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o | No fee required. |
þ | Fee computed on table below per Exchange ActRules 14a-6(i)(1) and0-11. |
(1) | Title of each class of securities to which transaction applies: |
(2) | Aggregate number of securities to which transaction applies: |
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange ActRule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
(4) | Proposed maximum aggregate value of transaction: |
(5) | Total fee paid: |
o | Fee paid previously with preliminary materials. |
o | Check box if any part of the fee is offset as provided by Exchange ActRule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
(1) | Amount Previously Paid: |
(2) | Form, Schedule or Registration Statement No.: |
(3) | Filing Party: |
(4) | Date Filed: |
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903 Murray Road
East Hanover, New Jersey 07936
TO BE HELD ON JANUARY 14, 2010
1. | To approve the sale of all of the issued and outstanding stock of National Patent’s wholly-owned subsidiary, Five Star Products, Inc., to The Merit Group, Inc. pursuant to the terms of a Stock Purchase Agreement, as described in the accompanying proxy materials. | ||
2. | To act upon such other business as may properly come before the Special Meeting. |
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By Order of the Board of Directors, HARVEY P. EISEN Chairman, Chief Executive Officer and President |
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Historical Financial Statements | 59 | |||
Consolidated Financial Statements of Five Star Products, Inc., December 31, 2008 and 2007 (audited) | 60 | |||
Interim Consolidated Financial Statements of Five Star Products, Inc. September 30, 2009 and 2008 (unaudited) | 77 | |||
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Annex A — Stock Purchase Agreement Dated November 24, 2009 | A-1 | |||
Annex B — Opinion of Financial Advisor | B-1 | |||
Annex C — Form of Escrow Agreement | C-1 | |||
Annex D — Forms of Non-Competition and Non-Solicitation Agreements | D-1 | |||
Annex E — Employee Agreement | E-1 | |||
Index to Consolidated Financial Statements | F-1 |
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• | The Sale (page 11) | |
National Patent Development Corporation is the owner and holder of record of all of the issued and outstanding stock of Five Star Products, the holding company and sole stockholder of Five Star Group. Pursuant to a Stock Purchase Agreement, dated as of November 24, 2009, by and between National Patent and Merit, National Patent will sell, and Merit will buy, all of the issued and outstanding stock of Five Star Products, according to the terms and subject to the conditions of the Stock Purchase Agreement. Upon consummation of the purchase and sale of stock as contemplated by the Stock Purchase Agreement, Merit will own all of the issued and outstanding stock of Five Star Products and as a result, all the stock of Five Star Group, the wholly-owned subsidiary of Five Star Products. | ||
Five Star is engaged in the wholesale distribution of home decorating, hardware and finishing products. It serves over 3,000 independent retail dealers in twelve states, making Five Star one of the largest distributors of its kind in the Northeast. Five Star also services the Mid-Atlantic States, as far south as North Carolina. Five Star operates two distribution centers, located in Newington, Connecticut and East Hanover, New Jersey. All operations are coordinated from Five Star’s New Jersey headquarters. |
• | Parties Involved in the Sale (page 9) | |
The parties to the Stock Purchase Agreement are: |
• | National Patent Development Corporation, as the seller; and | ||
• | The Merit Group, Inc., as the purchaser. |
• | Consideration for the Sale (page 11) | |
The aggregate purchase price for the shares of Five Star Products common stock to be sold to Merit in the sale is $33,124,000, subject to certain adjustments to reflect (i) (A) dollar for dollar decreases in the event Five Star’s outstanding revolving indebtedness under its loan agreement with Bank of America decreases from the amount outstanding at March 31, 2009 compared to the amount outstanding on the closing date or increases if such indebtedness increases and (B) increases dollar for dollar if Five Star Group has positive net results from March 31, 2009 to the closing date, or |
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decreases if it has negative net results and (ii) a potential downward adjustment based on the value of certain designated inventory held by Five Star Group, less the value received for such inventory after the closing, to the extent such inventory adjustment post-closing exceeds $400,000 but is equal to or less than $1,000,000. | ||
The proceeds of the sale will be reduced by the required repayment of Five Star’s debt outstanding on the closing date, which is required by the Stock Purchase Agreement, transaction costs, taxes, certain defined severance costs for employees of Five Star Products and Five Star Group, one half of the rent and other sums, if any, due under the warehouse lease for Five Star’s Connecticut location from the later of March 31, 2010 or when Five Star Group ceases to use the warehouse through September 30, 2010, if any, and post-closing indemnities by National Patent in favor of Merit, if any. National Patent for its own account must satisfy certain obligations under state environmental laws in New Jersey and Connecticut. National Patent is also required by the Stock Purchase Agreement to have Five Star discharge, or fully reserve against, any obligation or liability to vendors with respect to private label merchandise held by such vendors which is no longer in Five Star’s current product lines, if any. These costs and adjustments would reduce proceeds available to National Patent. | ||
National Patent estimates that the required repayments of Five Star’s debt outstanding on the closing date and these costs and adjustments (except for post-closing indemnities in favor of Merit for which management of National Patent has no estimate at the date of this proxy statement) will reduce the proceeds of the sale to National Patent to an estimated range of $8.5 million to $9.5 million. Management of National Patent believes that the post closing indemnities in favor of Merit for which it has provided no estimate are not likely to reduce the post closing sale proceeds based on the facts and circumstances known to it on the date of this proxy statement. The estimate of a range of sale proceeds to National Patent represents management of National Patent’s best estimate at the date of this proxy statement. Actual sale proceeds to National Patent may vary from the range presented above and such variance may be material. Stockholders are cautioned not to place undue reliance upon this estimate. | ||
The board of directors of National Patent has not determined to distribute the proceeds of the sale to its stockholders but instead is considering alternative strategies. See “THE SALE – Nature of Our Business Following the Sale” on page 35. | ||
The purchase price is payable by Merit in cash at the closing. In connection with the contemplated funding of the purchase price, Merit has entered into a commitment letter agreement dated November 24, 2009 with Regions Bank in respect of a $62,500,000 amended credit facility. Merit and Regions Bank anticipate that, on and subject to the terms and conditions of the amended credit facility, approximately $22,000,000 will be utilized by Merit at closing to fund a portion of the purchase price. | ||
Merit has also entered into a commitment letter agreement dated November 24, 2009, pursuant to the terms and subject to conditions of which Stonehenge Partners, Inc. through its affiliate, Stonehenge Opportunity Fund II, L.P., has agreed to provide approximately $7,500,000 to Merit in connection with Merit’s funding obligations at the closing. In addition, pursuant to the terms of the Stock Purchase Agreement, stockholders of Merit funded additional cash investments in Merit in the aggregate amount of $1,500,000 in connection with the anticipated sale. | ||
The commitment letters contain customary terms and conditions. Subject to the respective terms and conditions of the commitment letters, each of the commitment letters will expire on January 23, 2010. The Stock Purchase Agreement contains the representation and warranty by Merit that the financing detailed in the commitment letters is sufficient to enable Merit to fund the purchase price and all fees and expenses in connection with the sale. Merit’s obligation to close the sale under the Stock Purchase Agreement is not contingent upon the availability of this, or any other, financing. |
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• | Solicitation of Proxies (page 7) | |
The National Patent board of directors is requesting that the stockholders of National Patent approve the sale of all of the issued and outstanding stock of National Patent’s wholly-owned subsidiary, Five Star Products, to Merit pursuant to the terms of the Stock Purchase Agreement, as described in this proxy statement. | ||
Because National Patent concluded that the sale constitutes the sale of substantially all of the assets of National Patent for purposes of the Delaware General Corporation Law, the sale is required by that Delaware statute to be approved by the stockholders of National Patent. |
• | Vote Required to Approve the Sale and Voting Rights (page 7) | |
For us to complete the sale, stockholders holding at least a majority of the shares of National Patent’s common stock outstanding at the close of business on November 27, 2009, the record date for our Special Meeting of stockholders, entitled to vote at the Special Meeting must vote “FOR” the proposal to sell all of the issued and outstanding stock of Five Star Products pursuant to the Stock Purchase Agreement. If we fail to obtain the requisite vote for the proposal, we will not be able to consummate the sale as provided for in the Stock Purchase Agreement. | ||
The executive officers and directors of National Patent held voting rights with respect to 3,733,651 shares of National Patent common stock issued and outstanding on the record date, or 21.26% of the issued and outstanding shares of National Patent common stock. Our executive officers and directors have indicated to us that they intend to vote all these shares of National Patent common stock in favor of the approval of the Stock Purchase Agreement and the sale. |
• | Reasons for the Sale (page 25) | |
National Patent’s board of directors has concluded that the sale is in the best interests of National Patent and its stockholders because: (i) National Patent is seeking a higher return on assets than it is currently receiving on its investment in Five Star; (ii) National Patent’s board of directors believes that the likely return to National Patent from the roll-up strategy in the paint sundries and hardware industries previously considered by National Patent does not justify the risk and investment at this time; (iii) Five Star has made significant progress in improving its operating efficiency but recognizes that further progress will require consolidation of its two distribution centers to create economies of scale; (iv) Five Star is a highly leveraged company; (v) Merit is uniquely well suited to acquire and operate Five Star’s business because it is a significant strategic participant in the paint sundries industry, and has a substantial national market presence; (vi) the board of directors has received the fairness opinion dated November 24, 2009 delivered to the board of directors by National Patent’s financial advisor, CRT Investment Banking LLC, or CRT Investment Banking, which stated that as of November 24, 2009, based upon and subject to the factors and assumptions set forth in the fairness opinion, the consideration to be paid for the stock of Five Star Products by Merit would be fair from a financial point of view; (vii) presentations by, and discussions with, our senior management and representatives of our financial and legal advisors support the sale; and (viii) the board of directors believes that Stock Purchase Agreement fairly compensates National Patent for the assets being sold. |
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• | Interests of the Directors, Executive Officers and Other Parties (page 35) | |
No director, executive officer, associate of any director or executive officer of National Patent has any substantial interest, direct or indirect, by security holdings or otherwise, in the sale that is not otherwise shared by all other stockholders. |
• | Fairness of the Sale; Opinion of Financial Advisor (page 28) | |
At a meeting of the National Patent board of directors on November 24, 2009, CRT Investment Banking rendered its oral opinion, and subsequently confirmed in writing, to the National Patent board of directors that, as of November 24, 2009, based upon and subject to the limitations and assumptions set forth therein, that the $33,124,000 to be paid as consideration for the stock of Five Star Products by Merit was fair from a financial point of view. | ||
The full text of the written opinion of CRT Investment Banking, dated November 24, 2009, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached asAnnex B to this proxy statement and is incorporated by reference herein. CRT Investment Banking provided its opinion for the information and assistance of the National Patent board of directors in connection with its consideration of the transaction. The CRT Investment Banking opinion is not a recommendation as to how any National Patent stockholder should vote with respect to the transaction or any other matter and subject to certain assumptions and limitations that are described in the opinion. |
• | The Stock Purchase Agreement (page 38) | |
The Stock Purchase Agreement provides that National Patent will sell all of the issued and outstanding stock of Five Star Products to Merit, and Merit will buy all of the issued and outstanding stock of Five Star Products, for the purchase price. Upon consummation of the purchase and sale of the stock of Five Star Products as contemplated by the Stock Purchase Agreement, Merit will own all of the issued and outstanding stock of Five Star Products and, as a result, all the stock of Five Star Group. | ||
The Stock Purchase Agreement provides, among other things, detailed descriptions of the conditions to the closing of the sale, termination provisions, representations and warranties and covenants made by each of the parties thereto, covenants relating to the conduct of the business of Five Star Products and Five Star Group by National Patent until the closing of the sale, indemnity provisions and liquidated damages related to certain terminations of the Stock Purchase Agreement. |
• | Conditions to Closing of the Sale (page 47) | |
Closing of the transactions contemplated under the Stock Purchase Agreement is subject to customary closing conditions, including approval of the transaction by the stockholders of National Patent, the accuracy of representations and warranties of the parties, the performance of covenants by the respective parties and the absence of certain litigation regarding the sale. | ||
Assuming the closing conditions are met to the satisfaction of the National Patent and Merit or waived, a date will be set for closing, which the parties currently anticipate will be in the first quarter of 2010. |
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• | Representations and Warranties (page 39) | |
Our representations and warranties contained in the Stock Purchase Agreement include customary representations regarding the business and the assets of Five Star Products and Five Star Group to be conveyed to Merit, including representations and warranties relating to employee benefit plans and environmental matters, Five Star Products’, Five Star Group’s and National Patent’s formation and legal existence, our power and authority to enter into and perform our obligations under the Stock Purchase Agreement, and the obtainment of all consents, permissions, approvals and agreements necessary for us to consummate the sale. Merit’s representations and warranties contained in the Stock Purchase Agreement include customary representations regarding, among other things, Merit’s formation, legal existence, power and authority to enter into and perform its obligations under the Stock Purchase Agreement, obtainment of all consents, permissions, approvals and agreements necessary for Merit to consummate the sale, the financing contemplated to be provided in connection with the transactions contemplated by the Stock Purchase Agreement and Merit’s ability to fund the purchase price. Absent fraud, the representations and warranties of National Patent and Merit will terminate at the closing or the earlier of the termination of the Stock Purchase Agreement. |
• | Certain Covenants (page 41) | |
The Stock Purchase Agreement also contains customary covenants and agreements as well as covenants relating to (a) the conduct of Five Star’s business between April 1, 2009 through the closing, (b) National Patent’s right to solicit competing acquisition proposals, (c) matters affecting the Five Star Group, Inc. 401(k) Savings Plan, (d) our compliance with the New Jersey Transfer Act and Connecticut Transfer Act, (e) severance and other payments to employees of Five Star Products and Five Star Group, (f) Merit’s efforts to consummate the financing, (g) Merit’s refraining from taking action which would extend any guaranty under Five Star Group’s warehouse leases, (h) Merit’s agreement to provide federal health care continuation coverage to certain employees of Five Star Group, (i) Five Star discharging, or fully reserving against, any obligation or liability to vendors with respect to private label merchandise held by private label vendors that is no longer in Five Star’s current product lines, if any, (j) the election to treat the sale of stock as a deemed sale of assets under Section 338(h)(10) of the U.S. Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and (k) the efforts of the parties to cause the transactions contemplated by the Stock Purchase Agreement to be consummated. |
• | Indemnification (page 49) |
• | up to an amount of $2 million in connection with any liability or obligation arising out of or based upon: |
§ | all Indebtedness (as defined in the Stock Purchase Agreement) (however, National Patent is required by the Stock Purchase Agreement in any event to repay all of the outstanding revolving indebtedness under the loan agreement between Bank of America and Five Star Group as of the closing date, without limit); | ||
§ | all liabilities for pending or threatened litigation against National Patent, Five Star Products, or Five Star Group required to be set forth on a schedule relating to Section 3.19 of the Stock Purchase Agreement relating to litigation; |
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§ | all obligations and liabilities arising out of or related to environmental matters (i) relating to remedial actions required under Sections 5.10 and 5.11 of the Stock Purchase Agreement or (ii) which are disclosed by National Patent to Merit or are known to officers of National Patent, Five Star Group, or Five Star Products as of the closing, to the extent such matters are at the closing, or within a stated period thereafter become, the subject of third party claims pending or threatened; | ||
§ | the combination of the following items not to exceed $600,000 in the aggregate: (a) 75% of the liabilities or obligations arising with respect to the use of real property by Five Star Products or Five Star Group through September 30, 2011, to the extent that a failure to comply with applicable laws, rules and regulations existed as of the closing, (b) 75% of the liabilities and obligations arising with respect to certain conditions existing as of the closing, if such real property leases were to terminate after giving effect to Merit paying the first $25,000 of any such liabilities and obligations and (c) environmental matters which were not known to officers of National Patent, Five Star Group, or Five Star Products at closing and which would have otherwise been subject to disclosure on a schedule relating to Section 3.24 of the Stock Purchase Agreement relating to environmental matters, to the extent such matters become the subject of third party claims pending or threatened within a stated period after the closing; | ||
§ | all liabilities and obligations with respect to federal health care continuation coverage requirements and any applicable state health care continuation coverage requirements arising prior to the closing, except Merit’s liabilities or obligations to provide, or to cause Five Star Group to provide federal health care continuation coverage benefits after the closing pursuant to the Stock Purchase Agreement; |
• | arising out of the failure of National Patent to perform the covenants contained in the Stock Purchase Agreement to be performed by National Patent after the closing; | ||
• | arising out of any fraud by National Patent, Five Star Products or Five Star Group in connection with the Stock Purchase Agreement; or | ||
• | arising out of (i) any of the items identified on the schedule relating to Section 3.23(c) to the Stock Purchase Agreement relating to employee benefit plan compliance, or (ii) any other alleged operational or other compliance failures with respect to the Five Star Group, Inc. 401(k) Savings Plan, subject to certain exceptions described in the Stock Purchase Agreement. |
Merit has agreed to indemnify us and certain of our related parties from claims: |
• | arising out of any liabilities of National Patent under guaranties of certain real estate leases or of National Patent to GP Strategies, Inc. under its guaranty of the lease by Five Star Group of a warehouse in East Hanover, New Jersey; |
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• | arising out of the failure by Merit to perform its covenants in the Stock Purchase Agreement to be performed by Merit after the closing; | ||
• | arising out of changes of employment status or the terms of employment planned or communicated by Merit with respect to any such employees of Five Star Group as a result of the sale, including actions taken by Merit or by Five Star Group at the direction of Merit pursuant to the Employee Agreement between National Patent and Merit attached asAnnex E to this proxy statement, or the Employee Agreement; or | ||
• | arising out of any fraud by Merit in connection with the Stock Purchase Agreement. |
• | Termination of the Stock Purchase Agreement (page 50) | |
The Stock Purchase Agreement may be terminated: |
• | in accordance with a written agreement executed by the parties prior to the closing. | ||
• | by either National Patent or Merit if, among other reasons: |
• | the closing has not been completed prior to the earlier of (i) the first business day after the Target Meeting Date (as defined below) or (ii) 150 days after November 24, 2009 (which we refer to as the Closing Date Deadline); | ||
• | National Patent, Five Star Products or Five Star Group accepts in writing an offer for an Alternative Transaction (as described under “THE STOCK PURCHASE AGREEMENT — Solicitation of Other Offers” on page 47) based on the exercise of fiduciary duties by our board of directors; or | ||
• | prior to the Closing Date Deadline, Merit or National Patent determines that through the other party’s material breach of its obligations in the Stock Purchase Agreement, the conditions precedent to the obligation of the non-breaching party to proceed with the closing cannot be satisfied on or before the Closing Date Deadline. |
