows (in thousands):
Year Ended December 31,
---------------------------------------
--------- --------------- -------------
2006 2005 2004
---- ---- ----
--------- --------------- -------------
United States $7,025 $5,724 $5,662
Far East 1,372 1,376 1,288
Other 599 815 1,291
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Total $8,996 $7,915 $8,241
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Industry Overview and Competition
The optical quality molding business requires expertise, experience and
an environment totally committed to the task. It requires the construction of a
facility designed and built expressly for precision injection molding and
personnel with the technical expertise to run such facility.
The markets for the products currently manufactured and sold by MXL are
characterized by extensive competition. The principal competitive factors of MXL
are its reputation for quality, service and integrity. MXL is able to provide
its customers with a breadth of experience, from mold design through mold
construction, to injection molding, coating, laser eye protection and/or high
technology optical coating. MXL is able to accomplish the most complex projects
for its customers. In addition, MXL's engineering, performance, availability and
reliability are important competitive factors.
Many existing and potential competitors have greater financial,
marketing and research resources than MXL.
3
Business Strengths
MXL has earned a reputation as one the foremost toolmakers, molders and
coaters for optical quality products in the Unites States by consistently
meeting its customers' requirements, even in the case of the most difficult
designs and compound curve optics.
As a pioneer in the optical plastic coating business, MXL offers input
based on our extensive manufacturing experience. MXL has spent almost 40 years
developing and perfecting its coating technology and materials.
The market for optical injection molding, tooling and coating is
focused, leading to intense competition. The following are major competitive
strengths and characteristics of MXL.
o Reputation for Quality and Service. MXL's on-going commitment to
quality has enabled it to meet the rigorous requirements of its most
valued customers and has earned it a reputation as the premier optical
injection molder in the industry. MXL has a reputation for on-time
delivery, and its return rate is exceptionally low, representing only
1.5% of sales volume. As these customers continue to focus on product
quality, MXL's past performance and long-term improvement programs
should further strengthen customer relationships.
o Superior Technical Skills and Expertise. The engineering experience of
MXL's senior management has enabled MXL to take advantage of
state-of-the-art injection molding technology and effectively develop
cost-effective and efficient production facilities. MXL's proprietary
HYDRON(R) permanent anti-fog coating absorbs moisture to form a
barrier against fogging.
o ISO 9001:2000 Registration. MXL's Pennsylvania facility is ISO
9001:2000 certified-a universally accepted quality assurance
designation indicating the highest quality manufacturing standards. A
certification by the International Standards Organization means that a
company maintains a quality system that is regularly assessed for
compliance to ISO standards. Meeting the ISO standard of quality
confirms MXL's commitment to manufacturing excellence.
o Integrated Plastics Business. The combination of MXL's original
business and its acquired equipment and technology from AOtec, has
created an integrated business which offers clients a full range of
design, production and marketing services for molded and coated
optical plastic products.
o Modern Automated Manufacturing. MXL's presses and coating lines,
state-of-the-art for the molding business, are efficiently designed
and well maintained. The equipment can be quickly reconfigured to meet
specific job requirements.
o Well-Qualified Management Team. MXL's senior management has extensive
experience in all aspects of the plastic molding and coating industry.
The senior management team has on average a minimum of 10 years of
direct manufacturing experience in this or related industries.
o Attractive Growth Opportunities. With the leadership of the senior
management, MXL is poised to enter any plastic molding and coating
business. Its acquisition of certain of the AOtec assets was a logical
extension of its position as a significant provider of optical quality
injection molds by allowing MXL to further expand its business into
the military arena. MXL believes that the combination of its
proprietary "Anti-Fog" coating, the addition of a photochromatic
coating in 2007, precise processing of the "Anti-Scratch" coatings,
precise molding and proprietary grinding and polishing methods for its
injection tools as well as its vacuum deposited anti-reflection
coatings and laser eye protection technology will provide it with the
opportunity to expand into related products. Strategy
4
Strategy
MXL intends to leverage its expertise as a molder and coater of optical
quality products by expanding into other markets and products. The performance
of MXL in the future will depend on its ability to develop and market new
products that will gain customer acceptance and loyalty, as well as its ability
to adapt its product offerings to meet changing pricing conditions and other
factors.
Markets and Products
MXL focuses its manufacturing capabilities in three distinct
capacities: injection molding, precision coating of optical plastics, and tool
and mold design and manufacture.
Injection Molding. MXL has the capability to manufacture a wide variety
of custom injection molding plastics for the recreation, industrial safety,
security and defense industries. Some of the products that MXL produces include
facemasks and shields for recreation purposes and industrial safety companies.
All of MXL's custom molding involves polycarbonate or acrylic, which are
difficult resins to mold and have required the development of sophisticated
manufacturing skills. MXL's closed-loop process control system monitors and
provides quality-assurance for every critical variable from resin drying,
through mold temperature and alignment, to robotic part removal. MXL's specially
designed clean room environment automatically removes dust and holds temperature
and humidity constant throughout the year.
MXL serves as a key contractor for several major development programs
in industry and government for precision optical systems, including medical
optics; military eye wear; and custom molded and decorated products. In order to
maintain its competitive position, MXL has traditionally invested in state of
the art equipment, including molding presses ranging from 60 to 485 tons,
automation equipment, clean room facilities, and vacuum and dip coating
equipment. MXL utilizes computer aided design software to design its optical
products. In addition, modern computer controlled molding machinery is used to
fabricate precision optic components.
Precision Coating. MXL's two existing coating lines and a new flow coat
line that will be appended to one of the existing coating lines in 2007 allow it
to offer a wide range of coating technologies to its customers. These services
include dual coating processes, urethane hard coat, silicone hard coat,
permanent anti-fog, photochromatic and finish application design. 80% of MXL's
coating business is for abrasion resistant purposes and 20% is for anti-fog
applications. MXL's two coating lines were designed and built in-house, and
allow for maximum flexibility and quality throughout the coating process. All
functions are controlled by state-of-the-art programmable controllers and A.C.
Linear drives and robotics. These highly flexible dip, flow and spray operations
can deliver a variety of coatings for parts as large as eight inches by
twenty-six inches, including anti-scratch on all surfaces, anti-fog on all
surfaces, one coating on one side only or dual coating with anti-scratch on one
side and anti-fog on the opposite side.
Manufacturing and Raw Materials
MXL's primary raw materials are plastic resin (principally
polycarbonate), acrylic, silicone hard coatings and HYDRON(R) anti-fog coating.
MXL is able to fulfill its requirements for plastic resin and acrylic through
arrangements with various distributors and is able to fulfill its requirements
5
for silicone hard coating from manufacturers. MXL manufactures its proprietary
HYDRON(R), which is applied as a fog resistant coating to its optical products.
Plastic resin is a petroleum based product, and as such, is subject to price
increases (up to 3% during the year ended December 31, 2006) along with
increases in crude oil prices, which have increased by as much as 25% during the
year ended December 31, 2006.
Customers
As the market for optical injection molded plastics is relatively
focused, MXL serves virtually all of the major users. The customer base of MXL
includes over 50 commercial customers in 28 states and Japan, the United
Kingdom, Europe, China, the Middle East, Mexico, Canada and Australia. These
commercial customers are primarily in the recreation, safety, and security
industries. MXL's largest three customers comprised approximately 14%, 12% and
10%, respectively, of its total sales in 2006.
MXL's government customers include various offices of the Department of
Defense. MXL is required to comply with various federal regulations including
military specifications and Federal Acquisition Regulations for military end use
applications. There are no MXL government contracts subject to renegotiation or
termination at the election of the government.
Sales and Distribution
Because of the narrow niche MXL serves, its sales and marketing effort
concentrates on industry trade shows, such as the Society of Plastics Engineers,
and advertising in industry journals. Its senior management team, as well as two
marketing and sales executives, are responsible for the sales and marketing
effort. It also utilizes two sales associates to market its products.
Backlog
MXL's sales order backlog as of December 31, 2006 was approximately
$761,000 ($2,220,000 as of December 31, 2005) and most of the orders are
expected to be completed during fiscal 2007.
Patents, Trademarks, and other Intellectual Property
The names MXL and HYDRON are registered trademarks. In connection with
the AOtec transaction, MXL entered into an exclusive, royalty-free perpetual
license (with the right to grant sublicenses) to use the trademarks AOTEC(TM)
and AOGUARD(TM) for military eye protection products, electro-optical systems
and precision molded and coated plastic components.
Environmental Matters and Governmental Regulations
For its manufacturing work as a subcontractor in the military industry,
MXL is required to comply with various federal regulations including Military
Specifications and Federal Acquisition Regulations for military end use
applications. In addition, MXL's activities may subject it to federal, state and
local environmental laws and regulations. MXL believes that it is in compliance
in all material respects with such government regulations and environmental
laws.
6
Employees
As of December 31, 2006, MXL employed 76 persons, including 69 at its
Lancaster facility and 7 in its Illinois facility. Of the MXL employees, 40 are
in production or shipping, with the remainder serving in executive,
administrative office and sales capacities. None of MXL's employees are subject
to collective bargaining agreements. MXL believes its relationship with its
employees is good.
Five Star Products
General
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, making Five Star one of the largest distributors of its kind
in the Northeast. Five Star operates two distribution centers, located in
Newington, CT and East Hanover, NJ. All operations are coordinated from Five
Star's New Jersey headquarters. On July 30, 2004, GP Strategies contributed its
ownership interest in Five Star and the Five Star Note to the Company.
Five Star offers products from leading manufacturers such as
Valspar/Cabot Stain, William Zinsser & Company, DAP Inc., General Electric
Corporation, American Tool, USG Corporation, Stanley Tools, Minwax and 3M
Company. Five Star distributes its products to retail dealers, which include
lumber yards, "do-it yourself" centers, hardware stores and paint stores
principally in the northeast region. It carries an extensive inventory of the
products it distributes and provides delivery, generally within 24 to 72 hours.
Five Star has grown to be one of the largest independent distributors in the
Northeast by providing a complete line of competitively priced products, timely
delivery and attractive pricing and financing terms to its customers. Much of
Five Star's success can be attributed to a continued commitment to provide
customers with the highest quality service at reasonable prices.
As one of the largest distributors of paint sundry items in the
Northeast, Five Star enjoys cost advantages and favorable supply arrangements
over the smaller distributors in the industry. This enables Five Star to compete
as a "low cost" provider. Five Star uses a fully computerized warehouse system
to track all facets of its distribution operations. Nearly all phases of the
selling process from inventory management to receivable collection are automated
and tracked; all operations are overseen by senior management at the New Jersey
facility. Five Star is able to capitalize on manufacturer discounts by
strategically timing purchases involving large quantities.
Management takes a proactive approach in coordinating all phases of
Five Star's operations. For example, sales managers require all sales
representatives to call on customers once every week. Each salesperson transmits
his or her orders through Five Star's automated sales system, to the IBM AS/400
computer located at the New Jersey facility. The salesperson system combines the
ability to scan product codes in the customers' stores and download the
information to a laptop computer for final transmission. Based on the floor plan
of each warehouse and the location of products therein, the computer designs a
pattern for the orders to be picked. The orders are then relayed to the
appropriate location and typically picked in the evening. The warehouse
facilities are well-maintained and skillfully organized. A bar-coded part number
attached to the racking shelves identifies the location of each of the
approximately 19,000 stock keeping units (SKUs). The products are loaded onto
Five Star's trucks in the evening in the order that they will be unloaded, and
are delivered directly to the customers locations the following morning.
7
Industry Overview and Competition
The paint sundry items distribution industry is closely related to the
do-it-yourself retail market, which has tended to exhibit elements of
counter-cyclicality. In times of recession, consumers tend to spend more on home
improvements if they cannot afford to trade up to bigger homes. In times of
economic strength, consumers tend to spend heavily on home improvements because
they believe they can afford to complete their home improvement projects.
According to the National Retail Hardware Association, total retail sales by
home improvement retailers are estimated to be $300 billion in 2006 and are
projected to grow at a 5.7% compound rate through 2010.
Painting is the quintessential do-it-yourself project. Painting has to
be done more frequently than most remodeling jobs, and it is a relatively
inexpensive way to update the appearance of a home. For these reasons, the paint
and paint sundry items industry tends to be counter-cyclical and a solid growth
segment of the do-it-yourself market.
Competition within the do-it yourself industry is intense. There are
large national distributors commonly associated with national franchises such as
Ace Hardware and TruServ as well as smaller regional distributors, all of whom
offer similar products and services. Moreover, in some instances manufacturers
will bypass the distributor and choose to sell and ship their products directly
to the retail outlet. In addition, Five Star's customers face stiff competition
from Home Depot, Lowes and other large direct distributors, which purchase
directly from manufacturers. The principal means of competition for Five Star
are its strategically placed distribution centers and its extensive inventory of
quality, name-brand products. Five Star will continue to focus its efforts on
supplying its products to its customers at a competitive price and on a timely,
consistent basis. While other paint sundry items distributors sell to the same
retail networks as Five Star, they are at a distinct disadvantage due to Five
Star's experience, sophistication and size.
Hardware stores that are affiliated with the large, dealer-owned
distributors such as Ace also utilize Five Star's services because they are
uncomfortable with relying solely on their dealer network. Most cooperative-type
distributors lack the level of service and favorable credit terms that
independent hardware stores enjoy with Five Star. Five Star effectively competes
with the dealer-owned distributors because it provides more frequent sales
calls, faster deliveries, better financing terms and a full line of vendors and
products to choose from.
Business Strengths
As one of the largest distributors of paint sundry items in the
Northeast, Five Star enjoys cost advantages and favorable supply arrangements
over the smaller distributors in the industry. This enables Five Star to compete
as a "low cost" provider. Five Star uses a fully computerized warehouse system
to track all facets of its distribution operations. Five Star has enhanced the
sophistication of its warehouse and office facilities to take full advantage of
economies of scale, speed the flow of orders and to compete as a low cost
distributor. Nearly all phases of the selling process from inventory management
to receivable collection are automated and tracked; all operations are overseen
by senior management at the New Jersey facility. Five Star is able to capitalize
on manufacturer discounts by strategically timing large quantity purchases.
8
Strategy
Five Star carries an extensive inventory of the products it distributes
and provides delivery, generally within 24 to 72 hours. Five Star believes that
it will continue to grow its business by providing a complete line of
competitively priced products, timely delivery and attractive pricing and
financing terms to its customers. In the future, Five Star will attempt to
acquire complementary distributors and to expand the distribution of its use of
private-label products sold under the "Five Star" name. Through internal growth
and acquisitions, Five Star has already captured a leading share in its
principal market the Northeast. This growth-oriented acquisition strategy of
acquiring complementary distributors has allowed Five Star to compete against a
substantial number of its competitors.
Markets, Products and Sales
The do-it-yourself industry relies on distributors to link
manufacturer's products to the various retail networks. The do-it-yourself
market operates on this two-step distribution process, i.e., manufacturers deal
through distributors who in turn service retailers. This occurs principally
because most retailers are not equipped to carry sufficient inventory in order
to be cost effective in their purchases from manufacturers. Thus, distributors
add significant value by effectively coordinating and transporting products to
retail outlets on a timely basis. Five Star distributes and markets products
from hundreds of manufacturers to all of the various types of retailers from
regional paint stores, to lumber yards, to independent paint and hardware
stores.
The marketing efforts are directed by regional sales managers. These
individuals are responsible for designing, implementing and coordinating
marketing policies. They work closely with senior management to coordinate
company-wide marketing plans as well as to service Five Star's major multi-state
customers. In addition, each regional sales manager is responsible for
overseeing the efforts of his sales representatives.
The sales representatives, by virtue of daily contact with Five Star's
customers, are the most integral part of Five Star's marketing strategy. It is
their responsibility to generate revenue, ensure customer satisfaction and
expand the customer base. Each representative covers an assigned geographic
area. The representatives are compensated based solely on commission. Five Star
has experienced low turnover in its sales force; most representatives have a
minimum of five years' experience with Five Star. Many sales representatives had
retail experience in the paint or hardware industry when they were hired by Five
Star.
Five Star's size, solid reputation for service, large inventory and
attractive financing terms provide sales representatives with tremendous
advantages relative to competing sales representatives from other distributors.
In addition, the representatives' efforts are supported by company-sponsored
marketing events. For example, in the first quarter of each year , Five Star
invites all of its customers to special trade shows for Five Star's major
suppliers, so that suppliers may display their products and innovations. Five
Star also participates in advertising circular programs in the spring and the
fall which contain discount specials and information concerning new product
innovations.
Purchasing
Five Star relies heavily upon its purchasing capabilities to gain a
competitive advantage relative to its competitors. Five Star's capacity to stock
9
the necessary products in sufficient volume and its ability to deliver them
promptly upon demand is an essential components of their service and a major
factor in Five Star's success.
Since retail outlets depend upon their distributor's ability to supply
products quickly upon demand, inventory is the primary working capital
investment for most distribution companies, including Five Star. Through its
strategic purchasing decisions, Five Star carries large quantities of inventory
that support fill ratios of approximately 95%.
All purchasing decisions are made by the merchandising group, located
in New Jersey, in order to coordinate effectively Five Star's activities. In
addition to senior management's active involvement, regional sales managers play
an extremely critical role in this day-to-day process.
Five Star has developed strong, long-term relationships with the
leading suppliers since its predecessor company, J. Leven, was founded in 1912.
As a major distributor of paint sundry items, suppliers rely on Five Star to
introduce new products to market. Furthermore, suppliers have grown to trust
Five Star's ability to penetrate the market. As a result, Five Star is often
called on first by manufacturers to introduce new products into the marketplace.
For example, Minwax, Bestt Liebco and Cabot Stain have utilized Five Star to
introduce and distribute some of their new product innovations.
Customers
Five Star's largest customer accounted for approximately 4.3% of its
sales in 2006 and its 10 largest customers accounted for approximately 17.4% of
such sales. All customers are unaffiliated and Five Star does not have a
long-term contractual relationship with any of them.
Backlog
Five Star does not have any significant backlog.
Patents, Trademarks, and other Intellectual Property
Except for its line of private-label products, Five Star does not have
any other patents, trademarks or other intellectual property. Five Star intends
to expand the distribution of its line of private-label products sold under the
"Five Star" name.
Environmental Matters and Governmental Regulations
Five Star's activities may subject it to federal, state and local
environmental laws and regulations and OSHA regulations. Five Star believes that
it is in compliance in all material respects with such environmental and federal
laws and regulations.
Employees
Five Star employed 219 people as of December 31, 2006.
Management-employee relations are considered good at both of Five Star's
warehouse facilities. The Teamsters union represents 86 union employees at the
New Jersey warehouse facility. The Connecticut warehouse facility is
non-unionized. Five Star has never experienced a labor strike at its facilities.
Five Star's contract with Local No. 11, affiliated with the International
Brotherhood of Teamsters expires on December 20, 2008.
10
Other Assets
Valera Pharmaceuticals
Valera is a specialty pharmaceutical company focused on the development and
commercialization of urology and endocrinology products. Valera markets VANTAS
for advanced prostate cancer and has multiple products in clinical development
including SUPPRELIN-LA for central precocious puberty.
On February 7, 2006, Valera completed an initial public offering of common
stock. Valera's common stock is traded on the Nasdaq Global Market under the
symbol VLRX. All Valera convertible preferred stock outstanding at the time of
the offering, including accrued dividends, automatically converted into common
stock. Subsequent to the public offering, after giving effect to the conversion
of Valera Series B preferred stock, the Company owns 2,070,670 shares of Valera
common stock, or approximately 14% of the currently outstanding shares of Valera
common stock as of December 31, 2006. The Company entered into a lock-up
agreement with the underwriters of the public offering which restricts the
Company from selling or otherwise disposing of its shares of Valera common stock
for a period of 180 days from February 1, 2006. The Valera shares available for
sale over the next 12 months at December 31, 2006 totaled 595,422 and resulted
in an unrealized gain of $4,366,000 being included in accumulated other
comprehensive income as December 31, 2006. Two related parties, Bedford Oak
Partners and Mr. Feldman, (see "Certain Transactions") are entitled to receive
50% of any profit received from the sale, on a pro-rata basis, of 404,004 shares
of Valera common stock in excess of $3.94 per share. See Note 4 to Notes to
Consolidated Financial Statements. The unrealized profit on Valera shares
available for sale at December 31, 2006 which would be payable to the related
parties upon sale totaled $242,000, which is included in Investment and other
income (loss) and Other Liabilities.
