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 1934
 
 For the quarterly period ended June 30, 2009
 or
 
 o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For 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 August 10, 2009, there were 17,556,677 shares of the registrant’s common stock, $0.01 par value, outstanding.
 
 
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 
 TABLE OF CONTENTS
 
 Part I.  Financial Information
Page No.Item 1.
Financial StatementsCondensed  Consolidated Statements of Operations -Three Months  and Six Months Ended June 30, 2009 and 2008 (Unaudited)
1Condensed  Consolidated Statements of Comprehensive Income (Loss) -Three Months and Six Months Ended June 30, 2009 and 2008 (Unaudited)
2Condensed  Consolidated Balance Sheets -June 30, 2009 (Unaudited) and December 31, 2008
3Condensed  Consolidated Statements of Cash Flows -Six Months Ended June 30, 2009 and 2008 (Unaudited)
4Condensed  Consolidated Statement of Changes in Stockholders’ Equity -Six Months Ended June 30, 2009 (Unaudited)
5Notes to Condensed Consolidated Financial Statements -
Six Months Ended June 30, 2009 and 2008 (Unaudited)
6Item 2.
Management’s Discussion and Analysis of FinancialCondition and Results of Operations
18Item 3.
Quantitative and Qualitative Disclosures about Market Risk
26Item 4.
Controls and Procedures
26Part II. Other InformationItem 6.
Exhibits
26SIGNATURES
27
  
 PART I.  FINANCIAL INFORMATION
 Item 1. Financial Statements
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except per share data)
 
 Three months ended
June 30,


Six months ended
June 30,2009


2008


2009


2008Sales

$
27,766


$
31,429


$
52,896


$
62,898Cost of sales


22,900



25,979



44,040



52,272Gross margin


4,866



5,450



8,856



10,626Selling, general and administrative expenses


(5,118
)


(5,806
)


(9,503
)


(11,189
)Charge related to resignation of Chairman
of Five Star


-



-



-



(1,096
)Operating  loss


(252
)


(356
)


(647
)


(1,659
)Interest expense


(419
)


(388
)


(749
)


(690
)Investment and other income


15



58



28



151Loss from continuing operations before
income tax expense


(656
)


(686
)


(1,368
)


(2,198
)Income tax expense


(4
)


(12
)


(8
)


(25
)Loss from continuing operations


(660
)


(698
)


(1,376
)


(2,223
)Income from discontinued operations, net of
taxes, including an $87 gain on sale of assets


-



294



-



429Consolidated net loss


(660
)


(404
)


(1,376
)


(1,794
)Less: net income attributable to noncontrolling
interest


-



(24
)


-



(11
)Net loss attributable to National Patent
Development Corporation

$
(660
)

$
(428
)

$
(1,376
)

$
(1,805
)Basic and diluted net loss per share
attributable to National Patent Development
Corporation:Continuing operations

$
(0.04
)

$
(0.05
)

$
(0.08
)

$
(0.14
)Discontinued operations


-



0.02



-



0.03Net loss per share

$
(0.04
)

$
(0.03
)

$
(0. 08
)

$
(0.11
)
   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


Six months endedJune 30,


June 30,2009


2008


2009


2008Net loss

$
(660
)

$
(428
)

$
(1,376
)

$
(1,805
)Other comprehensive income (loss),
before tax:Net unrealized loss on available-for-
sale-securities


-



(36
)


-



(102
)Net unrealized gain on interest rate
swap


202



102



209



4Comprehensive loss before tax


(458
)


(362
)


(1,167
)


(1,903
)Income tax (expense) benefit related to
items of other comprehensive
income (loss)


(80
)


(37
)


(83
)


2Comprehensive loss


(538
)


(399
)


(1,250
)


(1, 901
)Comprehensive (income) loss
attributable to noncontrolling
interest


-



(21
)


-



4Comprehensive loss attributable to
National Patent Development
Corporation

$
(538
)

$
(420
)

$
(1,250
)

$
(1,897
)
  
 See accompanying notes to condensed consolidated financial statements.
  2
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
 
 June 30,


December 31,2009


2008(unaudited)AssetsCurrent assetsCash and cash equivalents

$
12,059


$
13,089Accounts and other receivables, less allowance
for doubtful accounts of $402 and $420


14,784



9,814Inventories (finished goods)