References to Target Meeting Date refer to the date that is 30 business days after the date this proxy statement may be filed in definitive form with the Securities and Exchange Commission, or the SEC, and mailed to our stockholders to consider the sale, plus additional time related to any delay in our ability to convene a valid stockholders’ meeting to consider the sale caused by compliance with Rule 14a-13 of the SEC or a re-solicitation of proxies or required amendment of the proxy materials, if any, if caused by a change in the terms or loss of Merit’s financing, or any other event or circumstance that necessitates a change in the information related to Merit or its financing contained in our proxy statement or the necessity to include information with respect to an alternative offer so long as our board of directors has not accepted such offer and so long as our board of directors continues to recommend the sale to our stockholders. | ||
If our stockholders do not approve the sale, the sale will not close and the Stock Purchase Agreement will terminate. |
• | Liquidated Damages; Break-up Fee (page 51) | |
In the event of a termination of the Stock Purchase Agreement by us or Merit (i) after the Closing Date Deadline described under the heading “Termination of the Stock Purchase Agreement” or |
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(ii) based on a material breach by one party of its obligations under the Stock Purchase Agreement, where one party is not in breach of its own obligations and the other party is in material breach of the Stock Purchase Agreement, such other party may be obligated to pay liquidated damages in the amount of $2,000,000 to the non-breaching party. | ||
The Stock Purchase Agreement also contains a $2,000,000 break-up fee payable if National Patent, Five Star Products or Five Star Group accepts in writing an offer for an Alternative Transaction based on the exercise of fiduciary duties by our board of directors, provided that Merit would not be entitled to receive both liquidated damages and the break-up fee. |
• | Escrow Deposits (page 12) | |
Merit will deduct the following amounts from the purchase price and deposit the same with an escrow agent: $300,000, which we refer to as the indemnity escrow funds, and $600,000, which we refer to as the inventory escrow funds, to be held in separate accounts. | ||
The indemnity escrow funds will be used to satisfy any claims that may be brought by Merit and certain of its related parties, subject to the procedures outlined in the related agreement with the escrow agent, against National Patent under Article 8 of the Stock Purchase Agreement relating to indemnification. | ||
The inventory escrow funds will be used, subject to the procedures outlined in the related escrow agreement, to satisfy any claims that may be made under Section 2.2(c) of the Stock Purchase Agreement relating to the designated inventory adjustment described in that Section and in this proxy statement under the heading “Consideration for the Sale” above and “THE SALE – The Sale; Consideration for the Sale” on page 11. |
• | Non-Competition and Non-Solicitation (page 13) | |
We have agreed to a three-year non-compete, which affects National Patent and its affiliates. During the period commencing effective as of the closing and expiring on the third anniversary of the closing, the non-compete prohibits us, in the United States or any city, county or state in which Five Star Group and/or Five Star Products conducted its business during 24 month period immediately prior to closing, from attempting to sell at the wholesale level products that are within the scope of Five Star Group’s business, soliciting any of Five Star Group’s vendors or customers to discontinue or decrease their sales to or purchases from Five Star Group or Five Star Products of products or services that are included within Five Star Group’s business, engaging in the business conducted by Five Star Group or soliciting or recruiting certain employees of Five Star Products or Five Star Group. | ||
The non-solicit provides that in the event of the termination of the Stock Purchase Agreement at any time prior to closing, during the period commencing on the date the Stock Purchase Agreement is terminated and expiring on the second anniversary of such date, other than through general advertising or general solicitations or with the consent of either National Patent or Merit, as the case may be: |
• | National Patent will not, solicit or recruit for hire any individuals employed by Merit or Merit Paint Sundries, LLC as of the date of the non-solicitation agreement or in any manner seek to induce any such employee to leave his or her employment; and |
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• | Merit will not solicit or recruit for hire any individuals employed by Five Star Products or Five Star Group as of the date of the non-solicitation agreement or in any manner seek to induce any such employee to leave his or her employment. |
• | Agreement Regarding Five Star Employees (page 13) | |
Also in connection with the sale, pursuant to the Employee Agreement, National Patent and Merit have agreed that certain employees and executives of Five Star Products and/or Five Star Group will be entitled to receive severance payments subject to certain terms and conditions related to the retention and termination of such employees and executives. |
• | Failure to Approve or Close the Sale (page 37) | |
If the stockholders do not approve the sale, the sale will not close and the Stock Purchase Agreement will terminate. Certain conditions to the closing of the sale are discussed under “THE STOCK PURCHASE AGREEMENT” beginning on page 38.If holders of a majority of the shares of National Patent common stock outstanding entitled to vote at the Special Meeting do not vote in favor of the transaction, in person or by proxy, the sale willnot close. |
• | Use of Proceeds From the Sale (page 35) | |
Our board of directors will consider strategic uses for the sale proceeds including, without limitation, using such funds, together with other funds of National Patent, to acquire one or more operating businesses or at least controlling interests in such businesses. Prior to this use, the sale proceeds will be invested in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation, until such time as we need to utilize such funds, or any portion thereof, for the purposes described above. We do not anticipate distributing the proceeds of the sale to our stockholders after the sale. |
• | Nature of Business Following the Sale (page 35) | |
Following the sale of Five Star Products, we will continue to be a public company. We also intend to evaluate and potentially explore all available strategic options. We will continue to work to maximize stockholder interests with a goal of returning value to our stockholders. After the sale of Five Star Products, we intend to develop or acquire a majority interest or at least a controlling interest (as defined for purposes of the federal Investment Company Act of 1940, as amended, or the Investment Company Act) in one or more operating businesses such that National Patent is primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities. Until such time as the proceeds from the sale of Five Star and other liquid assets of National Patent are so deployed into operating businesses, we intend to invest the proceeds and our other liquid assets in high-grade, short-term investments (such as cash and cash equivalents) consistent with the preservation of principal, maintenance of liquidity and avoidance of speculation. | ||
Immediately following consummation of the sale, we will have no or nominal operations. As a result, we believe that at such time we will be a “shell company”, as defined in Rule 405 of the Securities Act of 1933, as amended, or the Securities Act, and Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. If we become a shell company, our stockholders will be unable to utilize Rule 144 of the Securities Act, or Rule 144, to sell “restricted stock” as defined in Rule 144 or otherwise use Rule 144 to sell stock of National Patent, and we would be ineligible to utilize registration statements on Form S-3 or Form S-8 for so long as we remain a shell company and for 12 months thereafter. Among other things, as a consequence, the offering, issuance and sale of |
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our securities is likely to be more expensive and time consuming and may make our securities less attractive to investors. | ||
Although National Patent is not engaged in the business of investing, reinvesting, or trading in securities, and National Patent does not hold itself out as being engaged in those activities, following the closing of the sale, National Patent will likely be an “inadvertent investment company” under section 3(a)(1)(C) of the Investment Company Act. National Patent will fall within the scope of section 3(a)(1)(C) if the value of its investment securities (as defined in the Investment Company Act) is proposed to be more than 40% of its total assets (exclusive of government securities and cash and certain cash equivalents) following the closing of the sale. | ||
See “Risk Factors — Following the consummation of the sale, we will likely be classified as an inadvertent investment company” on page 89 and “Risk Factors – After the consummation of the sale, we believe that we will be a shell company under the federal securities laws” on page 90. | ||
National Patent does not intend to be regulated as an investment company under the Investment Company Act and, therefore, will rely on certain SEC no-action letters and other SEC guidance, including the “transient investment company” Rule 3a-2 under the Investment Company Act. That rule provides a one year grace period for companies that might otherwise be required to register as an investment company where the company has, as does National Patent, abona fideintent to be primarily engaged as soon as reasonably possible (but in any event, within one year), in a business other than that of investing, reinvesting, owning, holding or trading in securities. |
• | Appraisal Rights (page 94) | |
Holders of National Patent common stock will not be entitled to appraisal rights in connection with the sale under the Delaware General Corporation Law. |
• | Regulatory Matters (page 92) | |
There are no material federal or state regulatory requirements that must be complied with, or approvals that must be obtained, for the completion of the sale, other than the filing of this proxy statement, in preliminary and definitive form, with the SEC. |
• | Material U.S. Federal Income Tax Consequences (page 93) | |
The sale of the stock of Five Star Products will be a taxable transaction for us. We will realize gain or loss measured by the difference between the proceeds received by us on such sale and our tax basis in the assets of Five Star Products and its wholly-owned subsidiary, Five Star Group. For purposes of calculating gain, the proceeds received by us will include the cash we receive, the amount of our indebtedness that is cancelled or assumed, and any other consideration we receive in the transaction. | ||
The sale of the stock of Five Star Products will be treated for federal income tax purposes as a deemed sale of the assets of Five Star Products and its wholly-owned subsidiary, Five Star Group, in accordance with elections to be made jointly by National Patent and Merit under Section 338(h)(10) of the Internal Revenue Code. The aggregate deemed sales price of those assets will be allocated among each asset in accordance with the requirements of Section 338(h)(10) of the Internal Revenue Code and applicable regulations of the Department of the Treasury, or Treasury Regulations, thereunder. | ||
The sale of the stock of Five Star Products will not result in any direct Federal income tax consequences to our stockholders. For a more detailed explanation of the U.S. federal income tax |
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consequences to the sale and the subsequent transfers relating to National Patent, see “MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES” beginning on page 93 of this proxy statement. | ||
Tax matters are complex, and the tax consequences of the sale and their effect on you will depend on the facts of your particular situation. You are urged to consult with your own tax advisor with respect to your own individual tax consequences. |
• | Recommendation of Our Board of Directors | |
After careful consideration, our board of directors unanimously recommends that you vote “FOR” the proposal to approve the sale pursuant to the Stock Purchase Agreement, authorizing National Patent to consummate the sale pursuant to the terms of the Stock Purchase Agreement. |
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903 Murray Road
East Hanover, New Jersey 07936
OF STOCKHOLDERS TO BE HELD ON THURSDAY, JANUARY 14, 2010
1. | A proposal to sell of all of the issued and outstanding stock of National Patent’s wholly-owned subsidiary, Five Star Products, Inc., to The Merit Group, Inc. pursuant to the terms of a Stock Purchase Agreement, as described in the accompanying proxy materials; and | ||
2. | Such other business as may properly come before the Special Meeting. |
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Q: | When and where will the Special Meeting take place? | |
A: | The Special Meeting will be held on Thursday, January 14, 2010 at the offices of Day Pitney LLP, 7 Times Square, 19th floor, New York, New York 10036, beginning at 9:00 a.m. Eastern Time. | |
Q: | Who is soliciting my vote? | |
A: | The vote being sought by this proxy statement is being solicited by the board of directors of National Patent. | |
Q: | What am I being asked to vote on at the Special Meeting? | |
A. | At the Special Meeting, you will be asked to vote upon the following: |
• | a proposal to approve and authorize the sale of all of the issued and outstanding stock of National Patent’s wholly-owned subsidiary, Five Star Products, to Merit pursuant to the terms of the Stock Purchase Agreement, a copy of which is attached to this proxy statement asAnnex A; and | ||
• | such other matters as may properly come before the Special Meeting. |
Q: | How does the board recommend that I vote on the proposal for the sale? | |
A: | The board of directors unanimously recommends that you vote “FOR” the proposal to approve the Stock Purchase Agreement and to authorize the sale. | |
Q: | How do I vote? | |
A: | Sign and date each proxy card you receive and return it in the enclosed envelope prior to the Special Meeting. | |
Q: | Can I change my vote? | |
A: | Yes. You may change your proxy instructions at any time before your proxy is voted at the Special Meeting. Proxies may be revoked by taking any of the following actions: |
• | filing a written notice of revocation with our Corporate Secretary at our principal executive office (903 Murray Road, PO Box 1960, East Hanover, New Jersey 07936); | ||
• | filing a properly executed proxy showing a later date with our Corporate Secretary at our principal executive office; or | ||
• | attending the Special Meeting and voting in person (although attendance at the meeting will not, by itself, revoke a proxy). |
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Q: | What shares are included on the proxy card(s)? | |
A: | The shares on your proxy card(s) represent ALL of your shares. If you do not return your proxy card(s), your shares will not be voted. | |
Q: | What does it mean if I get more than one proxy card? | |
A: | If your shares are registered differently and are in more than one account, you will receive more than one proxy card. Sign and return all proxy cards to ensure that all of your shares are voted. | |
Q: | Who is entitled to vote at the Special Meeting? | |
Only holders of record of our common stock as of the close of business on November 27, 2009 are entitled to notice of, and to vote at, the Special Meeting. | ||
Q: | How many shares were outstanding on the record date? | |
A: | At the close of business on November 27, 2009, the record date, there were 17,561,240 shares of common stock outstanding and entitled to vote. A stockholder may vote (a) shares that are held of record directly in the stockholder’s name, and (b) shares held for the stockholder, as the beneficial owner, through a broker, bank or other nominee. At the meeting, each outstanding share of common stock will be entitled to one vote. | |
Q: | What is a “quorum” for purposes of the Special Meeting? | |
A: | In order to conduct business at the Special Meeting, a quorum must be present. A “quorum” is a majority of the outstanding shares entitled to be voted at the Special Meeting. The shares may be present in person or represented by proxy at the Special Meeting. Both abstentions and broker non-votes are counted as present for the purpose of determining the presence of a quorum. | |
Q: | What vote is required to approve the proposal? | |
A: | Once a quorum has been established, holders of at least a majority of our outstanding shares entitled to vote at the Special Meeting must vote “FOR” the proposal to approve and authorize the sale of all of the issued and outstanding stock of National Patent’s wholly-owned subsidiary, Five Star Products, to Merit to be approved and authorized. | |
If your shares are held in street name, your broker will vote your shares for you only if you provide instructions to your broker on how to vote your shares. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Your broker cannot vote your shares of National Patent common stock without specific instructions from you. Because the affirmative vote of a majority of the outstanding common stock entitled to vote at the Special Meeting is required to approve and authorize the proposal, a failure to provide your broker with instructions on how to vote your shares will have the effect of a vote against the proposal. | ||
Q: | What happens if I abstain? | |
A: | Proxies marked “abstain” will be counted as shares present for the purpose of determining the presence of a quorum, but for purposes of determining the outcome of the proposal to approve the sale, shares represented by such proxies will have the effect of a vote against the proposal. |
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Q: | How will voting on any other business be conducted? | |
A: | Although we do not know of any business to be considered at the Special Meeting other than the proposal described in this proxy statement, if any other business is properly presented at the Special Meeting, your signed proxy card gives authority to the proxy holders, John C. Belknap and Ira J. Sobotko, to vote on such matters at their discretion. | |
Q: | Who will bear the cost of this solicitation? | |
A: | We will pay the entire cost of preparing, assembling, printing, mailing and distributing these proxy materials. In addition to the use of the internet or mails, our directors, officers and regular employees (acting without additional compensation) may solicit proxies personally or by telephone, email, facsimile or direct contact. | |
Arrangements may be made with brokerage houses and other custodians, nominees and fiduciaries to send a notice of the meeting and, if requested, proxies and proxy materials to the beneficial owners of stock. National Patent will reimburse banks, brokers and other custodians, nominees and fiduciaries for their costs in sending notices and proxy materials to the beneficial owners of our common stock. In addition, National Patent has retained Georgeson Inc. to act as a proxy solicitor for the Special Meeting. National Patent has agreed to pay Georgeson Inc. approximately $7,500, plus reasonable out-of-pocket expenses, for providing proxy solicitation services. | ||
Q: | How can I find out the result of the vote? | |
A: | National Patent will promptly notify stockholders of the results of the vote following the Special Meeting through the issuance of a press release or the filing with the SEC of a Current Report on Form 8-K, or both. | |
Q: | Who can help answer my other questions? | |
A: | If you would like additional copies, without charge, of this proxy statement or if you have questions about the sale, including the procedures for voting your shares, you should call our Corporate Secretary, Ira J. Sobotko, at (973) 428-4600, ext. 117. |
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• | A proposal to sell of all of the issued and outstanding stock of National Patent’s wholly-owned subsidiary, Five Star Products, to Merit pursuant to the terms of a Stock Purchase Agreement, as described in the accompanying proxy materials; and | ||
• | Such other business as may properly come before the Special Meeting. |
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• | soliciting or marketing to any person for the purpose of selling to such person at the wholesale level products that are included within Five Star Group’s business; | ||
• | taking any action to induce or request any person who is a customer or vendor of Five Star Group’s business to discontinue or decrease its sales to or purchases from Five Star Group or Five Star Products of products or services that are included within Five Star Group’s business; | ||
• | otherwise engaging in any aspect or segment of Five Star Group’s business; or | ||
• | soliciting or recruiting for hire any individuals employed by Five Star Products or Five Star Group on the closing or at any time during the 90 day period prior to the closing, except such employees who are terminated by Five Star Products or Five Star Group at the time of the closing at Merit’s request, or in any manner seeking to induce any such employee to leave his or her employment, other than through general advertising or general solicitation and except as expressly permitted by the Stock Purchase Agreement. |
• | National Patent will not, solicit or recruit for hire any individuals employed by Merit or Merit Paint Sundries, LLC as of the date of the non-solicitation agreement or in any manner seek to induce any such employee to leave his or her employment; and | ||
• | Merit will not solicit or recruit for hire any individuals employed by Five Star Products or Five Star Group as of the date of the non-solicitation agreement or in any manner seek to induce any such employee to leave his or her employment. |
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• | Category A employees will receive an offer of continued employment on terms and conditions materially different than those in existence immediately prior to the closing. Employees in this category who do not accept the retention offer will be re-categorized into another category. | ||
• | Category B employees will receive an offer of employment for a transitional period of time which will not exceed six (6) months. Non-accepting employees in this category will be re-categorized as category C employees. |
All offers relating to category A and category B employees will be specifically conditioned upon the closing of the sale. |
• | Category C employees will be terminated on the closing date. | ||
• | Category D employees are all non-union employees who do not otherwise fit into any of the foregoing categories. |
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• | Cash consideration of $34 million plus assumption of certain trade payables, based on Five Star Products’ working capital and level of bank indebtedness at September 30, 2008; | ||