On December 12, 2006 Valera entered into an agreement and plan of merger
pursuant to which Indevus Pharmaceuticals, Inc. (NASDAQ: IDEV) would acquire
Valera in a stock transaction for $7.75 per share, plus contingent payments of
up to $3.50 per share based on the achievement of future product milestones. The
merger will take the form of a tax-free stock-for-stock merger. Under the terms
of the agreement, each share of Valera common stock will be exchanged for $7.75
in Indevus common stock, provided the volume weighted average closing price for
Indevus common stock is between $6.59 and $8.05 during the 25 trading day period
ending five trading days prior to the meeting of Valera stockholders to vote on
the merger. Each Valera share exchanged would be converted into not more than
1.1766 shares and not less than 0.9626 shares of Indevus common stock.
In addition, each share of Valera common stock will also be converted into three
contingent stock rights ("CSRs") relating to three Valera products in various
stages of development. One CSR is convertible into $1.00 of Indevus common stock
upon FDA approval of Valera's SUPPRELIN-LA and the availability of sufficient
launch quantities, one CSR is convertible into $1.00 of Indevus common stock
upon FDA approval of Valera's biodegradable ureteral stent and one CSR is
convertible into $1.50 of Indevus common stock upon FDA approval of Valera's
octreotide implant. The amount of Indevus common stock into which the CSRs
convert will be determined by a formula based on the average stock price of
Indevus prior to achievement of the applicable milestones, and CSRs convert into
Indevus common stock only if the applicable milestones are achieved within three
years of the closing of the merger in the case of SUPPRELIN-LA and within five
11
years of the closing of the merger in the case of the biodegradable ureteral
stent and the octreotide implant.
In connection with the transaction, certain affiliated funds of Sanders Morris
Harris, Valera's largest shareholder, and one other large shareholder of Valera,
have entered into voting agreements in which they have agreed to vote shares
representing approximately 41% of Valera's outstanding shares in favor of the
merger.
The merger has been approved by the boards of directors of Indevus and Valera
and is expected to be completed on or around April 30, 2007. Closing of the
merger is subject to clearance under the Hart-Scott Rodino Antitrust
Improvements Act, approval of Valera's stockholders, approval of Indevus'
stockholders and other customary closing conditions.
Millennium Cell
Millennium Cell is a publicly traded emerging technology company engaged in the
business of developing innovative fuel systems for the safe storage,
transportation and generation of hydrogen for use as an energy source. At
December 31, 2006 the Company owned 364,771 shares of common stock of Millennium
with a market value of $343,000, representing approximately a 1% ownership
interest.
Pawling Property
We own an approximately 950 acre parcel of undeveloped land in Pawling, New
York, which includes an approximately 50 acre lake, Little Whaley Lake. The site
is currently unoccupied. GP Strategies purchased this property in 1986.Pursuant
to a Note and Warrant Purchase Agreement dated August 8, 2003, GPS issued and
sold to four Gabelli funds $7,500,000 aggregate principal amount of 6%
Conditional Subordinated Notes due 2008 (the "Notes") and 937,500 warrants ("GP
Warrants"), each entitling the holder thereof to purchase (subject to
adjustment) one share of GPS's common stock. See Note 17 to the Consolidated
Financial Statements. In connection with the sale of the Gabelli Notes and GP
Warrants, GP Strategies mortgaged this property to the holders of the Gabelli
Notes, and GP Strategies transferred it to us subject to that mortgage.
Item 1A. Risk Factors
Risks Related to our Business
MXL's revenue and net income could decline as a result of a loss of business
from significant customers.
For the years ended December 31, 2006, 2005 and 2004, revenue from
MXL's three largest customers represented approximately 36%, 37% and 38%, of
MXL's revenue, respectively. MXL has no significant long-term supply contracts
and therefore its operations are dependent on its clients' continued
satisfaction with its services and their continued willingness to engage MXL,
rather than its competitors, to deliver such services.
MXL's source of raw materials may be limited and failure to obtain raw materials
with cost efficiency and on a timely basis may cause a disruption in MXL's
operations.
12
polycarbonate). In the past, MXL primarily relied on one supplier for its
primary raw material. Due to new entrants in the market to supply plastic resin,
MXL currently uses two primary suppliers and could choose from one or more other
suppliers for plastic resin. However, if the number of suppliers again declined
to past levels, MXL would be dependent on limited sources of supply for its raw
materials, and the failure of MXL to fulfill its raw material requirement could
disrupt its business and result in a decrease in net income.
In addition, plastic resin is a petroleum based product, and as such,
is subject to price increases (0% to 3% during the year ended December 31, 2006,
depending on grade and type) along with increases in crude oil prices (over 25%
during the year ended December 31, 2006). There is no guarantee that MXL will be
able to fully recover from its customers its cost increases associated with
increases in the price of plastic resin.
If our subsidiaries are unable to compete successfully, our revenues may be
adversely affected.
In the case of MXL, competition in the optical plastics industry is
vigorous. MXL's customers require state-of-the-art technology. In order to keep
pace with MXL's customers' needs, MXL is required to constantly develop and
improve its technology, facilities and production equipment and methods. MXL's
future success will depend upon its ability to gain expertise in technological
advances rapidly and respond quickly to evolving industry trends and client
needs.
In the case of Five Star, competition within the do-it-yourself
industry is intense. There are large national distributors commonly associated
with national franchises such as Ace and TruServ as well as smaller regional
distributors, all of whom offer products and services similar to those offered
by Five Star. Moreover, in some instances, manufacturers will bypass
distributors and choose to sell and ship their products directly to retail
outlets. In addition, Five Star's customers face stiff competition from Home
Depot, Lowe's and other large direct distributors, which purchase directly from
manufacturers, and national franchises such as Ace and TruServ. Five Star
competes principally through its strategically placed distribution centers and
its extensive inventory of quality, name-brand products. Five Star will continue
to focus its efforts on supplying its products to its customers at a competitive
price and on a timely, consistent basis.
Our subsidiaries' inability to compete successfully would materially
decrease our results of operations and working capital.
The loss of our key personnel, including our executive management team, could
harm our business.
The Company's success is largely dependent upon the experience and
continued services of its executive management team and their other key
personnel. The loss of one or more of the Company's key personnel and a failure
to attract or promote suitable replacements for them may adversely affect their
business.
13
Risks Related to Our Stock
We have agreed to restrictions and adopted policies that could have possible
anti-takeover effects and reduce the value of our stock.
We have agreed to certain restrictions on our future actions to assure
that the Spin-off will be tax-free, including restrictions with respect to an
acquisition of shares of common stock of the Company. If we fail to abide by
these restrictions, and, as a result, the spin-off fails to qualify as a
tax-free reorganization, the Company will be obligated to indemnify GP
Strategies for any resulting tax liability. The potential tax liability that
could arise from an acquisition of shares of Company common stock, together with
our related indemnification obligations, could have the effect of delaying,
deferring or preventing a change in control of the Company.
Several provisions of our Certificate of Incorporation and Bylaws could
deter or delay unsolicited changes in control of the Company. These include
limiting the stockholders' powers to amend the Bylaws or remove directors, and
prohibiting the stockholders from increasing the size of the Board of Directors
or acting by written consent instead of at a stockholders' meeting. Our Board of
Directors has the authority, without further action by the stockholders to fix
the rights and preferences of and issue preferred stock. These provisions and
others that could be adopted in the future could deter unsolicited takeovers or
delay or prevent changes in control or management of the Company including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. These provisions may limit the ability
of stockholders to approve transactions that they may deem to be in their best
interests.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The following information describes the material physical properties owned or
leased by us and our subsidiaries. We lease approximately 10,000 square feet of
space for our White Plains, New York principal executive offices. The lease
ended on December 31, 2006 and has been extended to March 31, 2007. The Company
entered into a sub-lease for office space in New York City at 10 East 40th
Street. The sublease runs through February 14, 2009 at a monthly rate of
$20,150.
MXL owns 50,200 square feet of warehouse and office space in Lancaster, PA and
leases space in Illinois. In January 2007, MXL decided to close its Illinois
facility in the first quarter of 2007, and ceased operations at the facility on
February 27, 2007. The lease obligation for the Illinois facility terminates on
April 30, 2007.
Five Star leases 236,000 square feet in New Jersey, 98,000 square feet in
Connecticut, and 1,300 square feet of sales office space in New York. GPS has
guaranteed the leases for Five Star's New Jersey and Connecticut warehouses,
having annual rentals of approximately $1,600,000 in aggregate and expiring in
the first quarter of 2009. The landlord at Five Star's Connecticut facility has
the option to cancel the lease if there is a signed contract to sell the
building upon six months written notice. Exercise by the landlord of the option
and our inability to enter into new lease under favorable terms could have an
adverse impact on our business. On September 20, 2006, Five Star renegotiated
14
the New York sales office lease terms with the lessor. The terms are month to
month with a monthly base rent of $ 1,968 for the period October 2006 through
March 2007 and a monthly base rent of $ 2,028 for the period April 2007 through
March 2008.
The facilities owned or leased by us are considered to be suitable and adequate
for their intended uses and are considered to be well maintained and in good
condition.
Item 3. Legal Proceedings
Claims Relating to Learning Technologies Acquisition
On July 30, 2004, GPS agreed to make an additional capital contribution
to the Company, 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 the claims described
below. In 2004, GPS received $13.7 million of net proceeds from such
claims and, pursuant to such agreement, in January 2005 GPS made a $5
million additional capital contribution to the Company. In November 2005,
GPS settled its remaining fraud claims against Electronic Data Systems
Corporation (EDS) and Systemhouse in connection with the GPS's 1998
acquisition of Learning Technologies. Pursuant to the settlement, EDS
made a cash payment to GPS in the amount of $9,000,000 in December 2005.
In accordance with the Spin-off agreement with the Company, GPS made an
additional capital contribution to the Company for approximately
$1,201,000 of the settlement proceeds. GPS did not transfer cash to the
Company for this additional capital contribution, but instead is
offsetting the management fee charges due from the Company against the
payable to the Company (see Note 13). As of December 31, 2006, GPS has a
remaining payable to the Company of $251,000 for this additional capital
contribution
GPS's original fraud action included MCI Communications Corporation (MCI)
as a defendant. The fraud action against MCI had been stayed as a result
of MCI's bankruptcy filing, and GPS's claims against MCI were not tried
or settled with the claims against EDS and Systemhouse. On December 13,
2005, the Bankruptcy Court heard arguments on a summary judgment motion
that MCI had made before filing for bankruptcy. On September 12, 2006,
the Bankruptcy Court asked the parties to submit further briefs
concerning whether the summary judgment motion should be decided based on
the standard applicable to such motions under state or federal law. A
decision on the motion for summary judgment has not been issued. Pursuant
to the Spin-off agreement with the Company, GPS will contribute to the
Company 50% of any proceeds received, net of legal fees and taxes, with
respect to the litigation claims.
The Company is not a party to any legal proceeding, the outcome of which
is believed by management to have a reasonable likelihood of having a
material adverse effect upon the financial condition of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
15
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters
The following table presents the high and low bid and asked prices for the
Company's common stock for 2006 and 2005. The Company's common stock, $0.1 par
value, is quoted on the OTC Bulletin Board. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Quarter High Low
2006 First $2.34 $1.35
Second $1.60 $1.37
Third $1.66 $1.20
Fourth $2.35 $1.37
2005 First $3.05 $2.03
Second $2.80 $2.26
Third $2.70 $2.30
Fourth $2.80 $1.78
The number of stockholders of record of the Common Stock as of March 16, 2007
was 1,201 and the closing price on the OTC Bulletin Board on that date was
$2.62.
The Company did not declare or pay any cash dividends on its common stock in
2006 or 2005. The Company currently intends to retain future earnings to finance
the growth and development of its business
16
Item 6. Selected Consolidated Financial Data (in thousands, except per
share data):
The selected financial data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes thereto
included elsewhere in this report. Before the Spin-off and the related corporate
restructuring transactions, we operated as part of GP Strategies. Because the
data reflect periods during which we did not operate as an independent company,
the historical data may not reflect the results of operations or the financial
condition that would have resulted if we had operated as a separate, independent
company during the periods shown.
- ----------------------------------------- --------------------------------------------------------------------------
Consolidated Statement of
Operations Data (1)
Year Ended December 31,
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
- ----------------------------------------- --------------- --------------- --------------- -------------- -----------
Sales $ 117,084 $ 114,366 $ 110,223 $103,698 $9,996
Gross Margin 19,479 18,452 19,640 19,082 2,099
Interest expense 1,565 1,585 1,098 864 208
Income (loss) before income taxes and
minority interest (777) (3,242) (3,111) 383 292
Net income (loss) (1,207) (2,919) (4,529) (104) 147
Net income (loss)
per share:
Basic and diluted $ (.07) $ (.16) $ (.25) $ (.01) $ .01
- ------------------------------------- -----------------------------------------------------------------------------
Consolidated Balance Sheet Data (1)
December 31,
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
- ------------------------------------- -------------- ------------ ------------- ------------ ------------
- ------------------------------------- -------------- ------------ ------------- ------------ ------------
Cash and cash equivalents $ 4,485 $ 5,115 $ 2,087 $ 602 $ 562
Short-term borrowings 18,414 20,764 18,784 16,960 -
Working capital 12,182 13,089 14,028 10,565 3,954
Total assets 53,234 52,222 60,474 53,638 29,870
Long-term debt 1,332 1,106 1,395 3,203 2,670
Stockholders' equity 21,137 18,469 19,760 17,236 25,451
(1) On October 8, 2003, the Company increased its ownership interest in Five
Star's outstanding common stock from 48% to 54%, resulting in a controlling
financial interest in Five Star and accordingly commenced consolidating Five
Star's financial statements with those of the Company. Five Star's results of
operations are included in the 2003 consolidated statement of operations as
though a controlling financial interest had been acquired by the Company at
the beginning of such year and, accordingly, Five Star's sales, cost of sales
and expenses are included for the twelve months ended December 31, 2003. The
acquisition of a controlling financial interest was accounted for as a
purchase transaction.
As a result of an issuer tender offer by Five Star, approximately 2,628,000
shares of Five Star common stock were tendered and acquired by Five Star
effective March 31, 2004 at a cost of $657,000. The effect of such tender
offer was to increase our ownership in Five Star to approximately 64% at
March 31, 2004.
17
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Executive Summary
The Company reported a net loss for the year ended December 31, 2006 of
$1,207,000 or $(.07) per share (basic and diluted), as compared to a net loss of
$2,919,000 or $(.16) per share (basic and diluted) for the year ended December
31, 2005. The reduced loss was primarily due to increased operating profits
achieved by Five Star in 2006 totaling $808,000 as well as operating profits of
$419,000 achieved by MXL in 2006, as compared to an operating loss of $1,135,000
in 2005, resulting in a positive variance of $1,554,000 for MXL. The
improvements achieved by MXL are primarily attributable to increased gross
margin and the elimination of the costs and operating inefficiencies incurred in
2005 due to the closing of its Massachusetts facility. The improved operating
results achieved by Five Star are primarily attributable to reduced selling,
general and administrative expenses.
General Overview
The Company was incorporated on March 10, 1998 as a wholly-owned
subsidiary of GP Strategies Corporation. On February 12, 2004, the Company was
recapitalized whereby the authorized capital was changed to 10,000,000 shares of
preferred stock and 30,000,000 shares of common stock. On July 30, 2004 GP
Strategies transferred to the Company its optical plastics business through its
wholly-owned subsidiary, MXL; the home improvement distribution business through
its partially owned subsidiary Five Star; and certain other non-core assets. The
separation of these businesses was accomplished through a pro-rata distribution
(the "Distribution" or "Spin-off") of 100% of the outstanding common stock of
the Company to the stockholders of GP Strategies on November 18, 2004, the
record date for the Distribution. On November 24, 2004, holders of record
received one share of the Company's common stock for each share of GP Strategies
common stock or Class B capital stock owned.
The Company operates in two segments: MXL and Five Star. The Company
also owns certain other non-core assets, including an investment in a publicly
held company, Millennium Cell; an approximately 14% interest in a publicly held
company, Valera Pharmaceuticals; and certain real estate. The Company monitors
Millennium Cell for progress in the commercialization of Millennium Cell's
emerging technology and monitors Valera for progress in its marketing efforts.
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.
18
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. MXL's
commitments to its customers, consisting of unfilled sales orders or backlog,
amounted to approximately $761,000 as of December 31, 2006. 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.
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. To further grow,
MXL not only intends to expand its 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.
Five Star Overview
Five Star is a publicly held company that is a distributor in the
United States of home decorating, hardware, and finishing products. Five Star
offers products from leading manufacturers in the home improvement industry and
distributes those products to retail dealers, which include lumber yards, "do-it
yourself" centers, hardware stores and paint stores. Five Star has grown to be
one of the largest independent distributors in the Northeast United States by
providing a complete line of competitively priced products, timely delivery and
attractive pricing and financing terms to its customers.
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.
19
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.
Five Star operates in the Home Improvement market, which has grown in
recent years and for which the National Retail Hardware Association predicts
average annual industry growth of approximately 5.7% 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 not increased at the same rate, and such revenue would have declined
if Five Star had not entered into new geographic sales territories.. 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.
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.
On March 14, 2007 Five Star signed a definitive agreement with
Right-Way Dealer Warehouse, Inc. to acquire substantially all of Right-Way's
assets (with certain exclusions including cash) and the operations of its
Brooklyn Cash & Carry business pursuant to Section 363 of the Bankruptcy Code
for an aggregate purchase price of approximately $5 million in cash subject to
adjustment as provided in the definitive agreement. The transaction, which is
subject to approval by the Bankruptcy Court for the District of Massachusetts,
is scheduled to close on April 13, 2007. Right-Way is also a distributor of
paint sundries, home decorating and hardware products, primarily in the
Northeast market. In addition to the agreement to acquire Right-Way's assets, at
the closing of the asset purchase, Five Star will enter into a lease of (and a
related option to purchase) a warehouse in Brooklyn, New York at which Right-Way
conducts the Brooklyn Cash & Carry business. At the closing, Five Star will also
enter into an employment agreement with Ron Kampner, the principal of Right-Way.
Mr. Kampner will become Five Star's Senior Vice President of Sales.
Consolidated Results of Operations
Year Ended December 31, 2006 compared to Year Ended December 31, 2005
The Company had a loss before income taxes and minority interest of
$777,000 for the year ended December 31, 2006 as compared to losses before
20
income taxes and minority interest of $3,242,000 for the year ended December 31,
2005. The reduced loss of $2,465,000 is primarily due to the following factors;
(i) reduced selling, general and administrative expenses of $1,300,000 in 2006,
primarily due to reduced expenses at Five Star (ii) increased gross margin of
$1,027,000 in 2006 primarily due to increased gross margins achieved by Five
Star due to increased sales and increased gross margins amounts and percentage
achieved by MXL and (iii) reduced increased investment and other income of
$64,000.
Sales
Year ended
December 31,
2006 2005
---- ----
Five Star $108,088,000 $106,451,000
MXL 8,996,000 7,915,000
------------- -------------
$117,084,000 $114,366,000
------------ ------------
For the year ended December 31, 2006, sales increased by $2,718,000 as
a result of increased sales at both Five Star and MXL.
For the year ended December 31, 2006, the increase in Five Star sales
of $1,637,000 was primarily the result of increased selling prices and reduced
sales discounts.
The increase in MXL sales of $1,081,000 was primarily the result
increased sales volume and an increase in prices to existing customer resulting
from a concerted effort to expand sales opportunities with existing customers.
Gross margin
Year ended
December 31,
---------------------------------------------------------
------------------ --------- ----------------- ----------
2006 % 2005 %
-------- - -------- -
Five Star $17,211,000 15.9 $17,197,000 16.2
MXL 2,268,000 25.2 1,255,000 15.9
------------- ------ ------------- ------
$19,479,000 16.6 $18,452,000 16.1
----------- ---- ----------- ----
For the year ended December 31, 2006, gross margin increased by
$1,027,000 primarily due to increased gross margin and gross margin percentage
earned by MXL.
The increase of $14,000 in Five Star gross margin for the year ended
December 31, 2006 was the result of increased sales, offset by reduced gross
margin percentage due to reduced vendor discounts realized in 2006. Five Star
includes warehousing expenses as part of cost of goods sold.
The increase in MXL gross margin of $1,013,000 and gross margin
percentage for the year ended December 31, 2006, is due to the following; (i)
increased margins in all product lines due to increased pricing, (ii) improved
product mix, (iii) reduced costs due to MXL's exit from its Massachusetts
facility, and the consolidation of all MXL's injection molding and precision
coating operations at its Lancaster PA facility and, (iv) increased sales.
