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As filed with the Securities and Exchange Commission on October 14, 2004
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Registration No. 333-118568
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
AMENDMENT
NO. 2
TO
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FORM S-1
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NATIONAL PATENT DEVELOPMENT CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware 3390 13-4005439
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
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777 Westchester Avenue
White Plains, NY 10604
(914) 249-9700
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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Jerome I. Feldman, Chairman and Chief Executive Officer
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National Patent Development Corporation
777 Westchester Avenue
White Plains, NY 10604
(914) 249-9700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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With copies to:
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Robert J. Hasday, Esq.
Duane Morris LLP
380 Lexington Avenue
New York, NY 10168
(212) 692-1010
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the registration statement for the same
offering./ /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
Calculation of Registration Fee
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Title of Each Class of Proposed Maximum Aggregate Amount of Registration
Securities to be Registered Offering Price (1) Fee
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Common Stock, $0.01 par value $13,261,115.25 $1,680.18
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based upon
the estimated fair market value of the common stock to be distributed in the
Spin-Off.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
[GP Strategies Letterhead]
, 2004
Dear GP Strategies Stockholder:
On July 30, 2004 the board of directors of GP Strategies Corporation
approved a spin-off that will result in GP Strategies becoming two independent,
publicly traded companies:
o GP Strategies, which will own and operate GP Strategies'
manufacturing & process business and information technology
business through its wholly-owned subsidiary, General Physics
Corporation, as well as GP Strategies' simulation business
through its majority owned subsidiary, GSE Systems Inc.; and
o National Patent Development Corporation, which will own and
operate GP Strategies' optical plastics business through its
subsidiary, MXL Industries, Inc., will own a majority interest
in Five Star Products, Inc., a publicly held company that is a
leading distributor in the United States of home decorating,
hardware, and finishing products, and will own certain of GP
Strategies' other non-core assets.
The separation of these businesses will be accomplished through a pro
rata distribution, which we refer to as the distribution, of 100% of the
outstanding common stock of National Patent Development to GP Strategies
stockholders on the record date for the distribution. As a result of the
distribution, GP Strategies stockholders will:
o receive one share of National Patent Development common stock
for every share of GP Strategies common stock or Class B
capital stock they own; and
o retain their GP Strategies shares and the preferred stock purchase rights
associated with those shares.
Shares of National Patent Development common stock will be quoted on
the OTC Bulletin Board under the symbol " ." Shares of GP Strategies common
stock will continue to be listed on The New York Stock Exchange under the symbol
"GPX."
No action is required on your part to receive your National Patent
Development shares. You will not be required either to pay anything for the new
shares or to surrender any certificates representing shares of GP Strategies
stock.
The enclosed Prospectus describes the distribution of shares of
National Patent Development common stock and contains important information
about National Patent Development and its business. I suggest that you read it
carefully. If you have any questions regarding the distribution, please contact
National Patent Development's transfer agent, Computershare Investor Services
LLC, P.O. Box 2388, Chicago, IL 60690-5440, Telephone: 312-360-5430.
Very truly yours,
Scott N. Greenberg
President and Chief Financial Officer
GP Strategies Corporation
[National Patent Development Letterhead]
, 2004
Dear National Patent Development Stockholder:
We are delighted to welcome you as an initial stockholder of National
Patent Development Corporation. We will conduct the National Patent Development
business as a company separate from GP Strategies Corporation, and our common
stock will be publicly traded for the first time on , 2004. You will receive one
share of National Patent Development common stock for every share of GP
Strategies common stock or Class B capital stock you owned on the close of
business on , 2004. Shares of our stock will be quoted on the OTC Bulletin Board
under the symbol " ."
We will conduct our optical plastics business through our subsidiary,
MXL Industries, Inc. We will also own a majority interest in Five Star Products,
Inc., a publicly held company that is a leading distributor in the Northeast of
home decorating, hardware, and finishing products, and will hold certain of GP
Strategies' other non-core assets.
