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 March 31, 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.)
 
 10
      East 40th Street, 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 May
10, 2009, there were 17,551,568 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 Ended March 31, 2009 and 2008
      (Unaudited)
                            1Condensed  Consolidated Statements of Comprehensive
      Loss-Three Months Ended March 31, 2009 and 2008
      (Unaudited)
                            2Condensed  Consolidated Balance Sheets
      -March 31, 2009 (Unaudited) and December 31,
      2008
                            3Condensed  Consolidated Statements of Cash Flows
      -Three Months Ended March 31, 2009 and 2008
      (Unaudited)
                            4Condensed  Consolidated
      Statement of Changes in Stockholders’ Equity-Three Months Ended
      March 31, 2009 (Unaudited)
                            5Notes to Condensed Consolidated Financial Statements -
                              Three Months Ended March 31, 2009 and 2008
      (Unaudited)
                            6Item 2.
                            Management’s Discussion and Analysis of
      FinancialCondition and Results of
      Operations
                            16Item 3.
                            Quantitative and Qualitative Disclosures about Market
      Risk
                            24Item 4.
                            Controls and Procedures
                            24Part
      II. Other InformationItem 6.
                            Exhibits
                            25SIGNATURES
                            26
  
  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 EndedMarch
      31,2009
                    
                    
                    2008Sales
                    
                    $
                    25,130
                    
                    
                    $
                    31,469Cost
      of sales
                    
                    
                    21,140
                    
                    
                    
                    26,293Gross
      margin
                    
                    
                    3,990
                    
                    
                    
                    5,176Selling,
      general and administrative expenses
                    
                    
                    (4,385
                    )
                    
                    
                    (5,384
                    )Charge
      related to resignation of Chairman of Five Star
                    
                    
                    
                    
                    
                    
                    (1,096
                    )Operating loss
                    
                    
                    (395
                    )
                    
                    
                    (1,304
                    )Interest
      expense
                    
                    
                    (330
                    )
                    
                    
                    (302
                    )Investment
      and other income, net
                    
                    
                    13
                    
                    
                    
                    94Loss
      from continuing operations before income taxes
                    
                    
                    (712
                    )
                    
                    
                    (1,512
                    )Income
      tax expense
                    
                    
                    (4
                    )
                    
                    
                    (14
                    )Loss
      from continuing operations
                    
                    
                    (716
                    )
                    
                    
                    (1,526
                    )Income
      from discontinued operations
                    
                    
                    
                    
                    
                    
                    136Consolidated
      net loss
                    
                    
                    (716
                    )
                    
                    
                    (1,390
                    )Less:
      Net loss attributable to noncontrolling interest
                    
                    
                    
                    
                    
                    
                    13Net
      loss attributable to National Patent Development
    Corporation
                    
                    $
                    (716
                    )
                    
                    $
                    (1,377
                    )Basic
      and diluted income / (loss) per share attributable to National PatentDevelopment
      Corporation:Continuing
      operations
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.09
                    )Discontinued
      operations
                    
                    
                    
                    
                    
                    
                    0.01Net
      loss
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.08
                    )
  See
accompanying notes to condensed consolidated financial statements.
  1
  NATIONAL PATENT DEVELOPMENT
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (Unaudited)
 (in
thousands)
 
 Three
      Months Ended
                  March
      31,2009
                
                
                2008Net
      loss
                
                $
                (716
                )
                
                $
                (1,390
                )Other
      comprehensive (loss) gain, before tax:Net
      unrealized loss on available-for-sale-securities
                
                
                
                
                
                
                (66
                )Net
      unrealized (loss) gain on interest rate swap
                
                
                7
                
                
                
                (98
                )Comprehensive
      loss before tax
                
                
                (709
                )
                
                
                (1,554
                )Income
      tax benefit (expense) related to items of other comprehensive
      income
                
                
                (3
                )
                
                
                39Comprehensive loss
                
                $
                (712
                )
                
                $
                (1,515
                )Less
      comprehensive loss attributable to noncontrolling interest
                