23,155



23,045Deferred tax asset


111



132Prepaid expenses and other current assets


909



1,334Total current assets


51,018



47,414Property, plant and equipment, net


780



912Intangible assets, net


535



599Deferred tax asset


1,475



1,537Other assets


3,209



3,209Total assets

$
57,017


$
53,671Liabilities and stockholders’ equityCurrent liabilitiesShort term borrowings

$
20,770


$
18,375Accounts payable and accrued expenses


10,175



8,236Total current liabilities


30,945



26,611Liability related to interest rate swap


902



1,111Contingencies (Notes 10 and 11)Stockholders’ equityCommon stock


181



181Additional paid-in capital


29,113



28,642Deficit


(2,225
)


(849
)Treasury stock, at cost


(1,358
)


(1,358
)Accumulated other comprehensive loss


(541
)


(667
)Total stockholders’ equity


25,170



25,949Total liabilities and stockholders’ equity

$
57,017


$
53,671
  See accompanying notes to condensed consolidated financial statements.
  3
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 
 Six months endedJune 30,2009


2008Cash flows from operations:Net loss

$
(1,376
)

$
(1,794
)Adjustments to reconcile net loss tonet cash used in operating activities:Depreciation and amortization


229



398Gain on sale of MXL


-



(87
)Expenses paid in common stock


13



29Deferred income taxes


-



(87
)Stock based compensation


458



1,214Changes in other operating items, net of effect of  disposition of MXLAccounts and other receivables


(4,970
)


(5,233
)Inventories


(110
)


(2,492
)Prepaid expenses and other assets, net of cash sold


425



444Accounts payable and accrued expenses


1,939



638Net cash used in operations


(3,392
)


(6,970
)Cash flows from investing activities:Additions to property, plant and equipment


(33
)


(458
)Acquisition of additional interest in Five Star


-



(1,523
)Net proceeds from sale of assets of MXL


-



4,661Investment in MXL


-



(275
)Net cash  provided by (used in)  investing activities


(33
)


2,405Cash flows from financing activities:Purchase of treasury stock


-



(1,017
)Settlement of option


-



(240
)Proceeds from short-term borrowings, net


2,395



5,003Repayment of long-term debt


-



(1,698
)Net cash provided by financing activities


2,395



2,048Net decrease in cash and cash equivalents


(1,030
)


(2,517
)Cash and cash equivalents at beginning of period


13,089



15,698Cash and cash equivalents at end of period

$
12,059


$
13,181Cash paid for:Interest

$
789


$
859Taxes

$
91


$
25
   See accompanying notes to the condensed consolidated financial statements.
  4
  NATIONAL PATENT DEVELOPMENT CORPORATION
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES
 IN STOCKHOLDERS’ EQUITY
 Six Months Ended June 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 $83






















126



126Net loss














(1,376
)










(1,376
)Stock based compensation expense










458















458Issuance of common stock to directors


11,019







13















13Balance at June 30, 2009


18,116,167


$
181


$
29,113


$
(2,225
)

$
(1,358
)

$
(541
)

$
25,170
  See accompanying notes to condensed consolidated financial statements.
 
 5
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notesto Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2009 and 2008
 (unaudited)
 1.           Basis of presentation and description of business
  Basis of presentation
  The accompanying Condensed Consolidated Balance Sheet as of June 30, 2009, the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008, the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008, the Condensed Consolidated Statements of Comprehensive
Income (Loss) for the three and six months ended June 30, 2009 and 2008, and the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2009 have not been audited, but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  The Condensed Consolidated Balance Sheet as of December 31, 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 SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”. The FASB Accounting Standards Codification (“Codification”) will be the single
source of authoritative nongovernmental U.S. generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS 168. All other accounting literature not included in the Codification is non-authoritative. SFAS No. 168 did not have any impact
on the Company’s consolidated financial statements.
 
 6
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2009 and 2008
 (unaudited)
   In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 improves financial reporting by enterprises involved with variable interest entities and to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation
of Variable Interest Entities”, as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is 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 SFAS 167 will have any effect on its consolidated financial statements.
 
  In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about
a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is 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 the adoption
of SFAS 166 will have any effect on its consolidated financial statements.
 
  In May 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 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 SFAS 165 effective April 1, 2009 and has evaluated subsequent events through the date the financial statements were issued or August 12, 2009.
 
