UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010oro
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _____ to _____
 
 Commission File Number: 000-50587
 
 NATIONAL PATENT DEVELOPMENT CORPORATION
 (Exact Name of Registrant as Specified in its Charter)
 
 Delaware

13-4005439(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)
 
 100 South Bedford Road, Suite 2 R, Mount Kisco, NY
10549(Address of principal executive offices)
(Zip code)
 
 (914) 242-5700(Registrant’s telephone number, including area code)
 
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o      No o
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer
o
Accelerated filer
oNon-accelerated filer

(Do not check if a smaller reporting company)
o
Smaller reporting company
x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  x   No  o
 
 As of August 2, 2010, there were 17,573,812 shares of the registrant’s common stock, $0.01 par value, outstanding.
  
 
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 
 TABLE OF CONTENTS
 
 Part I.  Financial Information
Page No.Item 1.
Financial StatementsCondensed  Consolidated Statements of Operations -Three Months  and Six Months Ended June 30, 2010 and 2009 (Unaudited)
1Condensed  Consolidated Statements of Comprehensive Loss -Three Months and Six Months Ended June 30, 2010 and 2009 (Unaudited)
2Condensed  Consolidated Balance Sheets -June 30, 2010 (Unaudited) and December 31, 2009
3Condensed  Consolidated Statements of Cash Flows -Six Months Ended June 30, 2010 and 2009 (Unaudited)
4Condensed  Consolidated Statement of Changes in Stockholders’ Equity -Six Months Ended June 30, 2010 (Unaudited)
5Notes to Condensed Consolidated Financial Statements -

Six Months Ended June 30, 2010 and 2009 (Unaudited)
6Item 2.
Management’s Discussion and Analysis of FinancialCondition and Results of Operations
15Item 3.
Quantitative and Qualitative Disclosures about Market Risk
20Item 4.
Controls and Procedures
20Part II. Other InformationItem 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21Item 6.
Exhibits
22SIGNATURES
23
 
 PART I.  FINANCIAL INFORMATION
 Item 1. Financial Statements
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except per share data)
 
 Three months ended

June 30,


Six months ended

June 30,2010


2009


2010


2009General and administrative expenses

$
(1,123
)

$
(829
)

$
(2,557
)

$
(1,567
)Operating  loss


(1,123
)


(829
)


(2,557
)


(1,567
)Investment and other income


11



6



20



14Loss from continuing operations before

income tax expense


(1,112
)


(823
)


(2,537
)


(1,553
)Income tax benefit


182



68



887



72Loss from continuing operations


(930
)


(755
)


(1,650
)


(1,481
)Income (loss) from discontinued operations


(182
)


95



(946
)


105Net loss

$
(1,112
)

$
(660
)

$
(2,596
)

$
(1,376
)Basic and diluted net (loss) income per shareContinuing operations

$
(0.05
)

$
(0.05
)

$
(0.10
)

$
(0.09
)Discontinued operations


(0.01
)


0.01



(0. 05
)


0.01Net loss per share

$
(0.06
)

$
(0.04
)

$
(0. 15
)

$
(0. 08
)
 
 See accompanying notes to condensed consolidated financial statements.
  1
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (unaudited)
 (in thousands)
 
 Three months ended


Six months endedJune 30,


June 30,2010


2009


2010


2009Net loss

$
(1,112
)

$
(660
)

$
(2,596
)

$
(1,376
)Other comprehensive income (loss), before tax:Net unrealized gain on interest rate swap






202







209Reclassification of loss on interest rate swap to loss from

discontinued operations










803Comprehensive loss before tax


(1,112
)


(458
)


(1,793
)


(1,167
)Income tax (expense) benefit related to  items of other

comprehensive  income (loss)






(80
)






(83
)Reclassification of deferred tax benefit related to interest

rate swap to loss from discontinued operations










(321
)Comprehensive loss

$
(1,112
)

$
(538
)

$
(2,114
)

$
(1,250
)
 
 See accompanying notes to condensed consolidated financial statements.
  2
 
 NATIONAL PATENT DEVELOPMENT CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share data)
 
 June 30,


December 31,2010


2009(unaudited)AssetsCurrent assetsCash and cash equivalents

$
28,755


$
23,006Cash held in escrow


300



-Assets held for sale


-



30,812Deferred tax asset


-



667Refundable and prepaid income tax


887



-Prepaid expenses and other current assets


92



901Total current assets


30,034



55,386Property, plant and equipment, net


11



18Investment in undeveloped land


355



355Other assets


375



282Total assets

$
30,775


$
56,041Liabilities and stockholders’ equityCurrent liabilitiesLiabilities related to assets held for sale

$
-


$
22,112Income taxes payable


434



964Accounts payable and accrued expenses


432



1,132Total current liabilities


866



24,208Commitments and contingenciesStockholders’ equityCommon stock


181



181Additional paid-in capital


29,764



29,574Retained earnings


1,322



3,918Treasury stock, at cost


(1,358
)


(1,358
)Accumulated other comprehensive loss


-



(482
)Total stockholders’ equity


29,909



31,833Total liabilities and stockholders’ equity

$
30,775


$
56,041
 
 See accompanying notes to condensed consolidated financial statements
  3
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in thousands)
 
 Six Months EndedJune 30,2010


2009Cash flows from operations:Net loss

$
(2,596
)

$
(1,376
)Adjustments to reconcile net loss tonet cash used in operating activities:Depreciation and amortization


7



229Loss on interest rate swap


803



-Expenses paid in common stock


12



13Deferred income taxes


346



-Stock based compensation expense


178



458Gain on sale of Five Star


(2,405
)


-Changes in other operating items, net of effect of sale of Five Star:Refundable and prepaid income tax


(887
)


-Income tax payable


(530
)


-Accounts and other receivables


-



(4,970
)Inventory


-



(110
)Prepaid expenses and other current assets


2



425Accounts payable and accrued expenses


(887
)


1,939Net cash used in operations


(5,957
)


(3,392
)Cash flows from investing activities:Additions to property, plant and equipment, net


-



(33
)Cash held in escrow


(300
)


-Net proceeds from sale of Five Star, net of $1 cash of discontinued operations


26,463
(a)


-Net cash provided by (used in) investing activities


26,163



(33
)Cash flows from financing activities:Proceeds from short-term borrowings


285



2,395Repayment of short-term borrowings


(14,804
)


-Net cash (used in) provided by financing activities


(14, 519
)


2,395Net increase (decrease) in cash and cash equivalents


5,687



(1,030
)Cash and cash equivalents at beginning of period


23,068
(b)


13,089Cash and cash equivalents at end of period, including assets held for sale in 2009


28,755



12,059Cash and cash equivalents included in assets held for sale


-



(16)Cash and cash equivalents at end of period

$
28,755


$
12,043(a) Includes $14,804 used to repay short-term borrowings simultaneously with closing of sale and