                
                
                
                
                
                34Comprehensive
      loss attributable to National Patent Development
    Corporation
                
                $
                (712
                )
                
                $
                (1,481
                )
 
 See
accompanying notes to condensed consolidated financial
statements.
  2
 
 NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands)
 
 March
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  12,612
                  
                  
                  $
                  13,089Accounts
      and other receivables, less allowance for doubtful accounts of $383 and
      $420
                  
                  
                  15,278
                  
                  
                  
                  9,814Inventories
      (finished goods)
                  
                  
                  24,740
                  
                  
                  
                  23,045Deferred
      tax asset
                  
                  
                  121
                  
                  
                  
                  132Prepaid
      expenses and other current assets
                  
                  
                  1,315
                  
                  
                  
                  1,334Total
      current assets
                  
                  
                  54,066
                  
                  
                  
                  47,414Property,
      plant and equipment, net
                  
                  
                  826
                  
                  
                  
                  912Intangible
      assets, net
                  
                  
                  567
                  
                  
                  
                  599Deferred
      tax asset
                  
                  
                  1,541
                  
                  
                  
                  1,537Other
      assets
                  
                  
                  3,209
                  
                  
                  
                  3,209Total
      assets
                  
                  $
                  60,209
                  
                  
                  $
                  53,671Liabilities
      and stockholders’ equityCurrent
      liabilitiesShort
      term borrowings
                  
                  $
                  19,770
                  
                  
                  $
                  18,375Accounts
      payable and accrued expenses
                  
                  
                  13,861
                  
                  
                  
                  8,236Total
      current liabilities
                  
                  
                  33,631
                  
                  
                  
                  26,611Liability
      related to interest rate swap
                  
                  
                  1,104
                  
                  
                  
                  1,111Stockholders’
      equityCommon
      stock
                  
                  
                  181
                  
                  
                  
                  181Additional
      paid-in capital
                  
                  
                  28,879
                  
                  
                  
                  28,642Deficit
                  
                  
                  (1,565
                  )
                  
                  
                  (849
                  )Treasury
      stock, at cost
                  
                  
                  (1,358
                  )
                  
                  
                  (1,358
                  )Accumulated
      other comprehensive loss
                  
                  
                  (663
                  )
                  
                  
                  (667
                  )Total
      stockholders’ equity
                  
                  
                  25,474
                  
                  
                  
                  25,949Total
      liabilities and stockholders’ equity
                  
                  $
                  60,209
                  
                  
                  $
                  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)
 
 Three
      Months EndedMarch
      31,2009
                    
                    
                    2008Cash
      flows from operations:Net
      loss
                    
                    $
                    (716
                    )
                    
                    $
                    (1,390
                    )Adjustments
      to reconcile net loss tonet cash used in operating activities:Depreciation
      and amortization
                    
                    
                    126
                    
                    
                    
                    179Expenses
      paid in common stock
                    
                    
                    8
                    
                    
                    
                    15Deferred
      income taxes
                    
                    
                    4
                    
                    
                    
                    (190
                    )Stock
      based compensation expense
                    
                    
                    229
                    
                    
                    
                    985Changes
      in other operating items:Accounts
      and other receivables
                    
                    
                    (5,464
                    )
                    
                    
                    (7,995
                    )Inventory
                    
                    
                    (1,695
                    )
                    
                    
                    (6,086
                    )Prepaid
      expenses an other current assets
                    
                    
                    19
                    
                    
                    
                    316Accounts
      payable and accrued expenses
                    
                    
                    5,625
                    
                    
                    
                    5,384Net
      cash used in operations
                    
                    
                    (1,864
                    )
                    
                    
                    (8,782
                    )Cash
      flows from investing activities:Additions
      to property, plant and equipment, net
                    
                    
                    (8
                    )
                    
                    
                    (167
                    )Acquisition
      of additional interest in Five Star
                    
                    
                    
                    
                    
                    
                    (1,523
                    )Net
      cash used in investing activities
                    
                    
                    (8
                    )
                    