• | A due diligence period for three weeks following Merit’s receipt of requested information from Five Star; | ||
• | A targeted closing date of April 30, 2009; and | ||
• | Satisfactory execution of non-competition and employment agreements. |
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• | National Patent is seeking a higher return on assets than it is currently receiving on its investment in Five Star. |
• | Five Star’s average net income for the five years ended December 31, 2008 was $238,000 and, excluding a one-time a charge of $1,096,000 related to the resignation of the former Chairman of its board of directors on March 25, 2008, Five Star’s average net income for such five-year period was $457,000. |
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• | National Patent believes there are attractive investment opportunities in the current economic climate which have greater potential for significant financial returns than a continuing investment in Five Star. | ||
• | National Patent has the opportunity with the sale to increase funds available to finance future acquisitions and other business opportunities. The sale is anticipated to generate cash sufficient to satisfy the obligations of Five Star’s business, retire its debt and provide capital for National Patent to acquire and grow new operating businesses. |
• | National Patent’s board of directors believes that the likely return to National Patent from the roll-up strategy in the paint sundries and hardware industries previously considered by National Patent does not justify the risk and investment at this time. |
• | Five Star’s infrastructure supports current operations adequately but is not suitable as a platform for acquisitions. | ||
• | National Patent recognizes that there are multiple challenges both in identifying suitable acquisition candidates and successfully effecting acquisitions. | ||
• | Since November 2006, National Patent has reviewed numerous potential acquisitions and completed only one, its acquisition of Right-Way Dealer Warehouse, Inc. |
• | Five Star has made significant progress in improving its operating efficiency but recognizes that further progress will require consolidation of its two distribution centers to create economies of scale. |
• | The current distribution centers’ layouts are not suitable for engineering significant productivity improvements. Their design and sizing reflect an incremental approach to accommodating expansion, not an integrated plan to maximize efficient handling and storage. | ||
• | Major productivity improvements would also require replacing Five Star’s principal systems with an integrated systems suite that has significantly more robust functionality. | ||
• | Warehouse consolidation and systems upgrades would require capital expenditures and other one-time outlays of approximately $9 million and acceptance of considerable operating risk during the transition. National Patent is not comfortable with the risk/reward ratio. | ||
• | The leases for the Newington, Connecticut and East Hanover, New Jersey distribution centers expire in the third quarter of 2010 and 2011, respectively. |
• | Five Star is a highly leveraged company. |
• | At September 30, 2009, Five Star’s stockholder’s equity was $9.6 million and it had approximately $16 million in outstanding revolving indebtedness under its $35 million line of credit with Bank of America. |
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During the twelve months ended December 31, 2008, Five Star’s maximum indebtedness under such line of credit was $27.1 million. | |||
• | For the year ended December 31, 2008, Five Star’s pro forma fixed charge coverage ratio was 1.4:1. | ||
• | Five Star has recently required waivers for non-compliance with its covenants under its Bank of America line of credit. In September, 2008, Bank of America granted Five Star Group a waiver to avoid a default on the Fixed Charge Covenant ratio under its loan agreement with Bank of America. The bank waived the default and agreed to certain amendments to the loan agreement. In the absence of the sale, there can be no assurance that Five Star could avoid future defaults nor, if there are any such defaults, that Bank of America would agree to future waivers and/or amendments. | ||
• | Five Star’s high leverage makes it vulnerable to the effects of downturns in the economy, general business environment and the home improvement industry. Five Star is currently experiencing such effects and there can be no assurance that conditions will improve in the near future. | ||
• | Five Star’s high leverage impedes its ability to expand either internally or through acquisition. | ||
• | Five Star’s leverage, coupled with current economic conditions, make it possible at some point that National Patent would need to provide credit support to Five Star. National Patent has been unwilling to encumber its own flexibility by doing so. |
• | Merit is uniquely well suited to acquire and operate Five Star’s business because it is a significant strategic participant in the paint sundries industry, and has a substantial national market presence. | ||
• | The board of directors received a fairness opinion dated November 24, 2009 from National Patent’s financial advisor, CRT Investment Banking, which stated that as of November 24, 2009, based upon and subject to the limitations and assumptions set forth in the fairness opinion, the consideration to be paid for the stock of Five Star Products by Merit would be fair from a financial point of view. | ||
• | Presentations by, and discussions with, our senior management and representatives of our financial and legal advisors support the sale. | ||
• | The board of directors believes that the Stock Purchase Agreement fairly compensates National Patent for the assets being sold. |
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• | The draft Stock Purchase Agreement dated November 19, 2009; | ||
• | annual reports to stockholders and Annual Reports on Form 10-K and Quarterly Reports on 10-Q of National Patent; | ||
• | audited financial statements and the interim financial statements of Five Star Products; and | ||
• | certain internal financial analyses and forecasts for Five Star Products prepared by its management, as approved for CRT Investment Banking’s use by National Patent. |
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• | The underlying business decision of National Patent, its respective security holders or any other party to proceed with or effect the transaction; | ||
• | the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, the transaction or otherwise, except as expressly addressed in the opinion; | ||
• | the fairness of any portion or aspect of the transaction to the holders of any class of securities, creditors or other constituencies of National Patent, or any other party; | ||
• | the relative merits of the transaction as compared to any alternative business strategies that might exist for National Patent or any other party or the effect of any other transaction in which National Patent or any other party might engage; | ||
• | the tax or legal consequences of the transaction to either National Patent, its respective security holders, or any other party; | ||
• | the fairness of any portion or aspect of the transaction to any one class or group of National Patent’s or any other party’s security holders vis-à-vis any other class or group of National Patent’s or such other party’s security holders (including without limitation the allocation of any consideration amongst or within such classes or groups of security holders); or | ||
• | the solvency, creditworthiness or fair value of National Patent or any other participant in the transaction under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters. |
• | Market Multiple Methodology | ||
• | Comparable Transaction Methodology | ||
• | Discounted Cash Flow Methodology |
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(Amounts in thousands) | Low | High | ||||||||||
Enterprise Value Indication from Operations | ||||||||||||
Market Approach | ||||||||||||
Market Multiple Methodology | $ | 14,000 | — | $ | 18,000 | |||||||
Comparable Transaction Methodology | $ | 16,000 | — | $ | 22,000 | |||||||
Income Approach | ||||||||||||
Discounted Cash Flow Methodology | $ | 23,000 | — | $ | 27,000 | |||||||
Results Summary: | ||||||||||||
Selected Total Enterprise Value from Operations | $ | 18,000 | — | $ | 22,000 | |||||||
Non-Operating Assets: | ||||||||||||
Add: Cash and Cash Equivalents(1) | — | — | — | |||||||||
Total Enterprise Value | $ | 18,000 | — | $ | 22,000 | |||||||
(1) Balances are as of October 31, 2009, the most recent balances available as indicated by management. |
• | Applied Industrial Technologies, Inc. | ||
• | Bluelinx Holdings Inc. | ||
• | Core-Mark Holding Company, Inc. | ||
• | Fastenal Co. | ||
• | Interline Brands Inc. | ||
• | Lawson Products Inc. | ||
• | MSC Industrial Direct Co. Inc. | ||
• | Pool Corp. | ||
• | W.W. Grainger, Inc. | ||
• | WESCO International Inc. |
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TEV / EBITDA Multiples | 2008 | LTM | 2009E | 2010E | ||||||||||||
Fastenal Co. | 10.9x | 14.9x | 16.2x | 13.9x | ||||||||||||
MSC Industrial Direct Co. Inc. | 12.5x | 12.5x | 14.9x | 12.1x | ||||||||||||
Lawson Products Inc. | 4.1x | 12.2x | nmf | na | ||||||||||||
Pool Corp | 9.2x | 11.2x | 11.2x | 10.4x | ||||||||||||
W.W. Grainger, Inc. | 8.0x | 9.0x | 9.4x | 8.5x | ||||||||||||
Interline Brands Inc. | 7.5x | 9.0x | 9.9x | 8.7x | ||||||||||||
Applied Industrial Technologies, Inc. | 7.0x | 8.4x | 9.4x | 8.7x | ||||||||||||
WESCO International Inc. | 4.7x | 7.4x | 8.6x | 8.7x | ||||||||||||
Core-Mark Holding Company, Inc. | 6.1x | 2.9x | 4.2x | 3.5x | ||||||||||||
Bluelinx Holdings Inc. | nmf | nmf | nmf | nmf | ||||||||||||
High | 12.5x | 14.9x | 16.2x | 13.9x | ||||||||||||
Low | 4.1x | 2.9x | 4.2x | 3.5x | ||||||||||||
Mean | 7.8x | 9.7x | 10.5x | 9.3x | ||||||||||||
Median | 7.5x | 9.0x | 9.6x | 8.7x | ||||||||||||
Selected Multiple | Indicated | |||||||||||||||||||||||||||
(Amounts in thousands) | Range | Enterprise Value Range | ||||||||||||||||||||||||||
FYE 2008 | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 3,110 | 5.0x | — | 7.0x | $ | 15,548 | — | $ | 21,767 | ||||||||||||||||||
LTM 8/31/2009 | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 1,910 | 6.0x | — | 8.0x | $ | 11,461 | — | $ | 15,282 | ||||||||||||||||||
NFY (2009) | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 1,307 | 7.0x | — | 9.0x | $ | 9,152 | — | $ | 11,766 | ||||||||||||||||||
NFY+1 (2010) | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 3,104 | 6.0x | — | 8.0x | $ | 18,623 | — | $ | 24,831 | ||||||||||||||||||
Mean | $ | 13,696 | — | $ | 18,411 | |||||||||||||||||||||||
Selected Enterprise Value Range | $ | 14,000 | — | $ | 18,000 | |||||||||||||||||||||||
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(Dollars in millions) | ||||||||||||
Annc. | TEV / | |||||||||||
Date | Target | Acquiror | EBITDA | Revenue | ||||||||
10/16/09 | Imperial Supplies, LLC | W.W. Grainger | 7.3x | 0.99x | ||||||||
10/05/09 | General Pool & Spa Supply | Pool Corp | 9.4x | 0.38x | ||||||||
09/30/09 | Schoeneman Beauty Supply Incorporated | Beauty Systems Group LLC | na | 0.70x | ||||||||
04/03/09 | Central Products LLC | K + K America Corporation | 9.3x | 1.19x | ||||||||
12/17/08 | Three distribution centers of GSC | Nash Finch Company | na | 0.11x | ||||||||
08/21/08 | Eagle Maintenance Supply, Inc. | Interline Brands Inc. | na | 0.56x | ||||||||
08/20/08 | ActionEmco Holdings, LLC | United Stationers Supply Company | na | na | ||||||||
08/01/08 | Industrial Air Tool, L.P., L.L.P. | ZS Fund L.P.; Allied Capital Corporation | na | 0.48x | ||||||||
07/14/08 | Fluid Power Resource, LLC | Applied Industrial Technologies, Inc. | 8.6x | 0.68x | ||||||||
05/09/08 | Auburn Merchandise Distributors | Core-Mark Holding Company, Inc. | na | 0.11x | ||||||||
02/16/08 | National Pool Tile Group, Inc. | Pool Corp | na | 0.50x | ||||||||
12/28/07 | All Points Industries, Inc. | The Hillman Group, Inc. | 6.9x | 0.37x | ||||||||
12/18/07 | Kendrick Holdings, LLC | Falcon Investment Advisors, LLC; Ancor Capital | na | na | ||||||||
11/15/07 | ORS Nasco, Inc. | United Stationers Supply Company | na | 0.61x | ||||||||
10/31/07 | McKernan Packaging Clearing House | Richards Packaging Income Fund | na | na | ||||||||
10/05/07 | Millbrook Distribution Services, Inc. | United Natural Foods, Inc. | na | 0.26x | ||||||||
09/30/07 | Conney Safety Products, LLC | CI Capital Partners LLC | na | 0.65x | ||||||||
08/13/07 | Central Lewmar, LLC | International Paper Co. | 7.4x | 0.21x | ||||||||
03/12/07 | CHEMCENTRAL Corporation | Univar USA, Inc. | 9.3x | 0.46x | ||||||||
02/25/07 | California Wholesale Material Supply, Inc. | L&W Supply Corporation | na | 0.47x | ||||||||
02/07/07 | Galleher Corporation | Itochu Corp. | na | 0.27x | ||||||||
High | 9.4x | 1.19x | ||||||||||
Low | 6.9x | 0.11x | ||||||||||
Mean | 8.3x | 0.50x | ||||||||||
Median | 8.6x | 0.47x | ||||||||||
Representative | Selected Multiple | Indicated | ||||||||||||||||||||||||||
(Amounts in thousands) | Level | Range | Enterprise Value Range | |||||||||||||||||||||||||
LTM 8/31/2009 | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 1,910 | 6.0x | — | 8.0x | $ | 11,461 | — | $ | 15,282 | ||||||||||||||||||
3-Yr Average(1) | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 3,516 | 6.0x | — | 8.0x | $ | 21,095 | — | $ | 28,126 | ||||||||||||||||||
Mean | $ | 16,278 | — | $ | 21,704 | |||||||||||||||||||||||
Selected Enterprise Value Range | $ | 16,000 | — | $ | 22,000 | |||||||||||||||||||||||
(1) | Reflects average EBITDA achieved in 2007, 2008 and LTM periods. |
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Total Enterprise Value | ||||||||||||||||||||
(Dollars in thousands) | Terminal Multiple | |||||||||||||||||||
Discount Rate | 6.0x | 6.5x | 7.0x | 7.5x | 8.0x | |||||||||||||||
15.0% | $ | 23,422 | $ | 24,951 | $ | 26,480 | $ | 28,009 | $ | 29,538 | ||||||||||
16.0% | $ | 22,731 | $ | 24,206 | $ | 25,682 | $ | 27,158 | $ | 28,634 | ||||||||||
17.0% | $ | 22,069 | $ | 23,494 | $ | 24,918 | $ | 26,343 | $ | 27,768 | ||||||||||
18.0% | $ | 21,435 | $ | 22,811 | $ | 24,187 | $ | 25,563 | $ | 26,938 | ||||||||||
19.0% | $ | 20,828 | $ | 22,157 | $ | 23,486 | $ | 24,815 | $ | 26,144 | ||||||||||
Selected Enterprise Value Range | $ | 23,000 | — | $ | 27,000 | |||||||||||||||
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Actual | Actual | Projected | ||||||||||||||||||||||||||||||||||||||
For the Year Ended December 31, | 8/31/2009 | For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | 2005A | 2006A | 2007A | 2008A | LTM | 2009E | 2010E | 2011E | 2012E | 2013E | ||||||||||||||||||||||||||||||
Net Sales | $ | 106,451 | $ | 108,088 | $ | 123,713 | $ | 115,461 | $ | 103,124 | $ | 103,422 | $ | 115,833 | $ | 127,416 | $ | 133,787 | $ | 140,476 | ||||||||||||||||||||
Growth | 1.5 | % | 14.5 | % | (6.7 | %) | (10.4 | %) | 12.0 | % | 10.0 | % | 5.0 | % | 5.0 | % | ||||||||||||||||||||||||
Less: Cost of Goods Sold | 80,114 | 82,150 | 92,520 | 85,287 | 76,140 | 77,453 | 86,874 | 95,562 | 100,340 | 105,357 | ||||||||||||||||||||||||||||||
Gross Profit | $ | 26,337 | $ | 25,938 | $ | 31,193 | $ | 30,174 | $ | 26,984 | $ | 25,969 | $ | 28,958 | $ | 31,854 | $ | 33,447 | $ | 35,119 | ||||||||||||||||||||
Gross Profit Margin | 24.7 | % | 24.0 | % | 25.2 | % | 26.1 | % | 26.2 | % | 25.1 | % | 25.0 | % | 25.0 | % | 25.0 | % | 25.0 | % | ||||||||||||||||||||
Less: Selling, General & Administrative | 24,819 | 23,504 | 26,015 | 29,610 | 25,073 | 24,661 | 25,854 | 27,405 | 28,525 | 29,694 | ||||||||||||||||||||||||||||||
EBITDA | $ | 1,518 | $ | 2,434 | $ | 5,178 | $ | 565 | $ | 1,910 | $ | 1,307 | $ | 3,104 | $ | 4,449 | $ | 4,922 | $ | 5,425 | ||||||||||||||||||||
Margin | 1.4 | % | 2.3 | % | 4.2 | % | 0.5 | % | 1.9 | % | 1.3 | % | 2.7 | % | 3.5 | % | 3.7 | % | 3.9 | % | ||||||||||||||||||||
Less: Depreciation & Amortization | 317 | 322 | 360 | 377 | 326 | 377 | 405 | 111 | 167 | 187 | ||||||||||||||||||||||||||||||
EBIT | $ | 1,201 | $ | 2,112 | $ | 4,818 | $ | 188 | $ | 1,584 | $ | 931 | $ | 2,698 | $ | 4,338 | $ | 4,755 | $ | 5,238 | ||||||||||||||||||||
Adjustments | ||||||||||||||||||||||||||||||||||||||||
One-time Employee Related Cost | — | — | — | $ | 1,585 | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Non-recurring Going Private Expenses | — | — | — | 310 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Public Company Expenses | — | — | 350 | 650 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total Adjustments | — | — | $ | 350 | $ | 2,545 | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 1,518 | $ | 2,434 | $ | 5,528 | $ | 3,110 | $ | 1,910 | $ | 1,307 | $ | 3,104 | $ | 4,449 | $ | 4,922 | $ | 5,425 | ||||||||||||||||||||
Margin | 1.4 | % | 2.3 | % | 4.5 | % | 2.7 | % | 1.9 | % | 1.3 | % | 2.7 | % | 3.5 | % | 3.7 | % | 3.9 | % |
1. | Five Star Projections Notes & Assumptions | |
The actual results reflected in the table above differ from National Patent’s and Five Star Products’ audited financial statements due to the reclassification of warehouse expense (which is included in cost of goods sold in the audited financial statements) to selling, general and administrative. | ||
2009 | ||
The 2009 projections incorporate actual results of operations for the eight months ended August 31, 2009 and an estimate for the remaining four months. | ||
Sales for the remaining four months were based on Five Star’s originally budgeted sales for that period reduced by 5% to reflect softness in the market environment. Gross margin was adjusted accordingly; operating expenses were individually adjusted to reflect management’s estimate of revised levels based on the reduced sales estimate. | ||
Year-end working capital balances were estimated by reference to historical ratios adjusted for steps taken in reaction to economic conditions. | ||
2010 — 2013 | ||
Projected sales reflect management’s expectation of a recovery in industry conditions beginning in 2010 (12% increase over 2009), continuing in 2011 (10% increase over 2010). At that point, sales would be 3% higher than they were in 2007, before economic conditions started to deteriorate. Thereafter, the sales growth rate is projected to return to a more traditional annual rate of 5%. The projected compound annual growth rate from 2009 to 2013 is 8%. | ||
To put these figures in context, sales increased from $108.1 million in 2006 to $123.7 million in 2007 (a 14.5% increase, 9% of it due to the Right-Way acquisition in April, 2007), then declined to $115.5 million in 2008 (a 6.7% decrease due to deteriorating economic conditions through the year), and are projected to fall further to $103.4 million (a decline of 10.4% as poor economic conditions persist). From 2003 to 2007, sales grew at a compound annual growth rate of 6.8% (4.6% excluding the impact of Right-Way). |
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Regarding the other components of the income statement: |
• | Gross margin is based on actual results from 2007-2009. Management knows of no reason why these trends would change significantly. | ||
• | Selling expense (which is net of vendor marketing allowances) is variable with sales and is consistent with recent years’ experience. | ||
• | Warehouse expense has been based on the current level of costs increased annually by both an inflation factor and a factor to reflect increasing resources to support a higher level of sales. | ||
• | Delivery expense generally varies with sales and is projected as a percentage of sales at rates consistent with current experience. | ||
• | General & Administrative expense is based on the current level of expense, increased annually for an inflation factor. |
Year-end working capital balances were estimated by applying historical ratios to projected sales and cost of sales. |
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• | limitations on our ability to borrow; | ||
• | limitations on our capital structure; | ||
• | limitations on the issuance of debt and equity securities, |
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• | restrictions on acquisitions of interests in partner companies; | ||
• | prohibitions on transactions with affiliates; | ||
• | prohibitions on the issuance of options and other limitations on our ability to compensate key employees; | ||
• | certain governance requirements, | ||
• | restrictions on specific investments; and | ||
• | reporting, record-keeping, voting and proxy disclosure requirements. |
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• | due organization, good standing and corporate power, and other corporate matters with respect to us and Five Star Products and Five Star Group; | ||
• | our subsidiaries, Five Star Products’ and Five Star Group’s wholly owned subsidiaries and ownership of other securities; | ||
• | our ownership of all issued and outstanding stock of Five Star Products and the ownership by Five Star Products of all of the issued and outstanding stock of Five Star Group, free and clear of encumbrances; | ||
• | our corporate power and authority to enter into, and the enforceability of, the Stock Purchase Agreement and related agreements; | ||
• | the absence of conflicts with, or defaults under, our organizational documents, Five Star Products’ or Five Star Group’s organizational documents or other contracts and the absence of violations of applicable laws; | ||
• | required consents and approvals of any third party or any governmental entity; | ||
• | the completeness and accuracy of certain Five Star Products financial statements; | ||
• | the conduct of the wholesale distribution of home decorating, hardware, and finishing products, which we refer to as the Five Star business, in the ordinary course, consistent with past practices since December 31, 2008 and the absence, subject to certain threshold limitations, since December 31, 2008, of certain changes; | ||
• | material contracts (including the enforceability thereof and compliance therewith); | ||
• | the operating assets utilized in carrying on the Five Star business in the ordinary course; | ||
• | certain equipment necessary for or used in the operation of the Five Star business; | ||
• | the satisfactory operation and reasonable capacity of material operating systems and software; | ||
• | reporting of all inventories in the financial statements of Five Star Group in accordance with GAAP, consistently applied; | ||
• | maintenance of inventory levels in the ordinary course consistent with past practices; | ||
• | accounts receivable of Five Star Group; | ||
• | warranties on products or services sold by Five Star Group (except for private label goods); |
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• | vendor programs in which Five Star Group participates as of the execution date of the Stock Purchase Agreement; | ||
• | matters relating to the real property owned or leased by Five Star Products or Five Star Group; | ||
• | intellectual property; | ||
• | accounts payable and accrued expenses of Five Star Group to third parties or affiliates of Five Star Group; | ||
• | authorizations, filings or registrations necessary for each of Five Star Products and Five Star Group to own its respective assets and for Five Star Group to operate the Five Star business; | ||
• | certain filings made with the SEC by either National Patent or Five Star Products and the accuracy of the information in those filings, including our financial statements; | ||
• | compliance with applicable laws by Five Star Products, Five Star Group and the operation of Five Star business; | ||
• | insurance matters; | ||