 In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133”.  SFAS No. 161 gives 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. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted SFAS No. 161 effective
January 1, 2009. See Note 9.
  7
 
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2009 and 2008
 (unaudited)
 In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin (“ARB”) No. 51” (“SFAS 160”).  SFAS 160 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.  SFAS
No. 160 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 of SFAS 160, effective January 1, 2009 the Company has retrospectively adjusted its financial statements for the three months and six months ended June 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 six months ended June 30, 2008:
  Attributable toTotal
Equity


Company


Noncontrolling
interestBeginning balance

$
28,977


$
26,075


$
2,902Net loss


(1,794
)


(1,805
)


11Other comprehensive loss


(96
)


(92
)


(4
)Acquisition of additional interest in Five Star


(1,222
)






(1,222
)Equity based compensation


488



458



30Other equity transactions, with no effect on
noncontrolling interest


(735
)


(735
)Ending balance

$
25,618


$
23,901


$
1,717
 
 In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R), replaces FASB Statement No. 141, “Business Combinations”, and 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. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of a business combination. SFAS No. 141(R) 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.  Adoption of SFAS No. 141(R), effective January 1, 2009, did not have any effect on the Company’s consolidated financial statements.
  In February, 2007, the FASB issued Statement of Financial Accounting Standards No.159, “The Fair Value Option for Financial Assets and Financial Liabilities”.  This statement provides companies with an option to report selected financial assets and liabilities at fair value. Although, this statement became 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 six months ended June 30, 2009 and 2008
 (unaudited)
 In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measurement of fair value and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position
157-2 “Partial Deferral of the Effective Date of Statement 157” (“FSP 157-2”). FSP 157-2 delayed the effective date of SFAS 157 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), to fiscal years beginning after November 15, 2008. SFAS No. 157 clarifies that fair value should be based on assumptions that market participants will use when pricing an asset
or liability and establishes a fair value hierarchy of three levels that  prioritize the information used to develop those assumptions. The Company adopted SFAS No. 157 and FSP 157-2 effective January 1, 2008 with respect to financial assets and financial liabilities and January 1, 2009 with respect to nonfinancial assets and nonfinancial liabilities. The adoption of SFAS No. 157 and FSP 157-2 did not have a material effect on the Company’s consolidated financial statements.
  On April 9, 2009, the FASB issued Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, the “Interim Disclosures about Fair Value of Financial Instruments” (FSP 107-1 and APB 28-1). FSP 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require
disclosures about fair value of financial instruments in interim and annual financial statements. APB 28-1 amends Opinion No. 28, “Interim Financial Reporting” to require those disclosures in all interim financial statements. FSP 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009 and the Company adopted them in the second quarter of 2009. See Note 14.
   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 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%
  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 six months
ended June 30, 2009 was approximately $33,000 and $65,000, respectively.
  9
 
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 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.
  For the three and six months ended June 30, 2008, the results for MXL Industries have been accounted for as a discontinued operation. Sales of MXL amounted to $1,714,000 and $4,053,000, respectively, for such periods.
  
 10
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2009 and 2008
 (unaudited)
   5.           Per share data
  Loss per share for the three and six months ended June 30, 2009 and 2008 are calculated as follows (in thousands, except per share amounts):
  Three months ended


Six months endedJune 30,


June 30,2009


2008


2009


2008Basic  and Diluted EPSLoss from continuing operations,
reduced in 2008 by amount applicable
to non-controlling interest

$
(660
)

$
(722
)

$
(1, 376
)

$
(2,234
)Income from discontinued operation


-



294



-



429Net loss attributable to National Patent
Development Corporation

$
(660
)

$
(428
)

$
(1, 376
)

$
(1,805
)Weighted average sharesoutstanding


17,548



16,264



17,550



16,328Per share:Continuing operations

$
(0.04
)

$
(0.05
)

$
(0.08
)

$
(0.14
)Discontinued operations


-



0.02



-



0.03Net loss

$
(0.04
)

$
(0.03
)

$
(0.08
)

$
(0.11
)
 
 The following were not included in the diluted computation, as their effect would be anti-dilutive:
 
 June 30, 2009


June 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
  The Company’s Board of Directors, without any vote or action by the holders of common stock, is authorized to issue preferred stock from time to time in one or more series and to determine the number of shares and to fix the powers, designations, preferences and relative, participating, optional or other special rights
of any series of preferred stock.
  11
 