$1,344 withheld by the buyer to pay severance and bank fees and $300 cash held in escrow(b) Includes $62 included in assets held for saleSupplemental disclosures of cash flow information:Cash paid  during the period for:Interest


31



789Income taxes


1,073



91
 
 See accompanying notes to condensed consolidated financial statements.
  4
 
 NATIONAL PATENT DEVELOPMENT CORPORATION
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 SIX MONTHS ENDED JUNE 30, 2010
 (Unaudited)
 (in thousands, except shares)
 
 Common

Stock


Additional

paid-in


Retained


Treasury

stock, at


Accumulated

other

comprehensive

income


Total

Stock-

holders’Shares

Amount


capital


earnings


cost


(loss)


equityBalance at December 31, 2009
18,125,809

$
181


$
29,574


$
3,918


$
(1,358
)

$
(482
)

$
31,833Reclassification of loss on interest rate swap

to loss from discontinued operations



















803



803Reclassification of deferred tax benefit related to

loss on interest rate swap to loss from

discontinued operations



















(321
)


(321
)Net loss











(2,596
)










(2,596
)Stock based compensation expense







178















178Issuance of common stock to directors
7,602






12















12Balance at June 30, 2010
18,133,411

$
181


$
29,764


$
1,322


$
(1,358
)

$
-


$
29,909
  See accompanying notes to condensed consolidated financial statements.
  5
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
   1.           Basis of presentation and description of business
  Basis of presentation
  The accompanying condensed consolidated interim financial statements as of June 30, 2010 andfor the three and six months ended June 30, 2010 and 2009 have not been audited, but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  The Condensed Consolidated Balance Sheet as of December 31, 2009 has been derived from audited financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2009 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature other than adjustments related to the sale of Five Star Group, Inc., necessary for a fair presentation. The results for the 2010 interim period are not necessarily indicative of results to be expected for the entire year.
  Description of business
  On January 15, 2010, after approval of its stockholders on January 14, 2010, National Patent Development Corporation (the “Company” or “National Patent”) completed the sale to The  Merit Group, Inc. (“Merit”) of all of the issued and outstanding stock of National Patent’s wholly-owned subsidiary, Five Star Products, Inc., the holding company and sole stockholder of  Five Star Group, Inc.,  for cash pursuant to the terms and subject to the conditions of an agreement dated as of November 24, 2009 (see Note 2).  As used herein, references to “Five Star” refer to Five Star Products or Five Star Group, or both, as the context requires.
  Upon the consummation of the Five Star sale, the Company became a “shell company”, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
  Although National Patent’s Board of Directors believes that it is not engaged primarily in the business of investing, reinvesting, or trading in securities, and National Patent does not hold itself out as being primarily engaged in those activities, once the closing of the sale occurred, National Patent appeared to come within the technical definition of an “investment company” under section 3(a) (1) (C) of the Investment Company Act.  National Patent has operated on the assumption, therefore, that it falls within the scope of section 3(a)(1)(C) because the value of its investment securities (as defined in the Investment Company Act) is more than 40% of its total assets as of June 30, 2010 (exclusive of government securities and cash and certain cash equivalents).  As of June 30, 2010, cash equivalents consist of approximately $28,755,000 of Treasury money market funds, which are considered investment securities under the Investment Company Act. Under the Investment Company Act, if National Patent does not develop or acquire sufficient interests in one or more operating businesses by mid-January 2011, National Patent may be required to register under the Investment Company Act.
  An investment company that falls within the scope of section 3(a) (1) (C) of the Investment Company Act can avoid being regulated as an investment company if it can rely on certain of the exclusions under the Investment Company Act.  One such exclusion that management believes applies is Rule 3a-2 under the Investment Company Act and similar Securities and Exchange Commission (the “SEC”) principles and guidance, which allow a 3(a)(1)(C) investment company (as a “transient investment company”) a grace period of one year from the date of classification (in our case, the date of stockholder approval of the Five Star sale, which was January 14, 2010), to avoid registration under the Investment Company Act so long as it does not intend to engage primarily in the business of investing, reinvesting, owning, holding or trading in securities.
  As a “transient investment company”, National Patent’s Board of Directors has resolved and determined that National Patent does not engage in the business of investing, reinvesting, owning, holding or trading in securities.  Instead, National Patent’s Board has directed that National Patent seek to develop or acquire interests in one or more operating businesses such that by mid-January 2011, National Patent is primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities for purposes of the Investment Company Act.  There can be no assurance that National Patent will be able to complete such acquisitions by the applicable deadline.
  6
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 National Patent is evaluating and exploring available strategic options for the investment of the Company’s cash and cash equivalent assets in one or more operating businesses.  While National Patent has focused its development or acquisition efforts on sectors in which its management has expertise, it does not wish to limit itself to, or to foreclose any opportunities in, any particular industry or sector.  The goal of National Patent’s investment strategy is to develop or acquire businesses in order to generate value for National Patent’s stockholders.  National Patent’s Board of Directors has resolved to develop or acquire interests in one or more operating businesses such that by mid-January 2011, National Patent is primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities for purposes of the Investment Company Act.  Until such time as the liquid assets of the Company are so deployed into operating businesses, National Patent intends to continue to invest such assets in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation.  National Patent cannot assure that it will successfully develop, or identify a suitable acquisition opportunity of an operating business or businesses, or that if National Patent does develop such a business or businesses or identify such an opportunity, any such development or acquisition will close on a timely basis, or at all.
 
 2.           Sale of Five Star
  On January 15, 2010 (the “Closing Date”), National Patent completed the sale to Merit of all of the issued and outstanding stock of Five Star for cash pursuant to the terms and subject to the conditions of a Stock Purchase Agreement between National Patent and Merit, dated November 24, 2009 (the “Five Star Stock Purchase Agreement”).
  The Five Star Stock Purchase Agreement provided for an aggregate purchase price (the “Purchase Price”) for the stock of $33,124,000, subject to certain adjustments to reflect (i)(A) changes in the outstanding balance of Five Star’s revolving indebtedness under its loan agreement with Bank of America (the “Revolving Indebtedness”) from the amount outstanding at March 31, 2009 compared to the amount outstanding on the Closing Date (the “Cash Flow Adjustment”) and (B) increases dollar for dollar if Five Star had positive net results, as defined, from March 31, 2009 to the Closing Date, or decreases if it had negative net results, as defined, during such period (the “Net Results Adjustment”) and (ii) a potential downward adjustment based on the value of certain designated inventory held by Five Star, less the value received for such inventory after the Closing Date (the “Inventory Adjustment”), to the extent such Inventory Adjustment post-closing exceeds $400,000 but is equal to or less than $1,000,000.
  At the Closing Date (i) the Cash Flow Adjustment reduced the Purchase Price by $5,611,000, (ii) $15,178,000 of the Purchase Price was used to repay the Revolving Indebtedness (including related fees and expenses of $374,000); (iii) $900,000 of the Purchase Price was placed in escrow - $300,000 of which is held by the Escrow Agent to provide for indemnity payments which National Patent may be required to pay to Merit as described below and $600,000 of which was held by the Escrow Agent to provide for payment of the Inventory Adjustment; and (iv) $970,000 of the Purchase Price was retained by Merit to fund severance payments to employees of Five Star.  The $10,465,000 balance of the Purchase Price was remitted to National Patent at the Closing Date. Additionally, the Purchase Price was subject to post-closing adjustments as a result of the Net Results Adjustment and the Inventory Adjustment as discussed above.
  Subject to the procedures outlined in the related escrow agreement, within three business days following the date that is the earlier of January 15, 2011 or receipt of written notice from Merit that it has vacated both warehouses located in East Hanover, New Jersey and Newington, Connecticut and there are no outstanding related claims, the escrow agent will disburse to the Company the Indemnity Escrow Deposit (along with accrued interest and earnings on such funds).  If, on such date, there are any claims pending, the escrow agent will (i) retain and continue to hold the aggregate amount of the Indemnity Escrow Deposit being reserved against such claims, determined in accordance with the claim notice(s) received by the escrow agent from Merit in accordance with the escrow agreement, and (ii) remit the remaining balance of the Indemnity Escrow Deposit to the Company (along with accrued interest and earnings on such funds).
 