We are excited about the opportunities that our spin-off from GP
Strategies provides, and are enthusiastic about what the future holds. We
believe that we have great potential to grow and are excited about your growing
with us as a National Patent Development Corporation stockholder.
Congratulations on becoming one of the "founding" stockholders of
National Patent Development Corporation!
Very truly yours,
Jerome I. Feldman
Chief Executive Officer
National Patent Development Corporation
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated , 2004
PROSPECTUS
[NATIONAL PATENT DEVELOPMENT CORPORATION LOGO]
Approximately 17,681,487 shares of Common Stock
(par value $.01 per share)
At this time, National Patent Development Corporation is wholly-owned
by GP Strategies Corporation. In this spin-off, GP Strategies will distribute
100% of the shares of National Patent Development common stock to GP Strategies
stockholders. Each of you, as a holder of GP Strategies' common stock or Class B
capital stock, will receive one share of National Patent Development common
stock for every share of GP Strategies common stock or Class B capital stock you
owned on the close of business on , 2004, the record date for the spin-off.
We are sending you this Prospectus to describe the spin-off. We expect
the spin-off to occur on or about , 2004. You will receive your proportionate
number of shares of National Patent Development common stock through our
transfer agent's book-entry registration system. These shares will not be in
certificated form. Following the spin-off, recipient shareholders may request to
receive their shares of our common stock in certificated form. Immediately after
the spin-off is completed, GP Strategies will not own any shares of National
Patent Development common stock, and we will be a public company independent of
GP Strategies.
We refer to ourselves in this Prospectus as "we" or "National Patent
Development."
No stockholder action is necessary to receive your shares of National
Patent Development common stock. This means that:
o you do not need to pay anything to GP Strategies or to National
Patent Development; and
o you do not need to surrender any shares of GP Strategies'
common stock or Class B capital stock to receive your shares
of National Patent Development common stock.
In addition, a stockholder vote is not required for the spin-off to
occur. GP Strategies is not asking you for a proxy, and GP Strategies requests
that you do not send a proxy.
There has been no trading market for National Patent Development common
stock. Our common stock is expected to be quoted on the OTC Bulletin Board under
the symbol " ."
As you review this Prospectus, you should carefully consider the
matters described in "Special Considerations" beginning on page .
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These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor has the
1
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
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This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities. Changes may occur after the date
of Prospectus and neither National Patent Development nor GP Strategies will
update the information contained herein except in the normal course of their
respective public disclosures.
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Stockholders of GP Strategies with inquiries related to the spin-off
should contact Lydia M. DeSantis at (914) 249-9700, or GP Strategies' stock
transfer agent and registrar, Computershare Investor Services LLC, P.O. Box
A3504, Chicago, IL 60690-3504, Telephone: 312-360-5430. Computershare Investor
Services LLC is also acting as distribution agent for the spin-off.
The date of this Prospectus is , 2004.
2
Table of Contents
Page
AVAILABLE INFORMATION.....................................................4
SUMMARY...................................................................4
HISTORICAL SELECTED FINANCIAL DATA........................................9
RISK FACTORS.............................................................11
FORWARD-LOOKING STATEMENTS...............................................14
THE SPIN-OFF.............................................................14
RELATIONSHIP BETWEEN GP STRATEGIES AND NATIONAL PATENT DEVELOPMENT.......21
CAPITALIZATION...........................................................23
DIVIDEND POLICY..........................................................24
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.............................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................30
BUSINESS.................................................................44
MANAGEMENT...............................................................57
EXECUTIVE COMPENSATION...................................................60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS
AND EXECUTIVE OFFICERS OF NATIONAL PATENT DEVELOPMENT..................66
DESCRIPTION OF CAPITAL STOCK.............................................68
DESCRIPTION OF WARRANTS..................................................69
DESCRIPTION OF INDEBTEDNESS..............................................70
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS..............................71
INDEMNIFICATION OF OFFICERS AND DIRECTORS................................75
LEGAL MATTERS............................................................76
EXPERTS..................................................................76
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS..........................f-1
3
AVAILABLE INFORMATION
We have filed a registration statement on Form S-1 (Registration No.