21
Selling, general and administrative
For the year ended December 31, 2006, selling, general and
administrative expenses decreased by $1,300,000, or 6.5%, from $19,978,000 for
the year ended December 31, 2005 to $18,678,000 for the year ended December 31,
2006 due to the following; (i) reduced general and administrative expenses of
$230,000 at the Company's corporate level, (ii) reduced selling, general and
administrative expenses at Five Star of $819,000, attributable to a $175,000
reduction of allowance for doubtful accounts and reduced selling expenses
resulting from a reduced overall commission rate and increased marketing
contributions received from vendors, partially offset by a $300,000 accrual for
severance and related expenses for a terminated executive of Five Star and (iii)
reduced selling, general and administrative expenses of $251,000 at MXL,
primarily due to reduced facility costs related to closing of the Massachusetts
facility in 2005, as well as increased operating efficiencies. In addition, for
the year ended December 31, 2005, the Company incurred a loss of $140,000, based
upon the final proceeds from the sale of its Illinois facility, net of
commissions, taxes and other closing costs. This loss is included as part of
selling, general and administrative expenses on the consolidated statement of
operation for the period.
Investment (loss) and other income, net
The Company earned investment and other income (loss) of $13,000 for
the year ended December 31, 2006 primarily attributable to$242,000 representing
the unrealized profit which would be paid to related parties upon sale of Valera
available for sale shares, offset by interest income on investments at the
corporate level totaling approximately $166,000, as well as $63,000 of other
income earned by Five Star primarily related to its interest rate collar and
late charges from customers. The Company earned investment and other income of
$51,000 for the year ended December 31, 2005 primarily as a result of the gain
recognized on the sale of Millennium Cell common stock of $192,000 partially
offset by a loss of $33,000 realized on the sale of the Company's investment in
Avenue Entertainment, an independent entertainment company which, through its
two operating subsidiaries (Avenue Pictures and Wombat Productions) produced
motion pictures for theatrical exhibition, television and other ancillary
markets, both domestically and internationally.
Income taxes
The Company had a tax provision of $327,000 for the year ended December
31, 2006 and a tax benefit of $220,000 for the year ended December 31, 2005.
The provision for income taxes differs from the tax computed at the federal
statuatory income tax rate due to (i) recording income tax expense on the
income of Five Star, a 64% owned subsidiary, which is not included in the
Company's consolidated return and (ii) not recording income tax benefit for
the losses of the Company.
Year Ended December 31, 2005 compared to Year Ended December 31, 2004
The Company had losses before income taxes and minority interest of
$3,242,000 for the year ended December 31, 2005 as compared to losses before
income taxes and minority interest of $3,111,000 for the year ended December 31,
2004. The increased loss of $131,000 is primarily due to the following factors;
(i) increased selling, general and administrative expenses of $439,000 in 2005,
partly due to higher expenses at the corporate level and expenses of
approximately $200,000 related to consulting fees for certain former executives
(ii) reduced gross margin of $1,187,000 in 2005 primarily due to reduced gross
margins achieved by Five Star, partially offset by increased gross margins
achieved by MXL; and (iii) increased interest expense of $487,000 due to
increased borrowings and interest rates incurred by Five Star.
22
These factors were partially offset by Investment and other income of
$51,000 in 2005 compared to a losses of $1,241,000 in 2004, as the result of an
impairment loss recognized in 2004 due to a decline in market value considered
other-than temporary of $1,081,000 on the Company's investment in Millennium
Cell stock and in addition MXL's Loss on the write-down of its Illinois facility
of $872,000 recognized in 2004.
Sales
Year ended
December 31,
2005 2004
---- ----
Five Star $106,451,000 $101,982,000
MXL 7,915,000 8,241,000
------------- -------------
$114,366,000 $110,223,000
------------ ------------
For the year ended December 31, 2005, sales increased by $4,143,000 due
to increased Five Star sales of $4,469,000. The increase was primarily a result
of rising prices due to increased raw material costs for certain of Five Star's
vendors, as well as increased sales volume generated from both annual and small
local trade shows.
The decrease in MXL sales of $327,000 was a result of a decrease in
sales from MXL's Massachusetts facility, which they 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
Year ended
December 31,
-------------------------------------------------------
---------------- --------- ----------------- ----------
2005 % 2004 %
-------- - -------- -
Five Star $17,197,000 16.2 $18,960,000 18.6
MXL 1,255,000 15.9 680,000 8.3
------------- ------ ----------- -----
$18,452,000 16.1 $19,640,000 17.8
----------- ---- ----------- ----
For the year ended December 31, 2005, gross margin decreased by
$1,187,000 due to reduced gross margin and gross margin percentage earned by
Five Star, partially offset by increased gross margin and gross margin
percentage earned by MXL.
The reduction of $1,763,000 in Five Star gross margin from $18,960,000
for the year ended December 31, 2004 to $17,197,000 for the year ended December
31, 2005 was the result of a reduced gross margin percentage. Five Star's gross
margin as a percentage of sales decreased from 18.6 % for the year ended
December 31, 2004 to 16.2% for the year ended December 31, 2005, as a result of
an unfavorable shift in the product mix sold, increased price based competition,
an increase in vendor pricing in particular for petroleum based products as well
as a resistance to price increases from customers. Five Star includes
warehousing expenses as part of cost of goods sold.
MXL gross margin of $1,255,000 or 15.9% of sales, for the year ended
December 31, 2005 increased by $575,000 from gross margin of $680,000, or 8.3%
23
of sales, for the year ended December 31, 2004. The increase in gross margin
dollars and percentage in 2005, is due to a favorable shift in the product mix
sold and the effect of the following factors which occurred in 2004: (i) the
Massachusetts facility, which MXL has exited as of March 31, 2005, experienced
higher levels of manufacturing overhead, and (ii) the Illinois facility incurred
certain cost associated with write-downs of inventory and equipment.
Selling, general and administrative
For the year ended December 31, 2005, selling, general and
administrative expenses increased by $438,000, or 2%, from $19,540,000 for the
year ended December 31, 2004 to $19,978,000 partially due to higher expenses at
the corporate level and expenses of approximately $200,000 related to consulting
fees for certain former executives. Five Star's selling, general and
administrative expenses increased by $98,000 primarily due to increased delivery
expenses and salesmen commissions, partially offset by reduced general and
administrative expenses. MXL's selling, general and administrative expenses
decreased by $108,000 due to reduced facility costs, partially offset by a
$140,000 loss incurred based upon the final proceeds from the sale of its
Illinois facility.
Investment (loss) and other income, net
The Company earned investment and other income of $51,000 for the year
ended December 31, 2005 primarily as a result of the gain recognized on the sale
of Millennium Cell common stock of $192,000 partially offset by a loss of
$33,000 realized on the sale of the Company's investment in Avenue
Entertainment. National Patent incurred investment and other losses of
$1,241,000 for the year ended December 31, 2004, mainly due to an impairment
loss due to a decline in market value considered other-than temporary of
$1,081,000 on the Company's investment in Millennium Cell stock, as well as an
aggregate net loss of $131,000 on sales of shares by the Company of Millenium
Cell and shares of Hemispherex Biopharma Inc., (HEB) a biopharmaceutical company
engaged in the manufacture and clinical development of new drug entities for
treatment of viral and immune based disorders.
Income taxes
The Company had an effective tax rate of (6.8%) and 31.6% for the year
ended December 31, 2005 and December 31, 2004, respectively. The rate was
primarily due to operating losses of MXL unable to be utilized on a stand-alone
basis, non-deductible expenses and impairment and realized losses for equity
investments for which no benefit had been provided in 2005 and 2004.
Liquidity and Capital Resources
At December 31, 2006, The Company had cash and cash equivalents
totaling $4,485,000, 364,771 shares of common stock of Millennium Cell with a
market value of $343,000 and a receivable from GP Strategies of $251,000. On
February 7, 2006, Valera Pharmaceuticals completed an initial public offering of
3,862,500 shares of common stock. The Company owns 2,070,670 shares of Valera
common stock or approximately 14% of the currently outstanding shares of common
stock as of December 31, 2006. At December 31, 2006, the Company classified
595,422 shares of Valera common stock as available for sale, and the closing
price of the stock was $8.10 per share. On December 12, 2006, Valera entered
24
into an agreement and plan of merger pursuant to which Indevus Pharmaceuticals,
Inc. (Nasdaq: IDEV) would acquire Valera in a stock transaction for $7.75 per
share (as described below), plus contingent payments of up to $3.50 per share
based on the achievement of future product milestones. See Note 4 to Notes to
Consolidated Financial Statements.
The Company believes the aforementioned resources, will be sufficient
to fund the working capital and other requirements of the Company for at least
the next twelve months, together with the cash received from the sale of other
assets,. From time to time the Company may attempt to raise capital with
potential equity financings, although no such equity financings are currently
anticipated.
For the year ended December 31, 2006, the Company's working capital
decreased by $907,000 to $12,182,000 from $13,089,000 as of December 31, 2005.
The working capital decrease was primarily a result of a net loss for the
period.
The decrease in cash and cash equivalents of $630,000 for the year
ended December 31, 2006 resulted from net cash provided by operations of
$1,552,000; cash provided by investing activities of $270,000, consisting of
additions to property, plant and equipment of $621,000 and repayment of
receivable from GP Strategies of $891,000 and cash used in financing activities
of $2,452,000, consisting of repayments of short-term borrowings of $2,350,000,
repayments of long-term debt of $291,000 and purchases of treasury stock of
$188,000, offset by proceeds from long-term debt of $377,000 .
On March 1, 2005, MXL obtained a Line of Credit Loan (the "MXL Line")
from M&T Bank with a one year term, maturing on March 1, 2006, which was
extended to June 30, 2007. The MXL Line provided for a $1,000,000 revolving
credit facility, which is secured by MXL's eligible accounts receivable,
inventory and a secondary claim on the Lancaster, PA property. On November 27,
2006 the MXL Line was amended to a $900,000 line of credit. The interest rates
under the MXL Line consist of LIBOR plus a credit spread of 2.5% or the prime
rate. The MXL Line is subject to an unused commitment fee of 0.125% of the
average daily unused balance of the line payable quarterly. The Company has
guaranteed the MXL Line. At December 31, 2006, $750,000 was outstanding under
the MXL Line and $150,000 was available to be borrowed. The MXL Line contains
certain financial covenants. As of December 31, 2006, the Company was in
compliance with its covenants.
On November 27, 2006, MXL entered into a 5 year $785,000 Term Loan for
the financing of machinery and equipment at 2.5% above the one month LIBOR rate,
or .25% above the banks prime lending rate, as applicable. The Term Loan
provides that from November 2006 through May 2007 the bank will disburse funds
to MXL, and MXL will pay on a monthly basis all accrued interest due the bank.
In May 2007, the balance borrowed will convert to a five year Term Loan, with
monthly payments of principle and accrued interest through May 2012. The Term
Loan is guaranteed by the Company and secured by MXL's Lancaster, PA property.
At December 31, 2006, $377,000 was outstanding under the Term Loan and $408,000
was available to be borrowed.
In 2003, Five Star obtained a Loan and Security Agreement (the "Loan
Agreement") with Bank of America Business Capital (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, as amended, consist of
LIBOR plus a credit spread of 1.5% (6.85% at December 31, 2006) for borrowings
not to exceed $15,000,000 and the prime rate (8.25% at December 31, 2006) for
borrowings in excess of the above-mentioned LIBOR-based borrowings. The credit
25
spreads can be reduced in the event that Five Star achieves and maintains
certain performance benchmarks. At December 31, 2006 and December 31, 2005,
$17,664,000 and $19,764,000 was outstanding under the Loan Agreement and
$2,929,000 and $1,451,000 was available to be borrowed, respectively.
Substantially all of Five Star's assets are pledged as collateral for these
borrowings. Under the Loan Agreement the 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 December 31, 2006 Five Star
was in compliance with all required covenants. The following table sets forth
the significant debt covenants at December 31, 2006:
Covenant Required Calculated
- -------- -------- ----------
Minimum tangible net worth $6,000,000 $7,329,000
Debt to tangible net worth < 6 2.41
Fixed charge coverage >1.1 1.43
Quarterly income (loss) No loss in consecutive quarters
$30,000 -third quarter income
$(123,000)-fourth quarter loss
In connection with the Loan Agreement, Five Star also entered into a
derivative transaction with the Lender on June 20, 2003. The derivative
transaction is an interest rate swap which 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 Loan Agreement is
not included in and will be paid in addition to this fixed interest rate of
3.38%. At December 31, 2006 and 2005, the interest rate swap had a fair value of
$320,000 and $395,000, respectively, which is included in other assets in the
accompanying balance sheets. On June 17, 2004, Five Star has 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.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003,
GP Strategies issued and sold to four Gabelli funds $7,500,000 aggregate
principal amount of 6% Conditional Subordinated Notes due 2008 (the "Notes") and
937,500 warrants ("GP Warrants"), each entitling the holder thereof to purchase
(subject to adjustment) one share of GP Strategies' common stock. The aggregate
purchase price for the Notes and GP Warrants was $7,500,000. GP Strategies
agreed to allocate to the Company $1,875,000 of the $7,500,000 received for the
Notes and Warrants (the "Gabelli Allocation"). The Company received the funds
pursuant to the Gabelli Allocation prior to the Spin-off.
The Notes are secured by a non-recourse mortgage on the property
located in Pawling, New York (the "Property") which was transferred to MXL. MXL
has no liability for repayment of the Notes or any other obligations of GP
Strategies under the Note and Warrant Purchase Agreement (other than foreclosure
on such property). If there is a foreclosure on the mortgage for payment of the
Notes, GP Strategies has agreed to indemnify MXL for loss of the value of the
Property.
26
The Note and Warrant Purchase Agreement provided that, on completion of
the spin-off, the Company would issue warrants ("National Patent Development
Warrants") to the holders of the GP Warrants. The National Patent Development
Warrants entitle the holders to purchase, in the aggregate, a number of shares
of National Patent Development common stock equal to 8% of the number of shares
of such stock outstanding at completion of the spin-off. An aggregate of
1,423,887 the Company Warrants were issued to the holders of the GP Warrants on
December 4, 2004, and allocated among them pro-rata based on the respective
number of GP Warrants held by them on such date.
The exercise price of the National Patent Development Warrants is
$3.57, which represents 160% of the average closing price of the Company's
common stock over the 20 consecutive trading days commencing on the record date
of the spin-off. National Patent Development Warrants are exercisable at any
time through August 2008. The Warrants have anti-dilution provisions similar to
those of the GP Warrants. The Company has provided the holders of the National
Patent Development Warrants with registration rights similar to those provided
by GP Strategies to the holders of the GP Warrants. The registration rights
agreement does not provide for any cash payments of liquidated damages by the
Company to the holders of the warrants if the registration statements are not
declared effective or if effectiveness is not maintained for the required
periods.
Contractual Obligations and Commitments
The following table summarizes operating lease commitments and
employment agreements as of December 31, 2006 (in thousands):
Payments due in
2007 2008 2009 2010 Total
---- ---- ------- ---- -----
Operating lease commitments $2,532 $1,979 $531 $6 $5,048
Employment agreements 117 21 - 263
------ --------- ------------ ------- -----
125
Total $2,650 $2,104 $552 $6 $5,311
GP Strategies has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,600,000 per year through the
first quarter of 2009. GP Strategies' guarantee of such leases was in effect
when Five Star was a wholly-owned subsidiary of GP Strategies. As part of the
Spin-off, the landlord of the New Jersey and Connecticut facilities and the
lessor of the equipment did not consent to the release of GP Strategies'
guarantee.
Management discussion of critical accounting policies
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates.
27
Certain of our accounting policies require higher degrees of judgment
than others in their application. These include valuation of accounts
receivable, accounting for investments, and impairment of long-lived assets
which are summarized below. In addition, Note 2 to the Consolidated Financial
Statements includes further discussion of our significant accounting policies.
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.
Valuation of accounts receivable
Provisions for allowance for doubtful accounts are made based on
historical loss experience adjusted for specific credit risks. Measurement of
such losses requires consideration of the Company's historical loss experience,
judgments about customer credit risk, and the need to adjust for current
economic conditions. The allowance for doubtful accounts as a percentage of
total gross trade receivables was 4.8% and 4.2% at December 31, 2006 and
December 31, 2005, respectively.
Impairment of long-lived tangible assets
Impairment of long-lived tangible assets with finite lives results in a
charge to operations whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by determining the amount by which the
carrying amount of the assets exceeds the fair value of the asset. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost of sale.
The measurement of the future net cash flows to be generated is subject
to management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows.
As of December 31, 2006, the Company holds undeveloped land in Pawling,
New York with a carrying amount of approximately $2.5 million and in East
Killingly, Connecticut with a carrying amount of approximately $0.4 million,
which management believes is less than its fair value, less cost of sale.
Vendor allowances
The Company accounts for vendor allowances under the guidance provided
by EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor," and EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16 by Resellers to Sales Incentives Offered to
28
Consumers by Manufacturers." Vendor allowances reduce the carrying cost of
inventory unless they are specifically identified as a reimbursement for
promotional programs and/or other services provided. Any such allowances
received in excess of the actual cost incurred also reduce the carrying cost of
inventory.
Accounting for investments
The Company's investment in marketable securities are classified as
available-for-sale and recorded at their market value with unrealized gains and
losses recorded as a separate component of stockholders' equity. A decline in
market value of any available-for-sale security below cost that is deemed to be
other than temporary, results in an impairment loss, which is charged to
earnings. The Company recorded an impairment loss of $1,081,000 in 2004 on its
marketable security investment in Millennium Cell. Management determined the
loss to be other than a temporary decline.
Determination of whether an investment is impaired and whether an
impairment is other than temporary requires management to evaluate evidence as
to whether an investment's carrying amount is recoverable within a reasonable
period of time considering factors which include the length of time that an
investment's market value is below its carrying amount and the ability of the
investee to sustain an earnings capacity that would justify the carrying amount
of the investment.
On October 17, 2003, the Company received GP Strategies' shares of
Valera Pharmaceuticals pursuant to the Repayment and recorded such shares at
$-0- representing their carrying amount to GP Strategies after reflecting Valera
losses. On December 31, 2005, the Company owned 100% of Valera's common stock
and 2,068,966 shares of the Series B convertible preferred stock (a 17.7%
ownership interest, assuming conversion of Valera outstanding preferred stock
and exercise of stock options held by employees of Valera) but no longer has
financial and operating control of Valera. As a condition of a private placement
of preferred stock in December 2001, GP Strategies contractually gave up
operating control over Valera through an Investors Rights Agreement. At December
31, 2005 the Company accounted for its investment in Valera's Series B
convertible preferred stock under the cost method. On February 7, 2006 Valera
completed an initial public offering of 3,862,500 shares of common stock at
$9.00 per share. After giving effect to the conversion of the preferred stock
into common stock and a 1 for 6 reverse stock split of common stock effected by
Valera in connection with the offering, the Company's preferred shares were
converted into common stock and the Company now owns 2,070,670 shares of common
stock of Valera or approximately 14% of the currently outstanding shares of
common stock as of December 31, 2006.
As a result of the initial public offering, the Company's investment in
Valera's common stock became a marketable security and accordingly, commencing
in the first quarter of fiscal 2006, the investment, to the extent of shares
available to be sold within a year at any balance sheet date under Rule 144 or
an effective registration statement, will be classified as available for sale
securities and measured at fair value with the adjustment to fair value and
changes therein recorded in other comprehensive income. In addition, two related
parties Bedford Oak Partners and Mr. Jerome I. Feldman are entitled to receive
50% of any profit received from the sale of 404,004 shares of Valera common
stock in excess of $3.94 per share. Amounts of fair value payable to related
parties will be recorded as a liability. Assuming the Company continues to be
considered an affiliate, the remainder of the investment will be considered
restricted and will continue to be carried at cost. At December 31, 2006,
approximately 595,000 of the Company's Valera shares are classified as available
for sale under Rule 144.
29
Recent accounting pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) released
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. The Company will adopt this
Interpretation in the first quarter of 2007. The cumulative effects, if any, of
applying this Interpretation will be recorded as an adjustment to retained
earnings as of the beginning of the period of adoption. The Company has
commenced the process of evaluating the expected effect of FIN 48 on its
Consolidated Financial Statements and is currently not yet in a position to
determine such effects.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements'"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. Earlier application is encouraged provided that the
reporting entity has not yet issued financial statements for that fiscal year
including financial statements for an interim period within that fiscal year.
The company is assessing SFAS No. 157 and has not determined yet the impact that
the adoption of SFAS No. 157 will have on its result of operations or financial
position.