 The proceeds of the Five Star sale were reduced by transaction costs, and will be reduced by one half of the rent and other sums, due under the warehouse lease for Five Star’s Connecticut location from the date on which Five Star ceases to use the warehouse through September 30, 2010, if any, costs relating to the satisfaction of certain obligations under state environmental laws in New Jersey and Connecticut, if any, and the payment of amounts to indemnify Merit as provided in the Five Star Stock Purchase Agreement, if any. At December 31, 2009, transaction costs related to the sale amounted to approximately $707,000, which are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.  In 2010, the Company incurred additional transaction expenses of $220,000.
  7
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 
 In February, 2010, the Company notified Merit that the Purchase Price should be increased by approximately $188,000 based on the Company’s calculation of the Net Results Adjustment.  On March 1, 2010, Merit notified the Company that based on Merit’s calculation of the Net Results Adjustment, the Purchase Price should be reduced by approximately $3,400,000.  The Company did not agree with Merit’s calculation.  Pursuant to the Five Star Stock Purchase Agreement, the dispute could have been submitted to binding arbitration by either Merit or the Company.
 
 On May 14, 2010, the Company and Merit entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”).  Pursuant to the Settlement Agreement, the parties mutually released and discharged each other (the “Releases”) from and against any and all claims or potential claims and/or causes of action in connection with the Stock Purchase Agreement and the Sale including, but not limited to, any and all such claims and/or causes of actions relating to the Cash Flow Adjustment, the Net Results Adjustment, the Inventory Adjustment or the Inventory Escrow Deposit, but excluding obligations and agreements by and among the parties identified as exclusions in the Settlement Agreement.
  In consideration of the Releases, the parties agreed that the Purchase Price would be reduced by an aggregate of $1,050,000, which reduction was effected as follows: (i) the Inventory Escrow Deposit was released to Merit by the Escrow Agent, and (ii) the Company paid to Merit, by wire transfer, the amount of $450,000. The Indemnity Escrow Deposit of $300,000 continues to be held by the Escrow Agent pursuant to the terms of the Escrow Agreement, as discussed above.
  The gain on the sale of Five Star, after giving effect to the Settlement Agreement, amounted to $2,405,000 and is included in Loss from discontinued operations in its Condensed Consolidated Statement of Operations for the six months ended June 30, 2010.
  Five Star’s assets sold and liabilities assumed, and gain on sale which has been reduced for estimated potential rent and other expenses which may be incurred, discussed above were as follows (in thousands):
  Assets sold:Cash and cash equivalents

$
1Accounts and other receivables, less allowance for doubtful accounts of $407


8,370Inventories – finished goods


19,611Prepaid expenses and other current assets


807Property, plant and equipment, net


676Intangible assets, net


465Other assets


45Total assets sold


29,975Liabilities assumed:Accounts payable and accrued expenses


6,041Liability related to interest rate swap


803Total liabilities assumed


6,844Net assets sold


23,131Selling price, as adjusted


26,463Legal fees and other transaction costs


(927
)Gain on sale of Five Star


2,405
  8
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 
 Five Star’s results of operations in 2010 have been accounted for as a discontinued operation in the accompanying condensed consolidated statements of operations and its 2009 results of operations have been reclassified as discontinued operations to be consistent with the current year presentation. Assets and liabilities of Five Star have been classified as held for sale in the accompanying condensed consolidated balance sheet at December 31, 2009.
 
 For the three and six months ended June 30, 2010 and 2009 the components of (loss) income from discontinued operations were as follows (in thousands):
 
 Three months ended


Six months endedJune 30,


June 30,2010


2009


2010


2009Five StarSales

$
-


$
27,766


$
2,635


$
52,896Cost of sales


-



22,900



2,294



44,040Gross margin


-



4,866



341



8,856Selling, general and administrative expenses


-



4,289



423



7,936Severance payments


-



-



1,062



-Fees and expenses related to repayment of debt


-



-



374



-Loss on interest rate swap


-



-



803



-Operating (loss) income


-



577



(2,321
)


920Interest expense


-



(419
)


(100
)


(749
)Other  (expense) income


-



10



(53
)


15(Loss) income from operations before items shown below


-



168



(2,474
)


186Gain on sale of Five Star


-



-



2,405



-(Loss) income before income tax expense


-



168



(69
)


186Income tax expense, including deferred tax expense of $346

in six months ended June 30, 2010


(182
)


(73
)


(877
)


(81
)(Loss) income from discontinued operations

$
(182
)

$
95


$
(946
)

$
105
 
 
 9
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 
 3.           Per share data
 
 Loss per share for the three and six months ended June 30, 2010 and 2009 are calculated as follows (in thousands, except per share amounts):
 
 Three months ended


Six months endedJune 30,


June 30,2010


2009


2010


2009Basic  and Diluted EPSLoss from continuing operations

$
(930
)

$
(755
)

$
(1,650
)

$
(1,481
)(Loss) income from discontinued operation


(182
)


95



(946
)


105Net loss

$
(1,112
)

$
(660
)

$
(2,596
)

$
(1,376
)Weighted average shares outstanding


17,567



17,548



17,566



17,550Per share:Continuing operations

$
(0.05
)

$
(0.05
)

$
(0.10
)

$
(0.09
)Discontinued operations


(0.01
)


0.01



(0.05
)


0.01Net loss

$
(0.06
)

$
(0.04
)

$
(0.15
)

$
(0.08
)
 
 
 At June 30, 2010 and 2009, the Company has outstanding options to purchase 3,350,000 and 3,350,000 shares of Company common stock, which were not included in the diluted computation, as their effect would be anti-dilutive.
 