                    
                    (1,690
                    )Cash
      flows from financing activities:Purchases
      of treasury stock
                    
                    
                    
                    
                    
                    
                    (729
                    )Settlement
      of option
                    
                    
                    
                    
                    
                    
                    (240
                    )Proceeds
      from short-term borrowings
                    
                    
                    1,395
                    
                    
                    
                    8,173Repayment
      of long-term debt
                    
                    
                    
                    
                    
                    
                    (64
                    )Net
      cash provided by financing activities
                    
                    
                    1,395
                    
                    
                    
                    7,140Net
      decrease in cash and cash equivalents
                    
                    
                    (477
                    )
                    
                    
                    (3,332
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    13,089
                    
                    
                    
                    15,698Cash
      and cash equivalents at end of period
                    
                    $
                    12,612
                    
                    
                    $
                    12,366
 
 See
accompanying notes to condensed consolidated financial statements.
  4
 
 NATIONAL PATENT DEVELOPMENT CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 THREE
MONTHS ENDED MARCH 31, 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 $3
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4
                
                
                
                4Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (716
                )
                
                
                
                
                
                
                
                
                
                
                (716
                )Stock
      based compensation expense
                
                
                
                
                
                
                
                
                
                
                229
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                229Issuance
      of common stock to directors
                
                
                5,289
                
                
                
                
                
                
                
                8
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8Balance
      at March 31, 2009
                
                
                18,110,437
                
                
                $
                181
                
                
                $
                28,879
                
                
                $
                (1,565
                )
                
                $
                (1,358
                )
                
                $
                (663
                )
                
                $
                25,474
  See
accompanying notes to condensed consolidated financial statements.
  5
  NATIONAL PATENT DEVELOPMENT
CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
 1.           Basis of presentation and description
of business
  Basis
of presentation
  The
accompanying Condensed Consolidated Balance Sheet as of March 31, 2009 and
the Condensed Consolidated Statements of Operations and Cash Flows for the
three months ended March 31, 2009 and 2008 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. 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 period 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, which
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 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).
  Recent
Accounting Pronouncements
  In
September 2006, the FASB issued SFAS 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 delays 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 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.
  In
February, 2007, the FASB issued SFAS 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.
  6
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
  In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),“Business Combinations”
(“SFAS No. 141(R)”). SFAS No. 141(R), replaces
SFAS 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
December 2007, the FASB issued SFAS 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 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 ended March 31, 2008 to include net loss and comprehensive net loss
attributable to noncontrolling interest (previously referred to as minority
interest) in consolidated loss and consolidated comprehensive loss,
respectively.
  Following
is a reconciliation of total equity, equity attributable to the Company and
equity attributable to noncontrolling interest for the three months ended March
31, 2008:
  Attributable
      toTotal
      Equity
                      
                      
                      Company
                      
                      
                      Noncontrolling
                        interestBeginning
      balance
                      
                      $
                      28,977
                      
                      
                      $
                      26,075
                      
                      
                      $
                      2,902Net
      loss
                      
                      
                      (1,390
                      )
                      
                      
                      (1,377
                      )
                      
                      
                      (13
                      )Other
      comprehensive loss
                      
                      
                      (125
                      )
                      
                      
                      (91
                      )
                      
                      
                      (34
                      )Acquisition
      of additional interest in Five Star
                      
                      
                      (1,212
                      )
                      
                      
                      (13
                      )
                      
                      
                      (1,199
                      )Equity
      based compensation
                      
                      
                      250
                      
                      
                      
                      229
                      
                      
                      
                      21Other
      equity transactions, with no effect onnoncontrolling
      interest
                      
                      
                      (461
                      )
                      
