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 September 30, 2009oro
            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.)
 
 903
      Murray Road, PO Box 1960, East Hanover, NJ
            07936(Address
      of principal executive offices)
            (Zip
      code)
 
 (973)
      428-4600(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 o  No x
 
 As of
November 10, 2009, there were 17,561,240 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 and Nine
      Months Ended September 30, 2009 and 2008 (Unaudited)
            1Condensed  Consolidated Statements of Comprehensive Income
      (Loss) -Three and Nine
      Months Ended September 30, 2009 and 2008 (Unaudited)
            2Condensed  Consolidated Balance Sheets
      -September 30,
      2009 (Unaudited) and December 31, 2008
            3Condensed  Consolidated Statements of Cash Flows
      -Nine Months
      Ended September 30, 2009 and 2008 (Unaudited)
            4Condensed  Consolidated Statement of Changes in
      Stockholders’ Equity -Nine Months
      Ended September 30, 2009 (Unaudited)
            5Notes to Condensed Consolidated Financial Statements
      -
              Nine Months
      Ended September 30, 2009 and 2008 (Unaudited)
            6Item 2.
            Management’s Discussion and Analysis of
      FinancialCondition and
      Results of Operations
            19Item 3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            27Item 4.
            Controls and Procedures
            27Part
      II. Other InformationItem 6.
            Exhibits
            27SIGNATURES
            
            28
 
 
  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
              September
      30,
            
            
            Nine
      months ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Sales
            
            $
            27,131
            
            
            $
            31,216
            
            
            $
            80,027
            
            
            $
            94,114Cost
      of sales
            
            
            22,591
            
            
            
            25,702
            
            
            
            66,631
            
            
            
            77,975Gross
      margin
            
            
            4,540
            
            
            
            5,514
            
            
            
            13,396
            
            
            
            16,139Selling,
      general and administrative expenses
            
            
            (4,921
            )
            
            
            (6,271
            )
            
            
            (14,424
            )
            
            
            (17,460
            )Charge
      related to resignation of Chairman
              of
      Five Star
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,096
            )Operating  loss
            
            
            (381
            )
            
            
            (757
            )
            
            
            (1,028
            )
            
            
            (2,417
            )Interest
      expense
            
            
            (389
            )
            
            
            (370
            )
            
            
            (1,138
            )
            
            
            (1,060
            )Investment
      and other income (loss), net
            
            
            7
            
            
            
            (73
            )
            
            
            35
            
            
            
            78Loss
      from continuing operations before
              income
      tax expense
            
            
            (763
            )
            
            
            (1,200
            )
            
            
            (2,131
            )
            
            
            (3,399
            )Income
      tax (expense) benefit
            
            
            (4
            )
            
            
            354
            
            
            
            (12
            )
            
            
            329Loss
      from continuing operations
            
            
            (767
            )
            
            
            (846
            )
            
            
            (2,143
            )
            
            
            (3,070
            )Income from
      discontinued operations, net of
              taxes,
      including an $87 gain on sale of assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            429Consolidated
      net loss
            
            
            (767
            )
            
            
            (846
            )
            
            
            (2,143
            )
            
            
            (2,641
            )Less:
      net income attributable to noncontrolling
              Interest
            
            
            -
            
            
            
            (24
            )
            
            
            -
            
            
            
            (34
            )Net
      loss attributable to National Patent
              Development
      Corporation
            
            $
            (767
            )
            
            $
            (870
            )
            
            $
            (2,143
            )
            
            $
            (2,675
            )Basic and
      diluted net loss per share
              attributable
      to National Patent Development
              Corporation:Continuing
      operations
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            (0.12
            )
            
            $
            (0.19
            )Discontinued
      operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0.03Net
      loss per share
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            (0.
      12
            )
            
            $
            (0.16
            )
 
 See
accompanying notes to condensed consolidated financial statements.
  1
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (LOSS)
 (unaudited)
 (in
thousands)
 
 Three
      months ended
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      loss
            
            $
            (767
            )
            
            $
            (870
            )
            
            $
            (2,143
            )
            
            $
            (2,675
            )Other
      comprehensive income (loss),
              before tax:Net
      unrealized loss on available-for-
              sale-securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (102
            )Reclassification
      adjustment for impairment of investment in
              Millennium
      Cell, Inc. included in net income (loss)
            
            
            -
            
            
            
            138
            
            
            
            -
            
            
            
            138Net
      unrealized gain (loss) on interest rate
              Swap
            
            
            (5
            )
            
            
            (100
            )
            
            
            204
            
            
            
            (97
            )Comprehensive
      loss before tax
            
            
            (772
            )
            
            
            (832
            )
            
            
            (1,939
            )
            
            
            (2,736
            )Income
      tax (expense) benefit related to
              items of other comprehensive
              income (loss)
            
            
            2
            
            
            
            44
            
            
            
            (81
            )
            
            
            47Comprehensive
      loss
            
            
            (770
            )
            
            
            (788
            )
            
            
            (2,020
            )
            
            
            (2,
      689
            )Comprehensive
      loss
              attributable to noncontrolling
              interest
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4Comprehensive
      loss attributable to
              National Patent Development
              Corporation
            
            $
            (770
            )
            
            $
            (788
            )
            
            $
            (2,020
            )
            
            $
            (2,685
            )
 
 See
accompanying notes to condensed consolidated financial statements.
  2
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands)
 
 September
      30,
            
            
            December
      31,2009
            
            
            2008(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
            
            $
            11,588
            
            
            $
            13,089Accounts
      and other receivables, less allowance
              for
      doubtful accounts of $406 and $420
            
            
            12,978
            
            
            
            9,814Inventories
      (finished goods)
            
            
            21,965
            
            
            
            23,045Deferred
      tax asset
            
            
            107
            
            
            
            132Prepaid
      expenses and other current assets
            
            
            1,121
            
            
            
            1,334Total
      current assets
            
            
            47,759
            
            
            
            47,414Property,
      plant and equipment, net
            
            
            739
            
            
            
            912Intangible
      assets, net
            
            
            503
            
            
            
            599Deferred
      tax asset
            
            
            1,243
            
            
            
            1,537Other
      assets
            
            
            3,209
            
            
            
            3,209Total
      assets
            
            $
            53,453
            
            
            $
            53,671Liabilities
      and stockholders’ equityCurrent
      liabilitiesShort
      term borrowings
            
            $
            15,868
            
            
            $
            18,375Accounts
      payable and accrued expenses
            
            
            12,042
            
            
            
            8,236Total
      current liabilities
            
            
            27,910
            
            
            
            26,611Liability
      related to interest rate swap
            
            
            907
            
            
            
            1,111Contingencies
      (Notes 10 and 11)Stockholders’
      equityCommon
      stock
            
            
            181
            
            
            
            181Additional
      paid-in capital
            
            
            29,349
            
            
            
            28,642Deficit
            
            
            (2,992
            )
            
            
            (849
            )Treasury
      stock, at cost
            
            
            (1,358
            )
            
            
            (1,358
            )Accumulated
      other comprehensive loss
            
            
            (544
            )
            
            
            (667
            )Total
      stockholders’ equity
            
            
            24,636
            
            
            
            25,949Total
      liabilities and stockholders’ equity
            
            $
            53,453
            
            
            $
            53,671
 
 See
accompanying notes to condensed consolidated financial statements.
  3
 
 NATIONAL PATENTDEVELOPMENT CORPORATION AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in
thousands)
 
 Nine
      months endedSeptember
      30,2009
            
            
            2008Cash
      flows from operations:Net
      loss
            
            $
            (2,143
            )
            
            $
            (2,641
            )Adjustments
      to reconcile net loss tonet
      cash provided by (used in) operating activities:Depreciation
      and amortization
            
            
            326
            
            
            
            489Gain
      on sale of MXL
            
            
            -
            
            
            
            (87
            )Expenses
      paid in common stock
            
            
            20
            
            
            
            46Deferred
      income taxes
            
            
            238
            
            
            