In February, 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" including an amendment of FASB
Statement 115. This statement provides companies with an option to report
selected financial assets and liabilities at fair value. This statement is
effective for fiscal years beginning after November 15, 2007 with early adoption
permitted. We are assessing SFAS No. 159 and have not determined yet the impact
that the adoption of SFAS No. 159 will have on our results of operations or
financial position.
30
Staff Accounting Bulletin No.108
During fourth quarter of 2006, the Five Star and the Company adopted
the provisions of Staff Accounting Bulletin No. 108, "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements" ("SAB 108"). SAB 108 addresses how the effects of
prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB 108 requires an entity
to quantify misstatements using a balance sheet and income statement approach
and to evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors.
Prior to 2006, the Five Star identified prior year misstatements
related to accounting for vendors' allowances for product purchases, which did
not reduce the cost of inventory but instead were recognized as a reduction in
cost of goods sold in the years they arose. In the past Five Star and the
Company assessed the effect for each of the years impacted by these
misstatements, using the permitted rollover method (or income statement
approach), and determined that the effect on the financial statements, taken as
a whole, was not material. As the result of implementation of SAB 108, Five Star
and the Company reevaluated the effect of prior year misstatements on the
previously issued financial statements using both methods and determined that
the misstatements related to vendor' allowances which amounted to $540,000 at
December 31, 2005, under the balance sheet method would have been material at
December 31, 2005 had Five Star and the Company applied such method. As allowed
by SAB 108 transition provisions, Five Star and the Company elected to not
restate prior year financial statements but increased the 2006 beginning balance
of the accumulated deficit by $208,000, net of minority interest of $117,000,
and related tax effect of $215,000.
Stock based compensation
The Company and Five Star have stock-based compensation plans for
employees and non-employee members of the Board of Directors. The plans provide
for discretionary grants of stock options, restricted stock shares, and other
stock-based awards. The plans are administered by the Compensation Committee of
the Board of Directors, consisting of non-employee directors.
Effective January 1, 2006, the Company and Five Star adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment",
("SFAS 123R"), utilizing the modified prospective method whereby prior periods
will not be restated for comparability. Under such method, compensation cost is
recorded as earned (i) for all unvested stock options outstanding at the
beginning of the first fiscal year of adoptions of SFAS. 123R based on the grant
date fair value estimated in accordance with the original provisions of SFAS No.
123 and (ii) for all share-based payments granted subsequent to the adoption,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS 123R. SFAS 123R requires recognition of stock-based compensation expense
in the statement of operations over the vesting period based on the fair value
of the award at the grant date. Previously, the Company used the intrinsic value
method under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), as amended by related interpretations of the
FASB. Under APB 25, no compensation cost was recognized for stock options
because the quoted market price of the stock at the grant date was equal to the
amount per share the employee had to pay to acquire the stock after fulfilling
the vesting period. SFAS 123R supersedes APB 25 as well as Statement of
31
Financial Accounting Standard 123 "Accounting for Stock-Based Compensation",
which permitted pro forma footnote disclosures to report the difference between
the fair value method and the intrinsic value method. As of December 31, 2006,
no awards have been granted under the Company's plan. In addition, during the
year ended December 31, 2006, under its plan Five Star only granted stock
options with performance conditions for which no compensation was accrued based
on management's judgement that as of such date it was not probable that the
performance conditions will be satisfied. Therefore the adoption of this
pronouncement did not have a material effect on the Company's consolidated
results of operations for the year ended December 31, 2006.
Item 7a: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate, market risks and
currency fluctuations. In the normal course of business, the Company employs
internal processes to manage its exposure to interest rate, market risks and
currency fluctuations. The Company's objective in managing its interest rate
risk is to limit the impact of interest rate changes on earnings and cash flows
and to lower its overall borrowing costs. The Company is exposed to the impact
of currency fluctuations because of its sales to customers in foreign countries.
As of December 31, 2006, the Company had approximately $7 million of
variable rate borrowings. The Company estimates that for every 1% fluctuation in
general interest rates, assuming debt levels at December 31, 2006, interest
expense would vary by $70,000.
Five Star is a party to an interest rate swap agreement designated as a
cash flow hedge whereby changes in the cash flows of the swap will offset
changes in the interest rate payments on Five Star's variable-rate revolving
loan, thereby reducing Five Star's exposure to fluctuations in LIBOR. Changes in
the fair value of the interest rate swap are recognized in accumulated other
comprehensive income, net of income taxes.
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%.
On June 17, 2004, Five Star has 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.
32
Item 8 Financial Statements and Supplementary Data
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of National Patent Development Corporation and Subsidiaries
Page
Report of Independent Registered Public Accounting Firm 34
Consolidated Statements of Operations - Years ended December
31, 2006, 2005 and 2004 35
Consolidated Statements of Comprehensive Income (Loss) - Years
ended December 31, 2006, 2005 and 2004 35
Consolidated Balance Sheets - December 31, 2006 and 2005 36
Consolidated Statements of Cash Flows - Years ended December
31, 2006, 2005 and 2004 37
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2006, 2005 and 2004 39
Notes to Consolidated Financial Statements 41
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
National Patent Development Corporation:
We have audited the accompanying consolidated balance sheets of National Patent
Development Corporation (the "Company") as of December 31, 2006 and 2005 and the
related consolidated statements of operations, comprehensive income (loss), cash
flows and stockholders' equity for each of the years in the three year period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Patent
Development Corporation as of December 31, 2006 and 2005, and the consolidated
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2006, the Company adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current Year Financial
Statements."
EISNER LLP
New York, New York
March 30, 2007
34
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2006 2005 2004
----------------------------------------------------- ---------------- --------------- ---------------
Sales $117,084 $114,366 $110,223
Cost of sales 97,605 95,914 90,583
----------------------------------------------------- ---------------- --------------- ---------------
Gross margin 19,479 18,452 19,640
----------------------------------------------------- ---------------- --------------- ---------------
Selling, general and administrative expenses (18,678) (19,978) (19,540)
Impairment of goodwill (182)
Loss on write-down of Illinois property (872)
----------------------------------------------------- ---------------- --------------- ---------------
Operating profit (loss) 801 (1,708) (772)
----------------------------------------------------- ---------------- --------------- ---------------
Interest expense (1,565) (1,585) (1,098)
Investment and other income (loss) (13) 51 (1,241)
----------------------------------------------------- ---------------- --------------- ---------------
Loss before income taxes (777) (3,242) (3,111)
and minority interest
----------------------------------------------------- ---------------- --------------- ---------------
Income tax (expense) benefit (327) 220 (982)
----------------------------------------------------- ---------------- --------------- ---------------
Loss before minority interest (1,104) (3,022) (4,093)
----------------------------------------------------- ---------------- --------------- ---------------
Minority interest (103) 103 (436)
----------------------------------------------------- ---------------- --------------- ---------------
Net loss (1,207) (2,919) (4,529)
----------------------------------------------------- ---------------- --------------- ---------------
Net loss per share
Basic and diluted $ (.07) $ (.16) $ (.25)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year Ended December 31,
2006 2005 2004
------------------------------------------------------------ --------------- -------------- -------------
Net loss $ (1,207) $ (2,919) $ (4,529)
Other comprehensive income (loss), before tax:
Net unrealized gain (loss) on available-for-sale-securities
4,231 519 (1,067)
Reclassification adjustment for (gain) loss on securities
sold included in net loss (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 (48) 186 31
------------------------------------------------------------ --------------- -------------- -------------
Comprehensive income (loss) before tax 2,976 (2,373) (4,311)
------------------------------------------------------------ --------------- -------------- -------------
Income tax benefit (expense) related to items of other
comprehensive income (loss), net of minority interest
19 (78) (19)
------------------------------------------------------------ --------------- -------------- -------------
Comprehensive income (loss) $2,995 $(2,451) $(4,330)
------------------------------------------------------------ --------------- -------------- -------------
See accompanying notes to consolidated financial statements.
35
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
2006 2005
- --------------------------------------------------------------------------- ------------------ ------------------
Assets
Current assets
Cash and cash equivalents $ 4,485 $ 5,115
Accounts and other receivables, less allowance
for doubtful accounts of $566 and $480 11,939 12,083
Inventories 22,535 24,021
Receivable from GP Strategies Corporation 251 1,142
Deferred tax asset 791 352
Prepaid expenses and other current assets 724 997
Total current assets 40,725 43,710
- --------------------------------------------------------------------------- ------------------ ------------------
- --------------------------------------------------------------------------- ------------------ ------------------
Marketable securities available for sale 343 477
Investment in Valera, including available for
sale securities of $4,823 in 2006 5,955 1,590
Property, plant and equipment, net 2,925 3,085
Other assets 3,286 3,360
- --------------------------------------------------------------------------- ------------------ ------------------
Total assets $53,234 $52,222
- --------------------------------------------------------------------------- ------------------ ------------------
Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $ 151 $ 291
Short term borrowings 18,414 20,764
Accounts payable and accrued expenses 9,978 9,566
- --------------------------------------------------------------------------- ------------------ ------------------
Total current liabilities 28,543 30,621
- --------------------------------------------------------------------------- ------------------ ------------------
Long-term debt less current maturities 1,332 1,106
Deferred tax liability 279 279
Other liabilities 247 20
Minority interest 1,696 1,727
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $0.01 per share
authorized 10,000,000 shares; issued none - -
Common stock, par value $0.01 per share
authorized 30,000,000 shares; issued 17,861,670 shares in 2006 and
17,818,926 shares in 2005 178 178
Additional paid-in capital 25,990 25,921
Accumulated deficit (9,177) (7,762)
Treasury stock, at cost (100,000 shares in 2006) (188)
Accumulated other comprehensive income 4,334 132
- --------------------------------------------------------------------------- ------------------ ------------------
Total stockholders' equity 21,137 18,469
- --------------------------------------------------------------------------- ------------------ ------------------
Total liabilities and stockholders' equity $53,234 $52,222
- --------------------------------------------------------------------------- ------------------ ------------------
See accompanying notes to consolidated financial statements.
36
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2006 2005 2004
----------------------------------------------------- ------------ ------------- ------------
----------------------------------------------------- ------------ ------------- ------------
Cash flows from operations:
Net loss $(1,207) $(2,919) $(4,529)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization 781 619 726
Minority interest 103 (103) 436
Net (gain) loss on marketable securities (159) 131
Impairment charge on securities 1,081
Impairment of goodwill 182
Expenses paid in common stock 69 50
Loss on write-off and disposal of equipment 324 83
Loss on write-down of Illinois property 872
Deferred income taxes (199) (253) 53
Allocation of expenses and taxes from GP Strategies 1,470
Changes in other operating items:
Accounts and other receivables 144 (673) (328)
Inventories 946 6,546 (2,398)
Prepaid expenses and other assets 261 (617) 80
Accounts payable and accrued expenses 654 (5,820) 1,682
----------------------------------------------------- ------------ ------------- ------------
Net cash provided by (used in) operations 1,552 (2,823) (641)
----------------------------------------------------- ------------ ------------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment (621) (1,165) (458)
Proceeds from sales of property, plant and equipment 1,562 -
Proceeds from sale of investments 1,351 1,013
Advances to GP Strategies (882)
Repayment of receivable from GP Strategies 891 59 1,032
Investment in Valera (1,590)
Acquisition of minority interest in Five Star
Products pursuant to the tender offer (657)
----------------------------------------------------- ------------ ------------- ------------
Net cash provided by (used in) investing activities 270 1,807 (1,542)
----------------------------------------------------- ------------ ------------- ------------
See accompanying notes to consolidated financial statements.
(Continued)
37
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2006 2005 2004
------------------------------------------------------------------- ------------- -------------- ------------
------------------------------------------------------------------- ------------- -------------- ------------
Cash flows from financing activities:
Distributions to GP Strategies (91) (1,008)
Contribution from GP Strategies 5,000 1,951
Purchase of treasury stock (188)
Proceeds from issuance of long-term debt 377 - 1,590
Proceeds from (repayment of)
short-term borrowings (2,350) 2,255 1,549
Repayment of long-term debt (291) (3,120) (414)
------------------------------------------------------------------- ------------- -------------- ------------
------------------------------------------------------------------- ------------- -------------- ------------
Net cash (used in) provided by financing activities (2,452) 4,044 3,668
------------------------------------------------------------------- ------------- -------------- ------------
------------------------------------------------------------------- ------------- -------------- ------------
Net (decrease) increase in cash and cash equivalents (630) 3,028 1,485
Cash and cash equivalents at beginning of period 5,115 2,087 602
------------------------------------------------------------------- ------------- -------------- ------------
Cash and cash equivalents at end of period $4,485 $5,115 $2,087
------------------------------------------------------------------- ------------- -------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,851 $ 1,810 $ 1,190
Income taxes 46 919 524
Non-cash financing activities:
Capital contribution receivable from GP Strategies 1,201 5,000
Settlement of AOtec note payable 275
See accompanying notes to consolidated financial statements.
38
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(in thousands, except per share data)
Common Accumulated
Stock Additional Treasury other Total
$(.01 Par paid-in Accumulated stock, comprehensive stockholders'
Value) capital deficit at cost income (loss) equity
- ----------------------------------- -------------- ----------------- --------------- ----------- ----------------- ----------------
- ----------------------------------- -------------- ----------------- --------------- ----------- ----------------- ----------------
Balance at December 31, 2003 $178 $17,946 $(353) $(535) $17,236
- ----------------------------------- -------------- ----------------- --------------- ----------- ----------------- ----------------
- ----------------------------------- -------------- ----------------- --------------- ----------- ----------------- ----------------
Net unrealized loss on available (1,067) (1,067)
for sale securities
Reclassification adjustment for
loss on securities sold
included in net loss, net of
tax 173 173
Net unrealized gain on interest
rate swap, net of tax and
minority interest 12 12
Reclassification adjustment for
impairment loss on securities
included in net loss 1,081 1,081
Net loss (4,529) (4,529)
Allocation of expenses from GP
Strategies 911 911
Reclassification (a) (39) 39 -
Distributions to GP Strategies (1,008) (1,008)
Contributions from GP Strategies 6,951 6,951
- ----------------------------------- -------------- ----------------- --------------- ----------- ----------------- -----------------
- ----------------------------------- -------------- ----------------- --------------- ----------- ----------------- -----------------
Balance at December 31, 2004 $178 $24,761 $(4,843) $(336) $19,760
- ----------------------------------- -------------- ----------------- --------------- ----------- ----------------- -----------------
See accompanying notes to consolidated financial statements.
(Continued)
39
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(in thousands, except per share data)
Common Accumulated
Stock Additional Treasury other Total
$(.01 Par paid-in Accumulated stock, comprehensive stockholders'
Value) capital deficit at cost income (loss) equity
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ ---------------
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ ---------------
Balance at December 31, 2004 $178 $24,761 $(4,843) $(336) $19,760
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ -------------
Net unrealized gain on available for 519 519
sale securities
Reclassification adjustment for gain on
securities sold included in net loss,
net of tax (159) (159)
Net unrealized gain on interest rate
swap, net of tax and minority
interest 108 108
Net loss (2,919) (2,919)
Issuance of 15,455 shares of common
stock to MXL Retirement and Savings
Plan 37 37
Issuance of 4,886 shares of common
stock to directors 13 13
Contributions from GP Strategies 1,201 1,201
Other (91) (91)
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ -------------
Balance at December 31, 2005 178 25,921 (7,762) 132 18,469
SAB 108 cumulative adjustment (208) (208)
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ -------------
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ -------------
Adjusted balance at December 31, 2005 178 25,921 (7,970) 132 18,261
Net unrealized gain on available for
sale securities 4,231 4,231
Net unrealized gain on interest rate
swap, net of tax and minority (29) (29)
interest
Net loss (1,207) (1,207)
Purchase of 100,000 shares of treasury
stock $(188) (188)
Issuance of 35,105 shares of common
stock to MXL Retirement and Savings 56 56
Plan
Issuance of 7,639 shares of common
stock to directors 13 13
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ -------------
Balance at December 31, 2006 $178 $25,990 $(9,177) $(188) $4,334 $21,137
----------------------------------------- ----------- ------------ ------------- -------------- ------------------ -------------
(a) Principally represents net income (loss) attributable to non-core assets not
operated as separate entities. See accompanying notes to consolidated financial
statements
40
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
1. Basis of presentation
National Patent Development Corporation (the "Company") was incorporated on
March 10, 1998 as a wholly-owned subsidiary of GP Strategies Corporation ("GPS"
or "GP Strategies").
On February 12, 2004 the Company was recapitalized whereby the authorized
capital was changed to 10,000,000 shares of preferred stock and 30,000,000 of
common stock.
On July 30, 2004, GP Strategies contributed its ownership interests in its
optical plastics and home improvement distribution businesses, as well as other
non-core assets, to the Company in exchange for the Company's common stock.
Subsequent thereto, GP Strategies made cash capital contributions to the Company
(see Notes 15(b) and 17). Prior to the July 2004 contribution, the Company was
inactive and had no operations. On November 24, 2004, GPS distributed 17,798,585
common shares of the Company representing 100% of the outstanding common stock,
to the GPS stockholders in a tax free spin-off.
The contribution of assets from GPS to the Company represents a transfer of
assets between entities under common control and accordingly has been accounted
for at the carryover basis to GPS of the transferred assets as if the transfer
occurred at the beginning of the periods presented. Accordingly, the
accompanying 2004 consolidated financial statements present the historical
results of operations, cash flows and changes in stockholders' equity of MXL
Industries, Inc. ("MXL") and Five Star Products Inc. ("Five Star") the
businesses contributed combined with the non-core assets for the period prior to
the contribution date. Results of operations reflect charges for allocations of
corporate expense incurred by GPS (see Note 15).
2. Description of business and a summary of significant accounting policies
Description of business. The Company owns and operates the optical plastics
business through its wholly-owned subsidiary, MXL, the home improvement
distribution business through its 64% owned subsidiary Five Star and also owns
certain other assets, including, an approximately 14% interest in Valera
Pharmaceuticals, Inc. (which went public in February 2006, see Note 4); and
certain real estate. MXL is a specialist in the manufacture of 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. Five Star is
engaged in the wholesale distribution of home decorating, hardware and finishing
products to 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.
Principles of consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash equivalents. Cash equivalents consist of highly liquid debt instruments
with original maturities of three months or less.
Marketable securities. Marketable securities consist of U.S. corporate equity
securities. The Company classifies its marketable securities as trading or
41
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
available-for-sale investments. Trading and available-for-sale securities are
recorded at their fair value. Trading securities are held principally for the
purpose of selling them in the near term. Unrealized holding gains and losses on
trading securities are included in earnings. Unrealized holding gains and losses
on available-for-sale securities are excluded from earnings and are reported as
a separate component of stockholders' equity in accumulated other comprehensive
income, net of the related tax effect, until realized. A decline in the market
value of any available-for-sale security below cost, that is deemed to be other
than temporary, results in a reduction in carrying amount to fair value. The
impairment is charged to earnings, and a new cost basis is established. Realized
gains and losses are derived using the average cost method for determining the
cost of securities sold. The Company fully disposed of its trading securities in
the year ended December 31, 2004.
Inventories. Inventories are valued at the lower of cost, using the first-in,
first-out method, or market.
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, which are included as
a part of selling, general and administrative expense, amounted to $4,971,000,
$5,067,000 and $4,840,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Vendor allowances. The Company accounts for vendor allowances under the guidance
provided by EITF Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor," and EITF Issue No.
03-10, "Application of EITF Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers." Vendor allowances reduce the carrying
cost of inventory unless they are specifically identified as a reimbursement for
promotional programs and/or other services provided. Any such reimbursements
received in excess of the actual cost incurred also reduce the carrying cost of
inventory.
Property, plant and equipment. Property, plant and equipment are carried at
cost. Major additions and improvements are capitalized while maintenance and
repairs which do not extend the lives of the assets are expensed as incurred.
Gain or loss on the disposition of property, plant and equipment is recognized
in operations when realized.
Depreciation. The Company provides for depreciation of property, plant and
equipment primarily on a straight-line basis over estimated useful lives of 5 to
40 years for buildings and improvements and 3 to 7 years for machinery,
equipment and furniture and fixtures.
Long-Lived Assets. The recoverability of long-lived assets, other than goodwill,
is assessed whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through future undiscounted
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment is measured by determining the amount
by which the carrying value of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less costs to sell.
42
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
The Company has investments in land in Pawling, New York with a carrying value
of $2.5 million and in East Killingly, Connecticut with a carrying value of $0.4
million, which are included in other assets in the Consolidated Balance Sheets
(see Note 15). Management believes the fair value of these investments exceed
their carrying value.