                      
                      (461
                      )Ending
      balance
                      
                      $
                      26,039
                      
                      
                      $
                      24,362
                      
                      
                      $
                      1,677
 
  In March
2008, the FASB issued SFAS 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.
  7
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
  Use of estimates. The
preparation of financial statements in conformity with  accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
  Concentrations of credit
risk. Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
investments, and accounts receivable from customers. The Company places its cash
investments with high quality financial institutions and limits the amount
of credit exposure to any one institution.
  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 SFAS No. 133, as amended,
“Accounting for Derivate Instruments and Hedging Activities.” SFAS No. 133
requires all derivatives to be recognized in the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivate is a cash flow hedge, changes in fair value of derivative are
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative’s change in fair value is
immediately recognized in earnings. Change in the fair value of the effective
portion of interest rate swap, which has been designated as a cash flow hedge
are recognized in other comprehensive income (“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
expenses.
  During
the three months ended March 31, 2009, $151,000 of loss was recognized in OCI
and $158,000 of loss was reclassified from accumulated OCI into operations as an
increase to interest expenses.
  Under the
loan agreement the bank has the option to reduce amounts available to the
Company as a result of the Liability related to the interest rate swap (see Note
8).
  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%.
  8
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
  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 tendered shares, $661,000 for the
remaining outstanding shares pursuant to the 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 months ended
March 31, 2009 was approximately $33,000.
  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 months ended March 31, 2008, the results for MXL Industries have been
accounted for as a discontinued operation. MXL’s sales were $2,339,000 for such
period.
  9
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
 5.           Per share data
  Loss per
share for the three months ended March 31, 2009 and 2008 attributable to
the Company is as follows (in thousands, except per share amounts):
  Three
      Months Ended
                            March
      31,2009
                          
                          
                          2008Basic and
      Diluted EPSLoss
      from continuing operations, reduced in June 2008 by amount
                            applicable
      to noncontrolling interest
                          
                          $
                          (716
                          )
                          
                          $
                          (1,513
                          )Income
      from discontinued operation
                          
                          
                          
                          
                          
                          
                          136Net
      loss
                          
                          $
                          (716
                          )
                          
                          $
                          (1,377
                          )Weighted
      average shares outstanding
                          
                          
                          17,545
                          
                          
                          
                          16,461Per
      share:Continuing
      operations
                          
                          $
                          (0.04
                          )
                          
                          $
                          (0.09
                          )Discontinued
      operations
                          
                          
                          
                          
                          
                          
                          0.01Net
      loss
                          
                          $
                          (0.04
                          )
                          
                          $
                          (0.08
                          )
  The
following were not included in the diluted computation, as their effect would be
anti-dilutive:
  March
      31, 2009
                    
                    
                    March
      31, 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 11(b))
 **      $2,800,000
convertible note was converted in July 2008 (see Note 3)
 ***    975,000
options were terminated in July 2008 (see Note 3)
  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.
  On
December 15, 2006, the Board of Directors authorized the Company
to repurchase up to 2,000,000 shares, or approximately 11%, of its
outstanding shares of common stock from time to time either in open market
or privately negotiated transactions. On August 13, 2008, the Company’s
Board of Directors authorized an increase of 2,000,000 common shares to be
repurchased. At March 31, 2009, the Company had repurchased 1,791,321 shares of
its common stock for $4,092,000 and, a total of 2,208,679 shares remained
available for repurchase.  There were no common stock repurchases made
by or on behalf of the Company during the quarter ended March 31,
2009.
  10
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
  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 March 31, 2009 is presented below. No stock options were granted
under the Company’s incentive stock plans in the three months ended March 31,
2009 or March 31, 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 March 31, 2009
                                        
                                        
                                        3,350,000
                                        
                                        
                                        $
                                        2.49
                                        
                                        
                                        
                                        7.6
                                        
                                        
                                        $
                                        0
                                        *Options
      exercisable at March 31, 2009
                                        
                                        
                                        2,183,000
                                        
                                        
                                        $
                                        2.45
                                        
                                        
                                        