            (935
            )Stock
      based compensation
            
            
            687
            
            
            
            1,694Impairment
      of investments
            
            
            -
            
            
            
            138Changes
      in other operating items, net of effect of  disposition of
      MXL:Accounts
      and other receivables
            
            
            (3,164
            )
            
            
            (4,334
            )Inventories
            
            
            1,080
            
            
            
            2,445Prepaid
      expenses and other assets
            
            
            213
            
            
            
            565Accounts
      payable and accrued expenses
            
            
            3,806
            
            
            
            715Net
      cash provided by (used in) operations
            
            
            1,063
            
            
            
            (1,905
            )Cash
      flows from investing activities:Additions
      to property, plant and equipment
            
            
            (57
            )
            
            
            (617
            )Acquisition
      of additional interest in Five Star
            
            
            -
            
            
            
            (3,838
            )Net
      proceeds from sale of assets of MXL, net of cash sold
            
            
            -
            
            
            
            4,661Investment
      in MXL
            
            
            -
            
            
            
            (275
            )Net
      cash  used in  investing activities
            
            
            (57
            )
            
            
            (69
            )Cash
      flows from financing activities:Exercise
      of common stock warrants
            
            
            -
            
            
            
            3,560Purchase
      of treasury stock
            
            
            -
            
            
            
            (1,115
            )Settlement
      of option
            
            
            -
            
            
            
            (240
            )Repayments
      of short-term borrowings, net
            
            
            (2,507
            )
            
            
            (454
            )Repayment
      of long-term debt
            
            
            -
            
            
            
            (1,698
            )Net
      cash (used in) provided by financing activities
            
            
            (2,507
            )
            
            
            53Net
      decrease in cash and cash equivalents
            
            
            (1,501
            )
            
            
            (1,921
            )Cash
      and cash equivalents at beginning of period
            
            
            13,089
            
            
            
            15,698Cash
      and cash equivalents at end of period
            
            $
            11,588
            
            
            $
            13,777
   See
accompanying notes to the condensed consolidated financial
statements.
  4
 
 NATIONAL PATENT DEVELOPMENT CORPORATION
 CONDENSED
CONSOLIDATED STATEMENT OF CHANGES
 IN
STOCKHOLDERS’ EQUITY
 Nine
Months Ended September 30, 2009
 (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, 2008
            18,105,148
            
            $
            181
            
            
            $
            28,642
            
            
            $
            (849
            )
            
            $
            (1,358
            )
            
            $
            (667
            )
            
            $
            25,949Net
      unrealized gain on interest rate
              swap,
      net of tax of $81
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            123
            
            
            
            123Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            (2,143
            )
            
            
            
            
            
            
            
            
            
            
            (2,143
            )Stock
      based compensation expense
            
            
            
            
            
            
            
            687
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            687Issuance
      of common stock to
              directors
            16,308
            
            
            
            
            
            
            20
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20Balance
      at September 30, 2009
            18,121,456
            
            $
            181
            
            
            $
            29,349
            
            
            $
            (2,992
            )
            
            $
            (1,358
            )
            
            $
            (544
            )
            
            $
            24,636
 
 See
accompanying notes to condensed consolidated financial statements.
     5
 NATIONAL PATENT DEVELOPMENT CORPORATION AND
SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
 1.           Basis
of presentation and description of business
 
 Basis
of presentation
 
 The
accompanying condensed consolidated financial statements 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, 2008 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, 2008 as presented in our Annual Report on Form
10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31,
2009, as amended. In the opinion of management, this interim information
includes all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation. The results for the 2009 interim periods are
not necessarily indicative of results to be expected for the entire
year.
 
 Description
of business
 
 National
Patent Development Corporation (the “Company”), through its wholly-owned
subsidiary, Five Star Products, Inc. (“Five Star”), is engaged in the wholesale
distribution of home decorating, hardware and finishing
products.  Five Star represents the only operating segment of the
Company. Five Star serves independent retail dealers in 12 states in the
Northeast. Products distributed include paint sundry items, interior and
exterior stains, brushes, rollers, caulking compounds and hardware
products.
 
 On June
19, 2008, the Company sold substantially all the operating assets and
transferred certain liabilities of its optical plastics molding and precision
coating operating segment, MXL Industries, Inc. (“MXL”) (see Note
4).  The results of operations for MXL have been accounted for as a
discontinued operation in 2008.
 
 On August
28, 2008, Five Star became a wholly-owned subsidiary of the Company upon the
consummation of a tender offer and a merger between Five Star and a newly
formed, wholly-owned subsidiary of the Company, with Five Star continuing as the
surviving corporation (see Note 3).
 
 2.           Recent
accounting pronouncements
 
 In June
2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the “Codification”). Effective July 1, 2009, the
Codification became the single source of authoritative nongovernmental U.S.
generally accepted accounting principles (GAAP), superseding existing rules and
related literature issued by the FASB, American Institute of Certified Public
Accountants (“AICPA”) and Emerging Issues task Force (“EITF”). The Codification
also eliminates the previous US GAAP hierarchy and establishes one level of
authoritative GAAP.  Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. All other literature is considered
non-authoritative.  The Codification, which has not changed GAAP, was
effective for interim and annual periods ending after September 15,
2009.  The Company adopted the Codification for the quarter ended
September 30, 2009.  Other than the manner in which new accounting
guidance is referenced, the adoption of the Codification had no impact on the
Company’s consolidated financial statements.
 
 In August
2009, the FASB issued amended guidance on the measurement of liabilities at fair
value.  The guidance provides clarification that in circumstances in
which a quoted market price in an active market for an identical liability is
not available, the fair value of a liability be measured using one or more of
the valuation techniques that uses the quoted price of an identical liability
when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets.  If none of this
information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles.  This guidance is
effective for the first reporting period (including interim periods) after
issuance.  The Company adopted this guidance in the quarter ended
September 30, 2009. The adoption had no impact on the Company’s consolidated
financial statements.
 
 6
 
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  In June
2009, the FASB issued amendments to the accounting rules for variable interest
entities (VIEs) and for transfers of financial assets.  The new
guidance for VIEs eliminates the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity and requires
ongoing qualitative reassessments of whether an enterprise is the primary
beneficiary. In addition, qualifying special purpose entities (QPESs) are no
longer exempt from consolidation under the amended guidance. The amendments also
limit the circumstances in which a financial asset, or a portion of a financial
asset, should be derecognized when the transferor has not transferred the entire
original financial asset to an entity that is not consolidated with the
transferor in the financial statements being presented, and/or when the
transferor has continuing involvement with the transferred financial asset. The
amendments are effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. The Company does not believe that adoption of these
amendments will have any effect on its consolidated financial
statements.
 
 In May
2009, the FASB issued guidelines on subsequent event accounting which sets
forth: (1) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and, (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date and (4) requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date. The Company adopted these amendments effective April 1, 2009 and has
evaluated subsequent events through the date the financial statements were filed
on November 13, 2009.
 
 In April,
2009, the FASB issued additional requirements regarding interim disclosures
about fair value of financial instruments to require disclosures about fair
value of financial instruments in interim and annual financial statements. The
new requirements are effective for interim periods ending after June 15, 2009
and the Company adopted these requirement in the second quarter of 2009. See
Note 14.
 
 In March
2008, the FASB issued new disclosure requirements regarding derivative
instruments and hedging activities. These requirements give financial statement
users better information about the reporting entity’s hedges by providing for
qualitative disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains and losses on
derivative contracts, and details of credit-risk-related contingent features in
their hedged positions. These requirements are effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company adopted the requirements effective January 1, 2009. See
Note 9.
 