 
 4.           Capital Stock
  The Company’s Board of Directors, without any vote or action by the holders of common stock, is authorized to issue preferred stock from time to time in one or more series and to determine the number of shares and to fix the powers, designations, preferences and relative, participating, optional or other special rights of any series of preferred stock.
  On December 15, 2006, the Board of Directors authorized the Company to repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding shares of common stock from time to time either in open market or privately negotiated transactions. On August 13, 2008, the Company’s Board of Directors authorized an increase of 2,000,000 common shares to be repurchased. At June 30, 2010, the Company had repurchased 1,791,321 shares of its common stock for $4,092,000 and, a total of 2,208,679 shares remained available for repurchase.  There were no common stock repurchases made by or on behalf of the Company during the six months ended June 30, 2010.
  10
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 
  5.           Incentive stock plans and stock based compensation
  The Company has a stock-based compensation plan for employees and non-employee members of its Board of Directors. The plan provides for discretionary grants of stock options, restricted shares, and other stock-based awards. The Company’s plan is administered by the Compensation Committee of the Board of Directors, which consists solely of non-employee directors.
  Information with respect to the Company’s outstanding stock options for the six months ended June 30, 2010 is as follows:
 
 Stock

Options


Weighted

Average

Exercise

Price


Weighted

Average

Contractual

Term


Aggregate

Intrinsic

ValueOptions outstanding at January 1, 2010


3,350,000


$
2.49



6.9


$
0
*Granted to directors


550,000


$
1.33



10.0


$
38,500
*Options cancelled


(550,000
)

$
2.48







0
*Options outstanding  at June 30, 2010


3,350,000


$
2.28



7.2


$
0
*Options exercisable at June 30, 2010


2,866,666


$
2.46



6.7


$
0
*
 
 *
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
  In March 2010, the Company issued 100,000 options to a director.  In April 2010, the Company issued 100,000 options to each of two directors, and 250,000 options to its Chairman and Chief Executive Officer. The options were issued at an exercise price equal to market value at the date of the grants.  The weighted average grant-date fair value of the options was $0.52, which was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:
 
 Dividend yield


0
%Weighted-average volatility


47.59
%Risk-free interest rate


1.96% and 2.07
%Expected life (in years)


4
  Compensation expense related to option grants amounted to $40,000 and $229,000 for each of the three months ended June 30, 2010 and 2009, respectively, and $178,000 and $458,000, for each of the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, there was $265,000 of total unrecognized compensation cost related to non-vested options. This cost is expected to be recognized over the vesting periods of the options, which on a weighted-average basis is approximately 2.4 years.
 
   6.           Accumulated other comprehensive loss
  Effective June 30, 2008, Five Star entered into an interest rate swap to manage exposures resulting from fluctuations in interest rates on its short-term borrowings with Bank of America, which was designated as a cash flow hedge.  Cumulative losses on the hedge were included in accumulated other comprehensive loss net of related tax benefit. Any ineffective portion of the hedge was recognized in earnings. Under the interest rate swap arrangement, effective June 30, 2008 and until June 30, 2011, Five Star was to pay a fixed interest rate of 3.62% to Bank of America on notional principal of $20,000,000.  In return, Bank of America was to pay to Five Star a floating rate, namely, LIBOR, on the same notional principal amount.   The fair value of the interest rate swap amounted to a liability of $803,000 at December 31, 2009.  Changes in the fair value of the interest rate swap were recognized in other comprehensive income.
  11
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 In connection with the sale of Five Star, the outstanding balance of the bank loan of $14,804,000, including accrued interest, was fully repaid to Bank of America from the sale proceeds (see Note 2). Accordingly, the $803,000 unrecognized loss on the interest rate swap together with the $321,000 related tax benefit was reclassified from accumulated other comprehensive loss to loss from discontinued operations.
   7.            Contingent rights
  Effective April 18, 2007 (the “Indevus Effective Time”), all of the outstanding common stock of Valera Pharmaceuticals, Inc. (“Valera”), a Delaware corporation in which the Company had owned 2,070,670 shares of common stock at such time, was acquired by Indevus Pharmaceuticals, Inc. (“Indevus”), a biopharmaceutical company engaging in the acquisition, development, and commercialization of products to treat urological, gynecological, and men’s health conditions.  The transaction was effected pursuant to the terms and conditions of an Agreement and Plan of Merger, dated as of December 11, 2006 (the “Valera Merger Agreement”). As a result of the transaction, the 2,070,670 shares of Valera common stock held by the Company immediately preceding the Indevus Effective Time were converted into an aggregate of 2,347,518 shares of Indevus common stock as of the Indevus Effective Time.  These shares of Indevus common stock were sold by the Company in 2007.
  Following the Indevus Effective Time and prior to March 23, 2009, the Company was entitled to two additional contingent tranches of shares of Indevus common stock (the “Contingent Rights”), to the extent of the achievement of certain milestones with respect to specific product candidates, namely FDA approval of certain drug applications (collectively, the “Drug Applications”). If each of the contingent milestones were to have been achieved, the Company would have received up to $5,176,675 worth of Indevus common stock on the date the milestone was met, at which date additional gain would have been recognized.
 On March 23, 2009, Indevus filed a Current Report on Form 8-K with the SEC announcing the completion of an Agreement and Plan of Merger with Endo Pharmaceuticals Holdings Inc., a Delaware corporation (“Endo”), and BTB Purchaser Inc., a Delaware corporation and wholly-owned subsidiary of Endo, pursuant to which Endo acquired all of the issued and outstanding shares of the common stock, par value $0.001 per share, of Indevus (the “Endo Merger”).  As a part of the Endo Merger, the Contingent Rights were converted into the right to receive a cash payment contingent upon FDA approval of the Drug Applications.  As a result of the consummation of the Endo Merger, the Company has contingent rights to receive from Endo the following cash payments: (i) upon FDA approval of the uteral stent drug application (the “Uteral Stent”), with respect to the Aveed TM product, on or before specified dates in 2012 - between $2,685,000 and $2,327,000, depending upon the terms contained in the FDA approval and (ii) upon FDA approval of the VP003 (Octreotide implant) drug application (“VP003”) on or before specified dates in 2012 - between $4,028,000 and $3,491,000, depending upon the terms contained in the FDA approval.   Two parties related to the Company at the time of the original transaction in which the Company received the Contingent Rights (one of which continues to be a related party) would be entitled to receive a portion of any such cash payments received by the Company (see Note 8 (a)).  In February 2010, Endo filed a current report on Form 8-K with the SEC in which it disclosed that it recorded a non-cash impairment charge due to heightened regulatory uncertainties related to its Aveed TM product, and reduced the corresponding liability for contingent payment due to former Indevus shareholders recorded on its balance sheet due to the decreased probability that Endo will be obligated to make the contingent consideration payments related to the Uteral Stent.
  8.            Related party transactions
  (a)
On November 12, 2004, the Company entered into an agreement to borrow approximately $1,022,000 from Bedford Oak Partners L.P., which is controlled by Harvey P. Eisen, Chairman, Chief Executive Officer and a director of the Company, and approximately $568,000 from Jerome I. Feldman, who was at the time Chairman and Chief Executive Officer and a director of the Company, which was utilized to exercise an option held by the Company to purchase Series B Convertible Preferred shares of Valera. On January 11, 2005, the Company prepaid the loans and all accrued interest in full. As further consideration for making these loans, Bedford Oak Partners and Mr. Feldman became entitled to a portion of the consideration received by the Company on the sale of certain Valera shares. As a result of the consummation of the acquisition of Valera by Indevus and the merger of Indevus into Endo (see Note 7), the Company has a contingent right to receive from Endo certain cash payments. The two related parties would receive the following portions of the Company’s cash payments upon the occurrence of the following events: (i) upon FDA approval of the Uteral Stent, between $262,000 and $227,000, and (ii) upon FDA approval of VP003, between $393,000 and $341,000.
  12
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 (b)
In March 2010, the Company paid Bedford Oak Advisors, LLC, an aggregate of $150,000 for consulting services rendered through February 28, 2010 by two individuals (together, the “Consultants”), each of whom served as consultants to Bedford Oak Advisors, LLC.  Such consulting services included advice on investment company matters and related issues, the evaluation of potential acquisition and business development opportunities for the Company and capital raises and other financings undertaken by the Company (the “Consulting Services”).
 