                                        7.6
                                        
                                        
                                        $
                                        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 quarters
ended March, 2009 and 2008. As of March 31, 2009, there was $833,000 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 one year.
  As a
result of the 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 quarter
ended March 31, 2008, Five Star recognized compensation expense related to the
terminated options and restricted stock of $100,000.
  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.  All obligations under the Revolving Credit Facility are
collateralized by first priority liens on all of Five Star’s existing and future
assets.
  11
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
  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
March 31, 2009 and December 31, 2008, $19,770,000 and $18,375,000 was
outstanding under the Loan Agreement and approximately $6,905,000 and $3,667,000
was available to be borrowed, respectively.  Substantially all of Five
Star’s assets are pledged as collateral for these borrowings.  The
amount available at March 31, 2009 reflects a $456,000 reduction in availability
as a result of the 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 $1,104,000 at March 31, 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.    The Company anticipates being
in violation of its original fixed charge coverage ratio during 2009, and
therefore Bank of America has amended the quarterly ratios through the quarter
ended March 31, 2010. As of March 31, 2009, Five Star was in compliance
with these amended covenants. There is no assurance that Five Star can
comply with these covenants in future quarters.
  9.           Investment
in Valera Pharmaceuticals, Inc. (“Valera”)
  Indevus
Pharmaceuticals, Inc. (“Indevus”) was a biopharmaceutical company that engages
in the acquisition, development, and commercialization of products to treat
urological, gynecological, and men’s health conditions.
  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 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, the 2,070,670 shares of Valera common stock held
by the Company at the Indevus Effective Time were converted into an aggregate of
2,347,518 shares of Indevus common stock at such time, which were sold 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, to the
extent certain milestones with respect to specific product candidates, namely
FDA approval of certain drug applications (collectively, the “Drug
Applications”), were achieved (the “Contingent Rights”). 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.
  12
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 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 (the “Endo Merger Agreement”) 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.  As a part of
the merger transaction, 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
Agreement, the Company has a contingent right 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, of 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, of between $4,028,000 and $3,491,000,
depending upon the terms contained in the FDA approval.  See Note
10(a).
  10.         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 9), 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 Agreement (see Note 9),
      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.
  13
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
  11.         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.
              