 7
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  In December 2007, the FASB issued
new guidance on noncontrolling interests in consolidated financial statements.
This guidance requires that ownership interests in subsidiaries held by parties
other than the parent, be clearly identified, labeled, and presented in the
consolidated financial statements within equity, but separate from the parent’s
equity. It also requires that once a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be initially measured
at fair value. Sufficient disclosures are required to clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners.  This guidance is effective for fiscal years
beginning after December 15, 2008, and is to be applied retrospectively for all
periods presented. As a result of adoption, effective January 1, 2009 the
Company has retrospectively adjusted its financial statements for the three
months and nine months ended September 30, 2008 to include net loss and
comprehensive net loss attributable to noncontrolling interest (previously
referred to as minority interest) in consolidated net loss and consolidated
comprehensive loss, respectively.
 
 
 The
following is a reconciliation of total equity, equity attributable to the
Company and equity attributable to noncontrolling interest for the nine months
ended September 30, 2008 (in thousands):
 
 Attributable
      toTotal
              Equity
            
            
            Company
            
            
            Noncontrolling
              interestBeginning
      balance
            
            $
            28,977
            
            
            $
            26,075
            
            
            $
            2,902Net
      loss
            
            
            (2,641
            )
            
            
            (2,675
            )
            
            
            34Other
      comprehensive loss
            
            
            (14
            )
            
            
            (10
            )
            
            
            (4
            )Acquisition
      of additional interest in Five Star
            
            
            (3,016
            )
            
            
            
            
            
            
            (3,016
            )Equity
      based compensation
            
            
            1,172
            
            
            
            1,088
            
            
            
            84Other
      equity transactions, with no effect on
              noncontrolling interest
            
            
            2,594
            
            
            
            2,594Ending
      balance
            
            $
            27,072
            
            
            $
            27,072
            
            
            $
            0
 
 
 In
December 2007, the FASB issued new accounting guidance related to the accounting
for business combinations and related disclosures. This guidance establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree, and any goodwill acquired in a
business combination. It also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of a business combination. The
guidance is to be applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.  The Company adopted this
guidance, effective January 1, 2009, and it did not have any effect on the
Company’s consolidated financial statements.
 
 In
February 2007, the FASB issued guidance on the fair value option for reporting
financial assets and financial liabilities.  The guidance provides
companies with an option to report selected financial assets and liabilities at
fair value. Although effective for the Company beginning January 1, 2008, the
Company did not elect to value any financial assets and liabilities at fair
value.
 
 8
 
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
 
 In
February 2008, the FASB issued amended guidance to delay the fair value
measurement and expanded disclosures about fair value measurements for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until fiscal years beginning after November 15,
2008.  Effective January 1, 2009, the Company adopted the guidance
related to fair value measurements for nonfinancial assets and nonfinancial
liabilities and the adoption of such guidance did not have a material effect on
the Company’s consolidated financial statements.
 
 
 3.           Acquisition
of noncontrolling interest in Five Star
 
 On June
26, 2008, the Company, Five Star and NPDV Acquisition Corp., a newly-formed
wholly-owned subsidiary of the Company (“NPDV”), entered into a Tender Offer and
Merger Agreement (the “Tender Offer Agreement”).  Pursuant to the
Tender Offer Agreement, on July 24, 2008, NPDV commenced a tender offer to
acquire all the outstanding shares of Five Star common stock not held by the
Company or NPDV at a purchase price of $0.40 per share, net to the seller in
cash, without interest thereon and less any required withholding taxes (the
“Tender Offer”).
 
 Prior to
the commencement of the Tender Offer, in accordance with the Tender Offer
Agreement, (i) the Company transferred to NPDV: (A) all of the shares of Five
Star common stock held by the Company (representing an approximately 75%
interest) and (B) a $2,800,000 convertible note issued by Five Star’s
wholly-owned subsidiary, and (ii) NPDV converted such note into an aggregate of
7,000,000 shares of Five Star common stock, increasing the Company’s indirect
ownership interest in Five Star to 82.3% of Five Star’s common stock outstanding
at such time.
 
 The
Tender Offer expired on August 26, 2008, and on August 28, 2008, NPDV merged
with and into Five Star (the “NPDV-Five Star Merger”) with Five Star continuing
as the surviving corporation, wholly-owned by the Company.  The
Company paid approximately $1,028,000 for the shares tendered pursuant to the
Tender Offer, $661,000 for the remaining outstanding shares pursuant to the
terms of the NPDV-Five Star Merger and incurred expenses related to the
NPDV-Five Star Merger of approximately $642,000.  The total purchase
price for the 17.7% minority interest was $2,331,000. The excess ($642,000) of
purchase price over the book value of the minority interest has been recorded as
customer lists. This intangible asset is being amortized over a five-year
period.  Amortization expense for the three and nine months ended
September 30, 2009 was approximately $33,000 and $96,000,
respectively.
 
 9
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  4.           Discontinued
operation - sale of assets of MXL Industries
 
 On June
19, 2008, pursuant to the terms of an Asset Purchase Agreement, dated as of June
16, 2008, by and among the Company, MXL Industries, Inc., a wholly-owned
subsidiary of the Company (“MXL Industries” or the “Seller”), MXL Operations,
Inc. (“MXL Operations”), MXL Leasing, LP (“MXL Leasing”) and MXL Realty, LP
(“MXL Realty” and, collectively with MXL Operations and MXL Leasing, the “MXL
Buyers”), the MXL Buyers purchased substantially all the assets and assumed
certain liabilities of Seller’s optical plastics molding and precision coating
businesses (the “MXL Business”).  As consideration, the Seller
received approximately $5,200,000 in cash, of which approximately $2,200,000 was
utilized to fully pay bank debt of MXL Industries.  The sale resulted
in a gain of $87,000, net of $143,000 of related expenses.
 
 The
Seller also made an aggregate investment in the MXL Buyers of $275,000,
allocated to each of MXL Operations, MXL Leasing and MXL Realty in a manner so
that, as of the effective time of the transaction, the Seller has a 19.9%
interest in the total capital of each of MXL Leasing and MXL Realty and a 40.95%
non-voting interest in the total capital of MXL Operations.  MXL
Operations issued additional shares before December 31, 2008 which reduced the
Seller’s interest in MXL Operations to 19.9%. The Company accounts for the
investment in MXL Operations, MXL Leasing and MXL Realty under the cost method
from the date of sale.
 
 Investors
in the MXL Buyers include certain senior managers of the MXL
Business.
 
 The
results for MXL Industries for the period from January 1, 2008 through the date
of sale have been accounted for as a discontinued operation. Sales of MXL
amounted to $4,053,000 for such period.
     10
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
 5.           Per
share data
 
 Loss per
share for the three and nine months ended September 30, 2009 and 2008 are
calculated as follows (in thousands, except per share amounts):
 
 Three
      months ended
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Basic  and
      Diluted EPSLoss
      from continuing operations,
              reduced in 2008 by amount applicable
              to non-controlling interest
            
            $
            (767
            )
            
            $
            (870
            )
            
            $
            (2,
      143
            )
            
            $
            (3,104
            )Income
      from discontinued operation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            429Net
      loss attributable to National Patent
              Development
      Corporation
            
            $
            (767
            )
            
            $
            (870
            )
            
            $
            (2,143
            )
            
            $
            (2,675
            )Weighted
      average sharesOutstanding
            
            
            17,556
            
            
            
            16,856
            
            
            
            17,550
            
            
            
            16,557Per share:Continuing
      operations
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            (0.12
            )
            
            $
            (0.19
            )Discontinued
      operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            0.03Net
      loss
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            (0.12
            )
            
            $
            (0.16
            )
   The
following were not included in the diluted computation, as their effect would be
anti-dilutive:
 
 September
              30,
      2009
            
            
            September
              30,
      2008Options
            
            
            3,350,000
            
            
            
            3,350,000Warrants
            
            
            *
            
            
            
            1,423,886Five
      Star’s convertible note
            
            
            **
            
            
            
            2,800,000Five
      Star’s options
            
            
            ***
            
            
            
            975,000
 
 *
            1,423,886
      warrants were exercised in August 2008 (see Note 12(b))**
            $2,800,000
      convertible note was converted in July 2008 (see Note
3)***
            975,000
      options were terminated in July
2008
 
 6.           Capital
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 under this program. At June 30, 2009, the Company had repurchased
1,791,321 shares of its common stock for $4,092,000 and as of such date, a total
of 2,208,679 shares remained available for repurchase under the repurchase
program.  There were no common stock repurchases made by or on behalf
of the Company during the quarter and nine months ended September 30,
2009.
 