Fair value of financial instruments. The carrying value of cash and cash
equivalents, accounts receivable and accounts payable approximate estimated fair
values because of short maturities. The carrying value of the receivable from
GPS approximates estimated fair value (see Note 13(b)). The carrying value of
short term borrowings approximates estimated fair value because borrowings
accrue interest which fluctuates with changes in LIBOR or prime. The carrying
value for the Company's long-term debt, certain of which have variable interest
rates, approximates fair value.
Marketable securities, are carried at fair value based upon quoted market
prices. Derivative instruments are carried at fair value representing the amount
the Company would receive or pay to terminate the derivative.
Derivatives and hedging activities. The interest rate swap and interest rate
collar entered into by Five Star in connection with its loan agreement (see Note
9) is being accounted for under SFAS No. 133, as amended, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires all
derivatives to be recognized in the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through earnings. If the
derivative is a cash flow hedge, changes in the fair value of the derivative are
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value is
immediately recognized in earnings. Changes in the fair value of the interest
rate swap, which has been designated as a cash flow hedge, were recognized in
other comprehensive income. Changes in the fair value of the interest rate
collar are recognized in earnings. During the years ended December 31, 2006,
2005 and 2004 the Company recognized a gain of $10,000, $1,000 and $19,000,
respectively, as part of other income, for changes in the fair value of the
interest rate collar. The fair value of the interest rate swap amounted to
$320,000 and $395,000 at December 31, 2006 and 2005, respectively, and is
included in accounts payable and accrued expenses in the accompanying balance
sheets.
Recent Accounting Pronouncements. In July 2006, the Financial Accounting
Standards Board (FASB) released FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" (FIN
48). FIN 48 clarifies the accounting and reporting for uncertainties in income
tax law. This Interpretation prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. The Company will
adopt this Interpretation in the first quarter of 2007. The cumulative effects,
if any, of applying this Interpretation will be recorded as an adjustment to
retained earnings as of the beginning of the period of adoption. The Company has
commenced the process of evaluating the expected effect of FIN 48 on its
Consolidated Financial Statements and is currently not yet in a position to
determine such effects.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements'" which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. This Statement is effective for financial statements issued
43
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. Earlier application is encouraged provided that the
reporting entity has not yet issued financial statements for that fiscal year
including financial statements for an interim period within that fiscal year.
The company is assessing SFAS No. 157 and has not determined yet the impact that
the adoption of SFAS No. 157 will have on its result of operations or financial
position.
In February, 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" including an amendment of FASB
Statement 115. This statement provides companies with an option to report
selected financial assets and liabilities at fair value. This statement is
effective for fiscal years beginning after November 15, 2007 with early adoption
permitted. The Company is assessing SFAS No. 159 and have not determined yet the
impact that the adoption of SFAS No. 159 will have on our results of operations
or financial position.
Staff Accounting Bulletin No.108. During the fourth quarter of 2006, the Company
adopted the provisions of Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements" ("SAB 108"). SAB 108 addresses how the effects of
prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB 108 requires an entity
to quantify misstatements using both a balance sheet and income statement
approach and to evaluate whether either approach results in quantifying an error
that is material in light of relevant quantitative and qualitative factors.
Prior to 2006, the Five Star identified prior year misstatements related to
accounting for vendors' allowances for product purchases, which did not reduce
the cost of inventory but instead were recognized as a reduction in cost of
goods sold in the years they arose. In the past the Company assessed the effect
for each of the years impacted by these misstatements, using the permitted
rollover method (or income statement approach), and determined that the effect
on the financial statements, taken as a whole, was not material. As the result
of implementation of SAB 108, the Company reevaluated the effect of prior year
misstatements on the previously issued financial statements using both methods
and determined that the misstatements related to vendors' allowances, which
amounted to $540,000 at December 31, 2005, under the balance sheet method would
have been material at December 31, 2005 had the Company applied such method. As
allowed by SAB 108 transition provisions, the Company elected to not restate
prior year financial statements but increased the 2006 beginning balance of the
accumulated deficit by $208,000, net of minority interest of $117,000 and
related tax effect of $215,000.
Stock based compensation. The Company has stock-based compensation plans for
employees and non-employee members of the Board of Directors. The plans provide
for discretionary grants of stock options, restricted stock shares, and other
stock-based awards. The plans are administered by the Compensation Committee of
the Board of Directors, consisting of non-employee directors.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment", ("SFAS 123R"),
utilizing the modified prospective method whereby prior periods will not be
restated for comparability. Under such method, compensation cost is recorded as
earned (i) for all unvested stock options outstanding at the beginning of the
first fiscal year of adoption of SFAS 123R based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123 and (ii)
44
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
for all share-based payments granted subsequent to the adoption, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
SFAS 123R requires recognition of stock-based compensation expense in the
statement of operations over the vesting period based on the fair value of the
award at the grant date. Previously, the Company used the intrinsic value method
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), as amended by related interpretations of the FASB.
Under APB 25, no compensation cost was recognized for stock options because the
quoted market price of the stock at the grant date was equal to the amount per
share the employee had to pay to acquire the stock after fulfilling the vesting
period. SFAS 123R supersedes APB 25 as well as Statement of Financial Accounting
Standard 123 "Accounting for Stock-Based Compensation", which permitted pro
forma footnote disclosures to report the difference between the fair value
method and the intrinsic value method. As of December 31, 2006, no awards have
been granted under the Company's plan. In addition, during the year ended
December 31, 2006, under its plan Five Star only granted stock options with
performance conditions for which no compensation was accrued based on
managements judgement as of such date that it was not probable that the
performance conditions will be satisfied. Therefore the adoption of this
pronouncement did not have a material effect on the Company's consolidated
results of operations for the year ended December 31, 2006.
45
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
The following table provides the pro forma effect on net earnings as if the
fair-value-based measurement method had been applied to all stock-based
compensation for the years ended December 31, 2005 and 2004 (in thousands,
except per share amounts):
Year ended December 31,
2005 2004
- --------------------------------------------- ------------------------ ---------------------
Net loss - As reported $(2,919) $(4,529)
Compensation expense, net of tax
Five Star stock options (7)(1) (7) (1)
- ------------------------- ------------------- ------------------------ ----------------------
Pro forma net loss $(2,926) $(4,536)
Basic and diluted loss per share
As reported $(.16) $(.25)
Pro forma $(.16) $(.25)
(1) Expense relates to option grants made by Five Star prior to the acquisition
of a controlling interest in Five Star by the Company.
Per share data. Basic and diluted loss per share for the year ended December 31,
2004, is based upon the 17,798,585 common shares of the Company issued in 2004
and distributed in the spin-off described in Note 1,. Basic and diluted loss per
share for the year ended December 31, 2006 and 2005 is based upon the weighted
average number of the Company shares outstanding for such years.
Outstanding warrants to acquire 1,423,887 common shares issued in December 2004
(see Note 17) were not included in the 2006, 2005 and 2004 diluted computation
as their effect would be anti-dilutive.
Net loss per share for the years ended December 31, 2006, 2005 and 2004 is as
follows (in thousands, except per share amounts):
Year ended December 31,
2006 2005 2004
--------------------------------------- ---------- ------------- ------------
Basic and Diluted EPS
Net loss $(1,207) $(2,919) $(4,529)
Weighted average shares
outstanding, basic and diluted 17,829 17,807 17,798
Basic and diluted loss per share $(.07) $(.16) $(.25)
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date (see Note 9).
46
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments, accounts receivable from customers and the receivable from GP
Strategies. The Company places its cash investments with high quality financial
institutions and limits the amount of credit exposure to any one institution.
See Note 13 with respect to transactions affecting the receivable from GP
Strategies.
Accumulated other comprehensive income (loss). The components of accumulated
other comprehensive income (loss) are as follows (in thousands):
December 31,
2006 2005
-------------------------------------------------- ----------------- -------------------
Net unrealized gain(loss) on
available-for-sale-securities $ 4,217 $ (14)
Net unrealized gain on interest rate swap 205 253
-------------------------------------------------- ----------------- -------------------
Accumulated other comprehensive income
before tax 4,422 239
-------------------------------------------------- ----------------- -------------------
Accumulated income tax expense
related to items of other comprehensive income (88) (107)
-------------------------------------------------- ----------------- -------------------
Accumulated other comprehensive income,
net of tax $ 4,334 $ 132
Financial statement reclassification. Certain amounts in the prior year
financial statements have been reclassified to conform to the 2006 presentation.
47
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
3. Inventories
Inventories are comprised of the following (in thousands):
December 31,
2006 2005
-------------------------- ------------------- ------------------
Raw materials 393 386
Work in process 149 113
Finished goods 21,993 23,522
-------------------------- ------------------- ------------------
-------------------------- ------------------- ------------------
$22,535 $24,021
4. Investment in Valera Pharmaceuticals, Inc. ("Valera")
Valera is a specialty pharmaceutical company focused on the development and
commercialization of urology and endocrinology products. Valera markets VANTAS
for advanced prostate cancer and has multiple products in clinical development
including SUPPRELIN-LA for central precocious puberty.
In December 2001, Valera completed a $7 million private placement of Series A
convertible preferred stock to certain institutional investors. As a condition
of the private placement, GP Strategies, which owned 100% of the common stock of
Valera contractually gave up operating control over Valera through an Investors
Rights Agreement, which gave GP Strategies the right to designate one director
on Valera's board of directors and gave the other stockholders the right to
designate the other directors, and subsequent thereto accounted for the
investment under the equity method. As a result of Valera's operating losses, GP
Strategies investment was written down to zero.
In 2003, Valera completed a private placement offering pursuant to which Valera
raised approximately $13.5 million in gross proceeds from the sale of Series B
convertible preferred stock. As part of such transaction, GP Strategies was
granted an option until March 31, 2004, to purchase up to $5 million of the
Series B convertible preferred stock at the offering price of $0.725 per share,
which was subsequently verbally extended to June 30, 2004. On June 30, 2004, GP
Strategies transferred a portion of its option to an institutional investor, who
exercised such option and purchased from Valera 3,448,276 shares of Series B
convertible preferred stock for $0.725 per share. The balance of the option
expired unexercised. In consideration of such transfer, such institutional
investor granted the Company an option until October 28, 2004 to purchase up to
2,068,966 shares of Series B convertible preferred stock owned by such
institutional investor for prices ranging from $0.725 to $0.7685 per share. The
Company exercised such option on October 28, 2004 at a price of $0.7685 per
share, for an aggregate exercise price of $1,590,000. On November 12, 2004, the
Company obtained the funds necessary to pay the exercise price (see Note 15
(d)). On August 16, 2004, Valera sold 11,600,000 shares of Series C convertible
preferred stock and received gross proceeds of $11.6 million. As of December 31,
2005, the Company owned 10,000,000 shares of Valera common stock and 2,068,966
shares of Valera series B convertible preferred stock. Assuming conversion of
all of the outstanding shares of Series A, Series B and Series C convertible
preferred stock and exercise of stock options held by employees of Valera at
December 31, 2005, the Company would own approximately 18% of Valera. On
February 7, 2006 Valera completed an initial public offering of 3,862,500 shares
of common stock at $9.00 per share. All the convertible preferred stock
outstanding at the time of the offering, including accrued dividends,
automatically converted into common stock. In addition, Valera effected a 1 for
6 reverse split of common stock. Subsequent to the public offering after giving
48
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
effect to the conversion of the Series B preferred stock and the reverse split
the Company owned 2,070,670 shares of Valera common stock or approximately 14%
of the outstanding shares of common stock. The Company entered into a lock-up
agreement with the underwriters of the public offering which restricted the
Company from selling or otherwise disposing of its shares of Valera common stock
until August 16, 2006.
On October 17, 2003, MXL received from GP Strategies in partial payment of a
note receivable the common shares of Valera and recorded such shares at zero
representing their carrying amount to GP Strategies. As a result of the
Investors Rights Agreement referred to above, the Company was accounting for its
investment in Valera under the equity method. However as the Company had not
guaranteed obligations of Valera and had not otherwise committed to provide
further support for Valera, it had discontinued recognizing additional losses of
Valera.
As described above, the Company's investment in voting stock of Valera has
declined below 20%. In addition, at December 31, 2005, Valera's board of
directors consisted of nine directors only one of which had been designated by
the Company. Accordingly the Company believed that it no longer had the ability
to exercise significant influence over operating and financial policies of
Valera and no longer accounted for its investment in Valera by the equity
method. As a result thereof, as of December 31, 2005, the investment in Valera's
Series B convertible preferred stock is being accounted for at cost.
As a result of the initial public offering in February 2006, the Company's
investment in Valera's common stock became a marketable security and
accordingly, the investment, to the extent of shares available to be sold within
a year at any balance sheet date under Rule 144 or an effective registration
statement, has been classified as available for sale securities and measured at
fair value with the adjustment to fair value and changes therein recorded in
other comprehensive income. The remainder of the investment is considered
restricted and is carried at cost. In addition, if it is determined that the
Company is no longer an affiliate, the shares would become freely tradable after
the initial six month lock-up period. During the 12 months ending December 31,
2007 is estimated that 595,000 Valera common shares will become available to be
sold resulting in an unrealized gain of $4,366,000 being included in accumulated
other comprehensive income at December 31, 2006. Two related parties, Bedford
Oak Partners and Mr. Jerome I. Feldman, are entitled to receive 50% of any
profit received from the sale, on a pro-rata basis, of 404,004 shares of Valera
common stock in excess of $3.94 per share (see Note 15(d)). The unrealized gain
on Valera shares available for sale at December 31, 2006 which would be payable
to the related parties upon sale totaled $242,000, which is included in
Investment and Other income (loss) and Other liabilities in the 2006 financial
statements.
On December 12, 2006 Valera entered into an agreement and plan of merger
pursuant to which Indevus Pharmaceuticals, Inc. (Nasdaq: IDEV) would acquire
Valera in a stock transaction for $7.75 per share (as described below), plus
contingent payments of up to $3.50 per share based on the achievement of future
product milestones (as described below).
The merger will take the form of a tax-free stock-for-stock merger. Under the
terms of the agreement, each share of Valera common stock will be exchanged for
$7.75 in Indevus common stock, provided the volume weighted average closing
price for Indevus common stock is between $6.59 and $8.05 during the 25 trading
day period ending five trading days prior to the meeting of Valera stockholders
to vote on the merger. Each Valera share exchanged would be converted into not
more than 1.1766 shares and not less than 0.9626 shares of Indevus common stock.
49
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
In addition, each share of Valera common stock will also be converted into three
contingent stock rights ("CSRs") relating to three Valera products in various
stages of development. One CSR is convertible into $1.00 of Indevus common stock
upon FDA approval of Valera's SUPPRELIN-LA and the availability of sufficient
launch quantities, one CSR is convertible into $1.00 of Indevus common stock
upon FDA approval of Valera's biodegradable ureteral stent and one CSR is
convertible into $1.50 of Indevus common stock upon FDA approval of Valera's
octreotide implant. The amount of Indevus common stock into which the CSRs
convert will be determined by a formula based on the average stock price of
Indevus prior to achievement of the applicable milestones, and CSRs convert into
Indevus common stock only if the applicable milestones are achieved within three
years of the closing of the merger in the case of SUPPRELIN-LA and within five
years of the closing of the merger in the case of the biodegradable ureteral
stent and the octreotide implant.
In connection with the transaction, certain affiliated funds of Sanders Morris
Harris, Valera's largest shareholder, and one other large shareholder of Valera,
have entered into voting agreements in which they have agreed to vote shares
representing approximately 41% of Valera's outstanding shares in favor of the
merger.
The merger has been approved by the boards of directors of Indevus and Valera
and is expected to be completed on or around April 30, 2007. Closing of the
merger is subject to clearance under the Hart-Scott Rodino Antitrust
Improvements Act, approval of Valera's stockholders, approval of Indevus'
stockholders and other customary closing conditions.
5. Marketable securities
Marketable securities, which are carried at market value, were comprised of the
following (in thousands):
Available-for-sale securities
December 31,
2006 2005
-------------------------------------- ------------- --------------
------------- --------------
Millennium Cell Inc. $343 $477
------------- --------------
Millennium Cell Inc. ("Millennium")
Millennium is a publicly traded emerging technology company engaged in the
business of developing innovative fuel systems for the safe storage,
transportation and generation of hydrogen for use as an energy source. On
October 17, 2003, the Company received from GP Strategies in partial payment of
a receivable an additional 1,000,000 shares of common stock of Millennium with a
market value on that date of approximately $3,500,000. During the year ended
December 31, 2004, the Company sold 223,500 Millennium shares received in
October 2003 for $609,000 and recognized a loss of $173,000, which is included
in Investment and other income (loss). At December 31, 2004, the Company held
964,771 shares of common stock of Millennium with a market value of $1,235,000,
representing approximately a 3% ownership interest, and an unrealized loss of
$499,000 reflecting further unrealized losses during the year ended December 31,
2004, after recognition of an impairment loss described below. During the year
50
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
ended December 31, 2005, the Company sold 600,000 shares of Millennium, and
generated net proceeds of approximately $1,326,000 and recognized gains of
approximately $192,000. At December 31, 2006 and 2005, the Company owned 364,771
shares of common stock of Millennium with a market value of $343,000 and
$477,000, respectively, representing approximately a 1% ownership interest, and
an unrealized loss of $149,000 and $14,000, respectively.
At December 31, 2003 the Company believed that the reduction in market value of
Millennium, which resulted in an unrealized loss of $721,000 at such date,
correlated with the general trend of the market for emerging technology
companies and reflected the volatility of Millennium's stock price. The Company
had evaluated the near-term prospects of Millennium in relation to the severity
and duration of the impairment. Based on that evaluation and the Company's
ability and intent to hold this investment for a reasonable period of time
sufficient for a forecasted recovery of fair value, the Company did not consider
its investment in Millennium to be other-than-temporarily impaired. However, at
June 30, 2004, based on the increase in the severity and duration of the
impairment and the absence of sufficient evidence to support a recovery of fair
value within a reasonable period of time, the Company considered the investment
in the 671,500 remaining shares acquired in October 2003 to be
other-than-temporarily impaired and accordingly recorded an impairment loss of
$1,081,000 related to such shares in Investment and other income (loss) in the
year ended December 31, 2004.
Trading securities
Hemispherx Biopharma Inc. ("HEB")
At December 31, 2003, the Company held 159,596 shares of HEB received as a
capital contribution from GPS. In 2004, these shares were sold for proceeds of
$404,000 and resulted in realized a gain of $43,000 which was included in in
Investment and other income (loss).
6. Property, plant and equipment
Property, plant and equipment consist of the following (in thousands):
December 31,
2006 2005
--------------------------------------------- ------------------ ------------
Land $ 90 $ 90
Buildings and improvements 3,334 3,181
Machinery and equipment 7,939 7,625
Furniture and fixtures 1,538 1,401
------------------ ------------
------------------ ------------
12,901 12,297
Accumulated depreciation and amortization (9,976) (9,212)
------------------ ------------
------------------ ------------
$ 2,925 $ 3,085
Depreciation and amortization expense for the years ended December 31, 2006,
2005 and 2004 amounted to $781,000, $619,000 and $726,000, respectively.
51
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
In the fourth quarter of 2004, management decided to sell MXL's Illinois
facility as a result of a decline in production volume for the Illinois division
and taking into consideration MXL's diminished real estate needs. 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,
after 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 reflected a loss of $872,000 to record
the Illinois facility at fair value, based upon the expected net proceeds from
sale. In 2005, an additional loss of $140,000 was recorded based upon the final
net proceeds from the sale.
7. Goodwill
Goodwill, which represents the excess of cost over the fair value of the
identifiable net assets of a business acquired by MXL, was being amortized
through December 31, 2001 on a straight line basis over 20 years.
Effective January 1, 2002, the Company adopted FASB Statement No. 142, Goodwill
and Other Intangible Assets. Statement No. 142 requires that goodwill no longer
be amortized but instead tested for impairment at least annually in accordance
with the provisions of Statement No. 142. At December 31, 2005, the Company
determined that the goodwill was impaired due to losses incurred by MXL over the
last three years, and therefore recorded a goodwill impairment loss of $182,000
and reduced its carrying value to zero.
8. Long-term debt and short term borrowings
Long-term debt is comprised of the following (in thousands):
December 31,
2006 2005
------------------------------------------ -------------- ------------
MXL Pennsylvania Mortgage (a) $1,105 $1,205
AOtec Debt (b) 186
Term Loan (c) 377
Capital lease obligations 1 6
------------------------------------------ -------------- ------------
------------------------------------------ -------------- ------------
1,483 1,397
Less current maturities (151) (291)
------------------------------------------ -------------- ------------
------------------------------------------ -------------- ------------
$1,332 $1,106
52
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
a) The loan which is collateralized by real estate and fixtures, requires
monthly repayments of $8,333 plus interest at 2.5% above the one month
LIBOR rate and matures on March 8, 2011, when the remaining amount
outstanding of approximately $680,000 is due in full. The loan is
guaranteed by GPS.