 As of March 1, 2010, the Consultants terminated their services with Bedford Oak Advisors, LLC and were retained by the Company to provide the Consulting Services to the Company on a month-to-month basis at a rate of $35,000 per month payable to one individual and $25,000 per month payable to the other individual.  The respective agreements with the Consultants expired on June 30, 2010.  However, the Company or either Consultant may terminate the agreement at any time upon thirty days prior written notice to the other party.  The agreement with the individual at the rate of $35,000 per month was terminated as of May 15, 2010 and the agreement with the individual at the rate of $25,000 per month was terminated as of June 30, 2010.
 
 (c)
Effective June 1, 2010, the Company relocated its headquarters to the offices of Bedford Oak Advisors, LLC in Mount Kisco, New York. The Company is subleasing a portion of the space on a month-to-month basis at the rate of approximately $19,700 per month.
  9.            Income taxes
  Pursuant to the Five Star Stock Purchase Agreement, the Company and Merit agreed to jointly make an election under Section 338 (h)(10) of the Internal Revenue Code to treat the sale of the Five Star stock as a sale of the  Five Star assets and liabilities.
 
 For the three and six months ended June 30, 2010, the income tax benefit related to continuing operations was approximately $ 182,000 and $887,000, respectively. This substantially represents a potential recovery of federal income tax paid in respect of 2009 as a result of a net operating loss carryback attributable to the loss from continuing operations in the six months ended June 30, 2010.
 
 Five Star is currently undergoing an income tax examination by the Internal Revenue Service for income tax filings for the years ended December 31, 2007 and 2008 and is being challenged with respect to the timing of certain tax deductions.  As a result thereof, the Company recorded a liability for uncertain tax positions during the six months ended June 30, 2010 for approximately $654,000 to cover the potential federal and state tax deficiencies, interest and penalties.  Of such amount, approximately $531,000 related to additional tax was charged to income tax expense, approximately $68,000 related to interest was charged to interest expense and approximately $55,000 related to penalties was charged to other expense within loss from discontinued operations (see Note 2). The Company intends to vigorously defend its position with the Internal Revenue Service.
 
 For the six months ended June 30, 2010, income tax expense charged to discontinued operations was due to the tax referred to above and the write-off of the deferred tax asset at December 31, 2009 attributable to the reversal of deductible temporary differences related to assets and liabilities held for sale at such date. For the three months ended June 30, 2010, income tax expense charged to discontinued operations related to reclassification to continuing operations of a tax benefit from a net operating loss carry back originally included in discontinued operations in the first quarter of 2010. Such reclassification resulted from the additional loss in the three months ended June 30, 2010 related to continuing operations. Additionally, the Company adjusted its state income tax liability and originally included the tax related benefit of approximately $220,000 in discontinued operations during the three months ended March 31, 2010, which benefit was reclassified to continuing operations in the accompanying statement of operations for six month ended June 30, 2010.
  13
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2010 and 2009
 (unaudited)
 
 10.         Contingency
  The Company and GP Strategies Corporation (“GP Strategies”), the former parent of the Company, have guaranteed the leases for Five Star’s New Jersey and Connecticut warehouses, totaling approximately $1,825,000 and $325,000 per year, respectively through the third quarter of 2010. GP Strategies’ guarantee of such leases was in effect at such time as Five Star was a wholly-owned subsidiary of GP Strategies. In March 2009, the landlord of the Connecticut facility released GP Strategies from its guarantee and accepted the guarantee from the Company.  GP Strategies is to be released from any further liability as guarantor of payments under the New Jersey lease beyond September 30, 2010, provided that prior to August 31, 2010, GP Strategies delivers to the landlord of the New Jersey warehouse a letter of credit for $128,000 effective through September 30, 2011. On January 15, 2010, the Company completed the sale to Merit of all the issued and outstanding stock of Five Star.  Merit has extended the New Jersey warehouse lease through January 2011 and has agreed under the terms of the Five Star Stock Purchase Agreement to use its best efforts to have the landlord of the New Jersey warehouse release GP Strategies and the Company of guarantees on any future extensions effective after September 30, 2011.
       14
 
 
 Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations
  Cautionary Statement Regarding Forward-Looking Statements
  This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.
  Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to, those listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 filed by the Company with the Securities and Exchange Commission (the “SEC”) on March 31, 2010.
  These forward-looking statements generally relate to our plans, objectives and expectations for future events and include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.  These statements are based upon our opinions and estimates as of the date they are made.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties that may be beyond our control, which could cause actual results, performance and achievements to differ materially from results, performance and achievements projected, expected, expressed or implied by the forward-looking statements.  While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.
  Factors that may cause actual results to differ from historical results or those results expressed or implied, include without limitation, the risk that:
 
 ·
if we do not develop or acquire sufficient interests in one or more operating businesses by mid-January 2011, we may be required to register under the Investment Company Act of 1940, as amended (the “Investment Company Act”),
 
 ·
any such required Investment Company Act registration could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, and
 