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2009 and 2008
 (unaudited)
 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 six months ended June 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.
  Information with respect to the Company’s outstanding stock options at January 1, 2009 and at June 30, 2009 is presented below. No stock options were granted under the Company’s incentive stock plans in the six months ended June 30, 2009 or 2008.
  Stock
Options

Weighted
Average
Exercise
Price


Weighted
Average
Contractual
Term


Aggregate
Intrinsic
ValueOptions outstanding at January 1, 2009
3,350,000

$
2.49



7.9


$
0
*Options outstanding  at June 30, 2009
3,350,000

$
2.49



7.3


$
0
*Options exercisable at June 30, 2009
2,183,000

$
2.45



7.3


$
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 June 30, 2009 and 2008 and $458,000 for each of the six months ended June 30, 2009 and 2008. As of June 30, 2009, there was $604,000 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 six months ended June 30, 2008, Five Star recognized compensation expense related to the terminated options and restricted stock of $100,000.
  12
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 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 June 30, 2009, Five Star was borrowing 55.7% 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 June 30, 2009 the LIBOR and Base Rate margins were 400 basis points and 3%, respectively.  At June 30, 2009 and December 31, 2008, $20,770,000 and $18,375,000 was outstanding under the Loan Agreement and approximately $3,060,000 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 June 30, 2009 reflects
an $856,000 reduction in availability as a result of liability for the interest rate swap (see Note 2).
  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 $902,000 at June 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 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 June 30, 2009 and although there can be no assurance, anticipates to be in compliance in future quarters.
  13
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 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 six months ended June 30, 2009, $40,000 and $111,000, respectively,  of income,  was recognized in OCI and $162,000 and $98,000, 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 six months ended June 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 adjustment.
  15
 
  NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
 Three and six months ended June 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 six months ended June 30, 2009 and 2008
 (unaudited)
 The agreement also contained one-year non-compete, standstill and non-solicitation provisions. In addition, the three year FS Agreement was terminated upon his 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 six months ended June 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 period.
  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 six months ended June 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. This resulted in no tax benefit being recorded by Five Star for the six months ended June 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 carries at fair value based upon quoted market prices. Derivative instruments are carries at fair value representing the amount the Company would receive or pay to terminate the derivative.
  17
 Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
  Cautionary Statement Regarding Forward-Looking Statements
  This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, 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 Pawling, New York and 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).
  18
 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 three and six months ended June 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.
  19
 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 June 30, 2009 compared to the three months ended June 30, 2008
  For the three months ended June 30, 2009, the Company had a loss from continuing operations before income tax expense of $(656,000), compared to a loss from continuing operations before income tax expense of $(686,000) for the three months ended June 30, 2008.  The change in pre-tax loss from continuing operations is primarily
the result of the following: (i) increased operating profit of $10,000 at Five Star due to reduced selling, general and administrative expenses, offset by reduced gross margin, (ii) reduced operating expenses at the corporate level of $93,000, partially offset by (iii) increased interest expense incurred by Five Star due to a higher interest rate in 2009.
  Sales
  For the three months ended June 30, 2009, sales, which are comprised solely of the sales of Five Star, were $27,766,000, a decrease of $3,663,000, or 11.7%, from June 30, 2008 sales of $31,429,000.  The decrease in sales by Five Star for the quarter ended June 30, 2009 as compared to the prior year period was the result of adverse
weather conditions in the Northeastern and Mid-Atlantic region of the United States during June 2009 and reduced sales out of the Five Star’s New Jersey and Connecticut warehouses due to an overall weakness in the economy.
  20
 Gross margin
  Gross margin was $4,866,000, or 17.5% of net sales, for the quarter ended June 30, 2009, as compared to $5,450,000, or 17.3% of net sales, for the quarter ended June 30, 2008. The decrease in gross margin dollars of $584,000 for the quarter ended June 30, 2009 as compared to the corresponding prior year quarter was the result of reduced
Five Star sales for the 2009 period.
  Selling, general, and administrative expenses
  For the three months ended June 30, 2009, selling, general and administrative (“SG&A”) expenses decreased by $688,000 to $5,118,000 for the three months ended June 30, 2008 from $5,806,000 for the three months ended June 30, 2008. The decrease consists of a decrease of $594,000 in Five Star’s SG&A and reduced SG&A
at the corporate level of $94,000.  The reduced SG&A expenses incurred by Five Star were primarily due to: (i) reduced delivery expenses of $106,000 due to reduced sales for the 2009 period, (ii) reduced general and administrative expenses of $489,000  in the 2009 period, primarily due to reduced personnel costs and professional fees (including $226,000 of costs incurred in the 2008 period 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)), and (iii) reduced sales commissions and related selling expenses of $135,000 in the 2009 period due to reduced sales for the period, partially offset by reduced vendor marketing revenue recognized of $136,000. The decrease in corporate SG&A expenses is primarily attributable to reduced facility and personnel costs.
  Investment and other income
  The Company recognized investment and other income of $15,000 for the three months ended June 30, 2009 compared to income of  $58,000 for the three months ended June 30, 2008.  The change of $45,000 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.
  Income taxes
  For the three months ended June 30, 2009 and 2008, the Company recorded income tax expense of $4,000 and $12,000, respectively, which represents the Company’s applicable federal, state and local tax expense for the periods from continuing operations.  For the three months ended June 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.  As of July 21, 2008, the Company owned more than 80% of Five Star, and is required to include Five Star in its federal consolidated tax return.
  For the three months ended June 30, 2008, the provision for income taxes differed from the tax computed at the federal statutory income tax rate primarily due to the recording by the Company of income tax expense on the income of Five Star, which was not included in the Company’s consolidated return prior to July 21, 2008, and the
Company not recording an income tax benefit for the loss of NPDC.
  Income tax expense of $32,000 was recorded as part of discontinued operations for the three months ended June 30, 2008, as it related to tax on the operations of MXL and the gain related to its sale.
  21
 Six months ended June 30, 2009 compared to the six months ended June 30, 2008
  For the six months ended June 30, 2009, the Company had an operating loss from continuing operations of $(647,000) compared to an operating loss from continuing operations $(1,659,000) for the six months ended June 30, 2008. The change in pre-tax loss from continuing operations is primarily the result of the following: (i) increased operating
profit of $705,000 at Five Star due to a $1,096,000 non-cash compensation expense related to the termination of  the Five Star’s agreement with Mr. Flegel during the first six months of 2008 (see Note 12(a) to the Condensed Consolidated Financial Statements), which is reflected in Charge related to resignation of Chairman of Five Star in the Condensed Consolidated Statements of Operations, and reduced selling, general and administrative expenses, offset by reduced gross margin, (ii) reduced operating
expenses at the corporate level of $308,000 for the 2009 period, partially offset by (iii) increased interest expense incurred by Five Star for the 2009 period due to higher interest rate in 2009.
  Sales
  The Company had sales, which are comprised solely of the sales of Five Star, of $52,896,000 for the six months ended June 30, 2009, as compared to sales of $62,898,000 for the six months ended June 30, 2008. The decrease in Five Star sales of $10,002,000, or 15.9%, for the six months ended June 30, 2009 as compared to the six months ended