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 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 paid 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 $50,000 as of
December 31, 2005 are classified as short term borrowings on the
Company's Consolidated Balance Sheet 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 $83,000
credited to operations as a recovery of a loss related to AOtec
equipment previously written-off in 2004.
c) On November 27, 2006, MXL entered into a 5 year $785,000 Term Loan for
the financing of machinery and equipment at 2.5% above the one month
LIBOR rate, or .25% above the banks prime lending rate, as applicable.
From November 2006 through May 2007 the Bank will disburse funds to
53
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
MXL, and MXL will pay on a monthly basis all accrued interest due the
bank. In May 2007 the balance borrowed will convert to a five year
Term Loan, with monthly payments of principal and accrued interest
through May 2012. The Term Loan is guaranteed by the Company and
secured by MXL's Lancaster, PA property. At December 31, 2006 $377,000
was outstanding under the Term Loan and $408,000 was available to be
borrowed.
Aggregate annual maturities of long-term debt at December 31, 2006 are as
follows (in thousands):
2007 $ 151
2008 176
2009 175
2010 175
2011 781
Thereafter 25
--------------------------------
Total $1,483
Short-term borrowings
Five Star
In 2003, Five Star entered into 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, as amended, consist of LIBOR plus a credit spread of 1.5%
(6.85% at December 31, 2006) for borrowings not to exceed $15,000,000 and the
prime rate (8.25% at December 31, 2006) 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
December 31, 2006 and 2005, approximately $17,664,000 and $19,764,000 was
outstanding under the Loan Agreement and approximately $2,929,000 and $1,451,000
was available to be borrowed, respectively. Substantially all of Five Star's
assets (amounting to approximately $34,000,000 and $36,000,000 at December 31,
2006 and 2005, respectively, 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 December 31, 2006, Five Star was in compliance with the
covenants.
In connection with the Loan Agreement, on June 30, 2003, Five Star entered an
interest rate swap with the lender which has been designated as a cash flow
hedge. Under the swap, 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 of 1.5%
will be paid in addition to the 3.38%. At December 31, 2006 and 2005, the
interest rate swap had a fair value of $320,000 and $395,000, respectively,
which is included in other assets in the accompanying balance sheets. On June
17, 2004, Five Star also entered into an 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.
54
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
MXL
On March 1, 2005, MXL obtained a Line of Credit Loan (the "MXL Line") from M&T
Bank with a one year term, maturing on March 1, 2006, which was extended to June
30, 2007. The MXL Line provided for a $1,000,000 revolving credit facility,
which is secured by MXL's eligible accounts receivable, inventory and a
secondary claim on the Lancaster, PA property. On November 27, 2006 the MXL Line
was amended to a $900,000 line of credit. The interest rates under the MXL Line
consist of LIBOR plus a credit spread of 2.5% or the prime rate. The MXL Line is
subject to an unused commitment fee of 0.125% of the average daily unused
balance of the line payable quarterly. The Company has guaranteed the MXL Line
up to $785,000. At December 31, 2006 and 2005, $750,000 and $950,000,
respectively, was outstanding under the MXL Line and $150,000 was available to
be borrowed at December 31, 2006. The MXL Line contains certain financial
covenants. As of December 31, 2006, the Company was in compliance with its
covenants.
9. Income taxes
Commencing November 24, 2004, the date of the spin-off, the Company files a
consolidated federal income tax return with its subsidiaries, except for Five
Star which is less than 80% owned and filed its own separate consolidated
federal income tax return. Prior to the spin-off, MXL's operating results
together with those of the non-core assets historically have been included in
consolidated federal income tax returns filed by GPS. In addition, MXL files
separate state income tax returns in Pennsylvania and Illinois. Income tax
expense (benefit) in the accompanying 2004 financial statements for the period
prior to the spin-off has been computed as if MXL filed its own separate federal
and state income tax returns including transactions related to the non-core
assets. As GPS did not own 80% of its common stock, Five Star filed its own
separate consolidated federal income tax return, as well as separate state and
local income tax returns.
Prior to the spin-off the Company and GPS entered into a Tax Sharing Agreement.
The Tax Sharing Agreement, which was effective as of January 1, 2004, provides
for tax sharing payments between the Company and GPS for the period prior to the
spin-off, so that the Company is generally responsible for tax expense
attributable to its lines of business and entities comprising it, and GPS is
generally responsible for the tax expense attributable to its lines of business
and entities comprising it. From January 1, 2004 through November 24, 2004, the
date of the spin-off, no amounts were charged to the Company under the Tax
Sharing Agreement, as no tax expense was incurred by the Company for this
period. In addition, no amount was credited to MXL for utilization by GPS of
MXL's 2004 loss for the period prior to the spin-off. Accordingly, the 2004
expense for current federal income taxes relates to Five Star.
The components of income tax expense (benefit) are as follows (in thousands):
Year Ended December 31,
2006 2005 2004
------------------------------------------ -------------- ------------- -------------
Current
Federal $ 353 $ - $703
State and local 173 33 226
------------------------------------------ -------------- ------------- -------------
------------------------------------------ -------------- ------------- -------------
Total current 526 33 929
------------------------------------------ -------------- ------------- -------------
------------------------------------------ -------------- ------------- -------------
Deferred
Federal (152) (200) 53
State and local (47) (53) -
------------------------------------------ -------------- ------------- -------------
------------------------------------------ -------------- ------------- -------------
Total deferred (199) (253) 53
------------------------------------------ -------------- ------------- -------------
------------------------------------------ -------------- ------------- -------------
Total income tax expense (benefit) $327 $(220) $982
55
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
The deferred expense (benefit) excludes activity in the net deferred tax
asset relating to tax on appreciation (depreciation) in available-for-sale
securities and the interest rate swap, which is recorded directly to
stockholders' equity.
The difference between the expense (benefit) for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit) is as follows:
Year Ended December 31,
2006 2005 2004
------------------------------------------------------------------------- ------------- ------------ -------------
Federal income tax rate (34.0)% (34.0)% (34.0)%
State and local taxes, net of federal benefit 19.5 (0.3) 4.7
Non-deductible expenses 2.1 3.0 0.4
Impairment and realized losses for investment in marketable securities
for which no benefit has been provided 15.2
Loss on write-down of Illinois property for which no benefit has been
provided 10.9
Net operating loss of MXL for period prior to spin-off unable to be
utilized on a stand-alone basis for which no benefit has been provided - - 15.1
Valuation allowance adjustment 54.7 (7.0)
Net operating loss of the Company for period subsequent to spin-off for
which no benefit has been provided 23.1 24.6
Other (.3) 8.4 (5.3)
------------------------------------------------------------------------- ------------- ------------ -------------
------------------------------------------------------------------------- ------------- ------------ -------------
Effective tax rate expense (benefit) 42% (6.8)% 31.6%
The tax effects of temporary differences between the financial reporting and tax
bases of assets and liabilities that are included in the net deferred tax
(liability) asset are summarized as follows (in thousands):
56
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
December 31,
2006 2005
----------------------------------------------------------------------- ------------- -----------
Deferred tax assets:
Property and equipment $ 247 $ 207
Allowance for doubtful accounts 170 154
Accrued liabilities 247 41
Marketable securities 31
Investments in Valera 997 2,535
Net operating loss carryforward 3,165 2,737
Interest rate collar 2 8
Inventory 365 13
Capital loss carryforward 414 476
----------------------------------------------------------------------- ------------- -----------
Deferred tax assets 5,638 6,171
----------------------------------------------------------------------- ------------- -----------
Deferred tax liabilities: - 83
Investment in subsidiary 279 279
Marketable securities
Interest rate swap 128 158
----------------------------------------------------------------------- ------------- -----------
Deferred tax liabilities 407 520
----------------------------------------------------------------------- ------------- -----------
Net deferred tax assets 5,231 5,651
----------------------------------------------------------------------- ------------- -----------
Less valuation allowance (4,719) (5,578)
----------------------------------------------------------------------- ------------- -----------
Net deferred tax asset $ 512 $ 73
----------------------------------------------------------------------- ------------- -----------
As of December 31, 2006, the Company has a net operating loss carryforward of
$8,116,000, representing losses incurred subsequent to the spin-off and losses
incurred by MXL prior to the spin-off, which expire from 2017 to 2026. In
addition, the Company has a capital loss carryforward of $1,062,000, which
expires in 2010.
Under the Internal Revenue Code's consolidated return regulations, each member
of GP Strategies consolidated group (including MXL) is jointly and severally
liable for the consolidated federal income tax liabilities. GPS, the Company and
their respective subsidiaries entered into a Tax Sharing Agreement that defines
the parties' rights and obligations with respect to deficiencies and refunds of
federal, state and other taxes relating to the Company's business for tax years
prior to the spin-off and with respect to certain tax attributes of the Company
after the spin-off. In general, GPS will be responsible for filing consolidated
federal tax returns and paying any associated taxes for periods through the date
of the spin-off (the "Distribution Date"). The Company will be required to pay
GPS an amount equivalent to federal taxes relating to the Company and its
subsidiaries allocated taxable income includable in GPS's consolidated federal
income tax return for the taxable period that ends on the Distribution Date. The
Company is responsible for filing its own tax returns and paying taxes for
periods beginning on or after the Distribution Date. GPS and the Company agreed
to cooperate with each other and to share information in preparing such tax
returns and in dealing with other tax matters. GPS and the Company will be
responsible for their own taxes other than those described above.
57
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
The Company has agreed not to take any actions or enter into any transactions
that would cause the spin-off not to qualify as tax-free. The Company also has
agreed to indemnify GPS to the extent that any action the Company takes gives
rise to a tax incurred by GPS with respect to the spin-off.
If the Company increases its ownership to at least 80% of Five Star's common
stock, Five Star would become, for federal tax purposes, part of the affiliated
group of which the Company is the common parent. As a member of such affiliated
group, Five Star would be included in the Company's consolidated federal income
tax returns, Five Star's income or loss would be included as part of the income
or loss of the affiliated group and any of Five Star's income so included might
be offset by the consolidated net operating losses, if any, of the affiliated
group. Five Star has entered into a tax sharing agreement with GP Strategies
(which was assigned to the Company as part of the spin-off) pursuant to which
Five Star will make tax sharing payments to the Company once Five Star becomes a
member of the consolidated group equal to 80% of the amount of taxes Five Star
would pay if Five Star were to file separate consolidated tax returns but did
not pay as a result of being included in the Company's affiliated group.
10. Capital Stock
The Board of Directors without any vote or action by the holders of common stock
is authorized to issue preferred stock from time to time in one or more series
and to determine the number of shares and to fix the powers, designations,
preferences and relative, participating, optional or other special rights of any
series of preferred stock.
On December 15, 2006, the Company Board of Directors authorized the Company to
repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding
shares of common stock from time to time either in open market or privately
negotiated transactions. At December 31, 2006, the Company had repurchased
100,000 shares of its common stock for $188,000.
11. Incentive stock plans
On November 3, 2003, GPS and the Board of Directors of the Company adopted an
Incentive Stock Plan under which 1,750,000 shares of common stock are available
for grant to employees, directors and outside service providers. The plan
permits awards of incentive stock options, nonqualified stock options,
restricted stock, stock units, performance shares, performance units and other
incentives payable in cash or in shares of the Company's common stock. As of
December 31, 2006 no awards have been granted under the plan. See Note 19(c).
Five Star Stock Option plan
On January 1, 1994, Five Star's Board of Directors adopted the Five Star
Products, Inc. 1994 Five Star Plan (the "Five Star Plan"), which became
effective August 5, 1994. On January 1, 2002, the Board of Directors amended the
Five Star Plan increasing the total number of shares of common stock to
4,000,000 shares reserved for issuance, subject to adjustment in the event of
stock splits, stock dividends, recapitalizations, reclassifications or other
capital adjustments. Unless designated as "incentive stock options" intended to
qualify under Section 422 of the Internal Revenue Code, options granted under
the Five Star Plan are intended to be nonqualified options. Options may be
granted to any director, officer or other key employee of Five Star and its
subsidiaries, and to consultants and other individuals providing services to
Five Star.
The term of any option granted under the Five Star Plan will not exceed ten
years from the date of grant and, in the case of incentive stock options granted
to a 10% or greater holder in the total voting stock of Five Star, three years
from the date of grant. The exercise price of any option will not be less than
the fair market value of the Common Stock on the date of grant or, in the case
of incentive stock options granted to a 10% or greater holder in the total
voting stock, 110% of such fair market value. Options granted vest 20% on date
of grant with the balance vesting in equal annual installments over four years.
At December 31, 2006, Five Star had 1,500,000 shares of common stock reserved
for future grants under the Five Star Plan.
Activity relating to stock options granted by Five Star for the three years in
the period ended December 31, 2006 follows:
58
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
Weighted-Average
Remaining Aggregate
Number of Weighted-Average Contractual Intrinsic
Shares Exercise Price Terms (Years) Value
Options outstanding at December 31, 2003 1,530,000 0.19
Cancelled (430,000) 0.33
-----------
Options outstanding at December 31, 2004 and 2005 1,100,000 0.14
Granted 400,000 0.18
Expired (450,000) (0.14)
---------
Options outstanding at December 31,2006 1,050,000 0.16 1.2 $148,500
========= ==== === ========
Options exercisable at December 31,2006 650,000 0.15 0.1 $100,500
======= ==== === ========
On October 18, 2006, Five Star granted options to purchase 400,000 shares of
Five Star's common stock at an exercise price equal to $0.18, the average of the
closing bid and asked prices of the common stock on that date. The options will
vest if Five Star meets certain EBITDA targets over the next three years and
upon employee's continued employment as well as shareholder approval of the 2007
Plan, Such approval is deemed to be essentially a formality as NPDC is the
majority shareholder and controls Five Star's Board of Directors, which adopted
the 2007 Plan (see Note 19(d)). Five Star determined the estimated aggregate
fair value of these options on the date of grant to be $66,000 based on the
Black-Scholes valuation model using the following assumptions: expected
volatility of 166%, dividend yield of 0%, risk free interest of 5% and an
expected life of 4 years. Achievement of performance criteria was determined as
less then probable at December 31, 2006 and therefore no compensation expense
was recognized. The EBITDA target and exercise price were modified in March
2007.
At December 31, 2006, Five Star did not have any unrecognized compensation
expenses relating to options granted to employees and directors.
See Note 19(d).
12. Other benefit plans
Five Star Employee Benefit Plan
Five Star maintains a 401(k) Savings Plan for employees who have completed one
year of service. The Savings Plan permits pre-tax contributions to the plan of
2% to 50% of compensation by participants pursuant to Section 401(k) of the
Internal Revenue Code. Five Star matches 40% of the participants' first 6% of
compensation contributed, not to exceed an amount equivalent to 2.4% of that
participant's compensation. Five Star's contribution to the plan was
approximately $125,000, $119,000 and $123,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
MXL Employee Benefit Plan
MXL maintains a 401(k) Savings Plan, the MXL Industries, Inc. Retirement and
Savings Plan (the "MXL Plan"), for employees who have completed at least one
hour of service coincident with the first day of each month. The MXL Plan
59
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
permits pre-tax contributions by participants. The Company matches up to 50% of
the participants' first 7% of compensation contributed. The Company matches
participants' contributions in shares of Company's common stock. During the
years ended December 31, 2006 and 2005, the Company contributed 35,105 and
15,455 shares of common stock with a value of approximately $56,000 and $37,000,
respectively as a matching contribution to the MXL Plan.
13. Commitments
Five Star has several noncancellable leases for real property and machinery and
equipment. In addition MXL has a noncancellable lease for real property. Such
leases expire at various dates with, in some cases, options to extend their
terms. As of December 31, 2006 minimum rentals under long-term operating leases
are as follows (in thousands):
Real Machinery &
property equipment Total
------------------------- ------------------ ------------------ --------------
2007 $ 1,645 $ 887 $ 2,532
2008 1,623 356 1,979
2009 378 153 531
2010 - 6 6
Thereafter - - -
------------------------- ------------------ ------------------ --------------
------------------------- ------------------ ------------------ --------------
Total $3,646 $1,402 $5,048
------------------------- ------------------ ------------------ --------------
Several of the leases contain provisions for rent escalation based primarily on
increases in real estate taxes and operating costs incurred by the lessor. Rent
expense was approximately $3,132,000, $3,163,000, and $3,147,000 for the years
ended December 31, 2006, 2005 and 2004, respectively. GPS has guaranteed the
leases for Five Star's New Jersey and Connecticut warehouses, having annual
rentals of approximately $1,600,000 and expiring in the first quarter of 2009.
The landlord at Five Star's Connecticut facility has the option to cancel the
lease if there is a signed contract to sell the building, upon six months
written notice.
14. Segment Information
The operations of the Company currently consist of the following two business
segments, by which the Company is managed.
The MXL 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 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 profit
attributable to each line of business (in thousands):
Year Ended December 31,
2006 2005 2004
------------------------------------------- ----------------- --------------- ---------------
Sales
MXL $ 8,996 $ 7,915 $ 8,241
Five Star 108,088 106,451 101,982
------------------------------------------- ----------------- --------------- ---------------
------------------------------------------- ----------------- --------------- ---------------
$117,084 $114,366 $110,223
------------------------------------------- ----------------- --------------- ---------------
------------------------------------------- ----------------- --------------- ---------------
Operating profit (loss)
MXL $ 419 $ (1,135) $ (2,593)
Five Star 2,207 1,399 3,244
Corporate and other (1,825) (1,972) (1,423)
------------------------------------------- ----------------- --------------- ---------------
------------------------------------------- ----------------- --------------- ---------------
$ 801 $(1,708) $ (772)
------------------------------------------- ----------------- --------------- ---------------
60
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
Additional information relating to the Company's business segments is as follows
(in thousands):
December 31,
2006 2005
------------------------------------ -------------- --------------
Total assets
MXL $19,881 $11,068
Five Star 29,885 36,100
Corporate and other 3,468 5,054
------------------------------------ -------------- --------------
------------------------------------ -------------- --------------
$53,234 $52,222
------------------------------------ -------------- --------------
Year Ended December 31,
2006 2005 2004
------------------------------------ ------------ ---------------- ----------
Additions to property,
plant, and equipment
MXL $ 367 $ 991 $ 183
Five Star 254 174 275
------------------------------------ ------------ ---------------- ----------
------------------------------------ ------------ ---------------- ----------
$621 $1,165 $458
------------------------------------ ------------ ---------------- ----------
Depreciation and amortization
MXL $ 459 $ 500 $ 616
Five Star 322 119 110
------------------------------------ ------------ ---------------- ----------
$ 781 $ 619 $ 726
------------------------------------ ------------ ---------------- ----------
For the years ended December 31, 2006, 2005 and 2004, no customer accounted for
10% or more of the Company's sales.
Information about the Company's net sales in different regions, which are
attributable to countries based upon location of customers, is as follows (in
thousands):
Year Ended December 31,
2006 2005 2004
----------------------------- ------------- ------------- --------------
----------------------------- ------------- ------------- --------------
United States $115,113 $112,175 $107,644
Far East 1,372 1,376 1,288
Other 599 815 1,291
----------------------------- ------------- ------------- --------------
----------------------------- ------------- ------------- --------------
$117,084 $114,366 $110,223
All assets of the Company are in the United States.
15. Related party transactions
(a) GPS provided certain administrative services to the Company, including but
not limited to tax and financial accounting, legal, human resources, employee
benefits and insurance. The costs of these services were allocated to the
Company based on specific identification and, to the extent that such
identification was not practical, on the basis of sales or other method which
management believes to be a reasonable reflection of the utilization of services
provided or the benefit received by the Company. These allocations resulted in
charges of $925,000, $1,141,000 and $911,000 being recorded in selling, general
and administrative expenses in the accompanying consolidated statements of
operations for the years ended December 31, 2006, 2005 and 2004, respectively
which include amounts described below. Allocated expenses in excess of amounts
which reduced the receivable balance due from GPS (see (b) below) in 2004 have
61
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
been recorded as a capital contribution resulting in an increase in additional
paid-in capital. The expenses allocated to the Company for these services are
not necessarily indicative of the expenses that would have been incurred if the
Company had been a separate, independent entity and had otherwise managed these
functions.
GPS and the Company have entered into contracts described below that will govern
certain relationships between them. GPS and the Company believe that these
agreements are at fair market value and are on terms comparable to those that
would have been reached in arm's-length negotiations had the parties been
unaffiliated at the time of the negotiations.