333-118568) with the Securities and Exchange Commission, or the Commission,
under the Securities Act of 1933, or the Securities Act, with respect to the
shares of our common stock being distributed to GP Strategies stockholders in
the distribution. This Prospectus, which forms a part of the registration
statement, does not contain all of the information set forth in the registration
statement. This Prospectus contains summaries of the material terms and
provisions of documents filed as exhibits to the registration statement. For
further information, you should refer to the registration statement and the
exhibits. Copies of these documents may be inspected without charge at the
Commission's Public Reference Room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the Commission at (800) SEC-0330. Copies of
this material are also available through the Internet at the Commission's
website, the address of which is http://www.sec.gov.
Following the spin-off, National Patent Development will be required to
comply with the reporting requirements of the Securities Exchange Act of 1934,
or the Exchange Act, and will file annual, quarterly and other reports with the
Commission. National Patent Development also will be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
annual reports containing audited financial statements to its stockholders in
connection with its annual meetings of stockholders. After the spin-off, such
reports, proxy statements and other information will be available to be
inspected and copied at the public reference facilities of the Commission or
obtained by mail or over the Internet from the Commission, as described above.
In addition, after the distribution, we intend to maintain an Internet website
at http://www.npdc.com.
No person is authorized by GP Strategies or National Patent Development
to give any information or to make any representations other than those
contained in this Prospectus. If given or made, such information or
representations must not be relied upon as having been authorized.
SUMMARY
This section contains a summary of all material terms of the
Prospectus. Because this is a summary, it does not contain all the information
that may be important to you. You should read the entire Prospectus, including
our historical and pro forma consolidated financial statements and the notes to
those financial statements included in this Prospectus. Unless otherwise
indicated, references in this document to "we," "us," "our," or "National Patent
Development" mean National Patent Development Corporation and its subsidiaries.
National Patent Development
National Patent Development was incorporated on March 10, 1998 as a
wholly-owned subsidiary of GP Strategies Corporation. In July 2002, GP
Strategies announced that it was actively considering transferring certain of
its non-core assets into National Patent Development and spinning-off National
Patent Development to the stockholders of GP Strategies. On November 14, 2002,
GP Strategies filed a ruling request with the Internal Revenue Service with
respect to the federal tax consequences of the proposed spin-off, and received a
favorable ruling on March 21, 2003. On February 12, 2004, National Patent
Development was recapitalized whereby the authorized capital was changed to
10,000,000 shares of preferred stock and 30,000,000 shares of common stock.
4
Following the distribution, we will own 100% of the stock of MXL
Industries, Inc., or MXL. The primary business of MXL is the manufacture of
polycarbonate parts requiring adherence to strict optical quality
specifications, and the application of abrasion and fog resistant coatings to
those parts. MXL also designs and constructs injection molds for a variety of
applications.
We will also own a 64% interest in Five Star Products, Inc., or Five
Star, a publicly held company that is a leading distributor in the United States
of home decorating, hardware, and finishing products, and certain of GP
Strategies' other non-core assets, including an investment in a publicly held
company, Millennium Cell Inc.; an approximately 15.3% interest in a private
company, Valera Pharmaceuticals, Inc. (formerly Hydro Med Sciences, Inc.);
certain real estate; and the right to certain proceeds, if any, from a
litigation and arbitration claim.
Our principal office is located at 777 Westchester Avenue, White
Plains, NY 10604, and our telephone number is (914) 249-9700.
The Spin-Off
The following is a brief set of questions and answers about the
spin-off.
What is the spin-off?
The spin-off is the method by which GP Strategies will be
separated into two independent, publicly held companies:
o GP Strategies, which will own and operate GP Strategies'
manufacturing & process business and information technology
business through its wholly-owned subsidiary, General
Physics Corporation as well as GP Strategies' simulation
business through its majority owned subsidiary, GSE Systems
Inc.; and
o National Patent Development, which will own and operate GP
Strategies' optical plastics business through its
subsidiary, MXL, and will own 64% of Five Star and certain
of GP Strategies' other non-core assets.