 7.           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 stock 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.
 11
 
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
 
 Information
with respect to the Company’s outstanding stock options at January 1, 2009 and
at September 30, 2009 is presented below. No stock options were
granted under the Company’s incentive stock plans in the nine months ended
September 30, 2009 or 2008.
 Stock
              Options
            
            Weighted
              Average
              Exercise
              Price
            
            
            Weighted
              Average
      Remaining
              Contractual
              Term
            
            
            Aggregate
              Intrinsic
              ValueOptions
      outstanding at January 1, 2009
            3,350,000
            
            $
            2.49
            
            
            
            7.9
            
            
            $
            0
            *Options
      outstanding  at September 30, 2009
            3,350,000
            
            $
            2.49
            
            
            
            7.4
            
            
            $
            0
            *Options
      exercisable at September 30, 2009
            2,233,000
            
            $
            2.46
            
            
            
            7.4
            
            
            $
            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.
 
 Compensation
expense related to option grants amounted to $229,000 for each of the three
months ended September 30, 2009 and 2008 and $687,000 for each of the nine
months ended September 30, 2009 and 2008. As of September 30, 2009, there was
$375,000 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 nine
months.
 
 As a
result of the Tender Offer and NPDV-Five Star Merger (see Note 3), all vested
and unvested options to purchase shares of Five Star common stock and unvested
shares of Five Star restricted stock granted under Five Star’s then-existing
incentive stock plan were cancelled and an aggregate cash payment of $182,000
was paid to holders in exchange for the termination of such options and shares
promptly following the completion of the NPDV-Five Star Merger.  In
the nine months ended September 30, 2008, Five Star recognized compensation
expense of $100,000 related to the terminated options and restricted
stock.  Further, the termination of the agreements related to the
options and shares resulted in $489,000 of previously unrecognized compensation
cost related to unvested share-based compensation arrangements of Five Star
which was charged to operations in the three and nine months ended September 30,
2008
 
 12
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  8.           Short-term
borrowings
 
 On June
27, 2008, Five Star entered into a Restated and Amended Loan and Security
Agreement (the “Amended Loan Agreement”) with Bank of America, N.A. (“Bank of
America”).  The Amended Loan Agreement extends the maturity date of
that certain Loan and Security Agreement, dated as of June 20, 2003, entered
into by Five Star and Bank of America (through its predecessor Fleet Capital
Corporation), as amended (the “2003 Loan Agreement”), until June 30,
2011. The 2003 Loan Agreement, as amended by the Amended Loan Agreement, is
referred to herein as the “Loan Agreement”.
 
 The Loan
Agreement provides Five Star with a $35,000,000 revolving credit facility
(“Revolving Credit Facility”), subject to a $3,500,000 sub-limit for letters of
credit.  The Revolving Credit Facility allows Five Star to borrow up
to (a) 85% of eligible receivables plus (b) the greater of (i) the lesser of
$20,000,000 or 65% (to be reduced by 1% per quarter commencing July 1, 2008) of
eligible inventory, or (ii) the lesser of $20,000,000 or 85% of the appraised
net orderly liquidation value of eligible inventory minus (c) the amount of
outstanding letter of credit obligations, as those terms are defined
therein.  At September 30, 2009, Five Star was allowed to borrow 54.7%
of eligible inventory.  All obligations under the Revolving Credit
Facility are collateralized by first priority liens on all of Five Star’s
existing and future assets.
 
 Loans
made to Five Star under the Revolving Credit Facility bear interest at a per
annum rate based on the Base Rate of Bank of America, as defined, plus 2.25%, as
modified, or at a per annum rate based on LIBOR plus 325 basis points, as
modified, at Five Star’s election.  The LIBOR and Base Rate
margins are subject to adjustment based on certain performance benchmarks. At
September 30, 2009, the LIBOR and Base Rate margins were 400 basis points and
3%, respectively.  At September 30, 2009 and December 31, 2008,
$15,868,000 and $18,375,000 was outstanding under the Loan Agreement and
approximately $4,518,000 and $3,677,000 was available to be borrowed,
respectively.  Substantially all of Five Star’s assets are pledged as
collateral for these borrowings.  The amount available at September
30, 2009 reflects a $937,000 reduction in availability as a result of liability
for the interest rate swap (see Note 9).
 
 In
connection with the Amended Loan Agreement, Five Star also entered into an
interest rate swap with Bank of America which has been designated as a cash flow
hedge.  Effective June 30, 2008 through June 30, 2011, Five Star will
pay a fixed interest rate of 3.62% to Bank of America on notional principal of
$20,000,000.  In return, Bank of America will pay to Five Star a
floating rate, namely, LIBOR, on the same notional principal
amount.  The credit spread under the Amended Loan Agreement is not
included in, and will be paid in addition to, this fixed interest rate of
3.62%.  The fair value of the interest rate swap amounted to a
liability of $907,000 at September 30, 2009 and a liability of $1,111,000 at
December 31, 2008. Changes in the fair value of the interest rate swap, which is
effective as a hedge, were recognized in other comprehensive
income.
 
 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. Five Star was in compliance with its amended covenants as of
September 30, 2009 and although there can be no assurance, Five Star anticipates
to be in compliance in future quarters.
 
 13
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  9.           Derivates
and hedging activities.
 
 In the
normal course of business, the Company enters into derivative instruments in
order to manage exposure from fluctuation in interest rates. The interest rate
swap entered into by Five Star in connection with its loan agreement (see Note
8) is being accounted for under Statement of Financial Accounting Standards No.
133, as amended, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS No. 133”).  SFAS No. 133 requires all derivatives to be
recognized on 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 fair value of the derivative are recognized in other
comprehensive income (“OCI”) until the hedged item is recognized in earnings.
The ineffective portion of a derivative’s change in fair value is immediately
recognized in earnings. Change in the fair value of the effective portion of an
interest rate swap, which has been designated as a cash flow hedge are
recognized in OCI and reclassified into earnings as an adjustment of interest
expense in the same period during which the hedged transaction effects
earnings.
 
 The
interest rate swap agreement utilized by the Company effectively modifies the
Company’s exposure to interest rate risk by converting $20,000,000 of the
Company’s floating-rate debt to a fixed rate basis through June 30, 2011, thus
reducing the impact of interest-rate changes on future interest
expense.
 
 During
the three and nine months ended September 30, 2009, $175,000 and $286,000,
respectively,  of loss was recognized in OCI and $170,000 and
$490,000, respectively, of loss was reclassified from accumulated OCI into
operations as an increase to interest expense.
 
 Bank of
America, N.A. has the option to reduce amounts available to the Company under
its Restated and Amended Loan and Security Agreement with Five Star as a result
of the liability related to the interest rate swap (see Note 8).
 
 10.         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.
 
 14
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  On March
23, 2009, Indevus filed a Current Report on Form 8-K with the SEC announcing the
completion of an Agreement and Plan of Merger with Endo Pharmaceuticals Holdings
Inc., a Delaware corporation (“Endo”) and BTB Purchaser Inc., a Delaware
corporation and wholly-owned subsidiary of Endo, pursuant to which Endo acquired
all of the issued and outstanding shares of the common stock, par value $0.001
per share, of Indevus (the “Endo Merger”).  As a part of the Endo
Merger, the Contingent Rights were converted into the right to receive a cash
payment contingent upon FDA approval of the Drug
Applications.  As a result of the consummation of the Endo Merger, the
Company has contingent rights to receive from Endo the following cash payments:
(i) upon FDA approval of the uteral stent drug application (the “Uteral Stent”)
on or before specified dates in 2012 - between $2,685,000 and $2,327,000,
depending upon the terms contained in the FDA approval and (ii) upon FDA
approval of the VP003 (Octreotide implant) drug application (“VP003”) on or
before specified dates in 2012 - between $4,028,000 and $3,491,000, depending
upon the terms contained in the FDA approval.   Two related
parties would be entitled to receive a portion of any such cash payments
received by the Company. See Note 11(a).
 