Certain of the Company's executive officers are also executive officers of GPS
and will remain on GPS's 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 GPS 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 GPS on or after July 30, 2006 with 180 days
prior written notice.
Prior to July 1, 2005, GPS 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 charges amounted to $656,000 for the six
months ended June 30, 2005 and $107,000 for the period subsequent to the
spin-off through December 31, 2004.
Effective July 1, 2005 GPS and the Company amended the above management
agreement. Pursuant to the amendment, the Company will pay GPS 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 and $666,000 for the period July 1, 2006 through May 31,
2007 relating to the services of Jerome I. Feldman, the Company's Chief
Executive Officer, representing approximately 80% of the cost of the
compensation and benefits required to be provided by GPS to Mr. Feldman. The
Company also occupies a portion of corporate office space leased by GPS. The
Company paid the total annual rent of $242,000 in 2006, and charged back $40,000
to GPS for GPS's share of the space. GPS's lease extends through March 31, 2007.
The Company had entered into a separate management agreement with GPS pursuant
to which the Company provided certain general corporate services to GPS. Under
this management agreement, the Company charged GPS 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 $50,000 and $82,000 for
the years ended December 31, 2006 and 2005, respectively, and $17,000 for the
period subsequent to the spin-off through December 31, 2004. Effective as of
July 1, 2005 the Company and GPS terminated the management agreement whereby the
Company provided general corporate services to GPS.
GPS also provided legal, tax, business development, insurance and employee
benefit administration services to Five Star pursuant to a management services
agreement for a fee of up to $10,000 per month. Prior to the Distribution, GPS
62
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
transferred to the Company the rights and obligations under the management
services agreement with Five Star. Fees paid by Five Star to GPS under this
agreement prior to the Distribution, which are included in selling, general and
administrative expenses, totaled $132,000 for the year ended December 31, 2004.
The Company was included in GPS's consolidated income tax group and the
Company's tax liability was included in the consolidated federal income tax
liability of GPS until the time of the spin-off. The Tax Sharing Agreement
provides for tax sharing payments between GPS and the Company for periods prior
to the spin-off, so that the Company will be generally responsible for the taxes
attributable to its lines of business and entities comprising it and GPS will be
generally responsible for the taxes attributable to its lines of business and
the entities comprising it.
GPS and the Company agreed that taxes related to intercompany transactions that
are triggered by the Company spin-off will be generally allocated to GPS. GPS
and the Company agreed that joint non-income tax liabilities will generally be
allocated between GPS and the Company based on the amount of such taxes
attributable to each group's line of business. If the line of business with
respect to which the liability is appropriately associated cannot be readily
determined, the tax liability will be allocated to GPS.
Under the distribution agreement that governed the spin-off of the Company from
GPS, GPS and the Company each agreed that neither would take any action that
might cause the spin-off of the Company to not qualify as a tax-free
distribution. Should one party take an action which causes the spin-off not to
so qualify, then that party would be liable to the other for any taxes incurred
by the other from the failure of the spin-off to qualify as a tax-free
distribution.
63
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
(b) The receivable from GPS, is non-interest bearing. Transactions affecting the
receivable, together with the average balances, follow (in thousands):
Year Ended December 31,
-------------------------------------------------
------------- -- -------------- -- --------------
2006 2005 2004
------------- -------------- --------------
Balance at beginning of period $ 1,142 $ 5,000 $ 709
Management fee and
Other charges from GPS (1) (891) (1,141) (559)
Repayments (5,000) (1,032)
Advances 882
Payment of fees 1,082
Contribution receivable from GPS 1,201 $ 5,000
----------------------------------------------- ------------- -- -------------- -- --------------
----------------------------------------------- ------------- -- -------------- -- --------------
Balance at end of period $ 251 $ 1,142 $ 5,000
----------------------------------------------- ------------- -- -------------- -- --------------
----------------------------------------------- ------------- -- -------------- -- --------------
Average balance $729 $(177) $ 897
(1) Includes a management fee paid to GPS by MXL of $140,000 for the year
ended December 31, 2004.
In December 2004, GPS received certain proceeds of litigation and arbitration
claims, out of which it had agreed on July 30, 2004 to make an additional
capital contribution to the Company (see Note 16). GPS made the capital
contribution to the Company in January 2005 to settle the receivable. On
November 23, 2005, GPS agreed to settle its claims, which resulted in an
additional capital contribution due to the Company of $1,201,000 at December 31,
2005.
(c) In 2002, GPS and Redstorm Scientific, Inc. ("RSS") entered into an agreement
pursuant to which GPS agreed to provide general business and administrative
support to RSS. RSS is a privately held computational drug design company
focused on utilizing bio-informatics and computer aided molecular design to
assist pharmaceutical and biotechnology companies. GPS performed and completed
all necessary services for RSS during the third quarter of 2002. In
consideration for such services, RSS agreed to grant GPS a five-year option to
purchase 500,000 shares of RSS common stock (an approximate 4% interest) at $1
per share. GPS also has an option to purchase additional equity in RSS upon the
occurrence of certain events. GPS ascribed no value to the options, due to the
adverse financial condition of RSS at that time. Michael Feldman is the Chief
Executive Officer of RSS and owns approximately 25.5% of the outstanding common
stock of RSS. Michael Feldman is the son of Jerome Feldman, Chief Executive
Officer and a director of the Company and GPS.
In addition, Roald Hoffmann, a director of the Company, is also a director of
RSS and has options to purchase shares of RSS common stock. Mr. Hoffman resigned
as a director of the Company on March 8, 2007.
(d) 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 for an aggregate purchase price of $1,590,000. The loans bore interest at
64
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
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 (see Note 16). GP
Strategies made a $5 million additional capital contribution to the Company on
January 6, 2005. 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 such proceeds. 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.
(e) Scott N. Greenberg, the Company's director and Chief Financial Officer is
the Chief Executive Officer and a Director of GPS. Harvey P. Eisen, a director
of the Company, is also the Non-Executive Chairman of the Board of GPS.
16. Litigation
On July 30, 2004, GPS agreed to make an additional capital contribution to the
Company, 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 the claims described below. In 2004, GPS received $13.7
million of net proceeds from such claims and, pursuant to such agreement, in
January 2005 GPS made a $5 million additional capital contribution to the
Company. In November 2005, GPS settled its remaining fraud claims against
Electronic Data Systems Corporation (EDS) and Systemhouse in connection with
GPS's 1998 acquisition of Learning Technologies. Pursuant to the settlement, EDS
made a cash payment to GPS in the amount of $9,000,000 in December 2005. In
accordance with the Spin-off agreement with the Company, GPS made an additional
capital contribution to the Company for approximately $1,201,000 of the
settlement proceeds. GPS did not transfer cash to the Company for this
additional capital contribution, but instead is offsetting the management fee
charges due from the Company against the payable to the Company (see Note 15).
As of December 31, 2006, GPS has a remaining payable to the Company of $251,000
for this additional capital contribution
GPS's original fraud action included MCI Communications Corporation (MCI) as a
defendant. The fraud action against MCI had been stayed as a result of MCI's
bankruptcy filing, and GPS's claims against MCI were not tried or settled with
the claims against EDS and Systemhouse. On December 13, 2005, the Bankruptcy
Court heard arguments on a summary judgment motion that MCI had made before
filing for bankruptcy. On September 12, 2006, the Bankruptcy Court asked the
parties to submit further briefs concerning whether the summary judgment motion
should be decided based on the standard applicable to such motions under state
or federal law. A decision on the motion for summary judgment has not been
issued. Pursuant to the Spin-off agreement with the Company, GPS will contribute
to the Company 50% of any proceeds received, net of legal fees and taxes, with
respect to the litigation claims.
The Company is not a party to any legal proceeding, the outcome of which is
believed by management to have a reasonable likelihood of having a material
adverse effect upon the financial condition of the Company.
65
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
17. GPS borrowings
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, GPS
issued and sold to four Gabelli funds $7,500,000 aggregate principal amount of
6% Conditional Subordinated Notes due 2008 (the "Notes") and 937,500 warrants
("GP Warrants"), each entitling the holder thereof to purchase (subject to
adjustment) one share of GPS's common stock. The aggregate purchase price for
the Notes and GP Warrants was $7,500,000. GP Strategies and the Company agreed
to allocate to the Company $1,875,000 of the $7,500,000 received for the Notes
and Warrants. The Company received the funds prior to the spin-off as a capital
contribution from GPS.
The Notes are secured by a non-recourse mortgage on the property located in
Pawling, New York (the "Property") which was transferred to MXL. MXL has no
liability for repayment of the Notes or any other obligations of GPS under the
Note and Warrant Purchase Agreement (other than foreclosure on such property).
If there is a foreclosure on the mortgage for payment of the Notes, GPS has
agreed to indemnify MXL for loss of the value of the Property.
At any time that less than $1,875,000 principal amount of Notes are outstanding,
GPS may defease the obligations secured by the mortgage and obtain a release of
the lien of the mortgage by depositing with an agent for the Noteholders bonds
or government securities with an investment grade rating by a nationally
recognized rating agency which, without reinvestment, will provide cash on the
maturity date of the Notes in an amount not less than the outstanding principal
amount of the Notes.
The Note and Warrant Purchase Agreement provided that, on completion of the
spin-off, the Company would issue warrants ("National Patent Development
Warrants") to the holders of the GP Warrants. The National Patent Development
Warrants entitle the holders to purchase, in the aggregate, a number of shares
of the Company's common stock equal to 8% of the number of shares of such stock
outstanding at completion of the spin-off. An aggregate of 1,423,887 National
Patent Development Warrants were issued to the holders of the GP Warrants on
December 4, 2004, and allocated among them pro-rata based on the respective
number of GP Warrants held by them on such date.
The exercise price of the National Patent Development Warrants is $3.57, which
represents 160% of the average closing price of the Company's common stock over
the 20 consecutive trading days commencing on the record date of the spin-off.
The National Patent Development Warrants are exercisable at any time through
August 2008 and have anti-dilution provisions similar to those of the GP
Warrants. The Company provided the holders of the National Patent Development
Warrants with registration rights similar to those provided by GPS to the
holders of the GP Warrant. The registration rights agreement requires the
Company to file registration statements with the SEC covering the shares
underlying the warrants and to use its best efforts to cause such registration
statements to become effective and remain effective for specified periods. The
registration rights agreement does not provide for any cash payments of
liquidated damages by the Company to the holders of the warrants if the
registration statements are not declared effective or if effectiveness is not
maintained for the required periods.
As the National Patent Development Warrants relate to a capital contribution by
GPS, their issuance has been accounted for as an offsetting charge and credit to
additional paid-in capital for $883,000, representing the estimated fair value
of the warrants.
66
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
18. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following at December
31, 2006 and 2005 (in thousands):
December 31,
2006 2005
-------------------------------------- ------------ ------------
-------------------------------------- ------------ ------------
Accounts payable $7,059 $6,794
Accrued expenses 2,116 1,725
Other 803 1,047
-------------------------------------- ------------ ------------
-------------------------------------- ------------ ------------
$9,978 $9,566
19. Valuation and Qualifying Accounts
The following is a summary of the allowance for doubtful accounts related to
accounts receivable for the years ended December 31 (in thousands):
2006 2005 2004
---- ---- ----
Balance at beginning of year $ 480 $ 306 $739
Charged (credited) to expense (73) 153 253
Uncollectible accounts written off,
net of recoveries 159 21 (686)
--- -- ------
Balance at end of year $ 566 $ 480 $306
< ===== ===== ====
20. Selected Quarterly Financial Data
(Unaudited) (in thousands, except per share data)
- -------------------------------------- -----------------------------------------------------------------------
Three months ended
(a) March 31, June 30, September 30, December 31,
2006 2006 2006 2006
- -------------------------------------- -------------- ---------------- -------------------- ------------------
- -------------------------------------- -------------- ---------------- -------------------- ------------------
Sales $31,205 $31,161 $30,125 $24,593
Gross margin 5,193 5,534 4,860 3,892
- -------------------------------------- -------------- ---------------- -------------------- ------------------
- -------------------------------------- -------------- ---------------- -------------------- ------------------
Net loss $ (437) $ (118) $ (95) $ (557)
- -------------------------------------- -------------- ---------------- -------------------- ------------------
- -------------------------------------- -------------- ---------------- -------------------- ------------------
Net loss per share:
Basic and Diluted $ (.02) $ (.01) $ (.01) $ (.03)
----------- ------------ ---------- ----------
(a) As result of the implementation of SAB 108 (Note 2 to the Consolidated
Financial Statements) previously issued interim financial information consisting
of costs of goods sold, gross margin and net income for the first three quarters
of the year ended December 31, 2006 has been revised. The net effect on net
income for the previously issued quarters ended March 31, June 30 and September
30 was a decrease of $17,000, $14,000, and $13,000 respectively. There was no
effect on earning per share for the periods.
In the fourth quarter of 2006, the Company charged Investment and other income
(loss) for $180,000 and credited other comprehensive income representing
67
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
unrealized gain for the period from January 1 through September 30, 2006 on
Valera shares classified as available for sale which is payable to related
parties (see Note 4). Quarterly financial data for the first three quarters of
2006 shown above have been restated by increasing (decreasing) net loss and net
loss per share as follows:
- ------------------------------------
Three months ended March 31, June 30, September 30,
2006 2006 2006
- ------------------------------------ ----------------- --------------- --------------------
- ------------------------------------ ----------------- --------------- --------------------
Net loss $271 $(12) $(79)
Net loss per share $(.01) $- $-
------ -- --
- -------------------------------------- ----------------------------------------------------------------------
Three months ended
March 31, June 30, September 30, December 31,
2005 2005 2005 2005
- -------------------------------------- -------------- --------------- ------------------- -------------------
- -------------------------------------- -------------- --------------- ------------------- -------------------
Sales $30,077 $31,669 $28,940 $23,680
Gross margin 4,437 5,989 3,836 4,190
- -------------------------------------- -------------- --------------- ------------------- -------------------
- -------------------------------------- -------------- --------------- ------------------- -------------------
Net income (loss) $ (820) $ (395) $ (785) $ (919)
- -------------------------------------- -------------- --------------- ------------------- -------------------
- -------------------------------------- -------------- --------------- ------------------- -------------------
Net income (loss) per share:
Basic and diluted $ (.05) $ (.02) $ (.04) $ (.05)
----------- ------------ ---------- ----------
19. Subsequent events
a. On March 1, 2007, the Company's Board of Directors determined that
effective upon the expiration of the employment agreement between the
Company and Jerome Feldman, the Chairman of the Board and Chief
Executive Officer of the Company, or upon his earlier resignation,
Harvey P. Eisen, who currently serves as a director of the Company,
will serve as Chairman of the Board and Chief Executive Officer of the
Company, and that effective upon the commencement of his service as
Chairman of the Board and Chief Executive Officer of the Company, Mr.
Eisen will receive an annual salary of $100,000. Mr. Feldman's
employment agreement will expire on May 31, 2007 unless earlier
terminated by mutual agreement of the parties. In addition, the
Company's Board of Directors granted to Mr. Eisen options to purchase
an aggregate of 2,500,000 shares of the Company's common stock,
2,250,000 of which are subject to shareholder approval of an amendment
to the Company's 2003 Incentive Stock Plan, at an exercise price equal
to $2.45 per share, which was the average of the closing bid and asked
prices of the Company's common stock on March 1, 2007. The options are
to vest in three equal annual installments, commencing on March 1,
2008.
b. On March , 2007, John C. Belknap was elected as a director of Five
Star. Mr. Belknap was also elected to serve as President and Chief
Executive Officer of Five Star. Mr. Belknap has served as a director
of the Company since October 20, 2006 and has been an employee of the
Company and unpaid consultant to Five Star since December 1, 2006.
68
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
Mr.Belknap was granted 1,000,000 restricted shares of Five Star Common
Stock. which will vest if Five Star meets certain EBITDA targets over
the next three years and upon Mr. Belknap's continued employment with
Five Star or the Company. Five Star has granted Mr. Belknap certain
demand and piggy-back registration rights beginning March 2, 2010.
In addition, Mr. Belknap was granted options to purchase an aggregate of
400,000 shares of the Company's common stock, 150,000 of which are
subject to shareholder approval of an amendment to the Company's 2003
Incentive Stock Plan, at an exercise price equal to $2.45 per share,
which was the average of the closing bid and asked prices of the
Company's common stock on March 1, 2007. Contingent upon Mr. Belknap's
continued employment with the Company, the options will vest in three
equal annual installments, commencing on December 1, 2007.
c. On March 1, 2007 the Company's Board of Directors approved and adopted
an amendment (the "Amendment") to the National Patent Development
Corporation 2003 Incentive Plan (the "2003 Plan") increasing the
aggregate number of shares of Company common stock issuable under the
2003 Plan from 1,750,000 shares to 3,500,000 shares (subject to
adjustment as provided in the 2003 Plan), and increasing the per
person limitation in the 2003 Plan from 250,000 shares to 2,500,000
shares, subject to stockholder approval of the Amendment. The Company
expects to submit the Amendment to the Company's stockholders for
approval at the Company's 2007 Annual Stockholders Meeting.
d. March 1, 2007, the Board of Directors of Five Star adopted the Five
Star Products, Inc. 2007 Incentive Stock Plan (the "2007 Plan"),
subject to the approval of the shareholders of Five Star. Five Star
may grant awards of non-qualified stock options, incentive stock
options (if the 2007 Plan is submitted to and approved by stockholders
of Five Star prior to February 28, 2008), restricted stock, stock
units, performance shares, performance units, and other incentives
payable in cash or in shares of Five Star's common stock to officers,
employees or members of the Board of Directors of Five Star and its
subsidiaries. Five Star is authorized to grant an aggregate of
2,500,000 shares of Five Star Common Stock under the 2007 Plan. Five
Star may issue new shares or use shares held in treasury to deliver
shares for equity grants or upon exercise of non-qualified stock
options.
e. Mr. Leslie Flegel was named a Director of the Company on March 2, 2007
and appointed as Chairman of Five Star. Mr. Flegel entered into a
three-year agreement with Five Star ending on March 1, 2010 (the "FS
Agreement") which provides for an annual fee of $100,000 and
reimbursement (i) for all travel expenses incurred in connection with
his performance of services for Five Star and (ii) beginning in
November 2007, for up to $125,000 per year of the cost of maintaining
an office. In addition, pursuant to the FS Agreement, Mr. Flegel was
issued 2,000,000 shares of Five Star common stock, all of which are
fully vested and not subject to forfeiture. The Agreement also
provides that if the fair market value of the 2,000,000 shares of Five
Star common stock that Mr. Flegel received pursuant to his agreement
with Five Star described below is less than $280,000 on the last day
of the term of such agreement with Five Star, Mr. Flegel may require
69
NATIONAL PATENT DEVELOPMENT CORPORATION
Notes to Consolidated Financial Statements
the Company to repurchase the shares of Five Star common stock for
$280,000. The 2,000,000 shares were valued at $720,000 based on the
closing price of Five Star's common stock on March 2, 2007. Such
amount is to be charged to compensation expense over the term of the
FS Agreement. In addition, the Company will recognize a gain or loss
on the indirect sale of Five Star common stock by the Company at the
time of issuance. The issuance of the Five Star shares reduced the
Company's ownership of Five Star from 64% to 56%.
On March 2, 2007, the Company sold Mr. Flegel 200,000 shares of the
Company's common stock at a price of $2.40 per share or $480,000. Mr.
Flegel has the right to exchange any or all of the 200,000 shares of
the Company's common stock into Five Star common stock held by the
Company at the rate of six shares of Five Star common stock for each
share of the Company's common stock at an exercise price of $0.40 for
each Five Star share. The value of the option to convert the Company's
stock held by Mr. Flegel into shares of Five Star will be valued using
a Black Sholes formula and recognized as compensation expense over the
three year term of the FS Agreement. In addition, the Company will
account for the issuance of the 200,000 shares as temporary equity as
a result of the exchange rights.
f. In connection with (e) above, on March 2, 2007 the Company amended a
$2,800,000 Promissory Note due from Five Star (eliminated in
consolidation). Under the terms of the amended Promissory Note, the
term of the Promissory Note has been extended from June 30, 2007 to
June 30, 2009 at an interest rate of 9% per annum. In addition, the
Promissory Note and any unpaid accrued interest is convertible, in
whole or in part, at the Company's option into shares of Five Star
common stock at a price of $.40 per share, subject to anti-dilution
adjustment. Further, Five Star no longer has the right to prepay the
Promissory Note prior to maturity.
g. On March 14, 2007 Five Star signed a definitive agreement with
Right-Way Dealer Warehouse, Inc. to acquire substantially all of
Right-Way's assets (with certain exclusions including cash) and the
operations of its Brooklyn Cash & Carry business pursuant to Section
363 of the Bankruptcy Code for an aggregate purchase price of
approximately $5 million in cash subject to adjustment as provided in
the definitive agreement. The transaction, which is subject to
approval by the Bankruptcy Court for the District of Massachusetts, is
scheduled to close on April 13, 2007. Right-Way is also a distributor
of paint sundries, home decorating and hardware products, primarily in
the Northeast market. In addition to the agreement to acquire
Right-Way's assets, at the closing of the asset purchase, Five Star
will enter into a lease of (and a related option to purchase) a
warehouse in Brooklyn, New York at which Right-Way conducts the
Brooklyn Cash & Carry business. At the closing, Five Star will also
enter into an employment agreement with Ron Kampner, the principal of
Right-Way. Mr. Kampner will become Five Star's Senior Vice President
of Sales.g.