• | filing of tax returns and reports by Five Star Products and Five Star Group and matters related thereto; | ||
• | the absence of litigation against National Patent, Five Star Products, or Five Star Group with respect to the operating assets or Five Star Group’s employees, customers, or vendors, or the Five Star business generally or the Stock Purchase Agreement or related transactions; | ||
• | powers of attorney from Five Star Products or Five Star Group; | ||
• | absence of brokers’, finders’ or agents’ fees, except for CRT Investment Banking; | ||
• | compensation arrangements and other employment information regarding Five Star Group employees and independent contractors; | ||
• | collective bargaining agreements or other labor contracts; | ||
• | employee benefit plans; | ||
• | environmental matters (except as to indemnified liabilities); | ||
• | the absence of interest of Five Star Products or Five Star Group or their affiliates in any competitors and related entities; | ||
• | our principal customers and vendors; and | ||
• | bank accounts. |
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• | the due organization, good standing and corporate power of Merit; | ||
• | Merit’s corporate power and authority to enter into, and the enforceability of, the Stock Purchase Agreement and related agreements; | ||
• | the absence of conflicts with, or defaults under, Merit’s organizational documents, other contracts and the absence of violations of applicable law; | ||
• | required consents and approvals of any third party or any governmental entity; | ||
• | the absence of any litigation against Merit that individually or in the aggregate has a materially adverse effect on Merit’s ability to consummate the transactions contemplated in the Stock Purchase Agreement; | ||
• | the accuracy and full force and effect as of the execution date of the Stock Purchase Agreement of the commitment letters delivered with respect to the financing of the transactions contemplated by the Stock Purchase Agreement; | ||
• | the sufficiency of the financing to pay the purchase price and all fees and expenses of Merit in connection with the transactions contemplated by the Stock Purchase Agreement; | ||
• | absence of brokers’, finders’ or agents’ fees; and | ||
• | information to be provided by Merit to National Patent for inclusion in the proxy materials referred to in the Stock Purchase Agreement. |
• | to maintain their corporate existence in good standing; | ||
• | to operate the Five Star business substantially as presently operated and only in the ordinary course and consistent with both past operations and its obligations (as may be impacted by Five Star Group’s actual or projected sales levels or actions taken as a result of changes in the financial condition of vendors or customers); | ||
• | to use commercially reasonable efforts to preserve intact the present organization and employees of the Five Star business and Five Star Group’s business relationships (except for actions taken as result of deteriorating financial condition of vendors of customers); | ||
• | to comply with all laws, rules, regulations and orders applicable to the Five Star business; | ||
• | to pay all taxes, charges and assessments with respect to the Five Star business; | ||
• | to make all debt service payments with respect to the Five Star business; |
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• | to pay all accounts payable and other current liabilities with respect to the Five Star business when due and in accordance with ordinary past business practices; | ||
• | except to the extent required by law, to maintain without amendment the employee benefit plans; | ||
• | to maintain the property, plant and equipment of Five Star Group in good operating condition; | ||
• | to maintain books and records of account with respect to the Five Star business in the usual, regular and ordinary manner; | ||
• | not to take any action which would cause the representations and warranties made by us, Five Star Products, and Five Star Group in the Stock Purchase Agreement, taken as a whole, to be materially untrue or incorrect as of the date of closing; and | ||
• | to cause Five Star Group to file certain environmental reports for calendar year 2007 and calendar year 2008 relating to the property located in Brooklyn, New York on or before December 31, 2009, to the extent required. |
• | incur any secured indebtedness; | ||
• | declare, issue or make any direct or indirect redemption, purchase or other acquisition of any shares of their capital stock or property or make any payment or distribution in respect of the capital stock of Five Star Products or Five Star Group; | ||
• | except for permitted encumbrances, encumber any of its properties or assets; | ||
• | sell, lease, transfer or dispose of any of its properties or assets (except for inventory sales in the ordinary course); | ||
• | grant any rights of value; | ||
• | cancel, compromise, release or assign any indebtedness owed to it or any claims held by it; | ||
• | make or commit to make any capital expenditures in excess of $50,000 in the aggregate; | ||
• | enter into any contract or agreement; | ||
• | amend, terminate or waive any rights or claims under any material contract (except as permitted with respect to the warehouse facility in East Hanover, NJ); | ||
• | cancel or terminate or allow to lapse any insurance policy naming it as a beneficiary or loss payee; |
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• | increase in any manner the compensation, remuneration or, except to the extent required by law, alter in any manner the fringe benefits of any of its officers or employees (except as permitted under the Employee Agreement); | ||
• | pay or agree to pay any of its officers or employees any pension, retirement allowance or other benefit not required by any existing employee benefit plan (except as permitted under the Employee Agreement); | ||
• | commit to any employment agreement or employee benefit plan with or for any of its officers or employees or any other person or entity; | ||
• | alter, amend or terminate in whole or in part or curtail or permanently discontinue contributions to any pension plan or any other employee benefit plan; | ||
• | change its cash management customs and practices or engage in any other practice to accelerate the collection of any accounts receivable or delay payment of any accounts payable or other liabilities beyond their scheduled due dates and consistent with past practice; | ||
• | change any of its accounting principles, methods or practices unless required by GAAP, PCAOB, the SEC or FASB accounting rules; | ||
• | terminate or fail to renew any applicable permits; | ||
• | make any investment, by purchase, contribution to capital, property transfer or otherwise, in any other person; | ||
• | dispose of or permit to lapse any intellectual property rights; | ||
• | make any payments to any person, except for payments in respect of indebtedness, after the opening of business on the day preceding the closing date; | ||
• | offer or make any incentives available to any customers which differ substantially from incentives previously offered in the ordinary course of business; | ||
• | pay any expenses of National Patent, Five Star Products, or Five Star Group relating to the transactions contemplated by the Stock Purchase Agreement to the extent such payment increases indebtedness as of the closing date; or | ||
• | take any action which would render inaccurate any representation or warranty made in the Stock Purchase Agreement or which would result in a breach by us of our obligations thereunder. |
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• | grant Merit and its representatives access to the properties, operations, books, records and personnel of Five Star Products and Five Star Group; | ||
• | provide Merit and its representatives such additional financing and operating data and other information as Merit reasonably requests; | ||
• | use commercially reasonable efforts to maintain Five Star Group’s insurance coverage with respect to the Five Star business, with the same insurers, at the same amounts of coverage, and with the same types of coverage that exist at the execution date of the Stock Purchase Agreement; | ||
• | prior to the closing, furnish to Merit such additional information with respect to any matters or events arising or discovered subsequent to the date of the execution of the Stock Purchase Agreement which, if existing or known on such execution date, would have rendered any representation or warranty made by us, Five Star Products, or Five Star Group or any information contained in any exhibit or schedule to the Stock Purchase Agreement then inaccurate or incomplete; | ||
• | distribute to Merit all management reports relating to the Five Star business which are circulated to mid-level or senior-level management consistent with past practices; | ||
• | notify Merit of any circumstances or events which are reasonably likely to have a material adverse impact on vendor, customer, employee, or bank relationships as such are related to the Five Star business; | ||
• | until the closing, fully cooperate with Merit with respect to Merit’s review of employee benefit plans and related matters, and to use commercially reasonable efforts to obtain and furnish Merit and its advisors with such additional information as they may reasonably request; | ||
• | prepare and be responsible for a submission under the Voluntary Correction Program with Service Approval relating to the Five Star Group, Inc. 401(k) Savings Plan, as described in the Stock Purchase Agreement and related compliance matters; | ||
• | promptly inform Merit of the existence of any inquiries, solicitations or proposals with respect to any alternative transaction for the sale of the Five Star business or a similar corporate transaction (as described under “Solicitation of Other Offers” on page 47) and to promptly provide Merit with notice of the details of any alternative offer for the sale of the Five Star business; | ||
• | use commercially reasonable efforts, within ten business days after the execution of the Stock Purchase Agreement, to file preliminary proxy materials with the SEC regarding the special meeting of its stockholders to consider the sale; | ||
• | promptly prepare and file with the SEC a proxy statement and related materials intended, after satisfaction of all comments of the SEC staff, to be sent to our stockholders soliciting their approval of the transactions contemplated in connection with the Stock Purchase Agreement; |
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• | the board of directors of National Patent will take action on the date of execution of the Stock Purchase Agreement to recommend approval of the sale by its stockholders; | ||
• | take all action necessary in accordance with our organizational documents to convene a meeting of stockholders to consider adoption and approval of the transactions contemplated by the Stock Purchase Agreement before the Closing Date Deadline (as defined under “Termination” on page 50); | ||
• | provide commercially reasonable cooperation in connection with the arrangement of the financing to be obtained by Merit with respect to the transactions contemplated by the Stock Purchase Agreement; | ||
• | take certain actions specified in the Stock Purchase Agreement designed to address environmental matters under the New Jersey Transfer Act; | ||
• | perform all activities and remediation options necessary to achieve compliance with the provisions of the Connecticut Transfer Act; | ||
• | make severance and other payments to employees of Five Star Products and Five Star Group, in accordance with the terms of the Employee Agreement; | ||
• | contact private label vendors to determine the nature of certain private label inventory prior to the closing date, to use reasonable commercial efforts, with Merit’s consent not to be unreasonably withheld, to discharge any obligation and/or liability Five Star Products or Five Star Group may have to any vendor of private label merchandise which is no longer in Five Star Group’s or Five Star Product’s private label lines, if any, or to establish reserves with respect thereto. |
• | refrain from taking any action which would reasonably be expected to materially increase the likelihood that a claim or threatened claim would be made with respect to environmental matters as to which indemnification is applicable, with the exception of (i) actions with any governmental authorities that are either required by law or reasonably prudent to protect Merit or Five Star Group, which Merit may make or take upon advice of its counsel after giving National Patent prior written notice and (ii) any other actions that are reasonably prudent in the ordinary conduct of the Five Star business, with prior consent of National Patent; | ||
• | use commercially reasonable efforts to do all things necessary to consummate the financing referred to in the commitment letters described in the Stock Purchase Agreement; | ||
• | give National Patent prompt written notice in the event that any of the commitment letters is, or is going to be, withdrawn or modified in any material respect; | ||
• | in the event that all or any portion of the financing referred to in the commitment letters becomes unavailable for any reason, use commercially reasonable efforts to arrange to obtain alternate financing from alternate sources in an amount sufficient to proceed with the closing and to keep National Patent reasonably informed of such efforts; |
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• | not repay the investment from its stockholders in the amount of $1,500,000 required pursuant to the Stock Purchase Agreement prior to the earlier of the day after the closing or the termination of the Stock Purchase Agreement; | ||
• | provide to National Patent all information and materials relating to Merit reasonably necessary under the rules and regulations of the SEC for National Patent to prepare and file the preliminary proxy materials required by the Stock Purchase Agreement; | ||
• | provide such further information and materials reasonably necessary for National Patent to satisfy any comments of the SEC with respect to the proxy statement and as otherwise required by the laws, rules and regulations of the SEC to prepare definitive proxy materials; | ||
• | promptly notify National Patent of an omission of a material fact or untrue statement of a material fact related to Merit or its financing which is contained, or should have been contained in the proxy statement and to promptly supply such information to National Patent to correct such omission or untrue statement; | ||
• | not take any action which would expand the scope of, or lengthen the guaranty period under, any guaranty or other instrument establishing a guarantor’s obligations with respect to the Five Star Group’s warehouse leases; and | ||
• | provide, or cause Five Star Group to provide, federal health care continuation coverage to those employees of Five Star Group who incur a COBRA qualifying event in connection with the consummation of the transactions contemplated by the Stock Purchase Agreement and eligible former employees of Five Star Group who are receiving federal health care continuation coverage under Five Star Group’s group health plan as of the closing date, in either case subject to the relevant individual’s timely election of, and timely payment of the applicable costs for such continuation coverage. |
• | acquire or offer or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities or securities convertible into voting securities of National Patent; | ||
• | propose to enter into, directly or indirectly, any merger or business combination involving National Patent or any of its subsidiaries (including Five Star Group); | ||
• | otherwise seek to influence or control, in any manner whatsoever the management or policies of National Patent; or | ||
• | assist, advise or encourage any other person in doing any of the above. |
• | to use commercially reasonable efforts to take all actions necessary in order to consummate and make effective the transactions contemplated by the Stock Purchase Agreement; |
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• | to pay all of its own fees, costs and expenses incurred by it in connection with the negotiation, preparation, execution, delivery and performance of the Stock Purchase Agreement and the related transactions; | ||
• | to not issue any press release or otherwise make any public statements with respect to transactions contemplated in the Stock Purchase Agreement except for public disclosure believed in good faith to be required by applicable law; | ||
• | to file and cooperate in the filing of specified tax returns of Five Star Products and Five Star Group; and | ||
• | that National Patent will make payment of half of the rent and other sums, if any, due under Five Star Group’s lease of a warehouse located in Newington, Connecticut from the later of March 31, 2010 or when Five Star Group ceases to use the warehouse through September 30, 2010. |
• | the representations and warranties made by National Patent in the Stock Purchase Agreement, taken as a whole and excluding matters to the extent Merit and its affiliates are indemnified pursuant to Section 8.2 of the Stock Purchase Agreement, are true and correct, except for any breach thereof which, in the aggregate with other breaches of representations and warranties of National Patent, is not material to the Five Star business, Five Star Group, Five Star Products or the operating assets taken as a whole as of the execution date of the Stock Purchase Agreement and as of the closing date; |
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• | each of National Patent, Five Star Products, and Five Star Group has performed and complied with all of its respective covenants, agreements, obligations and restrictions pursuant to the Stock Purchase Agreement required to be performed or complied with prior to or at closing, except for any non- performance or non-compliance which, in the aggregate with all other non-performance or non-compliance including any breach of representations or warranties by National Patent, is not material to consummation of the transactions contemplated in the Stock Purchase Agreement, the Five Star business or the operating assets taken as a whole; | ||
• | no action, suit or other proceeding is pending or threatened seeking to restrain or prohibit the consummation of the transactions contemplated by the Stock Purchase Agreement, or seeking to obtain damages in connection therewith, or involving a claim that consummation of such transactions would result in a violation of any law, and no order has been entered challenging the legality, validity or propriety of the Stock Purchase Agreement or the transactions contemplated thereby or preventing the consummation of such transactions; | ||
• | the holders of a majority of National Patent’s common stock approve the Stock Purchase Agreement and the related transactions by the Closing Date Deadline (defined ); and | ||
• | all consents and approvals of any governmental authority necessary in order to consummate the transactions contemplated by the Stock Purchase Agreement have been obtained and are in full force and effect and any and all applicable waiting periods have expired. |
• | the representations and warranties made by Merit in the Stock Purchase Agreement, taken as a whole and excluding matters to the extent National Patent and its affiliates are indemnified pursuant to the Stock Purchase Agreement, are true and correct except for any breach of the representations and warranties which, in the aggregate with other breaches of said representations and warranties of Merit, is not material to the consummation of the transactions as of the execution date of the Stock Purchase Agreement and as of the closing date; | ||
• | Merit has available to it sufficient cash to pay the purchase price in immediately available funds and has performed and complied with all of its other covenants, agreements, obligations and restrictions pursuant to the Stock Purchase Agreement required to be performed or complied with by Merit prior to or at closing, except for any non-performance or non-compliance including any breach of representations or warranties by Merit, which is not material to the consummation of the transactions contemplated in the Stock Purchase Agreement; | ||
• | no action, suit or other proceeding is pending or threatened seeking to restrain or prohibit the consummation of the transactions contemplated by the Stock Purchase Agreement, or seeking to obtain damages in connection therewith, or involving a claim that consummation of such transactions would result in a violation of any law, and no order has been entered challenging the legality, validity or propriety of the Stock Purchase Agreement or the transactions contemplated thereby or preventing the consummation of such transactions; |
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• | the holders of a majority of National Patent’s common stock approve the Stock Purchase Agreement and the related transactions by the Closing Date Deadline (defined under “Termination” on page 50); and | ||
• | all consents and approvals of any governmental authority necessary in order to consummate the transactions contemplated by the Stock Purchase Agreement have been obtained and are in full force and effect and any and all applicable waiting periods have expired. |
• | up to an amount of $2 million in connection with any liability or obligation arising out of or based upon: |
§ | all Indebtedness (as defined in the Stock Purchase Agreement) (however, National Patent is required by the Stock Purchase Agreement in any event to repay all of the outstanding revolving indebtedness under the loan agreement between Bank of America and Five Star Group as of the closing date, without limit); | ||
§ | all liabilities for pending or threatened litigation against National Patent, Five Star Products, or Five Star Group required to be set forth on a schedule relating to Section 3.19 of the Stock Purchase Agreement relating to litigation; | ||
§ | all obligations and liabilities arising out of or related to environmental matters (i) relating to remedial actions required under Sections 5.10 and 5.11 of the Stock Purchase Agreement or (ii) which are disclosed by National Patent to Merit or are known to officers of National Patent, Five Star Group, or Five Star Products as of the closing, to the extent such matters are at the closing, or within a stated period thereafter become, the subject of third party claims pending or threatened; | ||
§ | the combination of the following items not to exceed $600,000 in the aggregate: (a) 75% of the liabilities or obligations arising with respect to use of real property by Five Star Products or Five Star Group through September 30, 2011, to the extent that a failure to comply with applicable laws, rules and regulations existed as of the closing, (b) 75% of the liabilities and obligations arising with respect to certain conditions existing as of the closing, if such real property leases were to terminate after giving effect to Merit paying the first $25,000 of any such liabilities and obligations and (c) environmental matters which were not known to officers of National Patent, Five Star Group, or Five Star Products at closing and which would have otherwise been subject to disclosure on a schedule relating to Section 3.24 of the Stock Purchase Agreement relating to environmental matters, to the extent such matters become the subject of third party claims pending or threatened within a stated period after the closing; | ||