 11.         Related
party transactions
 
 (a)
            On
      November 12, 2004, the Company entered into an agreement to borrow
      approximately $1,022,000 from Bedford Oak Partners, which is controlled by
      Harvey P. Eisen, Chairman, Chief Executive Officer and a director of the
      Company, and approximately $568,000 from Jerome I. Feldman, who was at the
      time Chairman and Chief Executive Officer of the Company, which was
      utilized to exercise an option held by the Company to purchase Series B
      Convertible Preferred shares of Valera.  The loans bore interest
      at 6% per annum, had a maturity date on October 31, 2009, and were secured
      by all shares of Valera owned by the Company, including the purchased
      shares.  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 acquisition of Valera by Indevus
      (see Note 10), this obligation related to the sale of Indevus shares by
      the Company. From June 2007 through and including September 12, 2007, the
      Company sold, in a series of open market transactions, all of the
      2,639,482 shares of Indevus common stock held by the Company for an
      aggregate of approximately $17,598,000, net of commissions and brokerage
      fees.  The November 12, 2004 agreement among the Company, Bedford Oak
      Partners and Mr. Feldman provides for Bedford Oak Partners and Mr. Feldman
      to (i) receive 50% of any amount in excess of $3.47 per share which is
      received by the Company upon the sale of Indevus common stock and (ii)
      participate in 50% of the profits earned on 19.51% of shares of Indevus
      common stock received by the Company upon conversion of the Contingent
      Rights, if any, at such time as such shares are sold by the
      Company.
 
 As a
result of the consummation of the Endo Merger (see Note 10), the Company has a
contingent right to receive from Endo certain cash payments. The two related
parties would receive the following portions of the Company’s cash payments upon
the occurrence of the following events: (i) upon FDA approval of the Uteral
Stent, between $262,000 and $227,000, and (ii) upon FDA approval of
VP003, between $393,000 and $341,000.
 
 (b)
            On
      April 5, 2007, Five Star, in connection with its acquisition of
      substantially all the assets of Right-Way Dealer Warehouse (“Right-Way”),
      entered into a lease for a warehouse with a company owned by the
      former principal of Right-Way who presently serves as an executive of
      Five Star. The lease has an initial term of five years with two successive
      five-year renewal options and provides for an annual rent of $325,000,
      subject to adjustment. The adjusted rent expense for the 12 months
      commencing January 1, 2009 will be $280,000.   Five Star also
      has an option to purchase the warehouse at any time during the initial
      term of the lease for $7,750,000, subject to 3% annual
      adjustments.
 
 15
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  12.         Stockholders
equity
 
 (a)
            Mr. S.
      Leslie Flegel was named a director of the Company on March 2, 2007 and on
      March 1, 2007 was appointed as Chairman and elected as a director of Five
      Star.  Effective March 2, 2007, Mr. Flegel entered into a
      three-year agreement with Five Star (the “FS Agreement”) which provided
      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 were fully vested upon issuance and not subject to
      forfeiture.  The 2,000,000 shares were valued at $720,000 based
      on the closing price of Five Star common stock on March 2, 2007. Such
      amount was to be charged to compensation expense over the term of the FS
      Agreement.
 
 On March
2, 2007, the Company and Mr. Flegel entered into an agreement pursuant to which
the Company sold to Mr. Flegel 200,000 shares of Company common stock for
$480,000 ($2.40 per share).  The agreement gave Mr. Flegel the right
to exchange any or all of the 200,000 shares of the Company’s common stock into
shares of Five Star common stock held by the Company at the fixed rate of six
shares of Five Star common stock for each share of Company common stock. The
value of the option to convert the shares of Company common stock held by Mr.
Flegel into shares of Five Star common stock, which amounted to $264,000,
was valued using a Black Scholes formula and recognized as compensation expense
by Five Star over the three year term of the FS Agreement. In addition, as the
exchange rights, if exercised, would require the Company to effectively
surrender net assets to redeem common stock, the Company accounted for the
issuance of the 200,000 shares of Company common stock as temporary equity at an
amount equivalent to the carrying value of Five Star’s equity that could be
acquired by the holder of such shares.
 
 On March
25, 2008, Mr. Flegel resigned as director and Chairman of the Board of Five
Star, and as a director of the Company, effective immediately.  In
connection with Mr. Flegel’s resignation, Five Star, the Company and Mr. Flegel
entered into an agreement, dated March 25, 2008, pursuant to which Mr. Flegel
sold to the Company (i) 200,000 shares of Company common stock, which was
exchangeable into 1,200,000 shares of Five Star common stock owned by the
Company, at $3.60 per share, which equates to $0.60 per share of Five Star
common stock had Mr. Flegel exercised his right to exchange these shares
of  Company common stock into shares of Five Star common stock and
(ii) 1,698,336 shares of Five Star common stock at $0.60 per
share.  In addition, Mr. Flegel’s children and grandchildren sold to
the Company an additional 301,664 shares Five Star common stock that they had
received from Mr. Flegel at $0.60 per share. The market value of Company
common stock on March 25, 2008 was $2.40 per share.  The excess cash
paid of $1.20 per share over the market value on the 200,000 shares of Company
common stock purchased from Mr. Flegel, or $240,000, was deemed to be the
settlement of the option to exchange Company common stock for Five Star
common stock and was charged to Additional paid-in capital. Five Star recorded a
compensation charge of $1,096,000 in 2008 related to the above transactions,
including the unrecognized value of the 2,000,000 shares of Five Star common
stock issued and the option to convert the 200,000 shares of Company common
stock discussed above.  In addition, the expense included $440,000,
which represents the excess of the purchase price over the quoted market price
of the 2,000,000 shares of Five Star common stock on the date of the agreement
to acquire such shares. As a result of the repurchase of the 200,000 shares of
Company common stock, which were also convertible into shares of Five Star
common stock, the carrying value of the Company’s shares was reclassified from
temporary to permanent equity.
 
 16
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  The
agreement also contained one-year non-compete, standstill and non-solicitation
provisions. In addition, the FS Agreement was terminated upon Mr. Flegel’s
resignation.
 
 (b)
            On
      August 11, 2008, the Company, The Gabelli Small Cap Growth Fund, The
      Gabelli Equity Income Fund, The Gabelli ABC Fund and The Gabelli
      Convertible and Income Securities Fund Inc. (collectively, the
      “Warrantholders”), holders of warrants to purchase an aggregate of
      1,423,886 shares of Company common stock, dated as of December 3, 2004
      (the “Warrants”), amended the Warrants to (i) extend the expiration
      date of the Warrants from August 14, 2008 to August 15, 2008 and (ii)
      reduce the exercise price of the Warrants from $3.57 per share to $2.50
      per share, which was in excess of the closing price on August 11,
      2008.  On August 13, 2008, the Warrantholders exercised the
      warrants and the Company issued and sold 1,423,886 shares of treasury
      stock to the Warrantholders for cash consideration of $2.50 per share,
      representing an aggregate purchase price of
  $3,560,000.
 
 13.           Income
taxes
 
 For
the three and nine months ended September 30, 2009, the income tax expense
differed from the benefit computed at the federal statutory rate primarily due
to non deductible expenses, state taxes, and an increase in the valuation
allowance with respect to the tax benefit attributable to losses incurred during
the periods.
 
 As the
result of the resignation of Mr. Flegel, former director and Chairman of the
Board of Five Star and former director of the Company (see Note 12(a)),
compensation expense of $1,096,000 was recorded during the nine months ended
September 30, 2008, of which $704,000 did not result in a tax
benefit.  Such amount was treated as a discrete item. The tax effect
of the 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.
 