Why is GP Strategies spinning off National Patent
o To permit GP Strategies to improve its Development?
borrowing capacity, thereby satisfying its need to raise
additional funds as well as achieving other corporate
benefits.
o To allow financial markets to evaluate GP Strategies and
National Patent Development separately.
o To give National Patent Development's management more
flexibility to take advantage of growth opportunities.
5
What will I receive in the spin-off?
GP Strategies will distribute one share of National Patent
Development common stock for every share of GP Strategies
common stock or Class B capital stock owned as of the record
date. You will continue to own your GP Strategies stock.
How will GP Strategies distribute National Patent
Development's common stock to me?
National Patent Development stock will be issued as
uncertificated shares registered in book-entry form through
the direct registration system. No certificates representing
National Patent Development common stock will be mailed to
registered holders of GP Strategies common stock in the
ordinary course. If you are a stockholder of record of GP
Strategies stock on the record date, National Patent
Development's transfer agent, Computershare Investor
Services LLC, will hold your book-entry shares. On or about
, 2004, Computershare Investor Services LLC will mail you a
direct registration transaction advice reflecting your
ownership interest in shares of National Patent Development
common stock. When you receive this advice, you will receive
information explaining the direct registration system and
telling you how to obtain physical certificates if you
desire to do so. You will not receive new GP Strategies
stock certificates. Notwithstanding the foregoing, holders
of legended stock certificates representing GP common stock
or Class B capital stock will receive legended physical
stock certificates representing their National Patent
Development common stock.
When is the record date?
The record date is , 2004.
What if I hold my shares of GP Strategies stock through my stockbroker,
bank or other nominee?
If you hold your shares of GP Strategies stock through your
stockbroker, bank or other nominee, you are probably not a
stockholder of record and your receipt of National Patent
Development common stock depends on your arrangements with
the nominee that holds your shares of GP Strategies stock
for you. We anticipate that stockbrokers and banks generally
will credit their customers' accounts with National Patent
Development common stock on or about , 2004, but you should
check with your stockbroker, bank or other nominee.
Following the spin-off, you may instruct your stockbroker,
bank or other nominee to transfer your shares of National
Patent Development common stock into your own name.
What is National Patent Development's dividend policy?
We currently anticipate that no cash dividends will be paid
on our common stock in the foreseeable future in order to
6
conserve cash for the repayment of debt, future
acquisitions, and capital expenditures. We expect that our
Board of Directors will periodically reevaluate this
dividend policy, taking into account our operating results,
capital needs, debt restrictions and other factors.
How will National Patent Development's common stock trade?
We expect that National Patent Development common stock will
be quoted on the OTC Bulletin Board under the symbol " ",
and that regular trading will begin on , 2004.
Will my shares of GP Strategies continue to trade after the spin-off?
Yes, GP Strategies common stock will continue to be listed
and trade on the New York Stock Exchange under the symbol
"GPX." However, we cannot provide you with any assurance as
to the price at which the GP Strategies shares will trade
following the distribution.
Is the spin-off taxable for U.S. tax purposes?
No; the Internal Revenue Service has ruled that the spin-off
will be tax-free for U.S. tax purposes. To review tax
consequences in detail, see pages 17-20.
What are the risks involved in owning National Patent Development common stock?
The separation of National Patent Development from GP
Strategies presents certain risks. For example, National
Patent Development has no prior history of operating as an
independent company. Certain other risks are associated with
owning National Patent Development common stock due to the
nature of its business and the markets in which it competes.
You are encouraged to carefully consider these risks, which
are described in greater detail on pages 11-13.
Will GP Strategies and National Patent Development be related in any way after
the spin-off?