June 30, 2008 was the result of` reduced sales by Five Star in the first six months of 2009 due to an overall weakness in the economy and the Company’s marketplace, and the effect of adverse weather conditions in the Northeast and Mid-Atlantic region of the United States during June 2009.
  Gross margin
  Gross margin for the six months ended June 30, 2009 was $8,856,000, or 16.7% of net sales, as compared to $10,626,000, or 16.9% of net sales, for the six months ended June 30, 2008.  The decrease in gross margin dollars of $1,770,000 for the six months ended June 30, 2009 was the result of reduced Five Star sales for the period.
    22
 Selling, general, and administrative expenses
  For the six months ended June 30, 2009, SG&A expenses decreased by $1,686,000 to $9,503,000 for the six months ended June 30, 2009 from $11,189,000 for the six months ended June 30, 2008.  This decrease was primarily attributable to a decrease of $1,377,000 in Five Star’s SG&A expenses, and a decrease of $309,000
in SG&A expenses at the corporate level, for the first six months of 2009. The reduced SG&A expenses incurred by Five Star were primarily due to: (i) reduced delivery expenses of $292,000, due to reduced sales for the 2009 period, (ii) reduced general and administrative expenses of $918,000, primarily due to reduced personnel costs and professional fees (including $226,000 of costs incurred in the first six 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)), and (iii) reduced sales commissions and related selling expenses of $391,000 due to reduced sales in the 2009 period, partially offset by reduced vendor marketing revenue recognized of $224,000 for such period. The decrease in corporate SG&A expenses is primarily attributable to reduced facility and personnel costs for the first six months of 2009.
  Investment and other income (loss), net
  The Company recognized investment and other income of $28,000 for the six months ended June 30, 2009 compared to income of  $151,000 for the six months ended June 30, 2008.  The change of $123,000 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.
  Income taxes
  For the six months ended June 30, 2009 and 2008, the Company recorded an income tax expense of $8,000 and $25,000, respectively, which represents the Company’s applicable federal, state and local tax expense for the periods from continuing operations.  For the six months ended June 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.  As of July 21, 2008, the Company owned more than 80% of Five Star, and is required to include Five Star in its federal consolidated tax return.
  For the six months ended June 30, 2008, the provision for income taxes differed from the tax computed at the federal statutory income tax rate due primarily to recording income tax expense on the income of Five Star, which was not included in the Company’s consolidated return prior to July 21, 2008, and not recording an income tax
benefit for the losses of 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.
This resulted in no tax benefit being recorded by Five Star for the six months ended June 30, 2008.
  Income tax expense of $33,000 was recorded as part of discontinued operations for the six months ended June 30, 2008, as it related to tax on the operations of MXL and the gain related to its sale.
  23
 Financial condition
  The increase in accounts receivables and accounts payable at June 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 six months of 2009 as compared to the first six months of 2008 in order to better manage its working
capital.
  Liquidity and Capital Resources
  At June 30, 2009, the Company had cash and cash equivalents totaling $12,059,000. 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 six months ended June 30, 2009, the Company’s working capital decreased by $730,000 to $20,073,000 from $20,803,000 as of December 31, 2008.
  The decrease in cash and cash equivalents of $1,030,000 at June 30, 2009 as compared to December 31, 2008 resulted from:
  ·
net cash used in operations of $3,392,000, which includes the  net loss of $1,376,000, in the first six months of 2009;
  ·
an increase in accounts receivable of $4,970,000, partially offset by an increase in accounts payable and accrued expenses of $1,939,000 for the first six months of 2009;
  ·
net cash used in investing activities of $33,000 in the first six months of 2009; and
  ·
net cash provided by financing activities of $2,395,000, consisting of proceeds from short term borrowings, in the first six months of 2009.
  Five Star’s Loan Agreement with Bank of America, as amended on June 27, 2008,  provides Five Star with a $35,000,000 Revolving Credit Facility, subject to a $3,500,000 sub-limit for letters of credit.  See Note 8 to the Condensed Consolidated Financial Statements.
  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 June 30, 2009, Five Star had borrowed against 55.7% of its 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 June 30, 2009 the LIBOR and Base Rate margins were 400 basis points and 3%, respectively.  At June 30, 2009 and December 31, 2008, $20,770,000 and $18,375,000 was outstanding under the Loan Agreement and approximately $3,060,000 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 June 30,
2009 reflects an $856,000 reduction in availability as a result of the Liability for the interest rate swap (see Note 9 to the Condensed Consolidated Financial Statements).
  24
 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 $902,000 at June 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 June 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 June 30, 2009:
  Covenant

Required

CalculatedMinimum tangible net worth

$7,000,000

$9,581,000Debt to tangible net worth

< 6

2.26Fixed charge coverage (*)

>0.8

1.06Quarterly income (loss)

No loss in consecutive quarters

$95,000 – second quarter profit
$10,000 – first 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
  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, totaling 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 facility released GP Strategies from its guarantee, and accepted a guarantee solely by the Company.
  25
 Item 3.             Quantitativeand 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 June 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
*
Seventh Lease Modification and Extension Agreement, dated June 9, 2009, and prior modifications and extensions, to Lease dated as of May 4, 1983 between Vornado, Inc. and Five Star Group, Inc.10.2
*
Letter Amendment, dated March 24, 2008, and prior amendments, 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
 
 26
 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.
 
 NATIONAL PATENT DEVELOPMENT
CORPORATIONDate: August 13, 2009
By:
/s/ HARVEY P. EISENName:
Harvey P. EisenTitle:
Chairman of the Board and Chief
Executive OfficerDate: August 13, 2009
By:
/s/ IRA J. SOBOTKOName:
Ira J. SobotkoTitle:
Vice President, Chief Financial Officer