 In
connection with the increase in ownership of Five Star from less than 80% to
100% in the third quarter of 2008, the excess of the financial reporting basis
over tax basis in Five Star was no longer considered to be a taxable temporary
difference and accordingly a related $279,000 deferred income tax liability was
reflected as an income tax benefit in the three and nine months ended September
30, 2008.
 
 14.           Fair
value of financial instruments
 
 The
carrying value of cash and cash equivalents, accounts receivable and accounts
payable approximate estimated fair value because of short maturities. The
carrying value of short term borrowings approximates estimated fair value
because borrowings accrue interest which fluctuates with changes in LIBOR or
prime.
 
 Marketable
securities are carried at fair value based upon quoted market prices. Derivative
instruments are carried at fair value representing the amount the Company would
receive or pay to terminate the derivative.
 
 17
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2009 and 2008
 (unaudited)
  15.           Subsequent events
 
 On
October 20, 2009, NPDC Holdings, Inc., a wholly-owned subsidiary of the Company,
sold approximately 1,000 acres of undeveloped real property located in the Town
of Pawling, County of Dutchess, New York (the “Pawling Property”) for
$12,500,000 in cash, pursuant to the contract entered on October 7,
2009.  The carrying amount of the Pawling Property as reflected in
Other assets in the Condensed Consolidated Balance Sheet at September 30, 2009
was approximately $2,500,000. The Company realized a pre tax gain of
approximately $9,600,000, which will be recognized in October 2009.
       18
  Item
2.  Management’s Discussion and Analysis 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, 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 under “Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on
March 31, 2009, as amended.
  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, except as required by
law. You are cautioned not to unduly rely on such forward-looking statements
when evaluating the information presented in this report.
  General
Overview
  Five Star
represents the Company’s only operating segment.  The Company also
owns certain other non-core assets, including an investment in MXL Operations,
certain contingent stock rights in Endo Pharmaceuticals Holdings Inc. and
certain real estate in Killingly, Connecticut.  Through June 2008, MXL
Operations operated as a separate operating segment (see Note 4 to the Condensed
Consolidated Financial Statements).  The Company holds certain
contingent rights with respect to products in development by Endo and monitors
Endo for progress in achieving milestones relating to such products (See Note 10
to the Condensed Consolidated Financial
Statements).
  On
October 20, 2009, NPDC Holdings, Inc., a wholly-owned subsidiary of the Company,
closed a transaction with respect to the sale of the Pawling Property,
approximately 1,000 acres of real property located in the Town of Pawling,
County of Dutchess, New York, to Little Whaley Holdings, LLC, a New York limited
liability company, for a purchase price of $12,500,000 in cash.  The
carrying amount of the Pawling Property as reflected in Other assets in the
Condensed Consolidated Balance Sheet at September 30, 2009 was approximately
$2,500,000. The Company realized a pre tax gain of approximately $9,600,000,
which will reflected in the financial statements on the date of
sale.
  19
  MXL
Operations
  On June
19, 2008, pursuant to the terms of an Asset Purchase Agreement dated as of June
16, 2008, by and among the Company, MXL Industries, a wholly-owned subsidiary of
the Company, as the Seller, MXL Operations, MXL Leasing, and MXL Realty, the MXL
Buyers purchased substantially all the assets and assumed certain liabilities
(except the “Excluded Liabilities,” as defined in the Asset Purchase Agreement
of the MXL Business) of the Seller’s optical plastics molding and precision
coating business).  As consideration, the Seller received
approximately $5,200,000 in cash, of which approximately $2,200,000 was utilized
to fully pay the bank debt of MXL Industries.
  MXL
Industries also made an aggregate capital contribution to the MXL Buyers of
$275,000, allocated to each of MXL Operations, MXL Leasing and MXL Realty in a
manner so that, as of the effective time of the transaction, the Seller has a
19.9% interest in the total capital of each of MXL Leasing and MXL Realty and a
40.95% interest in the total capital of MXL Operations.  MXL
Operations had the right to issue additional shares which, if issued, would
reduce the Seller’s interest in each of the MXL Buyers on a pro rata basis to a
minimum of 19.9%. Those shares have been issued and the Company currently owns
19.9% of MXL Operations.  The results of the MXL Business have been
accounted for as a discontinued operation for the nine months ended September
30, 2008.  See Note 4 to the Condensed Consolidated Financial
Statements.
  Five
Star Tender Offer and Merger
  On June
26, 2008, pursuant to the terms of the Tender Offer Agreement among the Company,
Five Star and NPDV, a newly-formed wholly-owned subsidiary of the Company, NPDV
commenced a tender offer to acquire all the outstanding shares of Five Star
common stock not held by the Company or NPDV at a purchase price of $0.40 per
share, net to the seller in cash, without interest thereon and less any required
withholding taxes.  The Tender Offer closed on August 26, 2008, and on
August 28, 2008, the NPDV-Five Star Merger, in which NPDV merged with and into
Five Star, with Five Star continuing as the surviving corporation, wholly-owned
by the Company, was effected.  The Company paid approximately
$1,028,000 for the tendered shares, $661,000 for the remaining shares to be
tendered and incurred expenses related to the NPDV-Five Star Merger of
approximately $642,000.  See Note 3 to the Condensed Consolidated
Financial Statements.
  Due to
recent market events that have adversely affected the global economy, management
has placed increased emphasis on monitoring the risks associated with the
current economic environment, including the collectability of receivables, the
fair value of assets, and the Company’s liquidity.  Management will
continue to monitor the risks associated with the current economic environment
and their impact on the Company’s results of operations.
  Five
Star Overview
  Five
Star, a wholly-owned subsidiary of the Company, 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.
  20
  Five Star
operates in the home improvement market.  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 and dealer-owned distributors. Management of Five Star believes
that 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.
  Contingent
Rights - Endo
  On March
23, 2009, Indevus filed a Current Report on Form 8-K with the SEC announcing the
completion of the its merger with 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.  As a part of the merger transaction, certain
contingent rights to receive shares of Indevus common stock upon FDA approval of
two drug applications, acquired by the Company in April 2007, were converted
into the right to receive contingent cash payments.  These cash
payments are contingent upon FDA approval of the drug
applications.  As a result of the consummation of Indevus’ merger with
Endo, the Company has contingent rights to receive from Endo the following cash
payments:  (i) upon FDA approval of the uteral stent drug application
on or before specified dates in 2012 - 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 on or before
specified dates in 2012 - between $4,028,000 and $3,491,000, depending upon the
terms contained in the FDA approval.  See Note 10 to the Condensed
Consolidated Financial Statements.
  Operating
Highlights
  Three
months ended September 30, 2009 compared to the three months ended September 30,
2008
  For the
three months ended September 30, 2009, the Company had a loss from continuing
operations before income tax expense of $(763,000) compared to a loss from
continuing operations before income tax expense of $(1,200,000) for the three
months ended September 30, 2008.  The decrease in the pre-tax loss
from continuing operations is primarily the result of the following: (i)
increased operating income of $354,000 for Five Star for the three months ended
September 30, 2009; (ii) an impairment charge of $138,000 related to the
Company’s investment in Millennium Cell, Inc. (“Millennium Cell”) in 2008, (iii)
reduced operating expenses at the corporate level of $22,000, and (iv) reduction
on investment income/ loss of $80,000.
  The
increased operating income of $354,000 for Five Star was primarily attributable
to: (i) $489,000 reduction in non-cash compensation expense (see Note 7 to the
Condensed Consolidated Financial Statements); (ii) $974,000 reduction in gross
margin due to reduced sales levels, and; (iii) $839,000 reduction in selling,
general and administrative expenses.
  21
  Sales
  For the
three months ended September 30, 2009, sales, which are comprised solely of the
sales of Five Star, were $27,131,000, a decrease of $4,085,000, or 13.1%, from
September 30, 2008 sales of $31,216,000.  The decrease in sales by
Five Star for the quarter ended September 30, 2009 as compared to the prior year
period was the result of reduced sales out of the Five Star’s New Jersey and
Connecticut warehouses due to an overall weakness in the economy.
  Gross
margin
  Gross
margin was $4,540,000, or 16.7% of net sales, for the quarter ended September
30, 2009, as compared to $5,514,000, or 17.7% of net sales, for the quarter
ended September 30, 2008. The decrease in gross margin dollars of $974,000 for
the quarter ended September 30, 2009 as compared to the corresponding prior year
quarter was the result of reduced Five Star sales for the 2009
period.  The reduced gross margin percentage was primarily due to
increased warehouse expenses as a percentage of sales for the three months ended
September 30, 2009 due to reduced sales levels for the period, partially offset
by an overall decrease of $285,000 in warehouse expenses for the third quarter
of 2009 as compared to the corresponding prior year period.
  Selling,
general, and administrative expenses
  For the
three months ended September 30, 2009, selling, general and administrative
(“SG&A”) expenses decreased by $1,350,000 to $4,921,000 for the three months
ended September 30, 2008 from $6,271,000 for the three months ended September
30, 2008. The decrease consists of a decrease of $1,328,000 in Five Star’s
SG&A and reduced SG&A at the corporate level of $22,000.  The
reduced SG&A expenses incurred by Five Star were primarily due to: (i) a
$489,000 charge in the third quarter of 2008 for the unrecognized non-cash
compensation cost related to non-vested share-based compensation arrangements
terminated as a result of the Tender Offer and Merger; (ii) $79,000 of costs
incurred in the third quarter of 2008 related to the Tender Offer and Merger;
(iii) reduced delivery expenses of $25,000 for the third quarter of 2009 due to
reduced sales for the 2009 period; (ii) reduced general and administrative
expenses of $483,000  for the 2009 period, primarily due to reduced
personnel costs and professional  fees; and (iii) reduced sales
commissions and related selling expenses of $129,000 in the 2009 period due to
reduced sales for the period, partially offset by increased vendor marketing
revenue recognized of $156,000. The decrease in corporate SG&A expenses is
primarily attributable to reduced facility and personnel costs, offset by
increased professional fees.
  Investment
and other income (loss), net
  The
Company recognized investment and other income (loss) of $7,000 for the three
months ended September 30, 2009 compared to a loss of  $(73,000) for
the three months ended September 30, 2008.  The change of $80,000 was
due to an impairment charge of $138,000 for the three months ended September 30,
2008, related to the Company’s investment in Millennium Cell, offset by reduced
interest income due to lower interest rates on investments in the 2009 period
and reduced balances of cash and cash equivalents in such period.
  Income
taxes
  For the
three months ended September 30, 2009 and 2008, the Company recorded income tax
expense (benefit) of $4,000 and $(354,000), respectively, which represents the