              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.
  14
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes
to Condensed Consolidated Financial Statements
 Three
Months Ended March 31, 2009 and 2008
 (Unaudited)
  (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.
  12.         Income
taxes
  For the
three months ended March 31, 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 S. Leslie Flegel, former director and Chairman of
the Board of Five Star (see Note 11(a), compensation expense of $1,096,000 was
recorded during the three months ended March 31, 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 three months ended March 31, 2008.
    15
  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
Reports on Form 10-K for the year ended December 31, 2008 filed by the Company
with the Securities and Exchange Commission (the “SEC”) on March 31,
2009.
  We
caution that these risk factors may not be exhaustive. We operate in a
continually changing business environment, and new risk factors emerge from time
to time. We cannot predict these new risk factors, nor can we assess the effect,
if any, of the new risk factors on our business or the extent to which any
factor or combination of factors may cause actual results to differ from those
expressed or implied by these forward-looking statements.
  If any
one or more of these expectations and assumptions proves incorrect, actual
results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us, whether as a
result of new information, future events or otherwise. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this report.
  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
Inc., certain contingent stock rights in Indevus 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 9 to the Condensed Consolidated Financial
Statements.    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 a contingent cash payment.  This cash payment is
contingent upon FDA approval of the drug applications.  As a result of
the consummation of Indevus’ merger with Endo, the Company has a contingent
right 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, of 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, of between $4,028,000 and $3,491,000, depending upon
the terms contained in the FDA approval.
  16
  MXL
Operations
  On June
19, 2008, pursuant to the terms of an Asset Purchase Agreement, 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 (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 relating to the MXL Business.
  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 has 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
months ended March 31, 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 all industries and the economy
as a whole, management has placed increased emphasis on monitoring the risks
associated with the current environment, including the collectability of
receivables, the fair value of assets, and the Company’s liquidity. At this
point in time, there has not been a material impact on the Company’s assets and
liquidity. Management will continue to monitor the risks associated with the
current environment and their impact on the Company’s results.
  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.
  17
  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.
  Management
discussion of critical accounting policies
  The
following discussion and analysis of the financial condition and results of
operations are based on the consolidated financial statements and notes to
consolidated financial statements contained in this report that have been
prepared in accordance with the rules and regulations of the SEC and include all
the disclosures normally required in annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosures of contingent assets and
liabilities. We base these estimates on historical results and various other
assumptions believed to be reasonable, all of which form the basis for making
estimates concerning the carrying values of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates.
  Certain
of our accounting policies require higher degrees of judgment than others in
their application.  These include valuation of accounts receivable,
accounting for investments, vendors’ allowance, impairment of long-lived assets
and accounting for income taxes which are summarized below.
  Revenue
recognition
  Revenue
on product sales is recognized at the point in time when the product has been
shipped, title and risk of loss has been transferred to the customer, and the
following conditions are met: persuasive evidence of an arrangement exists, the
price is fixed and determinable, and collectability of the resulting receivable
is reasonably assured.  Allowances for estimated returns and discounts
are recognized when sales are recorded.
  Stock
based compensation
  The
Company accounts for stock based compensation pursuant to Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”). Under SFAS 123R, compensation cost is recognized over the vesting
period based on the fair value of the award at the grant date.
  Valuation
of accounts receivable
  Provisions for allowance for doubtful
accounts are made based on historical loss experience adjusted for specific
credit risks.  Measurement of such losses requires consideration of
the Company’s historical loss experience, judgments about customer credit risk,
and the need to adjust for current economic
conditions.
  18
  Impairment
of long-lived tangible assets
  Long-lived
tangible assets with finite lives are tested are for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.  Recoverability of long-lived tangible assets to
be held and used is measured by a comparison of the carrying amount of the asset
to future undiscounted net cash flows expected to be generated by the
asset.  If costs of such assets are considered not recoverable, the
impairment to be recognized is measured by determining the amount by which the
carrying amount of the assets exceeds the fair value of the
asset.  Assets to be disposed of are reported at the lower of their
carrying amount or fair value less cost of sale.
  The
measurement of the future net cash flows to be generated is subject to
management’s reasonable expectations with respect to the Company’s future
operations and future economic conditions which may affect those cash
flows.
  The
Company owns undeveloped land in Pawling, New York with a carrying amount of
approximately $2,500,000, which management believes is less than its fair value,
less cost of sale and property in East Killingly, Connecticut with a carrying
amount of approximately $400,000.
  Accounting for
investments
  The
Company’s investment in marketable securities are classified as
available-for-sale and recorded at their market value with unrealized gains and
losses recorded as a separate component of stockholders’ equity.  A
decline in market value of any available-for-sale security below cost that is
deemed to be other than temporary, results in an impairment loss, which is
charged to earnings.
  Determination
of whether an investment is impaired and whether an impairment is other than
temporary requires management to evaluate evidence as to whether an investment’s
carrying amount is recoverable within a reasonable period of time considering
factors which include the length of time that an investment’s market value is
below its carrying amount and the ability of the investee to sustain an earnings
capacity that would justify the carrying amount of the investment.
  Vendor
allowances
  The Company accounts for vendor
allowances under the guidance provided by Emerging Issues Task Force
(“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor,” and EITF Issue No.
03-10, “Application of EITF Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers.” Vendor allowances reduce the
carrying cost of inventory unless they are specifically identified as a
reimbursement for promotional programs and/or other services provided. Any
such allowances received in excess of the actual cost incurred also reduce
the carrying cost of inventory.
  Income
taxes
  Income
taxes are provided for based on the asset and liability method of accounting
pursuant to SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) and
Financial Accounting Standards Board (“FASB”) Interpretation No. 48 Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”.
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
  19
  Results
of Operations
  Three
months ended March 31, 2009 compared to the three months ended March 31,
2008
  For the
three months ended March 31, 2009, the Company had a loss from continuing
operations before income tax expense of $712,000 compared to a loss from
continuing operations before income tax expense of $1,512,000 for the three
months ended March 31, 2008. The decrease in the loss from continuing operations
before income taxes of $800,000 for the three months ended March 31, 2009 as
compared to the three months ended March 31, 2008, is primarily a result of the
following: (i) increased operating profit at Five Star of $695,000 principally
due to (a) $1,096,000 compensation expense in 2008 related to the termination
of  the Company’s agreement with S. Leslie Flegel (see Note 11(a) to
the Condensed Consolidated Financial Statements), and (b) reduced gross margin
due to reduced sales, partially offset by (c) reduced selling, general and
administrative expenses primarily due to reduced sales and efforts to control
costs, and (ii) reduced  operating expenses of  $214,000 at
the corporate level.
  Sales
  For the
three months ended March 31, 2009, Sales, which are comprised solely of the
sales of Five Star, were $25,130,000 a decrease of $6,339,000, or 20.1%, from
March 31, 2008 sales of $31,469,000.  The decrease in Sales was due to
an overall weakness in the economy and in Five Star’s marketplace, as well as
the timing of certain seasonal programs with Cabot stain, which totaled
approximately $1,400,000 of reduced sales.
  Gross
margin
  For the
three months ended March 31, 2009 Gross margin, which is comprised solely of
Five Star, was $3,990,000, or 15.9% of sales, as compared to $5,176,000, or
16.4% of sales, for the quarter ended March 31, 2008. The reduced gross margin
percentage in 2009 was the result of fixed warehouse expenses in relation to
reduced sales levels in 2009.
  Selling,
general, and administrative expenses
  For the
three months ended March 31, 2009, Selling, general and administrative
(“SG&A”) expenses decreased by $999,000 to $4,385,000 from $5,384,000 for
the three months ended March 31, 2008. The decrease consists of a decrease in
Five Star’s SG&A expenses of $785,000 and reduced SG&A at the corporate
level of $214,000.  The reduced SG&A expenses incurred by Five
Star were primarily due to (i) reduced delivery expenses of $185,000 due to
reduced sales in 2009, (ii) reduced general and administrative expenses of
$408,000 primarily due to reduced personnel costs and professional fees, and
(iii) reduced sales commissions and related selling expenses of $256,000 due to
reduced sales. The decrease in corporate SG&A expenses is primarily
attributable to reduced facility and personnel costs.
  Investment
and other income, net
  The
Company recognized investment and other income of $13,000 for the three months
ended March 31, 2009 compared to income of  $94,000 for the three
months ended March 31, 2008.  The change of $81,000 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.
  20
  Income
taxes
  For the
three months ended March 31, 2009 and 2008, the Company recorded income tax
expense of $4,000 and $14,000, respectively, which represents the Company’s
applicable federal, state and local tax expense for the periods from continuing
operations.  For the three months ended March 31, 2009, the income tax
expense differed from the tax benefit computed at the federal statutory income
tax rate due primarily to an increase in the valuation allowance with respect to
tax benefit attributable to losses incurred by the Company.  As of
July 21, 2008, National Patent 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 March 31, 2008, the provision for income taxes differed from
the tax benefit 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 loss of NPDC. As the result of the
resignation of S. Leslie Flegel, former director and Chairman of the Board of
Five Star (see Note 11(a) to the Condensed Consolidated Financial
Statement), 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 three months
ended March 31, 2008.
 