§ | all liabilities and obligations with respect to federal health care continuation coverage requirements and any applicable state health care continuation coverage requirements arising prior to the closing, except Merit’s liabilities or obligations to provide, or to cause Five Star Group to provide federal health care continuation coverage benefits after the closing pursuant to the Stock Purchase Agreement; |
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• | arising out of the failure of National Patent to perform the covenants contained in the Stock Purchase Agreement to be performed by National Patent after the closing; | ||
• | arising out of any fraud by National Patent, Five Star Products or Five Star Group in connection with the Stock Purchase Agreement; or | ||
• | arising out of (i) any of the items identified on the schedule relating to Section 3.23(c) to the Stock Purchase Agreement relating to employee benefit plan compliance, or (ii) any other alleged operational or other compliance failures with respect to the Five Star Group, Inc. 401(k) Savings Plan, subject to certain exceptions described in the Stock Purchase Agreement. |
• | arising out of any liabilities of National Patent under guaranties of certain real estate leases or of National Patent to GP Strategies, Inc. under its guaranty of the lease by Five Star Group of a warehouse in East Hanover, New Jersey; | ||
• | arising out of the failure by Merit to perform its covenants in the Stock Purchase Agreement to be performed by Merit after the closing; | ||
• | arising out of changes of employment status or the terms of employment planned or communicated by Merit with respect to any employees of Five Star Group as a result of the sale, including actions taken by Merit or by Five Star Group at the direction of Merit pursuant to the Employee Agreement; or | ||
• | arising out of any fraud by Merit in connection with the Stock Purchase Agreement. |
• | in accordance with a written agreement executed by the parties prior to the closing. | ||
• | by either National Patent or Merit if, among other reasons: |
• | the closing has not been completed prior to the earlier of (i) the first business day after the Target Meeting Date (as defined below) or (ii) 150 days after November 24, 2009 (which we refer to as the Closing Date Deadline); | ||
• | National Patent, Five Star Products or Five Star Group accepts in writing an offer for an Alternative Transaction based on the exercise of fiduciary duties by our board of directors; or |
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• | prior to the Closing Date Deadline, Merit or National Patent determines that through the other party’s material breach of its obligations in the Stock Purchase Agreement, the conditions precedent to the obligation of the non-breaching party to proceed with the closing cannot be satisfied on or before the Closing Date Deadline. |
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Five Star | Pro Forma | Pro Forma | ||||||||||||||
Historical | Products Adj | Adj inc / | Statement of | |||||||||||||
Consolidated | inc / (dec) | (dec) | Operations | |||||||||||||
Sales | $ | 123,713 | $ | (123,713 | ) | $ | $ | — | ||||||||
Cost of Sales | 102,246 | (102,246 | ) | — | ||||||||||||
Gross Margin | 21,467 | (21,467 | ) | — | ||||||||||||
Selling, general and administrative expenses | (22,229 | ) | 17,744 | (527) | (i) | (5,012 | ) | |||||||||
Operating Loss | (762 | ) | (3,723 | ) | (527 | ) | (5,012 | ) | ||||||||
Interest expense | (1,429 | ) | 1,681 | (252 | ) (ii) | — | ||||||||||
Investment and other income | 15,426 | (45 | ) | 15,381 | ||||||||||||
Income from continuing operations before income taxes | 13,235 | (2,087 | ) | (779 | ) | 10,369 | ||||||||||
Income Tax Expense | (1,269 | ) | 888 | — | (381 | ) | ||||||||||
Income from continuing operations | 11,966 | (1,199 | ) | (779 | ) | 9,988 | ||||||||||
Basic and diluted income per share from continuing operations | $ | 0.69 | $ | 0.57 | ||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 17,450 | 17,450 | ||||||||||||||
Diluted | 17,463 | 17,463 | ||||||||||||||
Pro forma adjustments include: | ||
(i) | Add back to Selling, general and administrative expenses fees incurred by Five Star for management services provided by National Patent, which were eliminated on consolidation. | |
(ii) | Add back to interest expense for interest incurred by Five Star on an unsecured note issued to National Patent, which was eliminated on consolidation. |
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Five Star | Pro Forma | Pro Forma | ||||||||||||||
Historical | Products Adj | Adj inc / | Statement of | |||||||||||||
Consolidated | inc / (dec) | (dec) | Operations | |||||||||||||
Sales | $ | 115,461 | $ | (115,461 | ) | $ | — | |||||||||
Cost of Sales | 95,133 | (95,133 | ) | — | ||||||||||||
Gross Margin | 20,328 | (20,328 | ) | — | ||||||||||||
Selling, general and administrative expenses | (23,633 | ) | 20,108 | (480) | (i) | (4,005 | ) | |||||||||
Operating Loss | (3,305 | ) | (220 | ) | (480 | ) | (4,005 | ) | ||||||||
Interest expense | (1,366 | ) | 1,513 | (147 | ) (ii) | — | ||||||||||
Investment and other income | 94 | (33 | ) | 61 | ||||||||||||
Loss from continuing operations before income taxes | (4,577 | ) | 1,260 | (627 | ) | (3,944 | ) | |||||||||
Income Tax Benefit | 940 | (111 | ) | (829 | ) (iii) | — | ||||||||||
Loss from continuing operations | (3,637 | ) | 1,149 | (1,456 | ) | (3,944 | ) | |||||||||
Basic and diluted loss per share from continuing operations | $ | (0.22 | ) | $ | (0.23 | ) | ||||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic and diluted | 16,784 | 16,784 | ||||||||||||||
Pro forma adjustments include: | ||
(i) | Add back to Selling, general and administrative expenses fees incurred by Five Star for management services provided by National Patent, which were eliminated on consolidation. | |
(ii) | Add back to interest expense for interest incurred by Five Star on an unsecured note issued to National Patent, which was eliminated on consolidation. | |
(iii) | Deduct income tax benefit associated with expected results from future operations of Five Star. |
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Five Star | Pro Forma | Pro Forma | ||||||||||||||
Historical | Products Adj | Adj inc / | Statement of | |||||||||||||
Consolidated | inc / (dec) | (dec) | Operations | |||||||||||||
Sales | $ | 94,114 | $ | (94,114 | ) | $ | — | |||||||||
Cost of Sales | 77,975 | (77,975 | ) | — | ||||||||||||
Gross Margin | 16,139 | (16,139 | ) | — | ||||||||||||
Selling, general and administrative expenses | (18,556 | ) | 15,844 | (360) | (i) | (3,072 | ) | |||||||||
Operating Loss | (2,417 | ) | (295 | ) | (360 | ) | (3,072 | ) | ||||||||
Interest expense | (1,060 | ) | 1,207 | (147 | ) (ii) | — | ||||||||||
Investment and other income | 78 | (25 | ) | 53 | ||||||||||||
Loss from continuing operations before income taxes | (3,399 | ) | 887 | (507 | ) | (3,019 | ) | |||||||||
Income Tax Benefit | 329 | 96 | (425 | ) (iii) | — | |||||||||||
Loss from continuing operations | (3,070 | ) | 983 | (932 | ) | (3,019 | ) | |||||||||
Basic and diluted loss per share from continuing operations | $ | (0.19 | ) | $ | (0.18 | ) | ||||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic and diluted | 16,557 | 16,557 | ||||||||||||||
Pro forma adjustments include: | ||
(i) | Add back to Selling, general and administrative expenses fees incurred by Five Star for management services provided by National Patent, which were eliminated on consolidation. | |
(ii) | Add back to interest expense for interest incurred by Five Star on an unsecured note issued to National Patent, which was eliminated on consolidation. | |
(iii) | Deduct income tax benefit associated with expected results from future operations of Five Star. |
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Five Star | Pro Forma | Pro Forma | ||||||||||||||
Historical | Products Adj | Adj inc / | Statement of | |||||||||||||
Consolidated | inc / (dec) | (dec) | Operations | |||||||||||||
Sales | $ | 80,027 | $ | (80,027 | ) | $ | — | |||||||||
Cost of Sales | 66,631 | (66,631 | ) | — | ||||||||||||
Gross Margin | 13,396 | (13,396 | ) | — | ||||||||||||
Selling, general and administrative expenses | (14,424 | ) | 12,042 | (360) | (i) | (2,742 | ) | |||||||||
Operating Loss | (1,028 | ) | �� | (1,354 | ) | (360 | ) | (2,742 | ) | |||||||
Interest expense | (1,138 | ) | 1,138 | — | ||||||||||||
Investment and other income | 35 | (20 | ) | 15 | ||||||||||||
Loss from continuing operations before income taxes | (2,131 | ) | (236 | ) | (360 | ) | (2,727 | ) | ||||||||
Income Tax Benefit | (12 | ) | 107 | (95 | ) (ii) | — | ||||||||||
Loss from continuing operations | (2,143 | ) | (129 | ) | (455 | ) | (2,727 | ) | ||||||||
Basic and diluted loss per share from continuing operations | $ | (0.12 | ) | $ | (0.16 | ) | ||||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic and diluted | 17,550 | 17,550 | ||||||||||||||
Pro forma adjustments include: | ||
(i) | Add back to Selling, general and administrative expenses fees incurred by Five Star for management services provided by National Patent, which were eliminated on consolidation. | |
(ii) | Deduct income tax benefit associated with expected results from future operations of Five Star. |
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Five Star | Pro Forma | |||||||||||||||
Historical | Products Adj | Pro Forma Adj | Balance | |||||||||||||
Consolidated | inc / (dec) | inc / (dec) | Sheet | |||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 11,588 | $ | (16 | ) | $ | 9,680 | (i) | $ | 33,504 | ||||||
12,100 | (ii) | |||||||||||||||
152 | (iii) | |||||||||||||||
Cash held in escrow | — | — | 900 | (iv) | 900 | |||||||||||
Accounts and other receivables, less allowance for doubtful accounts of $420 (including receivable from affiliate of $152) | 12,978 | (12,978 | ) | — | ||||||||||||
Inventories (finished goods) | 21,965 | (21,965 | ) | — | ||||||||||||
Deferred tax asset | 107 | (304 | ) | 197 | (ix) | — | ||||||||||
Prepaid expenses and other current assets | 1,121 | (640 | ) | 481 | ||||||||||||
Total current assets | 47,759 | (35,903 | ) | 23,029 | 34,885 | |||||||||||
Property, plant and equipment, net | 739 | (719 | ) | 20 | ||||||||||||
Intangible assets, net | 503 | (503 | ) | — | ||||||||||||
Deferred tax asset | 1,243 | (754 | ) | (489 | ) (ix) | — | ||||||||||
Other assets | 3,209 | (44 | ) | (2,528 | ) (vi) | 637 | ||||||||||
Total assets | $ | 53,453 | $ | (37,923 | ) | $ | 20,012 | $ | 35,542 | |||||||
Liabilities and stockholders’ equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Short term borrowings | $ | 15,868 | $ | (15,868 | ) | $ | — | |||||||||
Accounts payable and accrued expenses | 12,042 | (11,544 | ) | 1,102 | (viii) | 1,600 | ||||||||||
Deferred gain on sale | 681 | (v) | 681 | |||||||||||||
Total current liabilities | 27,910 | (27,412 | ) | 1,783 | 2,281 | |||||||||||
Liability related to interest rate swap | 907 | (907 | ) | — | ||||||||||||
Stockholders’ equity | 24,636 | (9,604 | ) | 18,521 | (vii) | 33,261 | ||||||||||
(292 | ) (ix) | |||||||||||||||
Total liabilities and stockholders’ equity | $ | 53,453 | $ | (37,923 | ) | $ | 20,012 | $ | 35,542 | |||||||
Pro forma adjustments include: | ||
i- | Stock purchase price of $12.7 million, net of repayment of approximately $15.9 million Five Star short term debt, for the Five Star Products, Inc. subsidiary outstanding as of September 30, 2009 reduced by (a) $0.9 million of proceeds to be held in escrow, (b) expenses, including $1.4 million of transaction expenses and (c) $1.1 million of estimated severance costs to be incurred by National Patent Development Corporation and increased by $0.38 million of net income adjustment from March 31, 2009 to September 30, 2009. | |
ii- | Sale proceeds of $12.5 million for the approximately 1,000 acres of real property located in the Town of Pawling, County of Dutchess, New York (the “Property) owned by National Patent Development Corporation reduced by $0.4 million for transaction expenses. | |
iii- | Amount owed by Five Star to National Patent Development Corporation assumed to be collected on the closing of sale. |
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iv- | Represents portion of purchase price to be held in escrow for possible inventory adjustment $0.6 million and indemnity payments $0.3 million. | |
v- | To defer gain on sale to extent of maximum potential reduction in proceeds attributable to inventory adjustment $0.6 million and half of rent for period from March 31, 2010 to September 30, 2010 related to Connecticut warehouse lease of $0.08 million. | |
vi- | Represents the cost basis of the Property sold by National Patent Development Corporation | |
vii- | Represents the increase in equity as a result of the sale of the subsidiary and the Property, net of taxes of approximately $0.95 million and deferred gain of $0.6 million. | |
viii- | Represents $0.152 million owed by Five Star to National Patent Development Corporation and taxes payable of approximately $0.95 million as a result of the gain on the sale of the subsidiary and the Property. | |
ix- | Reclassification of current portion of deferred tax assets and recognition of valuation allowance for deferred tax assets based on an expectation that it is more probable than not that deferred tax assets will not be realized. |
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Page | ||||
61 | ||||
62 | ||||
63 | ||||
64 | ||||
65 | ||||
66 | ||||
Interim Consolidated Financial Statements September 30, 2009 and 2008: | ||||
77 | ||||
78 | ||||
79 | ||||
80 |
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AND SUBSIDIARIES
(a wholly owned subsidiary of National Patent
Development Corporation)
DECEMBER 31, 2008 AND 2007
Contents | Page | |||
Independent auditors’ report | 61 | |||
Consolidated Financial Statements: | ||||
Balance sheets as of December 31, 2008 and 2007 | 62 | |||
Statements of operations and comprehensive income for the years ended December 31, 2008 and 2007 | 63 | |||
Statements of changes in stockholders’ equity for the years ended December 31, 2008 and 2007 | 64 | |||
Statements of cash flows for the years ended December 31, 2008 and 2007 | 65 | |||
Notes to financial statements | 66 |
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Five Star Products, Inc. and Subsidiaries
March 26, 2009
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(a wholly owned subsidiary of National Patent Development Corporation)
(in thousands, except share and per share data)
December 31, | ||||||||
2008 | 2007 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 68 | 3 | |||||
Accounts receivable, less allowance for doubtful accounts of $420 and $220, respectively | 9,812 | 11,254 | ||||||
Inventory | 23,045 | 26,965 | ||||||
Deferred income taxes | 304 | 469 | ||||||
Prepaid expenses and other current assets | 1,147 | 1,151 | ||||||
Total current assets | 34,376 | 39,842 | ||||||
Property and equipment, net | 884 | 833 | ||||||
Intangible assets, net | 600 | |||||||
Deferred income taxes | 798 | 24 | ||||||
Other assets | 32 | 391 | ||||||
$ | 36,690 | $ | 41,090 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 18,375 | $ | 19,303 | ||||
Accounts payable and accrued expenses (including due to affiliates of $204 and $129, respectively) | 7,852 | 12,211 | ||||||
Total current liabilities | 26,227 | 31,514 | ||||||
Convertible note payable to NPDC | 2,800 | |||||||
Liability related to interest rate swap | 1,111 | |||||||
27,338 | 34,314 | |||||||
Commitments (Note K) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, authorized 30,000,000 shares, par value $.01 per share; one share issued and outstanding in 2008 and 19,493,098 shares issued and 16,509,577 outstanding in 2007 | 195 | |||||||
Additional paid-in capital | 13,464 | 9,544 | ||||||
Accumulated deficit | (3,445 | ) | (2,296 | ) | ||||
Accumulated other comprehensive (loss) income | (667 | ) | 33 | |||||
Treasury stock, at cost 2,983,521 shares in 2007 | (700 | ) | ||||||
Total stockholders’ equity | $ | 9,352 | $ | 6,776 | ||||
$ | 36,690 | $ | 41,090 | |||||
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(a wholly owned subsidiary of National Patent Development Corporation)
(in thousands)
Year Ended | ||||||||
December 31, | ||||||||
2008 | 2007 | |||||||
Sales | $ | 115,461 | $ | 123,713 | ||||
Cost of goods sold | 95,133 | 102,246 | ||||||
Gross margin | 20,328 | 21,467 | ||||||
Selling, general and administrative expenses | (19,012 | ) | (17,744 | ) | ||||
Charge related to resignation of Chairman | (1,096 | ) | ||||||
Operating income | 220 | 3,723 | ||||||
Other income | 33 | 45 | ||||||
Interest expense (including $147 and $252 to NPDC) | (1,513 | ) | (1,681 | ) | ||||
(Loss) income before income taxes | (1,260 | ) | 2,087 | |||||
Income tax benefit (expense) | 111 | (888 | ) | |||||
Net (loss) income | (1,149 | ) | 1,199 | |||||
Other comprehensive loss, net of tax: | ||||||||
Change in value of cash flow hedge | (1,180 | ) | (251 | ) | ||||
Tax benefit | 480 | 100 | ||||||
Comprehensive (loss) income | $ | (1,849 | ) | $ | 1,048 | |||
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(a wholly owned subsidiary of National Patent Development Corporation)
Years Ended December 31, 2008 and 2007
(in thousands)
Accumulated | ||||||||||||||||||||||||
Common | Additional | Treasury | Other | Total | ||||||||||||||||||||
Stock Par | Paid-in | Accumulated | Stock | Comprehensive | Stockholders’ | |||||||||||||||||||
Value | Capital | Deficit | At Cost | Income (Loss) | Equity | |||||||||||||||||||
Balance at December 31, 2006 | $ | 173 | $ | 8,552 | $ | (3,495 | ) | $ | (700 | ) | $ | 184 | $ | 4,714 | ||||||||||
Net income | 1,199 | 1,199 | ||||||||||||||||||||||
Decrease in market value of interest rate swap, net of tax | (151 | ) | (151 | ) | ||||||||||||||||||||
Exercise of stock options | 2 | 29 | 31 | |||||||||||||||||||||
Issuance of common stock to non-employee for services | 20 | 700 | 720 | |||||||||||||||||||||
Equity based employee compensation expense | 263 | 263 | ||||||||||||||||||||||
Balance at December 31, 2007 | 195 | 9,544 | (2,296 | ) | (700 | ) | 33 | 6,776 | ||||||||||||||||
Net loss | (1,149 | ) | (1,149 | ) | ||||||||||||||||||||
Decrease in market value of interest rate swap, net of tax | (700 | ) | (700 | ) | ||||||||||||||||||||
Conversion of note payable | 70 | 2,730 | 2,800 | |||||||||||||||||||||
Equity based employee compensation expense | 3 | 722 | 725 | |||||||||||||||||||||
Repurchase of option related to resignation Chairman | (240 | ) | (240 | ) | ||||||||||||||||||||
Cash paid by Parent related to resignation Chairman | 680 | 680 | ||||||||||||||||||||||
Acquisition of minority interest by Parent | 642 | 642 | ||||||||||||||||||||||
Repurchase of options and restricted shares in connection with merger | (182 | ) | (182 | ) | ||||||||||||||||||||
Conversion of the Company’s shares | (268 | ) | (432 | ) | 700 | 0 | ||||||||||||||||||
Balance at December 31, 2008 | $ | 0 | $ | 13,464 | $ | (3,445 | ) | $ | 0 | $ | (667 | ) | $ | 9,352 | ||||||||||
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(a wholly owned subsidiary of National Patent Development Corporation)
(in thousands)
December 31, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (1,149 | ) | 1,199 | ||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 377 | 360 | ||||||
Equity-based compensation | 1,245 | 463 | ||||||
Other compensation | 440 | |||||||
Accounts receivable allowance | 278 | 71 | ||||||
Deferred income taxes | (129 | ) | 425 | |||||
Gain on interest rate collar | (6 | ) | ||||||
Changes in other operating items net of effect of acquisition of Right-Way: | ||||||||
Accounts receivable | 1,164 | 381 | ||||||
Inventory | 3,920 | (3,007 | ) | |||||
Prepaid expenses and other current assets | (226 | ) | (391 | ) | ||||
Accounts payable and accrued expenses | (4,483 | ) | 2,898 | |||||
Net cash provided by operating activities | 1,437 | 2,393 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property and equipment | (386 | ) | (663 | ) | ||||
Acquisition of Right-Way | (3,400 | ) | ||||||
Net cash used in investing activities | (386 | ) | (4,063 | ) | ||||
Cash flows from financing activities: | ||||||||
Net (decrease) increase in short-term borrowings | (928 | ) | 1,639 | |||||
Exercise (cancellation) of stock options | (58 | ) | 31 | |||||
Net cash (used in) provided by financing activities | (986 | ) | 1,670 | |||||
Net increase in cash | 65 | 0 | ||||||
Cash at beginning of year | 3 | 3 | ||||||
Cash at end of year | $ | 68 | $ | 3 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the periods for: | ||||||||
Interest | $ | 1,543 | $ | 1,677 | ||||
Income tax | $ | 374 | $ | 302 | ||||
Noncash investing and financing activities: | ||||||||
Acquisition of minority interest by Parent and recording related intangibles | $ | 642 | ||||||
Capital contribution by Parent in connection with resignation of Chairman | $ | 680 | ||||||
Payment by Parent in connection with repurchase of options and restricted shares In connection with merger | $ | 124 |
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
66
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
67
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
Year Ended | ||||
December 31, 2007 | ||||
(in thousands) | ||||
Sales | $ | 128,047 | ||
Net income | 564 |
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
Estimated | December 31, | |||||||||||
Useful Lives | 2008 | 2007 | ||||||||||
Machinery and equipment | 5-7 years | $ | 1,041 | $ | 714 | |||||||
Furniture and fixtures | 5 years | 905 | 866 | |||||||||
Leasehold improvements | 3-9 years | 429 | 409 | |||||||||
2,375 | 1,989 | |||||||||||
Accumulated depreciation and amortization | (1,491 | ) | (1,156 | ) | ||||||||
$ | 884 | $ | 833 | |||||||||
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
[1] | Management agreement: | |
NPDC provides legal, tax, business development, insurance and employee benefit administration services to the Company pursuant to a management services agreement, for a fee that was $40,000 per month from April 2007 through December 2008. The fee for the three months ended March 31, 2007 was approximately $28,000 per month. The agreement is automatically renewable for successive one-year terms unless one of the parties notifies the other in writing at least six months prior to the end of any renewal thereof. In addition, the Company agreed to reimburse NPDC for $16,666 per month for Mr. Feldman’s (NPDC’s former chief executive officer) service to the Company effective October 1, 2004 through May 31, 2007, the termination date of Mr. Feldman’s contract. The management services agreement between NPDC and the Company was renewed for 2009. | ||
Fees incurred under the agreement totaled $480,000 and $527,000, for the years ended December 31, 2008 and 2007, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. At December 31, 2008 and 2007, the amount due to NPDC under the agreement was $204,000 and $108,000, respectively. | ||
In addition, NPDC incurred certain expenses on behalf of Five Star, primarily involving insurance, legal and other professional expenses. Five Star reimbursed NPDC for such expense, which amounted to approximately, $344,000 and $561,000 for the years ended December 31, 2008 and 2007, respectively. | ||
[2] | Related party debt: | |
Five Star Group issued an unsecured note (the “Note”) payable to a wholly owned subsidiary of NPDC, which was scheduled to mature on June 30, 2006. On July 28, 2006, the Company and NPDC agreed to extend the Note for a one-year term maturing on June 30, 2007. The interest rate on the Note remained at 9% per annum. | ||