70
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
ITEM 9A. Controls and Procedures
"Disclosure controls and procedures" are the controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. These controls and procedures are
designed to ensure that information required to be disclosed by an issuer in its
Exchange Act reports is accumulated and communicated to the issuer's management,
including its principal executive and financial officers, as appropriate, to
allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, the Company carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(e)
as of December 31, 2006. Based upon the evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this report.
During the year ended December 31, 2006, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting.
Because the Company is not an "Accelerated Filer" as defined in Rule
12b-2 of the Exchange Act, the Company is not presently required to file
Management's annual report on internal control over financial reporting and the
Attestation report of the registered public accounting firm required by Item
308(a) and (b) of Regulation S-K promulgated under the Securities Act. Under
current rules, because the Company is neither a "large accelerated filer" nor an
"accelerated filer", the Company is not required to provide management's report
on internal control over financial reporting until the Company files its annual
report for 2007 and compliance with the auditor's attestation report requirement
is not required until the Company files its annual report for 2008. The Company
currently expects to comply with these requirements at such time as the Company
is required to do so.
ITEM 9B. Other Information
None
71
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to
the Company's Proxy Statement for its 2007 Annual Meeting of Stockholders under
the caption "Directors and Executive Officers."
Item 11. Executive Compensation
The information required by this item is incorporated by reference to
the Company's Proxy Statement for its 2007 Annual Meeting of Stockholders under
the caption "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related stockholder Matters
The information required by this item is incorporated by reference from
the Company's Proxy Statement for its 2007 Annual Meeting of Stockholders under
the captions "Stock Ownership of Management and Principal Stockholders" and
"Equity Compensation Plan Information."
Item 13. Certain Relationships and Related Transactions, and Director
Independence
This information required by this item is incorporated by reference
from the Company's Proxy Statement for its 2007 Annual Meeting of Stockholders
under the caption "Certain Transactions with Management."
Item 14. Principal Accountant Fees and Services
The information regarding principal accounting fees and services and
the Company's pre-approval policies and procedures for audit and non-audit
services provided by the Company's independent accountants is incorporated by
reference to the Company's Proxy Statement for its 2007 Annual Meeting of
Stockholders under the caption "Principal Accountant Fees and Services."
72
PART IV
Item 15: Exhibits and Financial Statement Schedules
(a)(1) The following financial statements are included in Part II, Item 8.
Financial Statements and Supplementary Data:
Financial Statements of National Patent Development Corporation and Subsidiaries:
Page
Report of Independent Registered Public Accounting Firm 34
Consolidated Statements of Operations - Years ended December 31,
2006, 2005 and 2004 35
Consolidated Statements of Comprehensive Income (Loss) - Years
ended December 31, 2006, 2005 and 2004 35
Consolidated Balance Sheets - December 31, 2006 and 2005 36
Consolidated Statements of Cash Flows - Years ended December 31,
2006, 2005 and 2004 37
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 2006, 2005 and 2004 39
Notes to Consolidated Financial Statements 41
(a)(2) Schedules have been omitted because they are not required or are not
applicable, or the required information has been
included in the financial statements or the notes thereto.
(a)(3) See accompanying Index to Exhibits
73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATIONAL PATENT DEVELOPMENT CORPORATION
Dated: March 30, 2007 Jerome I. Feldman
Chief Executive Officer
Title
Signatures
Date: March 30, 2007 Jerome I. Feldman
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2007 Scott N. Greenberg
Chief Financial Officer and Director
Principal Financial and Accounting Officer)
Date: March 30, 2007 Harvey P. Eisen
Director
Date: March 30, 2007 Talton R. Embry
Director
Date: March 30, 2007 John C. Belknap
Director
Date: March 30, 2007 Lawrence G. Schafran
Director
Date: March 30, 2007 S. Leslie Flegel
Director
74
vi
EXHIBIT INDEX
Number Description
2.1 Form of Distribution Agreement between GP Strategies Corporation and the Registrant
(incorporated herein by reference to Exhibit 2.1 to the Registrant's Form S-1,
Registration No. 333-118568 filed with the SEC on August 26, 2004)
3.1 Form of Amended and Restated Certificate of Incorporation
of National Patent Development Corporation (incorporated
herein by reference to Exhibit 3.1 to the Registrant's
Form S-1, Registration No. 333-118568 filed with the SEC
on August 26, 2004)
3.2 Amended and Restated Bylaws of National Patent
Development Corporation (incorporated herein by reference
to Exhibit 3.2 to the Registrant's Form S-1, Registration
No.
333-118568 filed with the SEC on August 26, 2004)
4.1 Form of certificate representing shares of common stock,
par value $0.01 per share, of National Patent Development
Corporation (incorporated herein by reference to Exhibit
4.1 to the Registrant's Form S-1, Registration No.
333-118568 filed with the SEC on August 26, 2004)
4.2 Form of National Patent Development Corporation Warrant
Certificate dated August 14, 2003 (incorporated herein by
reference to Exhibit 10.03 to GP Strategies Corporation
Form 10-Q for the quarter ended June 30, 2003 filed with
the SEC on August 19, 2003)
10.1 Form of Management Agreement between GP Strategies
Corporation and the Registrant (incorporated herein by
reference to Exhibit 10.1 to the Registrant's Form S-1,
Registration No. 333-118568 filed with the SEC on August
26, 2004)
10.2 Amendment, dated July 1, 2005, to the Management
Agreement dated July 30, 2004, between GP Strategies
Corporation and the Registrant (incorporated herein by
reference to Exhibit 10.7 to GP Strategies Form 10-Q for
the quarter ended June 30, 2005 filed with the SEC on
August 9, 2005)
10.3 Form of Management Agreement between the Registrant and
GP Strategies Corporation (incorporated herein by
reference to Exhibit 10.2 to the Registrant's Form S-1,
Registration No. 333-118568 filed with the SEC on August
26, 2004)
10.4 Termination Agreement, dated June 30, 2005, of the
Management Agreement dated July 30, 2004, between the
Registrant and GP Strategies Corporation (incorporated
herein by reference to Exhibit 10.8 to GP Strategies Form
10-Q for the quarter ended June 30, 2005 filed with the
SEC on August 9, 2005)
10.5 Financing and Security Agreement dated August 13, 2003 by
and between General Physics Corporation, MXL Industries,
Inc. and Wachovia Bank, National Association
(incorporated herein by reference to Exhibit 10.10 to GP
Strategies Corporation Form 10-Q for the quarter ended
June 30, 2003 filed with the SEC on August 19, 2003)
10.6 Form of Tax Sharing Agreement between GP Strategies
Corporation and the Registrant (incorporated herein by
reference to Exhibit 10.2 to the Registrant's Form S-1,
Registration No. 333-118568 filed with the SEC on August
75
26, 2004)
10.7 Note and Warrant Purchase Agreement, dated as of August
8, 2003, among GP Strategies Corporation, the Registrant,
MXL Industries, Inc., Gabelli Funds, LLC, as Agent, and
the Purchasers listed in Schedule 1.2 thereof
(incorporated herein by reference to Exhibit 10 to GP
Strategies Form 10-Q for the quarter ended June 30, 2003
filed with the SEC on August 19, 2003)
10.8 Registration Rights Agreement dated August 14, 2003
between the Registrant and Gabelli Funds, LLC
(incorporated herein by reference to Exhibit 10.06 to GP
Strategies' Form 10-Q for the quarter ended June 30, 2003
filed with the SEC on August 19, 2003)
10.9 Mortgage, Security Agreement and Assignment of Leases
dated August 14, 2003, between GP Strategies Corporation
and Gabelli Funds, LLC (incorporated herein by reference
to Exhibit 10.04 to GP Strategies Corporation Form 10-Q
for the quarter ended June 30, 2003 filed with the SEC on
August 19, 2003)
10.10 Indemnity Agreement dated August 14, 2003 by GP
Strategies Corporation for the benefit of the Registrant
and MXL Industries, Inc. (incorporated herein by
reference to Exhibit 10.07 to GP Strategies Corporation
Form 10-Q for the quarter ended June 30, 2003 filed with
the SEC on August 19, 2003)
10.11 # National Patent Development Corporation 2003 Incentive
Stock Plan (incorporated herein by reference to Exhibit
10.8 to the Registrant's Form S-1, Registration No.
333-118568 filed with the SEC on August 26, 2004)
10.12 # Employment Agreement, dated as of November 28, 2001,
between Charles Dawson and Five Star Group, Inc.
(incorporated herein by reference to Exhibit 10.12 to
Five Star Products, Inc. Form 10-K for the year ended
December 31, 2001 filed with the SEC on April 1, 2002)
10.13 Loan and Security Agreement dated as of June 20, 2003 by
and between Five Star Group, Inc. and Fleet Capital
Corporation (incorporated herein by reference to Exhibit
10.1 to Five Star Products, Inc. Form 10-Q for the
quarter ended June 30, 2003 filed with the SEC on August
14, 2003)
10.14 First Modification Agreement dated as of May 28, 2004 by
and between Five Star Group, Inc. as borrower and Fleet
Capital Corporation, as Lender (incorporated herein by
reference to Exhibit 10.11 to Five Star Products, Inc.
Form 10-K for the year ended December 31, 2004 filed with
the SEC on March 31, 2005)
10.15 Second Modification Agreement dated as of March 22, 2005
by and between Five Star Group, Inc. as borrower and
Fleet Capital Corporation, as Lender. (incorporated
herein by reference to Exhibit 10.12 to Five Star
Products, Inc. Form 10-K for the year ended December 31,
2004 filed with the SEC on March 31, 2005)
76
10.16 Third Modification Agreement dated as of June 1, 2005 by
and between Five Star Group, Inc. as borrower and fleet
Capital Corporation, as Lender. (incorporated herein by
reference to Exhibit 10.1 to Five Star Products, Inc.
Form 10-Q for the quarter ended June 30, 2005 filed with
the SEC on August 12, 2005)
10.17 Fourth Modification Agreement dated September 26, 2005,
but effective as of August 1, 2005, by and between Five
Star Group, Inc., as borrower and Fleet Capital
Corporation, as Lender (incorporated herein by reference
to Exhibit 10.1 to Five Star Products, Inc. Form 10-Q for
the quarter ended September 30, 2005 filed with the SEC
on November 15, 2005)
10.18 Fifth Modification Agreement dated November 14, 2005
-Waiver of minimum Fixed Charge Coverage Ratio
requirement for the three months ended September 30, 2005
by and between Five Star Group, Inc. as borrower and
Fleet Capital Corporation, as Lender (incorporated herein
by reference to Exhibit 10.2 to the Registrant's Form
10-Q for the third quarter ended September 30, 2005)
10.19 Sixth Modification Agreement dated March 23, 2006 -
Waiver of Fixed Charge Coverage for the fiscal quarter
and fiscal year ending December 31, 2005 by and between
Five Star Group, Inc. as borrower and Fleet Capital
Corporation, as Lender (incorporated herein by reference
to Exhibit 10.14 to Five Star Products, Inc. Form 10-K
for the year ended December 31, 2005 filed with the SEC
on March 31, 2006)
10.20 Agreement of Subordination & Assignment dated as of June 20, 2003, by JL
Distributors, Inc. in favor of Fleet Capital Corporation as Lender to Five Star
Group, Inc. (incorporated herein by reference to Exhibit 10.1 to Five Star Products,
Inc. Form 10-Q for the quarter ended June 30, 2003 filed with the SEC on August 14,
2003)
10.21 Amended Promissory Note in the amount of $2,800,000 dated
June 30, 2005, between the Five Star Products, Inc. and
National Patent Development Corporation (incorporated
herein by reference to Exhibit 10.2 to Five Star
Products, Inc. Form 10-Q for the quarter ended June 30,
2005 filed with the SEC on August 12, 2005)
10.22 Agreement dated as of January 22, 2004, between Five Star
Products, Inc. and GP Strategies Corporation
(incorporated herein by reference to Exhibit 99(d) to
Five Star Products, Inc. Schedule TO filed with the SEC
on February 6, 2004)
10.23 Tax Sharing Agreement dated as of February 1, 2004
between Five Star Products, Inc. and GP Strategies
Corporation (incorporated herein by reference to Exhibit
10.19 to Five Star Products, Inc. Form 10-K for the year
ended December 31, 2003 filed with the SEC on April 2,
2004)
10.24 Lease dated as of February 1, 1986 between Vernel Company
and Five Star Group, Inc., as amended on July 25, 1994
(incorporated herein by reference to Exhibit 10.6 to Five
Star Products, Inc. Form 10-K for the year ended December
31, 1998 filed with the SEC on March 31, 1998)
10.25 Lease dated as of May 4, 1983 between Vornado, Inc., and Five Star Group, Inc.
(incorporated herein by reference to Exhibit 10.7 to Five Star Products, Inc. Form
10-K for the year ended December 31, 1998 filed with the SEC on March 31, 1998)
10.26 Credit Agreement dated March 8, 2001 by and between Allfirst Bank and MXL
Industries, Inc. (incorporated herein by reference to Exhibit 10.14 to the
Registrant's Form S-1, Registration No. 333-118568 filed with the SEC on August 26,
77
2004)
10.27 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing
dated June 26, 2001 by MXL Industries, Inc. to LaSalle Bank National Association
(incorporated herein by reference to Exhibit 10.15 to the Registrant's Form S-1,
Registration No. 333-118568 filed with the SEC on August 26, 2004)
10.28 Credit Agreement dated March 1, 2005 by and between M&T
Bank and MXL Industries, Inc. (incorporated herein by
reference to Exhibit 10.22 to the Registrant's Form 10-K
for the year ended December 31, 2004 filed with the SEC
on May 2, 2005)
10.29 Continuing Guaranty Agreement dated March 1, 2005 by the
Registrant for the benefit of M&T Bank. (incorporated
herein by reference to Exhibit 10.23 to the Registrant's
Form 10-K for the year ended December 31, 2004 filed with
the SEC on May 2, 2005)
10.30 Amended and Restated Investor Rights Agreement dated as
of May 30, 2003 by and among Hydro Med Sciences and
certain Institutional Investors (incorporated herein by
reference to Exhibit 10.34 to GP Strategies' Form 10-K
for the year ended December 31, 2003 filed with the SEC
on April 14, 2004)
10.31 Amended and Restated Investor Right of First Refusal and
Co-Sale Agreement dated as of May 30, 2003 by and among
Hydro Med Sciences, Inc. and certain Institutional
Investors (incorporated herein by reference to Exhibit
10.35 to the GP Strategies' Form 10-K for the year ended
December 31, 2003 filed with the SEC on April 14, 2004)
10.32 # Stock Purchase Option Agreement dated as of June 30, 2004 by and among GP Strategies
Corporation, National Patent Development Corporation, Valera Pharmaceuticals Inc.
and certain Institutional Investors. (incorporated herein by reference to Exhibit
10.17 to the Registrant's Form S-1, Registration No. 333-118568 filed with the SEC
on August 26, 2004)
10.33 Note Purchase Agreement dated as of November 12, 2004 by and between the Registrant,
MXL Industries, Inc., Bedford Oak Partners L.P. and Jerome Feldman. (incorporated
herein by reference to Exhibit 10.27 to the Registrant's Form 10-K for the year
ended December 31, 2004 filed with the SEC on April 15, 2005)
10.34 The Registrant's 6% Secured Note due 2009 dated as of
November 12, 2004 (incorporated herein by reference to
Exhibit 10.28 to the Registrant's Form 10-K for the year
ended December 31, 2004 filed with the SEC on April 15,
2005)
10.35 # Consulting and Severance Agreement dated as of July 1, 2004 between MXL Industries,
Inc. and Steve Cliff. (incorporated herein by reference to Exhibit 10.29 to the
Registrant's Form 10-K for the year ended December 31, 2004 filed with the SEC on
April 15, 2005)
10.36 # Consulting and Severance Agreement dated as of
September 20, 2004 between MXL Industries, Inc. and Frank
Yohe (incorporated herein by reference to Exhibit 10.30
to the Registrant's Form 10-K for the year ended December
31, 2004 filed with the SEC on April 15, 2005)
10.37 Release and Settlement Agreement dated as of July 8, 2005
by and between AOtec, LLC and MXL Industries, Inc.
(incorporated herein by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the quarter ended September
30, 2005 filed with the SEC on November 14, 2005)
78
10.38 Form of Indemnification Agreement (incorporated herein by
reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K filed with the SEC on May 15, 2006)
10.39 Amended and Restated Convertible Promissory Note dated
June 30, 2005 between Five Star Products, Inc. and JL
Distributors, Inc. (incorporated herein by reference to
Exhibit 10.1 to the Registrant's Current Report on Form
8-K filed with the SEC on March 7, 2007)
10.40 Registration Rights Agreement, dated as of March 2, 2007,
between Five Star Products, Inc. and JL Distributors,
Inc. (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
10.41 Agreement, dated as of March 2, 2007, between Five Star
Products, Inc. and Leslie Flegel (incorporated by
reference to Exhibit 10.3 to the Registrant's Current
Report on Form 8-K filed with the SEC on March 7, 2007)
10.42 Registration Rights Agreement, dated as of March 2, 2007,
between Five Star Products, Inc. and Leslie Flegel
(incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
10.43 Purchase Agreement, dated as of March 2, 2007, between
National Patent Development Corporation and Leslie Flegel
(incorporated by reference to Exhibit 10.5 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
10.44 Registration Rights Agreement, dated as of March 2, 2007,
between National Patent Development Corporation. and
Leslie Flegel (incorporated by reference to Exhibit 10.6
to the Registrant's Current Report on Form 8-K filed with
the SEC on March 7, 2007)
10.45 Restricted Stock Agreement, dated as of March 2, 2007,
between Five Star Products, Inc. and John Belknap
(incorporated by reference to Exhibit 10.7 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
10.46 Registration Rights Agreement, dated as of March 2, 2007,
between Five Star Products, Inc. and John Belknap
(incorporated by reference to Exhibit 10.8 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
10.47 Stock Option Agreement, dated March 1, 2007, between
National Patent Development Corporation and Harvey Eisen
(incorporated by reference to Exhibit 10.9 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
10.48 Stock Option Agreement, dated March 1, 2007, between
National Patent Development Corporation and John Belknap
(incorporated by reference to Exhibit 10.10 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
10.49 Stock Option Agreement, dated March 1, 2007, between
National Patent Development Corporation and Talton Embry
(incorporated by reference to Exhibit 10.11 to the
Registrant's Current Report on Form 8-K filed with the
SEC on March 7, 2007)
79
10.50 Stock Option Agreement, dated March 1, 2007, between
National Patent Development Corporation and Scott
Greenberg (incorporated by reference to Exhibit 10.12 to
the Registrant's Current Report on Form 8-K filed with
the SEC on March 7, 2007)
10.51 Stock Option Agreement, dated March 1, 2007, between
National Patent Development Corporation and Lawrence
Schafran (incorporated by reference to Exhibit 10.13 to
the Registrant's Current Report on Form 8-K filed with
the SEC on March 7, 2007)
10.52 Asset Purchase Agreement dated as of March 13, 2007 between Five Star Products, Inc.
and Right-Way Dealer Warehouse, Inc. (incorporated herein by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on March 19,
2007)
14.1 Code of Ethics Policy (incorporated herein by reference
to Exhibit 14.1 to the Registrant's Form 10-K for the
year ended December 31, 2004 filed with the SEC on April
15, 2005)
21.1 * Subsidiaries of the Registrant
23.1 N/A
31.1 * Certification of Chief Executive Officer
31.2 * Certification of Chief Financial Officer
32.1 * Certification Pursuant to 18 U.S.C. Section 1350
* Filed herewith
# A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of Form
10-K.