GP Strategies will not own any National Patent Development
common stock after the spin-off, and National Patent
Development will operate as an independent, publicly held
company. Several of National Patent Development's directors
and officers are also directors and officers of GP
Strategies. GP Strategies will enter into agreements with
National Patent Development to allocate responsibility for
liabilities (including tax and other contingent liabilities
associated with their respective businesses or otherwise to
be assumed by National Patent Development or GP Strategies),
to separate their businesses, and for GP Strategies and
National Patent to provide management services to each
other. GP Strategies and National Patent Development will
also provide certain guarantees of each others' financial
obligations. These agreements are described in greater
detail on pages 21-23.
7
What do I need to do now?
You are not required to take any action, although we urge
you to read this entire document carefully. No stockholder
approval of the distribution is required or sought. We are
not asking you for a proxy and you are requested not to send
us a proxy. No action is required on your part to receive
your National Patent Development shares. You will not be
required either to pay anything for the new shares or to
surrender any shares of GP Strategies stock.
What We Have Already Accomplished to Prepare for the Spin-Off
Board Appointments
GP Strategies has elected seven directors to begin their
service on National Patent Development's Board. See pages
56-57.
Senior Management Appointments
The National Patent Development board of directors has
elected Jerome I. Feldman as Chairman and Chief Executive
Officer, Scott N. Greenberg as Chief Financial Officer, and
Andrea D. Kantor as Vice President and General Counsel. See
page 59.
Information Regarding the Spin-Off and National Patent Development
Before the spin-off, you should direct inquiries relating to the
spin-off to:
Computershare Investor Services LLC GP Strategies Corporation
P.O. Box 2388 777 Westchester Avenue
Chicago, IL 60690-2388 White Plains, NY 10604
Telephone: 312-360-5430 Telephone: 914-249-9700
Attn: Andrea Kantor
After the spin-off, you should direct inquiries relating to an
investment in National Patent Development common stock to:
......... National Patent Development Corporation
......... 777 Westchester Avenue
......... White Plains, NY 10604
......... Telephone: 914-249-9708
......... Attn: Lydia DeSantis
After the spin-off, the transfer agent and registrar for National
Patent Development's common stock will be:
Computershare Investor Services LLC
P.O. Box 2388
Chicago, IL 60690-3504
Telephone: 312-360-5430
8
HISTORICAL SELECTED FINANCIAL DATA
The following tables present: 1) summary historical consolidated
operations data for each of the last five fiscal years ended December 31, 2003
and for the six month periods ended June 30, 2004 and 2003 and 2) summary
historical consolidated balance sheet data for each of the last five fiscal
years ended December 31, 2003 and as of June 30, 2004. The historical financial
information as of December 31, 2003, 2002 and 2001 and for each of the three
years ended December 31, 2003 has been derived from our audited financial
statements, which are included elsewhere in this Prospectus. The historical
financial information for the six months ended June 30, 2004 and 2003, as of
June 30, 2004, and as of and for the years ended December 31, 2000 and 1999 have
been derived from our unaudited consolidated financial statements (the
historical financial statements as of and for the years ended December 31, 2000
and 1999 are not included in this Prospectus). The unaudited consolidated
financial statements have been prepared on a basis consistent with the audited
financial statements and, in the opinion of management, include all adjustments
necessary for a fair presentation of such data.
Before the spin-off and the related corporate restructuring
transactions, we operated as part of GP Strategies. Because the data reflect
periods during which we did not operate as an independent company, the
historical data may not reflect the results of operations or the financial
condition that would have resulted if we had operated as a separate, independent
company during the periods shown. We have presented unaudited pro forma
financial information as of and for the six months ended June 30, 2004 and for
the year ended December 31, 2003 to give a better picture of what this
information might have looked like if National Patent Development had been
operated independently during this period. The data may not necessarily be
indicative of our future results of operations or financial condition.
You should read the summary financial and operations data in
conjunction with our audited financial statements and the notes to the audited
financial statements. You should also read the sections "Pro Forma Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The summary financial and operations data
is qualified by reference to these sections, the audited financial statements
and the notes to the audited financial statements, each of which is included
elsewhere in this Prospectus.