Company’s applicable federal, state and local tax expense for the periods from
continuing operations.  For the three months ended September 30, 2009,
the income tax expense differed from the tax 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.
  22
  For the
three months ended September 30, 2008, the income tax benefit differed from the
tax 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.  In addition, the Company recorded discrete tax items during
the third quarter of 2008, with respect to certain non-cash compensation
expenses of Five Star, which did not result in a tax benefit, and the write-off
of a deferred tax liability with respect to the Company’s investment in Five
Star, which resulted in a deferred tax benefit.  The tax effect of
discrete items are reflected in the periods in which they occur and are not
reflected in the estimated annual effective tax rate.  As of July 21,
2008, the Company owned more than 80% of Five Star and is therefore required to
include Five Star in its federal consolidated tax return.
  Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008
  For the
nine months ended September 30, 2009, the Company had a loss from continuing
operations before income tax expense of $2,131,000 compared to a loss from
continuing operations before income tax expense of $3,399,000 for the nine
months ended September 30, 2008.  The decrease in pre-tax loss from
continuing operations is primarily a result of the following: (i) increased
operating income of $1,059,000 for Five Star for the nine months ended September
30, 2009, (ii) an impairment charge of $138,000 related to the Company’s
investment in Millennium Cell in 2008; (iii) reduced operating expenses at the
corporate level of $330,000, and (iv) increased interest expense of $78,000 due
to higher interest rates.
   The
increased operating income of $1,059,000 for Five Star was primarily
attributable to: (i) $1,096,000 reduction in non-cash compensation expense (see
Note 12(a) to the Condensed Consolidated Financial Statements); (ii) $2,743,000
reduction in gross margin due to reduced sales levels, and; (iii) $2,706,000
reduction in selling, general and administrative expenses.
   Sales
  The
Company had sales, which are comprised solely of the sales of Five Star, of
$80,027,000 for the nine months ended September 30, 2009, as compared to sales
of $94,114,000 for the nine months ended September 30, 2008. The decrease in
Five Star sales of $14,087,000, or 15%, for the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008 was due to an
overall weakness in the economy and the Company’s marketplace.
  Gross
margin
  Gross
margin for the nine months ended September 30, 2009 was $13,396,000, or 16.7% of
net sales, as compared to $16,139,000, or 17.1% of net sales, for the nine
months ended September 30, 2008.  The decrease in gross margin dollars
of $2,743,000 for the nine months ended September 30, 2009 was the result of
reduced Five Star sales for the period.  The reduced gross margin
percentage was primarily due to increased warehouse expenses as a percentage of
sales due to reduced sales levels, notwithstanding a decrease of $854,000 in
warehouse expenses for the first nine months of 2009 as compared to the
corresponding prior year period.
  23
  Selling,
general, and administrative expenses
  For the
nine months ended September 30, 2009, selling, general and administrative
expenses decreased by $3,036,000 to $14,424,000 for the nine months ended
September 30, 2009 from $17,460,000 for the nine months ended September 30,
2008.  This decrease was primarily attributable to a decrease of
$2,706,000 in Five Star’s SG&A expenses, and a decrease of $330,000 in
SG&A expenses at the corporate level, for the first nine months of 2009. The
reduced SG&A expenses incurred by Five Star were primarily due to: (i)
reduced delivery expenses of $317,000, due to reduced sales for the 2009 period;
(ii) reduced general and administrative expenses of $1,548,000, primarily due to
reduced personnel costs and professional fees (including $304,000 of costs
incurred in the first nine months of 2008 related to the Tender Offer to acquire
all the outstanding shares of Five Star common stock not previously held by the
Company (see Note 3 to the Condensed Consolidated Financial Statements)); (iii)
a non-cash compensation charge of $489,000 related to the termination of certain
Five Star equity awards (see Note 3 to the Condensed Consolidated Financial
Statements); and (iv) reduced sales commissions and related selling expenses of
$520,000 due to reduced sales in the 2009 period, partially offset by reduced
vendor marketing revenue recognized of $69,000 for such period. The decrease in
corporate SG&A expenses is primarily attributable to reduced facility and
personnel costs for the first nine months of 2009.
  Investment
and other income (loss), net
  The
Company recognized investment and other income of $35,000 for the nine months
ended September 30, 2009 compared to investment and other income
of  $78,000 for the nine months ended September 30,
2008.  The change of $43,000 was due to reduced interest income due to
lower interest rates on investments in the 2009 period and reduced balances of
cash and cash equivalents in such period, partially offset by an impairment
charge of $138,000 for the nine months ended September 30, 2008, related to the
Company’s investment in Millennium Cell.
  Income
taxes
  For the
nine months ended September 30, 2009 and 2008, the Company recorded an income
tax expense (benefit) of $12,000 and $(329,000), respectively, which represents
the Company’s applicable federal, state and local tax expense for the periods
from continuing operations.  For the nine months ended September 30, 2009,
the provision for income taxes differed from the tax 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.
  For the
nine months ended September 30, 2008, the income tax benefit differed from the
tax 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.  As the result of the resignation of S. Leslie Flegel, former
director and Chairman of the Board of Five Star, compensation expense of
$1,096,000 was recorded by Five Star of which $704,000 did not result in a tax
benefit.  Such amount was treated as a discrete item. The tax effect
of the 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 also recorded a discrete tax item
during the third quarter of 2008 related to a write-off of a deferred tax
liability with respect to the Company’s investment in Five Star, which resulted
in a deferred tax benefit.  The tax effect of discrete items are
reflected in the periods in which they occur and are not reflected in the
estimated annual effective tax rate.  As of July 21, 2008, the Company
owns more than 80% of Five Star and is required to include Five Star in its
federal consolidated tax return.
  Income
tax expense of $33,000 was recorded as part of discontinued operations for the
nine months ended September 30, 2008, as it relates to tax on the operations of
MXL Industries and the gain related to its sale
  24
  Financial
condition
  The
increase in accounts receivable and accounts payable at September 30, 2009 as
compared to December 31, 2008 are the result of seasonal
fluctuations.  The Company maintained lower than historical inventory
levels during the first nine months of 2009 as compared to the first nine months
of 2008 in order to better manage its working capital.
  Liquidity
and Capital Resources
  At
September 30, 2009, the Company had cash and cash equivalents totaling
$11,588,000. On October 20, 2009, NPDC Holdings, Inc., a wholly-owned subsidiary
of the Company, closed a transaction with respect to the sale of the Pawling
Property for a purchase price of $12,500,000 in cash.   The
Company believes that cash and borrowing availability under the existing
credit agreement will be sufficient to fund the Company’s working capital
requirements for at least the next 12 months.
  For the
nine months ended September 30, 2009, the Company’s working capital decreased by
$954,000 to $19,849,000 from $20,803,000 as of December 31, 2008.
  The
decrease in cash and cash equivalents of $1,501,000 at September 30, 2009 as
compared to December 31, 2008 resulted from:
  ·
            net
      cash provided by operations of $1,063,000, which includes
      the  net loss of $2,143,000, in the first nine months of
      2009;
  ·
            an
      increase in accounts payable and accrued expenses of $3,806,000 and a
      decrease in inventory of $1,080,000 partially offset by an increase in
      accounts receivable of $3,164,000 for the first nine months of
      2009;
  ·
            net
      cash used in financing activities of $2,507,000, consisting of repayments
      of short term borrowings, in the first nine months of
  2009.
  On June
27, 2008, Five Star entered into a Restated and Amended Loan and Security
Agreement (the “Amended Loan Agreement”) with Bank of America, N.A. (“Bank of
America”).  The Amended Loan Agreement extends the maturity date of
that certain Loan and Security Agreement, dated as of June 20, 2003, entered
into by Five Star and Bank of America (through its predecessor Fleet Capital
Corporation), as amended (the “2003 Loan Agreement”), until June 30,
2011. The 2003 Loan Agreement, as amended by the Amended Loan Agreement, is
referred to herein as the “Loan Agreement”.
  The Loan
Agreement provides Five Star with a $35,000,000 revolving credit facility
(“Revolving Credit Facility”), subject to a $3,500,000 sub-limit for letters of
credit.  The Revolving Credit Facility allows Five Star to borrow up
to (a) 85% of eligible receivables plus (b) the greater of (i) the lesser of
$20,000,000 or 65% (to be reduced by 1% per quarter commencing July 1, 2008) of
eligible inventory, or (ii) the lesser of $20,000,000 or 85% of the appraised
net orderly liquidation value of eligible inventory minus (c) the amount of
outstanding letter of credit obligations, as those terms are defined
therein.  At September 30, 2009, Five Star was allowed to borrow 54.7%
of eligible inventory.  All obligations under the Revolving Credit
Facility are collateralized by first priority liens on all of Five Star’s
existing and future assets.
  Loans
made to Five Star under the Revolving Credit Facility bear interest at a per
annum rate based on the Base Rate of Bank of America, as defined, plus 2.25%, as
modified, or at a per annum rate based on LIBOR plus 325 basis points, as
modified, at Five Star’s election.  The LIBOR and Base Rate
margins are subject to adjustment based on certain performance benchmarks. At
September 30, 2009 the LIBOR and Base Rate margins were 400 basis points and 3%,
respectively.  At September 30, 2009 and December 31, 2008,
$15,868,000 and $18,375,000 was outstanding under the Loan Agreement and
approximately $4,518,000 and $3,677,000 was available to be borrowed,
respectively.  Substantially all of Five Star’s assets are pledged as
collateral for these borrowings.  The amount available at September
30, 2009 reflects a $937,000 reduction in availability as a result of liability
for the interest rate swap (see Note 9 to the Condensed Consolidated Financial
Statements).
  25
  In
connection with the Amended Loan Agreement, Five Star also entered into an
interest rate swap with Bank of America which has been designated as a cash flow
hedge.  Effective June 30, 2008 through June 30, 2011, Five Star will
pay a fixed interest rate of 3.62% to Bank of America on notional principal of
$20,000,000.  In return, Bank of America will pay to Five Star a
floating rate, namely, LIBOR, on the same notional principal
amount.  The credit spread under the Amended Loan Agreement is not
included in, and will be paid in addition to, this fixed interest rate of
3.62%.  The fair value of the interest rate swap amounted to a
liability of $907,000 at September 30, 2009 and a liability of $1,111,000 at
December 31, 2008. Changes in the fair value of the interest rate swap were
recognized in other comprehensive income.
  Under the
Loan Agreement, Five Star is subject to covenants, as amended, requiring minimum
net worth, limitations on losses, if any, and minimum or maximum values for
certain financial ratios. Five Star was in compliance with its amended covenants
as of September 30, 2009 and although there can be no assurance, anticipates to
be in compliance in future quarters.
  The
following table sets forth the significant debt covenants, as defined, at
September 30, 2009:
  Covenant
            