 ·
our current status as a “shell company” (as defined in Exchange Act Rule 12b-2) may make investments in our securities less attractive to investors.
  If these or other significant risks and uncertainties occur, or if our estimates or underlying assumptions prove inaccurate, actual results could differ materially.  You are urged to consider all such risks and uncertainties. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved.
  General Overview
  On January 15, 2010, we completed the Five Star sale, in which we sold to Merit all of the issued and outstanding shares of Five Star for cash pursuant to the terms and subject to the conditions of the Five Star Stock Purchase Agreement (see Note 2 to the Condensed Consolidated Financial Statements).
  Five Star’s results of operations for the quarter and six months ended June 30, 2010 have been accounted for as a discontinued operation in the condensed consolidated statements of operations, and its results of operations for the quarter and six months ended June 30, 2009 have been reclassified as discontinued operations to be consistent with the current year presentation (see Note 2 to the Condensed Consolidated Financial Statements).  Assets and liabilities of Five Star have been classified as held for sale in the consolidated balance sheet at December 31, 2009.
  15
  Five Star Sale
  The Five Star Stock Purchase Agreement provided for an aggregate purchase price (the “Purchase Price”) for the Five Star Stock of $33,124,000, subject to certain adjustments to reflect (i)(A) dollar for dollar decreases in the event that Five Star’s outstanding revolving indebtedness under its loan agreement with Bank of America (the “Revolving Indebtedness”) decreased from the amount outstanding at March 31, 2009 compared to the amount outstanding on the date of the closing of the Five Star Sale (the “Closing Date”) or increases if such indebtedness increased (excluding increases or decreases due to income tax payments or refunds) (the “Cash Flow Adjustment”) and (B) increases dollar for dollar if Five Star had positive net results from March 31, 2009 to the Closing Date, or decreases if it had negative net results (the “Net Results Adjustment”) and (ii) a potential downward adjustment based on the value of certain designated inventory held by Five Star Group, less the value received for such inventory after the Closing Date (the “Inventory Adjustment”), to the extent such Inventory Adjustment post-closing exceeds $400,000 but is equal to or less than $1,000,000.
  At the closing of the Five Star Sale (the “Five Star Closing”), (i) the Cash Flow Adjustment reduced the Purchase Price by $5,611,000, (ii) $15,178,000 of the Purchase Price was used to repay the Revolving Indebtedness (including related fees and expenses); (iii) $900,000 of the Purchase Price was placed in escrow - $300,000 of which is held by the Escrow Agent to provide for indemnity payments which we may be required to pay to Merit as described below (the “Indemnity Escrow Deposit”) and $600,000 of which is held by the Escrow Agent to provide for payment of Inventory Adjustments (the “Inventory Escrow Deposit”); and (iv) $970,000 of the Purchase Price was retained by Merit to fund severance payments to employees of Five Star.  $10,465,000 of the Purchase Price was remitted to the Company at the Five Star Closing.
  The Purchase Price is subject to post-closing adjustments as a result of the Net Results Adjustment and the Inventory Adjustment. In February, 2010, the Company notified Merit that the Purchase Price should be increased by approximately $188,000 based on the Company’s calculation of the Net Results Adjustment.  On March 1, 2010, Merit notified the Company that based on their calculation of the Net Results Adjustment, the Purchase Price should be reduced by approximately $3,400,000.   The Company did not agree with Merit’s calculation.  Pursuant to the Five Star Stock Purchase Agreement, the dispute could have been submitted to binding arbitration by either Merit or the Company.
  On May 14, 2010, the Company and Merit entered into a Settlement Agreement and Mutual Release dated May 14, 2010 (the “Settlement Agreement”).  A copy of the Settlement Agreement was included as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on May 17, 2010.
  Pursuant to the Settlement Agreement, the parties mutually released and discharged each other (the “Releases”) from and against any and all claims or potential claims and/or causes of action in connection with the Stock Purchase Agreement and the Sale including, but not limited to, any and all such claims and/or causes of actions relating to the Cash Flow Adjustment, the Net Results Calculation, the Inventory Adjustment or the Inventory Escrow Deposit, but excluding obligations and agreements by and among the parties identified as exclusions in the Settlement Agreement.
  In consideration of the Releases, the parties agreed that the Purchase Price would be reduced by an aggregate of $1,050,000, which reduction was effected as follows: (i) the Inventory Escrow Deposit was released to Merit by the Escrow Agent, and (ii) the Company paid to Merit, by wire transfer, the amount of $450,000.  To effect the release of the Inventory Escrow, on May 14, 2010, the parties mutually executed and delivered joint written instructions to the Escrow Agent instructing the Escrow Agent to promptly disburse the Inventory Escrow Deposit as follows: (a) $600,000 to Merit, and (b) all interest and earnings attributable to the Inventory Escrow Deposit to the Company. The Indemnity Escrow Deposit continues to be held by the Escrow Agent pursuant to the terms of the Escrow Agreement.
  Subject to the procedures outlined in the related escrow agreement, within three business days following the date that is the earlier of January 15, 2011 or receipt of written notice from Merit that it has vacated both warehouses located in East Hanover, New Jersey and Newington, Connecticut and there are no outstanding related claims, the escrow agent will disburse to the Company the Indemnity Escrow Deposit (along with accrued interest and earnings on such funds).  If, on such date, there are any claims pending, the escrow agent will (i) retain and continue to hold the aggregate amount of the Indemnity Escrow Deposit being reserved against such claims, determined in accordance with the claim notice(s) received by the escrow agent from Merit in accordance with the escrow agreement, and (ii) remit the remaining balance of the Indemnity Escrow Deposit to the Company (along with accrued interest and earnings on such funds).
  16
  The Company reflected the Settlement Agreement in the gain on the sale of Five Star which is included in Loss from discontinued operations in its Condensed Consolidated Statement of Operations for the six months ended June 30, 2010.
 