On March 2, 2007, the Company and NPDC amended the Note: (i) to extend the maturity date from June 30, 2007 to June 30, 2009; (ii) to add a conversion feature such that the holder of the Note, at its option, may convert the principal of the Note, and any accrued interest, into shares of the Company’s common stock at a fixed conversion price of $0.40 per share; and (iii) to eliminate the Company’s right to prepay the Note prior to maturity. The Company also granted NPDC certain registration rights with respect to the shares of the Company’s common stock issuable upon exercise of the Note pursuant to a Registration Rights Agreement, dated as of March 2, 2007, between the Company and NPDC. The carrying value of the |
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
Note before the amendment approximated the fair value of the amended Note; |
[2] | Related party debt: (continued) | |
therefore, no gain or loss was recognized as the result of the modification. For each of the years ended December 31, 2008 and 2007, the Company incurred interest expense on the Note of $147,000 and $252,000, respectively. On July 16, 2008, NPDC transferred the Note to NPDV and on July 21, 2008, NPDV converted the Note (see Note B). The Note was subordinated to the indebtedness under the Amended Loan Agreement. | ||
[3] | Other related party transactions | |
On April 5, 2007, the Company, in connection with its acquisition of 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 officer of the Company. 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. Rent expense for the warehouse for the year ended December 31, 2008 and 2007 was $325,000 and $217,000, respectively. The Company 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. |
Year Ended December 31, | 2008 | 2007 | ||||||
Current: | ||||||||
Federal | $ | 14 | $ | 348 | ||||
State and local | 4 | 115 | ||||||
Total current expense | 18 | 463 | ||||||
Deferred: | ||||||||
Federal | (108 | ) | 357 | |||||
State and local | (21 | ) | 68 | |||||
Total deferred (benefit) expense | (129 | ) | 425 | |||||
Total income tax (benefit) expense | $ | (111 | ) | $ | 888 | |||
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
December 31, | ||||||||
2008 | 2007 | |||||||
Deferred tax assets (liabilities) | ||||||||
Allowance for doubtful accounts | $ | 170 | $ | 89 | ||||
Accrued compensation | 41 | 341 | ||||||
Inventory | 93 | 67 | ||||||
Interest rate swap | — | (28 | ) | |||||
Total current deferred tax assets | 304 | 469 | ||||||
Property and equipment | 343 | 317 | ||||||
Interest rate swap | 452 | — | ||||||
Unamortized share-based compensation | — | (293 | ) | |||||
Other | 3 | — | ||||||
Net long-term deferred tax assets | 798 | 24 | ||||||
Net deferred tax assets | $ | 1,102 | $ | 493 | ||||
Year ended December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Tax (benefit) at U.S. statutory rate | $ | (414 | ) | 34.0 | % | $ | 710 | 34.0 | % | |||||||
State and local taxes net of Federal effect | (18 | ) | 1.5 | 121 | 5.8 | |||||||||||
Items not deductible | 321 | (26.4 | ) | 57 | 2.7 | |||||||||||
Income taxes | $ | (111 | ) | 9.1 | % | $ | 888 | 42.5 | % | |||||||
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Terms Years | Value | |||||||||||||
Options outstanding at December 31, 2006 | 1,050,000 | 0.16 | 1.2 | $ | 148,500 | (*) | ||||||||||
Granted | 575,000 | 0.60 | ||||||||||||||
Exercised | (200,000 | ) | 0.16 | |||||||||||||
Forfeited or expired | (450,000 | ) | 0.14 | |||||||||||||
Options outstanding at December 31, 2007 | 975,000 | ) | 0.51 | 9.2 | $ | 201,500 | (*) | |||||||||
Canceled | (975,000 | ) | 0.51 | |||||||||||||
Options outstanding, vested, expected to vest and exercisable at December 31, 2008 | 0 | 0 | 0 | $ | 0 | (*) | ||||||||||
* | The intrinsic value of stock options is the amount by which the market value of the underlying stock exceeds the exercise price of the option. |
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
Machinery | ||||||||||||
Real | and | |||||||||||
Property | Equipment | Total | ||||||||||
2009 | $ | 2,439 | $ | 736 | $ | 3,175 | ||||||
2010 | 841 | 355 | 1,196 | |||||||||
2011 | 280 | 136 | 416 | |||||||||
2012 | 70 | 70 | ||||||||||
Total | $ | 3,630 | $ | 1,227 | $ | 4,857 | ||||||
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(a wholly owned subsidiary of National Patent Development Corporation)
December 31, 2008 and 2007
76
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(a wholly owned subsidiary of National Patent Development Corporation)
(in thousands)
(Unaudited)
September 30, 2009 | ||||
Assets | ||||
Current assets | ||||
Cash | $ | 16 | ||
Accounts receivable, less allowance for doubtful accounts of $406 | 12,978 | |||
Inventory (finished goods) | 21,965 | |||
Deferred income taxes | 304 | |||
Prepaid expenses and other current assets | 640 | |||
Total current assets | 35,903 | |||
Property and equipment, net | 719 | |||
Intangible assets, net | 503 | |||
Deferred income taxes | 754 | |||
Other assets | 44 | |||
Total assets | $ | 37,923 | ||
Liabilities and Stockholders’ Equity | ||||
Current liabilities | ||||
Short-term borrowings | $ | 15,868 | ||
Accounts payable and accrued expenses (including due to Parent of $153) | 11,544 | |||
Total current liabilities | 27,412 | |||
Liability related to interest rate swap | 907 | |||
Total liabilities | 28,319 | |||
Stockholders’ equity | 9,604 | |||
Total Liabilities and Stockholders’ Equity | $ | 37,923 | ||
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(a wholly owned subsidiary of National Patent Development Corporation)
(LOSS)
(Unaudited)
Nine months ended | ||||||||
September 30, 2009 | September 30, 2008 | |||||||
Sales | $ | 80,027 | $ | 94,114 | ||||
Cost of goods sold | 66,631 | 77,975 | ||||||
Gross margin | 13,396 | 16,139 | ||||||
Selling, general and administrative expenses | (12,042 | ) | (14,748 | ) | ||||
Charge related to resignation of Chairman | (1,096 | ) | ||||||
Operating income | 1,354 | 295 | ||||||
Other income | 20 | 25 | ||||||
Interest expense (including $0 and $147 to NPDC) | (1,138 | ) | (1,207 | ) | ||||
Income (loss) before income taxes | 236 | (887 | ) | |||||
Income tax expense | (107 | ) | (96 | ) | ||||
Net income (loss) | 129 | (983 | ) | |||||
Other comprehensive income (loss), net of tax: | ||||||||
Net unrealized gain (loss) on cash flow hedge | 204 | (97 | ) | |||||
Tax (expense) benefit | (81 | ) | 47 | |||||
Comprehensive income (loss) | $ | 252 | $ | (1,033 | ) | |||
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(a wholly owned subsidiary of National Patent Development Corporation)
(in thousands)
(Unaudited)
Nine months ended | ||||||||
September 30, 2009 | September 30, 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 129 | $ | (983 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 318 | 236 | ||||||
Equity based compensation | 1,245 | |||||||
Other compensation | 440 | |||||||
Accounts receivable allowance | 278 | |||||||
Deferred income taxes | (49 | ) | (337 | ) | ||||
Changes in other operating items: | ||||||||
Accounts receivable | (3,444 | ) | (4,690 | ) | ||||
Inventory | 1,080 | 2,698 | ||||||
Prepaid expenses and other current assets | 507 | 500 | ||||||
Accounts payable and accrued expenses | 3,693 | 1,124 | ||||||
Net cash provided by operating activities | 2,512 | 233 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property and equipment | (56 | ) | (333 | ) | ||||
Cash used in investing activities | (56 | ) | (333 | ) | ||||
Cash flows from financing activities: | ||||||||
Net (decrease) increase in short-term borrowings | (2,508 | ) | 171 | |||||
Cancellation of stock options | (58 | ) | ||||||
Net cash (used in) provided by financing activities | (2,508 | ) | 113 | |||||
Net (decrease) increase in cash | (52 | ) | 13 | |||||
Cash at beginning of period | 68 | 3 | ||||||
Cash at end of period | $ | 16 | $ | 16 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the periods for: | ||||||||
Interest | $ | 1,113 | 1,219 | |||||
Income tax | $ | (80 | ) | 362 |
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• | loss of key employees or customers; | ||
• | failure to adjust or implement our business model; | ||
• | additional expenditures required to facilitate this sale; and | ||
• | the diversion of management’s attention from our day-to-day business. |
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• | limitations on our ability to borrow; |
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• | limitations on our capital structure; | ||
• | limitations on the issuance of debt and equity securities, | ||
• | restrictions on acquisitions of interests in partner companies; | ||
• | prohibitions on transactions with affiliates; | ||
• | prohibitions on the issuance of options and other limitations on our ability to compensate key employees; | ||
• | certain governance requirements, | ||
• | restrictions on specific investments; and | ||
• | reporting, record-keeping, voting and proxy disclosure requirements. |
• | no or nominal assets; | ||
• | assets consisting solely of cash and cash equivalents; or | ||
• | assets consisting of any amount of cash and cash equivalents and nominal other assets. |
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Name and Address | Amount and Nature of Beneficial | |||||||
of Beneficial Owner | Ownership | Percent of Class | ||||||
Bedford Oak Advisors, LLC 100 South Bedford Road Mt. Kisco, NY 10549 | 3,666,253 | (1) | 20.88 | % | ||||
GAMCO Investors, Inc. One Corporate Center Rye, NY 10580 | 2,062,483 | (2) | 11.74 | % | ||||
Frost Gamma Investments Trust 4400 Biscayne Blvd. Miami, FL 33137 | 1,601,000 | (3) | 9.11 | % | ||||
Ilex Partners, L.L.C. 650 Madison Avenue – 17th Floor New York, New York 10022 | 1,078,655 | (4) | 6.14 | % | ||||
Carl E. Warden 1516 Country Club Drive Los Altos, CA 94024 | 922,173 | (5) | 5.25 | % |
(1) | Based on a Schedule 13D/A filed jointly by Bedford Oak Advisors, LLC (“Bedford Oak”), Bedford Oak Capital, L.P. (“Capital”), Bedford Oak Acorn, L.P. (“Acorn”) and Mr. Eisen with the SEC on October 9, 2008. Mr. Eisen is deemed to have beneficial ownership of such shares by virtue of his position as managing member of Bedford Oak, the investment manager of Capital and Acorn and certain other private investment partnerships. Does not include options to purchase 1,666,666 shares of National Patent common stock exercisable by Mr. Eisen within 60 days of November 2, 2009. See Security Ownership of Directors and Executive Officers table below. | |
(2) | Based on a Schedule 13D/A filed jointly by Gabelli Funds, LLC, GGCP, Inc., GAMCO Investors, Inc., GAMCO Asset Management, Inc., MJG Associates, Inc., Teton Advisors and Mario J. Gabelli with the SEC on March 17, 2009. | |
(3) | Based on a Schedule 13G filed by Frost Gamma Investments Trust with the SEC on February 12, 2009. | |
(4) | Based on a Schedule 13G filed jointly by Ilex Partners, L.L.C., Steinhardt Overseas Management, L.P. and Michael H. Steinhardt with the SEC on May 13, 2009. | |
(5) | Based on a Schedule 13G filed by Carl Warden with the SEC on May 21, 2007. Includes 43,500 shares of National Patent common stock held by the Carl and Vicki Warden Family Foundation, of which Mr. Warden is the trustee. Mr. Warden disclaims beneficial ownership of the 43,500 shares of National Patent common stock held by the Carl and Vicki Warden Family Foundation. |
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Amount and Nature of | ||||||||
Beneficial | ||||||||
Name | Ownership | Percent of Class | ||||||
Harvey P. Eisen | 5,332,919 | (1) | 27.74 | % | ||||
John C. Belknap | 400,000 | (2) | * | |||||
Scott N. Greenberg | 92,101 | (3)(4) | * | |||||
Talton R. Embry | 84,242 | (4) | * | |||||
Lawrence G. Schafran | 90,428 | (4) | * | |||||
Ira J. Sobotko | 67,291 | (4) | * | |||||
James Schreiber | 0 | (5) | * | |||||
Directors and executive officers as a group (7 persons) (6) | 6,066,981 | 30.50 | % |
* | The number of shares owned is less than one percent of the outstanding shares. | |
(1) | Includes 3,658,400 shares of National Patent common stock beneficially owned by Bedford Oak, Capital and Acorn. Mr. Eisen is deemed to have beneficial ownership of such shares by virtue of his position as managing member of Bedford Oak, the investment manager of Capital and Acorn. See footnote 1 to Principal Stockholders table above. Also includes 7,853 shares of National Patent common stock owned by Mr. Eisen individually and 1,666,666 shares of National Patent common stock issuable upon the exercise of options that are exercisable by Mr. Eisen within 60 days of November 2, 2009. | |
(2) | All shares of National Patent common stock are issuable upon the exercise of options exercisable within 60 days of November 2, 2009. | |
(3) | Includes 4,000 shares of National Patent common stock held by members of Mr. Greenberg’s family, and 5,867 shares of National Patent common stock allocated to Mr. Greenberg’s account pursuant to the provisions of the GP Strategies Retirement Savings Plan. Mr. Greenberg disclaims beneficial ownership of the 4,000 shares of National Patent common stock held by members of his family. Mr. Greenberg ceased serving as National Patent’s Chief Financial Officer effective July 31, 2007. | |
(4) | Includes 66,666 shares of National Patent common stock issuable to each of Messrs. Embry, Greenberg, Schafran and Sobotko upon the exercise of options, all of which are currently exercisable. |
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(5) | Mr. Schreiber became a director of National Patent on November 11, 2009. | |
(6) | Includes Messrs. Eisen, Greenberg, Embry, Schafran and Schreiber, each of whom is a current director of National Patent, Mr. Belknap, who is currently a director and a named executive offer of National Patent, and Mr. Sobotko, who is currently a named executive officer of National Patent. |
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100 F Street, N.E.
Washington, D.C. 20549
Chairman, Chief Executive Officer
and President
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Purchase and Sale of the Stock
Purchase Price; Adjustment; Allocation; Closing
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Representations and Warranties of Seller
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Representations and Warranties of Buyer
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Covenants
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Conditions Precedent to Obligations of Buyer
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Conditions Precedent to Obligations of Seller
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Indemnification and Nonsurvival of Representations and Warranties
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Termination
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Miscellaneous Provisions
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If to Buyer, to: | With a copy to: | |
The Merit Group, Inc. | Parker Poe Adams & Bernstein LLP | |
1310 Union Street | 401 South Tryon Street, Suite 3000 | |
Spartanburg, South Carolina 29302 | Charlotte, North Carolina 28202 | |
Attention: Jay Baker | Attention: Richard K. Schell | |
Fax: (864) 699-3505 | Fax: (704) 335-9690 |
Attention; Harvey P. Eisen, Chairman of the Board
c/o Bedford Oak Advisors, LLC
100 South Bedford Road
Mt. Kisco, NY 10549
Fax: (914) 242-5798
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One Canterbury Green
201 Broad Street
Stamford, Connecticut 06901
Attention: Robert F. Wrobel
Fax: (203) 977-7301
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A-49
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/s/ Jay Baker | ||||
Title: President | ||||
SELLER: | ||||
/s/ Harvey Eisen | ||||
Title: Chairman, President and Chief Executive Officer |
Exhibit A: Definitions
Exhibit B: Form of Escrow Agreement
Exhibit C: Form of Opinion Letter of Day Pitney LLP
Exhibit D: Intentionally Deleted
Exhibit E: Form of Non-Competition Agreement
Exhibit F: Form of Employee Agreement
Exhibit G: Form of Letter of Credit
Exhibit H: Form of Non-Solicitation Agreement
Exhibit I: Form of Indemnity Escrow Agreement
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7:26B-1.1 et seq., as amended by the SRRA.
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903 Murray Road
East Hanover, New Jersey 07936
1. | reviewed the Parent’s annual reports on Form 10-K for the fiscal years ended December 31, 2008, December 31, 2007 and December 31, 2006 and quarterly reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009; | ||
2. | reviewed the Company’s annual reports on Form 10-K for the fiscal years ended December 31, 2007 and December 31, 2006 and quarterly reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008; | ||
3. | reviewed the audited financial statements of the Company for the fiscal years ended December 31, 2008, December 31, 2007, and December 31, 2006 and the interim financial statements for the quarters ended March 31, 2009 and June 30, 2009 and interim financial statements for the two-month period ended August 31, 2009, which the Parent’s management has identified as being the most current financial statements available; | ||
4. | spoken to and met with certain members of the management of the Company regarding the operations, financial condition, future prospects and projected operations and performance of the Company and regarding the Transaction; | ||
5. | reviewed the draft Stock Purchase Agreement by and among The Merit Group, Inc. and National Patent Development Corporation, dated November 19, 2009; |
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6. | reviewed financial projections prepared by the management of the Company with respect to the Company for the fiscal years ending December 31, 2009 through 2013; | ||
7. | reviewed the historical market prices and trading volume for the Parent’s publicly traded securities; | ||
8. | reviewed certain other publicly available financial data for certain companies that we deemed relevant and publicly available transaction prices and premiums paid in other change of control transactions that we deemed relevant for companies in related industries to the Company; and | ||
9. | conducted such other financial studies, analyses and inquiries as we have deemed appropriate. |
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(b) on the next Business Day (as hereinafter defined) if sent by overnight courier; or
(c) four (4) Business Days after mailing if mailed by prepaid registered mail, return receipt requested, to the appropriate notice address set forth below or at such other address as any party hereto may have furnished to the other parties in writing by registered mail, return receipt requested.
If to Merit: | With a copy to: | |
The Merit Group, Inc. | Parker Poe Adams & Bernstein LLP | |
1310 Union Street | 401 South Tryon Street, Suite 3000 | |
Spartanburg, South Carolina 29302 | Charlotte, North Carolina 28202 | |
Attention: Jay Baker | Attention: Richard K. Schell | |
Fax: (864) 699-3505 | Fax: (704) 335-9690 | |
If to NPDC: | With a copy to: | |
National Patent Development Corporation | Day Pitney LLP | |
Attention; Harvey P. Eisen, Chairman of the Board | One Canterbury Green | |
c/o Bedford Oak Avisors, LLC | 201 Broad Street | |
100 South Bedford Road | Stamford, Connecticut 06901 | |
Mt. Kisco, NY 10549 | Attention: Robert F. Wrobel | |
Fax: (914) 272-5779 | Fax: (203) 977-7301 |
If to the Escrow Agent: | JPMorgan Chase Bank, N.A. | |
Clearance and Agency Services | ||
(street address) | ||
(City, state [country], zip [postal code]) | ||
Attention: | ||
Fax No.:[for website only; regional docs. can be customized] |
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By: | ||
Name: | ||
Title: | ||
NPDC | ||
By: | ||
Name: | ||
Title: | ||
JPMORGAN CHASE BANK, NATIONAL ASSOCIATION as Escrow Agent | ||
By: | ||
Name: | ||
Title: | ||
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If to Buyer, to: | With a copy to: | |
The Merit Group, Inc. | Parker Poe Adams & Bernstein LLP | |
1310 Union Street | 401 South Tryon Street, Suite 3000 | |
Spartanburg, South Carolina 29302 | Charlotte, North Carolina 28202 | |
Attention: Jay Baker | Attention: Richard K. Schell | |
Fax: (864) 699-3505 | Fax: (704) 335-9690 |
If to Seller, to: | With a copy to: | |
National Patent Development Corporation | Day Pitney LLP | |
Attention; Harvey P. Eisen, Chairman of the Board | One Canterbury Green | |
c/o Bedford Oak Avisors, LLC | 201 Broad Street | |
100 South Bedford Road | Stamford, Connecticut 06901 | |
Mt. Kisco, NY 10549 | Attention: Robert F. Wrobel | |
Fax: (914) 272-5779 | Fax: (203) 977-7301 |
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Name: Harvey Eisen | ||
Title: Chairman, President and CEO |
Name: Jay Baker | ||
Title: President |
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If to Merit, to: | With a copy to: | |
The Merit Group, Inc. | Parker Poe Adams & Bernstein LLP | |
1310 Union Street | 401 South Tryon Street, Suite 3000 |
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Spartanburg, South Carolina 29302 | Charlotte, North Carolina 28202 | |
Attention: Jay Baker | Attention: Richard K. Schell | |
Fax: (864) 699-3505 | Fax: (704) 335-9690 |
If to NPDC, to: | With a copy to: | |
National Patent Development Corporation | Day Pitney LLP | |
Attention; Harvey P. Eisen, Chairman of the Board | One Canterbury Green | |
c/o Bedford Oak Avisors, LLC | 201 Broad Street | |
100 South Bedford Road | Stamford, Connecticut 06901 | |
Mt. Kisco, NY 10549 | Attention: Robert F. Wrobel | |
Fax: (914) 272-5772 | Fax: (203) 977-7301 |
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Name: Jay Baker | ||
Title: President |
Name: Harvey Eisen | ||
Title: Chairman, President and CEO |
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DEFINITIONS
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EMPLOYEES
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CLOSING CONDITIONS
TERMINATION
MISCELLANEOUS
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If to Buyer: | With Copy to: | |
The Merit Group, Inc. | Parker Poe Adams & Bernstein LLP | |
1310 Union Street | 401 South Tryon Street, Suite 3000 | |
Spartanburg, South Carolina 29302 | Charlotte, North Carolina 28202 | |
Attention: Jay Baker | Attention: Richard K. Schell | |
Fax: (864) 699-3505 | Fax: (704) 335-9690 | |
If to Seller: | With Copies to: | |
National Patent Development Corporation | Day Pitney LLP | |
c/o Bedford Oak Advisors, LLC | One Canterbury Green | |
100 South Bedford Road | Stamford, CT 06901-2047 | |
Mt. Kisco, New York 10549 | Fax: (203) 583-4693 | |
Fax: (914) 272-5779 | Attn: Robert F. Wrobel | |
Attn: Harvey Eisen |
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SELLER: | ||||
NATIONAL PATENT DEVELOPMENT CORPORATION | ||||
By: /s/ Harvey Eisen | ||||
Title: Chairman, President and CEO | ||||
BUYER: | ||||
THE MERIT GROUP, INC. | ||||
By: /s/ Jay Baker | ||||
Title: President |
Schedule 2: Preliminary Category B Employees
Schedule 3: Category C Employees
Schedule 4: Key Executive
Schedule 5: Long Term Executive
E-13
Financial Statements of National Patent Development Corporation and Subsidiaries: | ||||
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Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Sales | $ | 27,131 | $ | 31,216 | $ | 80,027 | $ | 94,114 | ||||||||
Cost of sales | 22,591 | 25,702 | 66,631 | 77,975 | ||||||||||||
Gross margin | 4,540 | 5,514 | 13,396 | 16,139 | ||||||||||||
Selling, general and administrative expenses | (4,921 | ) | (6,271 | ) | (14,424 | ) | (17,460 | ) | ||||||||
Charge related to resignation of Chairman of Five Star | — | — | — | (1,096 | ) | |||||||||||