            Required
            
            CalculatedMinimum
      tangible net worth
            
            $7,000,000
            
            $9,602,000Debt
      to tangible net worth
            
            <
      6
            
            1.65Fixed
      charge coverage (*)
            
            >0.8
            
            1.29Quarterly
      income (loss)
            
            No
      loss in consecutive quarters
            
            $25,000 – third
      quarter profit
              $95,000 – second
      quarter profit
 *           Amended
by Bank of America through the quarter ended March 31, 2010.
 
 Recent
accounting pronouncements
 
 See Note
2 to the Condensed Consolidated Financial Statements regarding the effects on
the Company’s financial statements of the adoptions of recent accounting
pronouncements.
 
 Contractual
Obligations and Commitments
 
 Each of
GP Strategies Corporation (“GP Strategies”), formerly the parent entity of Five
Star, and the Company have guaranteed the leases for Five Star’s New Jersey and
Connecticut warehouses, which lease rental payment obligations total
approximately $2,150,000 per year, through the third quarter of 2010. GP
Strategies’ guarantee of such leases was in effect when Five Star was a
wholly-owned subsidiary of GP Strategies. As part of the spin-off of Five Star,
the landlord of the New Jersey and Connecticut warehouses did not consent
to the release of GP Strategies’ guarantee.  In March 2009, the landlord of
the Connecticut warehouse released GP Strategies from its guarantee and accepted
a guarantee solely by the Company.
 
 26
  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 three months ended September 30, 2009
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
 PART
II. OTHER INFORMATION
 
 Item 6.  Exhibits.
 
 Exhibit
              No.
            
            Description10.1
            *
            Contract
      of Sale dated as of October 7, 2009 between NPDC Holdings, Inc. and Little
      Whaley Holdings LLC (included by reference to Ex. 10 to Form 8-K filed by
      the Company with the SEC on October 14, 200910.2
            
            Letter
      Amendment, dated June 23, 2009 to Lease dated February 1, 1986 between
      Vernel Company and Five Star Group, Inc.31.1
            *
            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
  27
 
 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: November
      16, 2009
            By:
            /s/ HARVEY
      P. EISENName:
            Harvey
      P. EisenTitle:
            Chairman
      of the Board and Chief
              Executive
      OfficerDate: November
      16, 2009
            By:
            /s/ IRA
      J. SOBOTKOName:
            Ira
      J. SobotkoTitle:
            Vice
      President, Chief Financial Officer
      
 28