 The proceeds of the Five Star Sale will also be reduced by transaction costs, taxes, one half of the rent and other sums, if any, due under the warehouse lease for Five Star’s Connecticut location from the later of March 31, 2010 or when Five Star ceases to use the warehouse, through September 30, 2010, if any, costs relating to the satisfaction of certain obligations under state environmental laws in New Jersey and Connecticut, if any, as well as the post-closing adjustments due Merit pursuant to the Five Star Stock Purchase Agreement and the payment of amounts to indemnify Merit as provided in the Five Star Stock Purchase Agreement, if any.
  Upon the consummation of the Five Star Sale, we became a “shell company”, as defined in Rule 12b-2 of the Exchange Act.  Because we are a shell company, our stockholders are unable to utilize Rule 144 to sell “restricted stock” as defined in Rule 144 or to otherwise use Rule 144 to sell our securities, and we are ineligible to utilize registration statements on Form S-3 or Form S-8 for so long as we remain a shell company and for 12 months thereafter.  As a consequence, among other things, the offering, issuance and sale of our securities is likely to be more expensive and time consuming and may make our securities less attractive to investors.  See “Item 1. Business – Nature of Our Business Following the Five Star Sale”, and “Item 1A. Risk Factors – As a result of the sale of Five Star, we are a shell company under the federal securities laws, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
  Our Board of Directors is considering strategic uses for the Five Star Sale proceeds including, without limitation, using such funds, together with other funds of the Company, to develop or acquire interests in one or more operating businesses.  While we have focused our development or acquisition efforts on sectors in which our management has expertise, we do not wish to limit ourselves to, or to foreclose any opportunities in, any particular industry or sector.  Prior to this use, the Five Star Sale proceeds have been, and we anticipate will continue to be, invested in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation, until such time as we need to utilize such funds, or any portion thereof, for the purposes described above.  We have not distributed, and do not anticipate distributing, the proceeds of the Five Star Sale to our stockholders.
  Although our Board of Directors believes that we are not engaged primarily in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being primarily engaged in those activities, once the closing of the Five Star Sale occurred we appeared to come within the technical definition of an “investment company” under section 3(a) (1) (C) of the Investment Company Act.  We have operated on the assumption, therefore, that we fall within the scope of section 3(a)(1)(C) because the value of our investment securities (as defined in the Investment Company Act) is more than 40% of our total assets (exclusive of government securities and cash and certain cash equivalents).  Under the Investment Company Act, if we do not develop or acquire sufficient interests in one or more operating businesses by mid-January 2011, we may be required to register under the Investment Company Act.  See “Item 1A. Risk Factors - If we do not develop or acquire sufficient interests in one or more operating businesses by mid-January 2011, we may be required to register under the Investment Company Act” in our Annual Report on Form 10-K for the year ended December 31, 2010.
  An investment company that falls within the scope of section 3(a) (1) (C) of the Investment Company Act can avoid being regulated as an investment company if it can rely on certain of the exclusions under the Investment Company Act.  One such exclusion that management believes applies is Rule 3a-2 under the Investment Company Act and similar SEC principles and guidance, which allow a 3(a)(1)(C) investment company (as a “transient investment company”) a grace period of one year from the date of classification (in our case, the date of stockholder approval of the Five Star Sale, which was January 14, 2010), to avoid registration under the Investment Company Act so long as it does not intend to engage primarily in the business of investing, reinvesting, owning, holding or trading in securities.
  As a “transient investment company” our Board of Directors has resolved and determined that we not engage in the business of investing, reinvesting, owning, holding or trading in securities.  Instead, the Board has directed that we seek to develop or acquire interests in one or more operating businesses such that by mid-January 2011 we are primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities for purposes of the Investment Company Act.  There can be no assurance that we will be able to complete such acquisitions by the applicable deadline.
  17
  We are evaluating and exploring available strategic options for the investment of the Company’s cash and cash equivalent assets in one or more operating business.  While we have focused our development or acquisition efforts on sectors in which our management has expertise, we do not wish to limit ourselves to, or to foreclose any opportunities in, any particular industry or sector.  The goal of our investment strategy is to develop or acquire businesses in order to generate value for our stockholders.  Our Board of Directors has resolved to develop or acquire interests in one or more operating businesses such that by mid-January 2011, we are primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities for purposes of the Investment Company Act.  Until such time as the liquid assets of the Company are so deployed into operating businesses, we intend to continue to invest such assets in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation.  We cannot assure that we will successfully develop, or identify a suitable acquisition opportunity of, an operating business or businesses, or that if we do develop such a business or businesses or identify such an opportunity, any such development or acquisition will close on a timely basis, or at all.
  Other Assets
  The Company owns certain non-strategic assets, including an investment in MXL Operations Inc., certain contingent stock rights in products under development by Endo Pharmaceuticals Holdings Inc., a Delaware corporation (“Endo”), and interests in land and flowage rights in undeveloped property in Killingly, Connecticut.  The Company monitors Endo for progress in achieving the milestones related to the contingent stock rights.
  A Current Report on Form 8-K was filed by Indevus with the SEC on March 23, 2009 disclosing that Endo had acquired all of the issued and outstanding shares of Indevus common stock at such time.  Notwithstanding the consummation of such transaction, the Company retains rights to receive certain cash payments based on FDA approval of certain drug applications.  Specifically, the Company has a contingent right to receive from Endo the following cash payments: (i) upon FDA approval of the uteral stent drug application, related to the Aveed TM product, on or before specified dates in 2012, of between $2,685,000 and $2,327,000 depending on the terms contained in the FDA approval and (ii) upon FDA approval of VP003 (Octreotide implant) drug application on or before specified dates in 2012, of between $4,028,000 and $3,491,000 depending on the terms contained in the FDA approval.  A Current Report on Form 8-K was filed by Endo on February 22, 2010 disclosing that Endo had recorded a non-cash impairment charge due to heightened regulatory uncertainties related to their Aveed TM product, and reduced the corresponding contingent payment due to former Indevus shareholders due to the decreased probability that they will be obligated to make the contingent consideration payments related to the Uteral Stent.
  
 Operating Highlights
 
 As a result of the sale of Five Star by the Company pursuant to the Five Star Stock Purchase Agreement dated November 24, 2009, the results for Five Star have been treated as a discontinued operation. On January 15, 2010, the Company completed the sale of all the issued and outstanding stock of Five Star.
 
 Three months ended June 30, 2010 compared to the three months ended June 30, 2009
 
 For the three months ended June 30, 2010, the Company had a loss from continuing operations before income taxes of $1,112,000 compared to a loss from continuing operations before income taxes of $823,000 for the three months ended June 30, 2009.  The reduced operating results are the result of increased General and administrative expenses (“G&A”) of $294,000.
 
 18
  General and administrative expenses
 
 For the three months ended June 30, 2010, G&A was $1,123,000 as compared to $829,000 for the three months ended June 30, 2009.  The increased G&A at the corporate level of $294,000, which the Company believes is not indicative of the level of future G &A expenses was primarily due to the following: (i) $142,000 of severance costs related to the Separation Agreement entered into between the Company and John Belknap, a former director, officer and employee of the Company, (ii)  increased consulting services and professional fees of $220,000 related to the evaluation of potential acquisition and business development opportunities for the Company, (iii) the elimination of the receipt of the Five Star management fee as a result of the Five Star sale in January 2010, which was $120,000 for the three months ended June 30, 2009 and was zero for the three months ended June 30, 2010,and (iv) partially offset by reduced compensation expense related to option grants by $189,000 from $229,000 for the three months ended June 30, 2009 to $40,000 for the three months ended June 30, 2010.The consulting services referred to above were terminated in the second quarter of 2010 and the Company believes that the level of expenses incurred for the three months ended June 30, 2010 is not necessarily  indicative of the G&A expenses to be incurred for the remainder of the year.
 Income taxes
 
 For the three months ended June 30, 2010 and 2009, the Company recorded income tax benefit of $182,000 and $68,000, respectively, which represents the Company’s applicable federal, state and local tax benefit for the periods from continuing operations.  For the three months ended June 30, 2010 and 2009, the income tax benefit differed from the benefit computed at the federal statutory income tax rate due primarily to an increase in the valuation allowance with respect to losses incurred by the Company.
  Six months ended June 30, 2010 compared to the six months ended June 30, 2009
 
 For the six months ended June 30, 2010, the Company had a loss from continuing operations before income taxes of $2,537,000 compared to a loss from continuing operations before income taxes of $1,553,000 for the six months ended June 30, 2009.  The reduced operating results are the result of increased General and administrative expenses (“G&A”) of $990,000.
 