Operating loss | (381 | ) | (757 | ) | (1,028 | ) | (2,417 | ) | ||||||||
Interest expense | (389 | ) | (370 | ) | (1,138 | ) | (1,060 | ) | ||||||||
Investment and other income (loss), net | 7 | (73 | ) | 35 | 78 | |||||||||||
Loss from continuing operations before income tax expense | (763 | ) | (1,200 | ) | (2,131 | ) | (3,399 | ) | ||||||||
Income tax (expense) benefit | (4 | ) | 354 | (12 | ) | 329 | ||||||||||
Loss from continuing operations | (767 | ) | (846 | ) | (2,143 | ) | (3,070 | ) | ||||||||
Income from discontinued operations, net of taxes, including an $87 gain on sale of assets | — | — | — | 429 | ||||||||||||
Consolidated net loss | (767 | ) | (846 | ) | (2,143 | ) | (2,641 | ) | ||||||||
Less: net income attributable to noncontrolling Interest | — | (24 | ) | — | (34 | ) | ||||||||||
Net loss attributable to National Patent Development Corporation | $ | (767 | ) | $ | (870 | ) | $ | (2,143 | ) | $ | (2,675 | ) | ||||
Basic and diluted net loss per share attributable to National Patent Development Corporation: | ||||||||||||||||
Continuing operations | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.12 | ) | $ | (0.19 | ) | ||||
Discontinued operations | — | — | — | 0.03 | ||||||||||||
Net loss per share | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0. 12 | ) | $ | (0.16 | ) | ||||
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(LOSS)
(unaudited)
(in thousands)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss | $ | (767 | ) | $ | (870 | ) | $ | (2,143 | ) | $ | (2,675 | ) | ||||
Other comprehensive income (loss), before tax: | ||||||||||||||||
Net unrealized loss on available-for- sale-securities | — | — | — | (102 | ) | |||||||||||
Reclassification adjustment for impairment of investment in Millennium Cell, Inc. included in net income (loss) | — | 138 | — | 138 | ||||||||||||
Net unrealized gain (loss) on interest rate Swap | (5 | ) | (100 | ) | 204 | (97 | ) | |||||||||
Comprehensive loss before tax | (772 | ) | (832 | ) | (1,939 | ) | (2,736 | ) | ||||||||
Income tax (expense) benefit related to items of other comprehensive income (loss) | 2 | 44 | (81 | ) | 47 | |||||||||||
Comprehensive loss | (770 | ) | (788 | ) | (2,020 | ) | (2, 689 | ) | ||||||||
Comprehensive loss attributable to noncontrolling interest | — | — | — | 4 | ||||||||||||
Comprehensive loss attributable to National Patent Development Corporation | $ | (770 | ) | $ | (788 | ) | $ | (2,020 | ) | $ | (2,685 | ) | ||||
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(in thousands)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 11,588 | $ | 13,089 | ||||
Accounts and other receivables, less allowance for doubtful accounts of $406 and $420 | 12,978 | 9,814 | ||||||
Inventories (finished goods) | 21,965 | 23,045 | ||||||
Deferred tax asset | 107 | 132 | ||||||
Prepaid expenses and other current assets | 1,121 | 1,334 | ||||||
Total current assets | 47,759 | 47,414 | ||||||
Property, plant and equipment, net | 739 | 912 | ||||||
Intangible assets, net | 503 | 599 | ||||||
Deferred tax asset | 1,243 | 1,537 | ||||||
Other assets | 3,209 | 3,209 | ||||||
Total assets | $ | 53,453 | $ | 53,671 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities | ||||||||
Short term borrowings | $ | 15,868 | $ | 18,375 | ||||
Accounts payable and accrued expenses | 12,042 | 8,236 | ||||||
Total current liabilities | 27,910 | 26,611 | ||||||
Liability related to interest rate swap | 907 | 1,111 | ||||||
Contingencies (Notes 10 and 11) | ||||||||
Stockholders’ equity | ||||||||
Common stock | 181 | 181 | ||||||
Additional paid-in capital | 29,349 | 28,642 | ||||||
Deficit | (2,992 | ) | (849 | ) | ||||
Treasury stock, at cost | (1,358 | ) | (1,358 | ) | ||||
Accumulated other comprehensive loss | (544 | ) | (667 | ) | ||||
Total stockholders’ equity | 24,636 | 25,949 | ||||||
Total liabilities and stockholders’ equity | $ | 53,453 | $ | 53,671 | ||||
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(unaudited)
(in thousands)
Nine months ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operations: | ||||||||
Net loss | $ | (2,143 | ) | $ | (2,641 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 326 | 489 | ||||||
Gain on sale of MXL | — | (87 | ) | |||||
Expenses paid in common stock | 20 | 46 | ||||||
Deferred income taxes | 238 | (935 | ) | |||||
Stock based compensation | 687 | 1,694 | ||||||
Impairment of investments | — | 138 | ||||||
Changes in other operating items, net of effect of disposition of MXL: | ||||||||
Accounts and other receivables | (3,164 | ) | (4,334 | ) | ||||
Inventories | 1,080 | 2,445 | ||||||
Prepaid expenses and other assets | 213 | 565 | ||||||
Accounts payable and accrued expenses | 3,806 | 715 | ||||||
Net cash provided by (used in) operations | 1,063 | (1,905 | ) | |||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (57 | ) | (617 | ) | ||||
Acquisition of additional interest in Five Star | — | (3,838 | ) | |||||
Net proceeds from sale of assets of MXL, net of cash sold | — | 4,661 | ||||||
Investment in MXL | — | (275 | ) | |||||
Net cash used in investing activities | (57 | ) | (69 | ) | ||||
Cash flows from financing activities: | ||||||||
Exercise of common stock warrants | — | 3,560 | ||||||
Purchase of treasury stock | — | (1,115 | ) | |||||
Settlement of option | — | (240 | ) | |||||
Repayments of short-term borrowings, net | (2,507 | ) | (454 | ) | ||||
Repayment of long-term debt | — | (1,698 | ) | |||||
Net cash (used in) provided by financing activities | (2,507 | ) | 53 | |||||
Net decrease in cash and cash equivalents | (1,501 | ) | (1,921 | ) | ||||
Cash and cash equivalents at beginning of period | 13,089 | 15,698 | ||||||
Cash and cash equivalents at end of period | $ | 11,588 | $ | 13,777 | ||||
F-5
Table of Contents
IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2009
(Unaudited)
(in thousands, except shares)
Accumulated | ||||||||||||||||||||||||||||
other | Total | |||||||||||||||||||||||||||
Common | Additional | Treasury | comprehensive | Stock- | ||||||||||||||||||||||||
Stock | paid-in | Retained | stock, at | income | holders’ | |||||||||||||||||||||||
Shares | Amount | capital | earnings | cost | (loss) | equity | ||||||||||||||||||||||
Balance at December 31, 2008 | 18,105,148 | $ | 181 | $ | 28,642 | $ | (849 | ) | $ | (1,358 | ) | $ | (667 | ) | $ | 25,949 | ||||||||||||
Net unrealized gain on interest rate swap, net of tax of $81 | 123 | 123 | ||||||||||||||||||||||||||
Net loss | (2,143 | ) | (2,143 | ) | ||||||||||||||||||||||||
Stock based compensation expense | 687 | 687 | ||||||||||||||||||||||||||
Issuance of common stock to directors | 16,308 | 20 | 20 | |||||||||||||||||||||||||
Balance at September 30, 2009 | 18,121,456 | $ | 181 | $ | 29,349 | $ | (2,992 | ) | $ | (1,358 | ) | $ | (544 | ) | $ | 24,636 | ||||||||||||
F-6
Table of Contents
Three and nine months ended September 30, 2009 and 2008
(unaudited)
F-7
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
F-8
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
Attributable to | ||||||||||||
Total | Noncontrolling | |||||||||||
Equity | Company | interest | ||||||||||
Beginning balance | $ | 28,977 | $ | 26,075 | $ | 2,902 | ||||||
Net loss | (2,641 | ) | (2,675 | ) | 34 | |||||||
Other comprehensive loss | (14 | ) | (10 | ) | (4 | ) | ||||||
Acquisition of additional interest in Five Star | (3,016 | ) | (3,016 | ) | ||||||||
Equity based compensation | 1,172 | 1,088 | 84 | |||||||||
Other equity transactions, with no effect on noncontrolling interest | 2,594 | 2,594 | ||||||||||
Ending balance | $ | 27,072 | $ | 27,072 | $ | 0 | ||||||
F-9
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
F-10
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
F-11
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Basic and Diluted EPS | ||||||||||||||||
Loss from continuing operations, reduced in 2008 by amount applicable to non-controlling interest | $ | (767 | ) | $ | (870 | ) | $ | (2,143 | ) | $ | (3,104 | ) | ||||
Income from discontinued operation | — | — | — | 429 | ||||||||||||
Net loss attributable to National Patent Development Corporation | $ | (767 | ) | $ | (870 | ) | $ | (2,143 | ) | $ | (2,675 | ) | ||||
Weighted average shares Outstanding | 17,556 | 16,856 | 17,550 | 16,557 | ||||||||||||
Per share: | ||||||||||||||||
Continuing operations | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.12 | ) | $ | (0.19 | ) | ||||
Discontinued operations | — | — | — | 0.03 | ||||||||||||
Net loss | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.12 | ) | $ | (0.16 | ) | ||||
September | September | |||||||
30, 2009 | 30, 2008 | |||||||
Options | 3,350,000 | 3,350,000 | ||||||
Warrants | * | 1,423,886 | ||||||
Five Star’s convertible note | ** | 2,800,000 | ||||||
Five Star’s options | *** | 975,000 |
* | 1,423,886 warrants were exercised in August 2008 (see Note 12(b)) | |
** | $2,800,000 convertible note was converted in July 2008 (see Note 3) | |
*** | 975,000 options were terminated in July 2008 |
F-12
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Stock | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Options outstanding at January 1, 2009 | 3,350,000 | $ | 2.49 | 7.9 | $ | 0 | * | |||||||||
Options outstanding at September 30, 2009 | 3,350,000 | $ | 2.49 | 7.4 | $ | 0 | * | |||||||||
Options exercisable at September 30, 2009 | 2,233,000 | $ | 2.46 | 7.4 | $ | 0 | * | |||||||||
* | The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. |
F-13
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
F-14
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
F-15
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
(a) | On November 12, 2004, the Company entered into an agreement to borrow approximately $1,022,000 from Bedford Oak Partners, which is controlled by Harvey P. Eisen, Chairman, Chief Executive Officer and a director of the Company, and approximately $568,000 from Jerome I. Feldman, who was at the time Chairman and Chief Executive Officer of the Company, which was utilized to exercise an option held by the Company to purchase Series B Convertible Preferred shares of Valera. The loans bore interest at 6% per annum, had a maturity date on October 31, 2009, and were secured by all shares of Valera owned by the Company, including the purchased shares. On January 11, 2005, the Company prepaid the loans and all accrued interest in full. As further consideration for making these loans, Bedford Oak Partners and Mr. Feldman became entitled to a portion of the consideration received by the Company on the sale of certain Valera shares. As a result of the acquisition of Valera by Indevus (see Note 10), this obligation related to the sale of Indevus shares by the Company. From June 2007 through and including September 12, 2007, the Company sold, in a series of open market transactions, all of the 2,639,482 shares of Indevus common stock held by the Company for an aggregate of approximately $17,598,000, net of commissions and brokerage fees. The November 12, 2004 agreement among the Company, Bedford Oak Partners and Mr. Feldman provides for Bedford Oak Partners and Mr. Feldman to (i) receive 50% of any amount in excess of $3.47 per share which is received by the Company upon the sale of Indevus common stock and (ii) participate in 50% of the profits earned on 19.51% of shares of Indevus common stock received by the Company upon conversion of the Contingent Rights, if any, at such time as such shares are sold by the Company. | |
As a result of the consummation of the Endo Merger (see Note 10), the Company has a contingent right to receive from Endo certain cash payments. The two related parties would receive the following portions of the Company’s cash payments upon the occurrence of the following events: (i) upon FDA approval of the Uteral Stent, between $262,000 and $227,000, and (ii) upon FDA approval of VP003, between $393,000 and $341,000. | ||
(b) | On April 5, 2007, Five Star, in connection with its acquisition of substantially all the assets of Right-Way Dealer Warehouse (“Right-Way”), entered into a lease for a warehouse with a company owned by the former principal of Right-Way who presently serves as an executive of Five Star. The lease has an initial term of five years with two successive five-year renewal options and provides for an annual rent of $325,000, subject to adjustment. The adjusted rent expense for the 12 months commencing January 1, 2009 will be $280,000. Five Star also has an option to purchase the warehouse at any time during the initial term of the lease for $7,750,000, subject to 3% annual adjustments. |
F-16
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
(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. |
F-17
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
The agreement also contained one-year non-compete, standstill and non-solicitation provisions. In addition, the FS Agreement was terminated upon Mr. Flegel’s resignation. | ||
(b) | On August 11, 2008, the Company, The Gabelli Small Cap Growth Fund, The Gabelli Equity Income Fund, The Gabelli ABC Fund and The Gabelli Convertible and Income Securities Fund Inc. (collectively, the “Warrantholders”), holders of warrants to purchase an aggregate of 1,423,886 shares of Company common stock, dated as of December 3, 2004 (the “Warrants”), amended the Warrants to (i) extend the expiration date of the Warrants from August 14, 2008 to August 15, 2008 and (ii) reduce the exercise price of the Warrants from $3.57 per share to $2.50 per share, which was in excess of the closing price on August 11, 2008. On August 13, 2008, the Warrantholders exercised the warrants and the Company issued and sold 1,423,886 shares of treasury stock to the Warrantholders for cash consideration of $2.50 per share, representing an aggregate purchase price of $3,560,000. |
F-18
Table of Contents
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2009 and 2008
(unaudited)
(a) | On October 20, 2009, NPDC Holdings, Inc., a wholly-owned subsidiary of the Company, sold approximately 1,000 acres of undeveloped real property located in the Town of Pawling, County of Dutchess, New York (the “Pawling Property”) for $12,500,000 in cash, pursuant to the contract entered on October 7, 2009. The carrying amount of the Pawling Property as reflected in Other assets in the Condensed Consolidated Balance Sheet at September 30, 2009 was approximately $2,500,000. The Company realized a pre tax gain of approximately $9,600,000, which will be recognized in October 2009. | |
(b) | On November 24, 2009, the Company and The Merit Group, Inc., a South Carolina corporation (“Merit”), entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, the Company intends to sell, and Merit will purchase for cash (the “Sale”), all of the issued and outstanding stock (the “Stock”) of the Company’s wholly-owned subsidiary, Five Star, the holding company and sole stockholder of Five Star Group, Inc. (“Five Star Group”). The aggregate purchase price for the Stock is $33,124,000, subject to certain adjustments to reflect (i) (A) dollar for dollar decreases in the event Five Star Group’s outstanding revolving indebtedness under its loan agreement with Bank of America decreases from the amount outstanding at March 31, 2009 compared to the amount outstanding on the closing date or increases if such indebtedness increases and (B) increases dollar for dollar if Five Star has positive net results from March 31, 2009 to the closing date, or decreases if it has negative net results and (ii) a potential downward adjustment based on the value of certain designated inventory held by Five Star Group, less the value received for such inventory after the closing, to the extent such inventory adjustment post-closing exceeds $400,000 but is equal to or less than $1,000,000. | |
The proceeds of the Sale will be reduced by the repayment of Five Star Group’s debt outstanding on the closing date, which is required by the Stock Purchase Agreement, transaction costs, taxes, severance costs for employees of Five Star, one half of the rent and other sums, if any, due under the warehouse lease for Five Star’s Connecticut location from the later of March 31, 2010 or when Five Star ceases to use the warehouse, through September 30, 2010, if any, and post-closing adjustments due Merit pursuant to the Stock Purchase Agreement. In addition, the Company must satisfy certain obligations under state environmental laws in New Jersey and Connecticut. These costs and other adjustments would reduce proceeds available to the Company. The Sale is subject to the approval of the stockholders of the Company. | ||
The Company estimates that the required repayments of Five Star’s outstanding debt on the closing date and any costs and adjustments in connection with the Sale may reduce the proceeds of the Sale to the Company to an estimated range of $8,500,000 to $9,500,000. The estimate of a range of Sale proceeds to the Company represents the management of the Company’s best estimate and the actual sale proceeds to the Company may vary from the range presented above. |
F-19
Table of Contents
National Patent Development Corporation:
New York, New York
March 26, 2009, except for Note 21 as to which the date is November 24, 2009
F-20
Table of Contents
(in thousands, except per share data)
Year Ended | ||||||||
December 31, | ||||||||
2008 | 2007 | |||||||
Sales | $ | 115,461 | $ | 123,713 | ||||
Cost of sales | 95,133 | 102,246 | ||||||
Gross margin | 20,328 | 21,467 | ||||||
Selling, general and administrative expenses | (22,537 | ) | (22,229 | ) | ||||
Charge related to resignation of Chairman of Five Star | (1,096 | ) | ||||||
Operating loss | (3,305 | ) | (762 | ) | ||||
Interest expense | (1,366 | ) | (1,429 | ) | ||||
Gain on exchange of Valera for Indevus shares | — | 17,031 | ||||||
Investment and other income (loss), net | 94 | (1,605 | ) | |||||
(Loss) income from continuing operations before income taxes and minority interest | (4,577 | ) | 13,235 | |||||
Income tax benefit (expense) | 940 | (1,269 | ) | |||||
(Loss) income from continuing operations before minority interest | (3,637 | ) | 11,966 | |||||
Minority interest | (34 | ) | (514 | ) | ||||
(Loss) income from continuing operations | (3,671 | ) | 11,452 | |||||
Income from discontinued operations, net of taxes, including an $87 gain on sale of assets in 2008 | 277 | 270 | ||||||
Net (loss) income | $ | (3,394 | ) | $ | 11,722 | |||
Basic and diluted net (loss) income per share: | ||||||||
Continuing operations | $ | (0.22 | ) | $ | 0.65 | |||
Discontinued operations | 0.02 | 0.02 | ||||||
Net (loss) income per share | $ | (0.20 | ) | $ | 0.67 | |||
F-21
Table of Contents
(in thousands)
Year Ended December 31, | ||||||||||||
2008 | 2007 | |||||||||||
Net (loss) income | $ | (3,394 | ) | $ | 11,722 | |||||||
Other comprehensive income (loss), before tax: | ||||||||||||
Net unrealized loss on available-for-sale-securities | (102 | ) | (1,036 | ) | ||||||||
Reclassification adjustment principally for gain on exchange of Valera securities recognized in merger included in net income | (4,598 | ) | ||||||||||
Reclassification adjustment for realized losses on sales of Indevus shares included in net income | 1,023 | |||||||||||
Reclassification adjustment for loss on impairment of investment in Millenium Cell included in net income (loss) | 138 | 346 | ||||||||||
Net unrealized loss on interest rate swap, net of minority interest in 2007 | (1,112 | ) | (143 | ) | ||||||||
Comprehensive (loss) income before tax | (4,470 | ) | 7,314 | |||||||||
Income tax benefit related to items of other comprehensive income (loss), net of minority interest | 426 | 57 | ||||||||||
Comprehensive (loss) income | $ | (4,044 | ) | $ | 7,371 | |||||||
F-22
Table of Contents
(in thousands, except share and per share data)
December 31, | ||||||||
2008 | 2007 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 13,089 | $ | 15,698 | ||||
Accounts and other receivables, less allowance for doubtful accounts of $420 and $271 | 9,814 | 12,755 | ||||||
Inventories | 23,045 | 27,720 | ||||||
Deferred tax asset | 132 | 470 | ||||||
Prepaid expenses and other current assets | 1,334 | 1,326 | ||||||
Total current assets | 47,414 | 57,969 | ||||||
Marketable securities available for sale | 7 | 109 | ||||||
Property, plant and equipment, net | 912 | 3,534 | ||||||
Intangible assets, net | 599 | |||||||
Deferred tax asset | 1,537 | |||||||
Other assets | 3,202 | 3,293 | ||||||
Total assets | $ | 53,671 | $ | 64,905 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | $ | 257 | |||||
Short term borrowings | 18,375 | 19,928 | ||||||
Accounts payable and accrued expenses | 8,236 | 13,530 | ||||||
Total current liabilities | 26,611 | 33,715 | ||||||
Long-term debt less current maturities | 1,441 | |||||||
Deferred tax liability | 279 | |||||||
Liability related to interest rate swap | 1,111 | |||||||
Minority interest | 2,902 | |||||||
Common stock subject to exchange rights | 493 | |||||||
Commitments and contingencies | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, par value $0.01 per share authorized 10,000,000 shares; issued none | — | — | ||||||
Common stock, par value $0.01 per share authorized 30,000,000 shares; issued 18,105,148 shares in 2008 and 18,086,006 shares in 2007 | 181 | 180 | ||||||
Additional paid-in capital | 28,642 | 26,825 | ||||||
Retained earnings (deficit) | (849 | ) | 2,545 | |||||
Treasury stock, at cost (564,569 shares in 2008 and 1,528,462 shares in 2007) | (1,358 | ) | (3,458 | ) | ||||
Accumulated other comprehensive (loss) income | (667 | ) | (17 | ) | ||||
Total stockholders’ equity | 25,949 | 26,075 | ||||||
Total liabilities and stockholders’ equity | $ | 53,671 | $ | 64,905 | ||||
F-23
Table of Contents
(in thousands)
Year ended December 31, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (3,394 | ) | $ | 11,722 | |||
Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 656 | 783 | ||||||
Minority interest | 34 | 514 | ||||||
Gain on sale of MXL assets | (87 | ) | ||||||
Impairment of investment | 138 | 346 | ||||||
Gain on exchange of Valera for Indevus shares | (17,031 | ) | ||||||
Expenses paid in common stock | 52 | 60 | ||||||
Stock based compensation | 2,160 | 1,253 | ||||||
Provision for doubtful accounts | 278 | 123 | ||||||
Loss on sale of Indevus shares | 1,023 | |||||||
Gain on issuance of stock by subsidiary | (1 | ) | ||||||
Deferred income taxes | (1,027 | ) | 426 | |||||
Changes in other operating items net of acquisition: | ||||||||
Accounts and other receivables | 1,530 | 247 | ||||||
Inventories | 3,667 | (2,972 | ) | |||||
Prepaid expenses and other assets | (308 | ) | (476 | ) | ||||
Accounts payable and accrued expenses | (4,940 | ) | 3,305 | |||||
Net cash used in operating activities | (1,241 | ) | (678 | ) | ||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (672 | ) | (1,392 | ) | ||||
Acquisition of minority interest in Five Star | (3,854 | ) | (106 | ) | ||||
Acquisition of Right Way by Five Star | (3,399 | ) | ||||||
Net proceeds from sales of assets of MXL | 4,661 | |||||||
Investment in MXL | (275 | ) | ||||||
Proceeds from sale of investment | 17,598 | |||||||
Repayment of receivable from GP Strategies | 251 | |||||||
Net cash (used in) provided by investing activities | $ | (140 | ) | $ | 12,952 | |||
F-24
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, | ||||||||
2008 | 2007 | |||||||
Cash flows from financing activities: | ||||||||
Proceeds from sale of common stock | $ | $ | 480 | |||||
Purchase of treasury stock | (1,115 | ) | (3,270 | ) | ||||
Proceeds from exercise of common stock warrants | 3,560 | |||||||
Proceeds from issuance of long-term debt | 407 | |||||||
Proceeds from (repayment of) short-term borrowings | (1,553 | ) | 1,514 | |||||
Settlement of option and repurchase of Five Star options | (422 | ) | ||||||