  Financial
condition
  The increase in inventory, accounts receivable
and accounts payable is due tothe seasonal nature of the
business.
  Liquidity
and Capital Resources
  At March
31, 2009, the Company had cash and cash equivalents totaling $12,612,000. 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
three months ended March 31, 2009, the Company’s working capital decreased by
$368,000 to $20,435,000 from $20,803,000 as of December 31, 2008.
  The
decrease in cash and cash equivalents of $477,000 for the three months ended
March 31, 2009 as compared to December 31, 2008 resulted from:
  ·
            net
      cash used in operations of $1,864,000, which includes the  net
      loss of $716,000;
  ·
            an
      increase in accounts receivable of $5,464,000, and an increase in
      inventory of $1,695,000, partially offset by an increase in accounts
      payable and accrued expenses of $5,625,000 in the 2009
    period;
  ·
            net
      cash used in investing activities of $8,000;
and
  ·
            net
      cash used in financing activities of $1,395,000, consisting of repayments
      of short term borrowings.
  21
 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.  All obligations under the Revolving Credit Facility are
secured by first priority liens on all of Five Star’s existing and future
assets.  In connection with the Amended Loan Agreement, on June 27,
2008, Five Star executed the Restated and Amended Promissory Note, dated as of
June 26, 2008, payable to Bank of America in the principal amount of $35,000,000
(the “Promissory Note”).  The Promissory Note restated and replaced a
certain $35,000,000 Revolving Note, dated as of June 1, 2005, made by Five Star
in favor of Bank of America.  The principal amount under the
Promissory Note is due and payable on June 30, 2011.
  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
March 31, 2009 and December 31, 2008, $19,770,000 and $18,375,000 was
outstanding under the Loan Agreement and $6,905,000 and $3,667,000 was available
to be borrowed, respectively.  Substantially all of Five Star’s assets
are pledged as collateral for these borrowings.  The amount available
at March 31, 2009 reflects a $456,000 reduction in availability as a result of
the Liability for the interest rate swap (see Note 2 to the Condensed
Consolidated Financial Statements).
  In
connection with the Amended Loan Agreement, Five Star also entered into a
derivative transaction with Bank of America.  The derivative
transaction is an interest rate swap and has been designated as a cash flow
hedge.  Effective June 30, 2008 through June 30, 2011, Five Star pays
a fixed interest rate of 3.62% to Bank of America on notional principal of
$20,000,000.  In return, Bank of America pays 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 is paid
in addition to this fixed interest rate of 3.62%.  The fair value of
the interest rate swap amounted to liability of $1,104,000 at March 31, 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.    The Company anticipates being
in violation of its original fixed charge coverage ratio during 2009, and
therefore Bank of America has amended the quarterly ratios through the quarter
ended March 31, 2010. As of March 31, 2009, Five Star was in compliance
with these amended covenants. There is no assurance that Five Star can
comply with these covenants in future quarters.
  22
 