 General and administrative expenses
 
 For the six months ended June 30, 2010, G&A was $2,557,000 as compared to $1,567,000 for the six months ended June 30, 2009.  The increased G&A  of $990,000, which the Company believes is not indicative of the level of future G &A expenses, was primarily due to: (i) $142,000 of severance costs related to the Separation Agreement entered into between the Company and John Belknap, a former director, officer and employee of the Company, (ii)  consulting services and professional fees of $430,000 related to the evaluation of potential acquisition and business development opportunities for the Company, (iii)  a discrete  bonus granted by the Board of Directors in 2010 to the Chairman, Chief Executive Officer and President of the Company for his specific role in the completion of the sale of both the Company’s undeveloped real property located in Pawling, New York and Five Star in the amount of $500,000, (iv) the elimination of the receipt of the Five Star management fee as a result of the Five Star sale in January 2010, which was $240,000 for the six months ended June 30, 2009 and was zero for the six months ended June 30, 2010, and (v) partially offset by reduced compensation expense related to option grants by $280,000 from $458,000 for the six months ended June 30, 2009 to $178,000 for the six months ended June 30, 2010.The consulting services referred to above were terminated in the second quarter of 2010 and the  Company believes that the level of expenses incurred for the six months ended June 30, 2010 is not necessarily indicative of the G&A expenses to be incurred for the remainder of the year.
  Income taxes
 
 For the six months ended June 30, 2010 and 2009, the Company recorded an income tax benefit of $887,000 and $72,000, respectively, which represents the Company’s applicable federal, state and local tax benefit for the periods from continuing operations.  The Company adjusted state income tax liability and originally included the  related tax benefit of approximately $220,000 in discontinued operations during the three months ended March 31, 2010, which was reclassified to continuing operations in the statement of operations for six month ended June 30, 2010. For the six months ended June 30, 2010 and 2009, the income taxes benefit differed from the benefit computed at the federal statutory income tax rate due primarily to an increase in the valuation allowance with respect to losses incurred by the Company and the $220,000 benefit referred to above.
  Five Star is currently undergoing an income tax examination by the Internal Revenue Service for income tax filings for the years ended December 31, 2007 and 2008.  Five Star is being challenged with regard to the timing of certain tax deductions.  Even though the open issues under audit relate solely to the timing of deductions (not to the underlying appropriateness of those deductions), the Company recorded a liability for uncertain tax positions during the six months ended June 30, 2010 for approximately $654,000 to cover the potential costs, including interest and penalties, associated with deductions at issue which was charged to discontinued operations.  If the Company is not able to successfully defend its position, the resultant effect could be an increase to income tax expense for the year ended December 31, 2007, a decrease to income tax expense for the years ended December 31, 2008 and 2009, and an increase of the Company’s net operating loss carryforward which may arise in the year ending December 31, 2010.
  19
 
 The increase in the liability for uncertain tax positions was treated as a discrete item during the six months ended June 30, 2010. The tax effect of discrete items are reflected in the periods in which they occur and not reflected in the estimated annual effective tax rate which is used for interim period tax provisions. The Company intends to vigorously defend its position with the Internal Revenue Service.
   Financial condition
  Liquidity and Capital Resources
  At June 30, 2010, the Company had cash and cash equivalents totaling $28,755,000. The Company believes that such cash will be sufficient to fund the Company’s working capital requirements for at least the next 12 months.
  Contractual Obligations and Commitments
  The Company and GP Strategies Corporation (“GP Strategies”), the former parent of the Company, have guaranteed the leases for Five Star’s New Jersey and Connecticut warehouses, totaling approximately $1,825,000 and $325,000 per year, respectively through the third quarter of 2010. GP Strategies’ guarantee of such leases was in effect at such time as Five Star was a wholly-owned subsidiary of GP Strategies. In March 2009, the landlord of the Connecticut facility released GP Strategies from its guarantee and accepted the guarantee from the Company.  GP Strategies is to be released from any further liability as guarantor of payments under the New Jersey lease beyond September 30, 2010, provided that prior to August 31, 2010, GP Strategies delivers to the landlord of the New Jersey warehouse a letter of credit for $128,000 effective through September 30, 2011. On January 15, 2010, the Company completed the sale to Merit of all the issued and outstanding stock of Five Star.  Merit has extended the New Jersey warehouse lease through January 2011 and has agreed under the terms of the Five Star Stock Purchase Agreement to use its best efforts to have the landlord of the New Jersey warehouse release GP Strategies and the Company of guarantees on any future extensions effective after September 30, 2011.
 
 Item 3.                 Quantitative and Qualitative Disclosures About Market Risk
  Not required.
  Item 4.               Controls and Procedures
  The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
  The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 20
  PART II. OTHER INFORMATION
  Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds.
  Issuances of Equity Securities
  On May 6, 2010, the Company issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), shares of Company common stock to Lawrence G. Schafran, a director of the Company, in payment of his quarterly directors fees.  Mr. Schafran received 3,304 shares of Company common stock.  The aggregate value of the 3,304 shares of Company common stock issued to Mr. Schafran was approximately $4,625 on the date of issuance.  These shares were issued pursuant to exemptions from registration set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
  This issuance qualified for exemption from registration under the Securities Act because (i)  Mr. Schafran is an accredited investor, (ii) the Company did not engage in any general solicitation or advertising in connection with the issuance, and (iii) Mr. Schafran received restricted securities.
  Purchases of Equity Securities
  On December 15, 2006, the Company’s Board of Directors authorized the Company to repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding shares of common stock on that date, from time to time either in open market or privately negotiated transactions. The Company undertook this repurchase program in an effort to increase stockholder value.
  On August 13, 2008, the Company’s Board of Directors authorized an increase of 2,000,000 shares, or approximately 11% of the Company’s then-outstanding shares of common stock, to the Company’s stock repurchase program originally adopted in December 2006. Immediately prior to this increase, a total of 255,038 shares remained available for repurchase under this repurchase program.
  There were no common stock repurchases made by or on behalf of the Company during the second quarter ended June 30, 2010.  At June 30 2010, a total of 2,208,679 shares remained available for purchase.
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  Item 6.                 Exhibits.
  Exhibit No.

Description10.1
*
Separation Agreement by and between the Company and John C. Belknap, dated as of June 7, 201031.1
*
Certification of principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)31.2
*
Certification of principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)32.1
*
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by the principal executive officer of the Company and the principal financial officer of the Company
 
 
 *Filed herewith
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 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.
  NATIONAL PATENT DEVELOPMENT CORPORATIONDate: August 5, 2010

/s/ HARVEY P. EISENName: Harvey P. EisenTitle: Chairman of the Board and Chief Executive OfficerDate: August 5, 2010

/s/ IRA J. SOBOTKOName: Ira J. SobotkoTitle: Vice President, Chief Financial Officer