Repayment of long-term debt | (1,698 | ) | (192 | ) | ||||
Net cash used in financing activities | (1,228 | ) | (1,061 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (2,609 | ) | 11,213 | |||||
Cash and cash equivalents at beginning of period | 15,698 | 4,485 | ||||||
Cash and cash equivalents at end of period | $ | 13,089 | $ | 15,698 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 1,543 | $ | 1,616 | ||||
Income taxes | 564 | 651 |
F-25
Table of Contents
YEARS ENDED DECEMBER 31, 2008 AND 2007
Accumulated | ||||||||||||||||||||||||||||
Common | Additional | Treasury | other | Total | ||||||||||||||||||||||||
Stock | paid-in | Retained | stock, at | comprehensive | stockholders’ | |||||||||||||||||||||||
shares | amount | capital | earnings | cost | income (loss) | equity | ||||||||||||||||||||||
Balance at December 31, 2006 | 17,861,670 | $ | 178 | $ | 25,990 | $ | (9,177 | ) | $ | (188 | ) | $ | 4,334 | $ | 21,137 | |||||||||||||
Proceeds from sale of common stock | 200,000 | 2 | 478 | 480 | ||||||||||||||||||||||||
Reclassification adjustment, principally for gain on exchange of | ||||||||||||||||||||||||||||
Valera securities recognized in merger included in net income | (4,598 | ) | (4,598 | ) | ||||||||||||||||||||||||
Reclassification adjustment for realized losses on sale of Indevus shares included in net income | 1,023 | 1,023 | ||||||||||||||||||||||||||
Reclassification adjustment for impairment of investment in Millenium Cell measured in net income | 346 | 346 | ||||||||||||||||||||||||||
Net unrealized loss on available for sale securities | (1,036 | ) | (1,036 | ) | ||||||||||||||||||||||||
Net unrealized loss on interest rate swap, net of tax and minority interest | (86 | ) | (86 | ) | ||||||||||||||||||||||||
Net income | 11,722 | 11,722 | ||||||||||||||||||||||||||
Common stock subject to exchange rights reclassified to temporary equity | (493 | ) | (493 | ) | ||||||||||||||||||||||||
Equity based compensation expense | 790 | 790 | ||||||||||||||||||||||||||
Purchase of 1,428,462 shares of treasury stock | (3,270 | ) | (3,270 | ) | ||||||||||||||||||||||||
Issuance of common stock to MXL | ||||||||||||||||||||||||||||
Retirement and Savings Plan | 19,161 | 47 | 47 | |||||||||||||||||||||||||
Issuance of common stock to directors | 5,175 | 13 | 13 | |||||||||||||||||||||||||
Balance at December 31, 2007 | 18,086,006 | $ | 180 | $ | 26,825 | $ | 2,545 | $ | (3,458 | ) | $ | (17 | ) | $ | 26,075 | |||||||||||||
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2008 AND 2007
(continued)
(in thousands, except per share data)
Accumulated | ||||||||||||||||||||||||||||
other | Total | |||||||||||||||||||||||||||
Common | Additional | Treasury | comprehensive | Stock- | ||||||||||||||||||||||||
Stock | paid-in | Retained | stock, at | income | holders’ | |||||||||||||||||||||||
shares | amount | capital | earnings | cost | (loss) | equity | ||||||||||||||||||||||
Balance at December 31, 2007 | 18,086,006 | $ | 180 | $ | 26,825 | $ | 2,545 | $ | (3,458 | ) | $ | (17 | ) | $ | 26,075 | |||||||||||||
Net unrealized loss on available for sale securities | (102 | ) | (102 | ) | ||||||||||||||||||||||||
Reclassification adjustment related to loss on impairment of available for sale securities included in net loss | 138 | 138 | ||||||||||||||||||||||||||
Net unrealized loss on interest rate swap, net of tax of $472 and minority interest of $14 | (686 | ) | (686 | ) | ||||||||||||||||||||||||
Net loss | (3,394 | ) | (3,394 | ) | ||||||||||||||||||||||||
Equity based compensation expense | 1,318 | 1,318 | ||||||||||||||||||||||||||
Repurchased equity options of Five Star, net of minority interest of $32 | (150 | ) | (150 | ) | ||||||||||||||||||||||||
Settlement of option to acquire shares of Five Star | (240 | ) | (240 | ) | ||||||||||||||||||||||||
Issuance of 1,423,886 treasury shares upon exercise of warrants | 351 | 3,209 | 3,560 | |||||||||||||||||||||||||
Purchase of 462,859 shares of Treasury Stock | (1,115 | ) | (1,115 | ) | ||||||||||||||||||||||||
Issuance of 2,866 shares of treasury stock to directors | 6 | 6 | ||||||||||||||||||||||||||
Reclassification of common stock subject to exchange rights | 493 | 493 | ||||||||||||||||||||||||||
Issuance of common stock to MXL Retirement and Savings Plan | 10,260 | 1 | 24 | 25 | ||||||||||||||||||||||||
Issuance of common stock to directors | 8,882 | 21 | 21 | |||||||||||||||||||||||||
Balance at December 31, 2008 | 18,105,148 | $ | 181 | $ | 28,642 | $ | (849 | ) | $ | (1,358 | ) | $ | (667 | ) | $ | 25,949 | ||||||||||||
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Year Ended | ||||||||
December 31, | ||||||||
2008 | 2007 | |||||||
Basic EPS | ||||||||
Income (loss) from continuing operations | $ | (3,671 | ) | $ | 11,452 | |||
Income from discontinued operation | 277 | 270 | ||||||
Net income (loss) | $ | (3,394 | ) | $ | 11,722 | |||
Weighted average shares outstanding | 16,784 | 17,450 | ||||||
Continuing operations | $ | (0.22 | ) | $ | 0.65 | |||
Discontinued operations | 0.02 | 0.02 | ||||||
Net earnings (loss) per share | $ | (0.20 | ) | $ | 0.67 | |||
Diluted EPS | ||||||||
Weighted average shares outstanding | 16,784 | 17,450 | ||||||
Dilutive effect of stock options | 13 | |||||||
Diluted weighted average shares outstanding | 16,784 | 17,463 | ||||||
Continuing operations | $ | (0.22 | ) | $ | 0.65 | |||
Discontinued operations | 0.02 | 0.02 | ||||||
Net earnings (loss) per share | $ | (0.20 | ) | $ | 0.67 | |||
December 31, 2008 | December 31, 2007 | |||||||
Options | 3,350,000 | 782,830 | ||||||
Warrants | * | 1,423,887 | ||||||
Five Star’s convertible note | ** | 2,800,000 | ||||||
Five Star’s options | *** | 975,000 |
* | 1,423,887 warrants were exercised in August 2008 (see Note 19(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) |
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December 31, | ||||||||
2008 | 2007 | |||||||
Net unrealized loss on available-for-sale-securities | $ | $ | (36 | ) | ||||
Net unrealized (loss) gain on interest rate swap | (1,147 | ) | 33 | |||||
Accumulated other comprehensive loss before tax | (1,147 | ) | (3 | ) | ||||
Accumulated income tax benefit (expense) related to items of other comprehensive income | 480 | (14 | ) | |||||
Accumulated other comprehensive loss, net of tax | $ | (667 | ) | $ | (17 | ) | ||
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Current assets (including $755 of inventories and $1,453 of accounts receivable) | $ | 2,924 | ||
Non current assets (including $2,587 of property, plant and equipment, net) | 2,609 | |||
Total assets | 5,533 | |||
Current liabilities (including $625 of short-term borrowings) | (1,444 | ) | ||
Non current liabilities (including $1,441 long-term debt net of $257 current maturities) | (1,709 | ) | ||
Net assets | $ | 2,380 | ||
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Sales | $ | 137,221 | ||
Net income | 11,359 | |||
Earnings from continuing operations per share basic and fully diluted | $ | 0.65 |
December 31, | ||||||||
2008 | 2007 | |||||||
Raw materials * | $ | $ | 410 | |||||
Work in process * | 141 | |||||||
Finished goods | 23,045 | 27,169 | ||||||
$ | 23,045 | $ | 27,720 | |||||
* | Relate to MXL |
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Investment and other income (loss), net is comprised of the following (in thousands):
Year Ended | ||||||||
December 31, | ||||||||
2008 | 2007 | |||||||
Loss on sale of Indevus | $ | $ | (1,023 | ) | ||||
Indevus profit sharing | (680 | ) | ||||||
Impairment of Investment in Millenium Cell | (138 | ) | (346 | ) | ||||
Interest income | 200 | 236 | ||||||
Other | 32 | 208 | ||||||
$ | 94 | $ | (1,605 | ) | ||||
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December 31, | ||||||||
2008 | 2007 | |||||||
Land | $ | $ | 90 | |||||
Buildings and improvements | 429 | 2,754 | ||||||
Machinery and equipment | 1,041 | 7,033 | ||||||
Furniture and fixtures | 961 | 1,197 | ||||||
2,431 | 11,074 | |||||||
Accumulated depreciation | (1,519 | ) | (7,540 | ) | ||||
$ | 912 | $ | 3,534 | |||||
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Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
Current | ||||||||
Federal | $ | 83 | $ | 348 | ||||
State and local | 4 | 495 | ||||||
Total current | 87 | 843 | ||||||
Deferred | ||||||||
Federal | (956 | ) | 357 | |||||
State and local | (71 | ) | 69 | |||||
Total deferred | (1,027 | ) | 426 | |||||
Total income tax expense (benefit) | $ | (940 | ) | $ | 1,269 | |||
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
Federal income tax rate | (34.0 | )% | 34.0 | % | ||||
State and local taxes, net of federal effect | 2.5 | 2.9 | ||||||
Non-deductible expenses | 7.5 | 0.3 | ||||||
Benefit from increase in ownership of Five Star | (6.1 | ) | ||||||
Increase in valuation allowance | 9.6 | (27.8 | ) | |||||
Effective tax rate | (20.5 | )% | 9.4 | % | ||||
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December 31, | ||||||||
2008 | 2007 | |||||||
Deferred tax assets: | ||||||||
Property and equipment | $ | 342 | $ | 285 | ||||
Allowance for doubtful accounts | 170 | 89 | ||||||
Accrued liabilities | 56 | 507 | ||||||
Marketable securities | 7 | 165 | ||||||
Interest rate swap | 451 | |||||||
Net operating loss carryforward | 2,105 | 1,173 | ||||||
Charitable contributions carryforward | 7 | |||||||
Inventory | 93 | 67 | ||||||
Equity-based compensation | 508 | 17 | ||||||
Alternative minimum tax credit carryforward | 172 | |||||||
Gross deferred tax assets | 3,911 | 2,303 | ||||||
Less: valuation allowance | (2,242 | ) | (1,805 | ) | ||||
Deferred tax assets after valuation allowance | 1,669 | 498 | ||||||
Deferred tax liabilities: | ||||||||
Investment in subsidiary | 279 | |||||||
Interest rate swap | 28 | |||||||
Deferred tax liabilities | 307 | |||||||
Net deferred tax asset | 1,669 | 191 | ||||||
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Weighted | Weighted | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Stock | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Options outstanding at January 1, 2008 | 3,350,000 | $ | 2.49 | 8.9 | $ | 768,000 | * | |||||||||
Options outstanding at December 31, 2008 | 3,350,000 | 2.49 | 7.9 | $ | 0 | * | ||||||||||
Options exercisable at December 31, 2008 | 1,250,000 | $ | 2.45 | 7.9 | $ | 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. |
Dividend yield | 0 | % | ||
Expected volatility | 46.90 | % | ||
Risk-free interest rate | 3.46 | % | ||
Expected life (in years) | 4 | |||
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(a) | Five Star has several noncancellable leases for real property and machinery and equipment. Such leases expire at various dates with, in some cases, options to extend their terms. As of December 31, 2008, minimum rentals under long-term operating leases are as follows (in thousands): |
Real | Machinery & | |||||||||||
Property | Equipment | Total | ||||||||||
2009 | $ | 2,463 | $ | 760 | $ | 3,223 | ||||||
2010 | 841 | 367 | 1,208 | |||||||||
2011 | 280 | 136 | 416 | |||||||||
2012 | 70 | 70 | ||||||||||
Total | $ | 3,654 | $ | 1,263 | $ | 4,917 | ||||||
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Several of the leases contain provisions for rent escalation based primarily on increases in real estate taxes and operating costs incurred by the lessor. Rent expense was approximately $3,676,000, and $3,964,000 for the years ended December 31, 2008 and 2007, respectively. GP Strategies and the Company have guaranteed the leases for Five Star’s New Jersey and Connecticut warehouses, having annual rentals of approximately $2,150,000 and expiring in the first quarter of 2010. In March 2009, the landlord of the Connecticut facility released GP Strategies from its guarantee, and accepted the guarantee from the Company. The landlord at Five Star’s Connecticut facility has the option to cancel the lease if there is a signed contract to sell the building, upon six months written notice. | ||
(b) | In connection with its land investments, the Company has certain ownership interests in several dams and related reservoirs located in the State of Connecticut. Under relevant Connecticut law, the Company is responsible for maintaining the safety of these dams. The Company has been notified by certain landowners adjoining one of the reservoirs that the water level in the reservoir has decreased; allegedly causing harm to such landowners. While the Company is currently investigating the cause of the decline in the water level, it does not presently know the cause of the decrease in water level or have any reasonable estimation of the cost of repairs, if any, that may be required. Further, the Company cannot presently determine the extent of its legal liability, if any, with respect to the landowners. The Company has not received any claims with respect to any of the other reservoirs. The Company cannot reasonably estimate at this time the costs which may be incurred with respect to this matter and while these costs could be material to the Company’s results of operations in the period incurred, based upon the present state of its knowledge, the Company has no reason to believe that these costs will be material to its financial position. No amounts have been provided for this matter in the accompanying financial statements. | |
(c) | In 2001, GP Strategies initiated legal proceedings in connection with its 1998 acquisition of Learning Technologies from various subsidiaries (“Systemhouse”) of MCI Communications Corporation (“MCI”) which were subsequently acquired by Electronic Data Systems Corporation (“EDS”). The action against MCI was stayed as a result of MCI’s bankruptcy filing in 2002. GP Strategies settled its claims against EDS and Systemhouse in 2005, but continued to have a claim in bankruptcy against MCI as an unsecured creditor. In September 2008, the Bankruptcy Court approved a settlement between GP Strategies and MCI which allowed GP Strategies a Class 6 General Unsecured Claim (as defined in MCI’s Modified Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code) in the amount of $1,700,000 (the “Allowed Claim”). The Allowed Claim was satisfied in December 2008 through the distribution of $337,000 in cash and shares of stock of Verizon Communications Inc. valued at $226,000 on the distribution date. In connection with the spin-off of the Company, GP Strategies agreed to contribute to the Company 50% of the proceeds received, net of legal fees and taxes, with respect to the MCI claims. No contribution has been reflected in the accompanying financial statements for the Company’s share of the Allocated Claim, which will be recorded as capital contribution when received. | |
(d) | Contingencies | |
The notes issued by GP Strategies with an outstanding balance of $2,885,000 at December 31, 2007 were secured by a non-recourse mortgage on the property located in Pawling, New York, which was transferred to MXL. GP Strategies had indemnified the Company for loss of the property value in case of foreclosure of the mortgage for payment of the note. GP Strategies has settled its obligations under the note in August 2008 and the non-recourse mortgage was canceled. |
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(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, matured 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 7), 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, described below, if any, at such time as such shares are sold by the Company. The aggregate amount paid towards the profit sharing in 2007 was $922,000 of which $680,000 is included in Investment and other income (loss), net for the year ended December 31 2007 and $242,000 had been accrued at December 31, 2006. | |
As a result of the consummation of the Endo Merger Agreement (see Note 7), the Company has a contingent right to receive from Endo certain cash payments. The two related parties would receive the following portions of the Company’s cash payments: (i) upon FDA approval of the uteral stent between $262,000 and $227,000, and (ii) upon FDA approval of VP003 (Octreotide implant), between $393,000 and $341,000. | ||
(b) | Concurrently with its spin-off from GP Strategies, the Company and GP Strategies entered into a management agreement under which certain of the Company’s executive officers who were also executive officers of GP Strategies were paid by GP Strategies subject to reimbursement by the Company. Additionally, GP Strategies provided support with respect to corporate federal and state income taxes, corporate legal services, corporate secretarial administrative support, and executive management consulting. The agreement terminated on November 24, 2007. | |
Expenses of $335,000 incurred by the Company under this agreement for the year ended December 31, 2007, which includes approximately 80% of the cost of the compensation and benefits required to be provided by GP Strategies to Jerome Feldman, who served as the Company’s Chief Executive Officer until May 31, 2007. | ||
Scott N. Greenberg, a director of the Company, serves as the Chief Executive Officer and a director of GP Strategies. Harvey P. Eisen, the Chairman and Chief Executive Officer of the Company, also serves as the non-executive Chairman of the Board of GP Strategies. | ||
(c) | On April 5, 2007, Five Star, in connection with its acquisition of Right-Way (see Note 5), 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 |
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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. Rent expense for the warehouse for the years ended December 31, 2008 and 2007 was $325,000 and $217,000 respectively. 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. |
(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. At December 31, 2007, the unrecognized compensation was $520,000, of which $240,000 was included in Prepaid expenses and other current assets and $280,000 was included in Other assets. In addition, the Company recognized a gain of $1,000 on the reduction in ownership interest of Five Star at the time of issuance. | |
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. During the year ended December 31, 2007 Five Star recognized $73,000 of such compensation expense. 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 ($493,000 at December 31, 2007). | ||
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 |
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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 stock, which were also convertible into Five Star shares, 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. | ||
(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. |
December 31, | ||||||||
2008 | 2007 | |||||||
Accounts payable | $ | 5,021 | $ | 8,051 | ||||
Accrued expenses | 2,139 | 3,846 | ||||||
Deferred revenue | 1,074 | 785 | ||||||
Other | 2 | 848 | ||||||
$ | 8,236 | $ | 13,530 | |||||
2008 | 2007 | |||||||
Balance at beginning of year | $ | 412 | $ | 566 | ||||
Provision for doubtful accounts | 279 | 123 | ||||||
Elimination of MXL allowance in connection with sale of its assets (Note 4) | (192 | ) | ||||||
Uncollectible accounts written off, net of recoveries | (79 | ) | (277 | ) | ||||
Balance at end of year | $ | 420 | $ | 412 | * | |||
* | Includes $141 applicable to MXL |
(a) | On October 20, 2009, NPDC Holdings, Inc., a wholly-owned subsidiary of the Company, sold approximately 1,000 acres of undeveloped real property located in the Town of Pawling, County of Dutchess, New York (the “Pawling Property”) for $12,500,000 in cash, pursuant to the contract entered on October 7, 2009. The carrying amount of the Pawling Property as reflected in Other assets on the Company’s balance sheet was approximately $2,500,000, resulting in a pre tax gain of approximately $9,600,000. | |
(b) | On November 24, 2009, the Company and The Merit Group, Inc., a South Carolina corporation (“Merit”), entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, the Company intends to sell, and Merit will purchase for cash (the “Sale”), all of the issued and outstanding stock (the “Stock”) of the Company’s wholly-owned subsidiary, Five Star, the holding company and sole stockholder of Five Star Group, Inc. (“Five Star Group”). The aggregate purchase price for the Stock is $33,124,000, subject to certain adjustments to reflect (i) (A) dollar for dollar decreases in the event Five Star Group’s outstanding revolving indebtedness under its loan agreement with Bank of America decreases from the amount outstanding at March 31, 2009 compared to the amount outstanding on the closing date or increases if such indebtedness increases and (B) increases dollar for dollar if Five Star has positive net results from March 31, 2009 to the closing date, or decreases if it has negative net results and (ii) a potential downward adjustment based on the value of certain designated inventory held by Five Star Group, less the value received for such inventory after the closing, to the extent such inventory adjustment post-closing exceeds $400,000 but is equal to or less than $1,000,000. | |
The proceeds of the Sale will be reduced by the repayment of Five Star Group’s debt outstanding on the closing date, which is required by the Stock Purchase Agreement, transaction costs, taxes, severance costs for employees of Five Star, one half of the rent and other sums, if any, due under the warehouse lease for Five Star’s Connecticut location from the later of March 31, 2010 or when Five Star ceases to use the warehouse, through September 30, 2010, if any, and post-closing adjustments due Merit pursuant to the Stock Purchase Agreement. In addition, the Company must satisfy certain obligations under state environmental laws in New Jersey and Connecticut. These costs and other adjustments would reduce proceeds available to the Company. The Sale is subject to the approval of the stockholders of the Company. | ||
The Company estimates that the required repayments of Five Star’s outstanding debt on the closing date and any costs and adjustments in connection with the Sale may reduce the proceeds of the Sale to the Company to an estimated range of $8,500,000 to $9,500,000. The estimate of a range of Sale proceeds to the Company represents the management of the Company’s best estimate and the actual sale proceeds to the Company may vary from the range presented above. |
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C123456789 | ||||||||||
000004 | 000000000.000000 ext 000000000.000000 ext | |||||||||
MR A SAMPLE DESIGNATION (IF ANY) ADD 1 ADD 2 ADD 3 ADD 4 ADD 5 ADD 6 | 000000000.000000 ext 000000000.000000 ext 000000000.000000 ext 000000000.000000 ext | |||||||||
Using ablack ink pen, mark your votes with anX as shown in this example. Please do not write outside the designated areas. | x |
Special Meeting Proxy Card | |||
A Proposal — THE NATIONAL PATENT BOARD RECOMMENDS A VOTE “FOR” THE FOLLOWING PROPOSAL. |
For | Against | Abstain | |||||||||||||||||
1. | Approval of the sale of all of the issued and outstanding stock of National Patent Development Corporation’s wholly-owned subsidiary, Five Star Products, Inc., to The Merit Group, Inc. pursuant to the terms of the Stock Purchase Agreement, dated as of November 24, 2009, by and between National Patent Development Corporation and The Merit Group, Inc. | o | o | o |
B Non-Voting Items | ||||
Change of Address —Please print new address below. | ||||
C | Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below |
Date (mm/dd/yyyy) — Please print date below. | Signature 1 — Please keep signature within the box. | Signature 2 — Please keep signature within the box. | ||
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Table of Contents
for the Special Meeting of Stockholders
To Be Held on Thursday, January 14, 2010