 The
following table sets forth the significant debt covenants at March 31,
2009:
  Covenant
              
              Required
              
              CalculatedMinimum
      tangible net worth
              
              $7,000,000
              
              $9,362,000Debt
      to tangible net worth
              
              <
      6
              
              2.11Fixed
      charge coverage (*)
              
              >0.7
              
              0.97Quarterly
      income (loss)
              
              No
      loss in consecutive quarters
              
              $10,000 –   first
      quarter profit
                $125,000
      – fourth quarter loss
 
 *
            Amended
      by Bank of America through the quarter ended March 31,
    2010.
  Recent
accounting pronouncements
 
 See Note
1 to the Condensed Consolidated Financial Statements with respect to the effects
on the 2009 financial statements of the adoptions of resent accounting
pronouncements.
  Contractual
Obligations and Commitments
  GP
Strategies 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 first 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, 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.
  23
  Item
3.     Quantitative and Qualitative Disclosures About
Market Risk
  Not
required.
  Item
4.     Controls and Procedures
  The
Company’s principal executive officer and principal financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this quarterly report.
Based upon such evaluation, the Company’s principal executive officer and
principal financial officer have concluded that the Company’s disclosure
controls and procedures are effective as of the end of the period covered by
this quarterly report.
  The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended March 31, 2009 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
    24
  PART
II. OTHER INFORMATION
  Item 6.     Exhibits.
  Exhibit
      No.
              
              Description31.1
              *
              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
     25
  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: May
      15, 2009
            
            /s/ HARVEY
      P. EISENName:
      Harvey P. EisenTitle:
      Chairman of the Board and Chief Executive OfficerDate: May
      15, 2009
            
            /s/ IRA
      J. SOBOTKOName:
      Ira J. SobotkoTitle:
      Vice President, Chief Financial
Officer
 
    26