Historical Selected Financial Data
(in thousands, except per share data):
- ----------------------------------------- ------------------------- ------------------------------------------------------------
Consolidated Statement of Six Months Ended
Operations Data (1) June 30, Year Ended December 31,________
------- ------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
- ----------------------------------------- ------------ ------------ ------------- ---------- ----------- ----------- -----------
(unaudited)
Sales $58,725 $53,925 $103,698 $9,996 $11,184 $10,998 $10,353
Gross Margin 10,170 9,223 19,582 2,099 2,816 2,888 2,719
Interest expense 481 445 864 208 169 102 147
Income (loss) before income taxes and
minority interest (233) 139 383 292 764 (1,468) 948
Net income (loss) (1,663) (83) (104) 147 369 (960) 569
Pro forma net income (loss) per share:
Basic and diluted $ (.09) $ .00 $ (.01) $ .01 $ .03 $ (.08) $ .05
9
- ----------------------------------------- ------------------ -------------------
Consolidated Balance Sheet
Data (1)
June 30, 2004 December 31,
------------- ------------------
(unaudited) 2003 2002 2001 2000 1999
----------- ---- ---- ---- ---- ----
- ----------------------------------------- ------------------ ------------ ------------ ---------- ----------- -----------
Cash and cash equivalents $ 185 $ 602 $ 562 $ 536 $ 627 $ 817
Short-term borrowings 22,451 16,960 - - - 1,500
Working capital 9,882 10,565 3,954 14,139 10,866 9,793
Total assets 55,432 55,748 29,870 30,836 29,441 29,695
Long-term debt 3,001 3,203 2,670 2,875 59 172
Stockholders' equity 16,119 17,236 25,451 26,025 26,580 25,443
(1) On October 8, 2003, the Company increased its ownership interest in Five
Star's outstanding common stock from 48% to 54%, resulting in a controlling
financial interest in Five Star and accordingly commenced consolidating Five
Star's financial statements with those of the Company. Five Star's results of
operations are included in the 2003 consolidated statement of operations as
though a controlling financial interest had been acquired by the Company at
the beginning of such year and, accordingly, Five Star's sales, cost of sales
and expenses are included for the twelve months ended December 31, 2003. Five
Star comprises the Company's new Home Improvement Distribution Segment. The
acquisition of a controlling financial interest was accounted for as a
purchase transaction.
The following table represents the Company's unaudited pro forma consolidated
statements of operations for the years ended December 31, 2003 and 2002, as
if the acquisition of a controlling financial interest in Five Star had been
completed at the beginning of each period. The pro forma information is
presented for comparative purposes only and does not purport to be indicative
of what would have occurred had the acquisition actually been made at such
dates, nor is it necessarily indicative of future operating results (in
thousands, except per share data):
----------------------------------- ------------------------------------
Year ended December 31,
----------------------------------- ------------------------------------
----------------------------------- ------------------ -----------------
2003 2002
----------------------------------- ------------------ -----------------
----------------------------------- ------------------ -----------------
Sales $103,698 $104,070
Income before minority interest 61 585
Minority interest (319) (180)
Net income $ 32 $ 405
Net income per share
Basic and diluted $ .00 $ .03
----------------------------------- ------------------ -----------------
As a result of an issuer tender offer by Five Star, 2,627,790 shares of Five
Star common stock were tendered and acquired by Five Star effective March 31,
2004 at a cost of $657,000. The effect of such tender offer was to increase
our ownership in Five Star to approximately 64% at March 31, 2004.
10
RISK FACTORS
Risks Related to the Distribution
We will have increased expenses as an independent public company. This could
impair our profitability.
We do not have an operating history as an independent company. Our
business has historically relied on GP Strategies for various financial,
managerial and administrative services and has been able to benefit from the
earnings, assets and cash flows of GP Strategies' other businesses. GP
Strategies will not be obligated to provide assistance or services to National
Patent Development after the spin-off, except as provided in certain agreements
entered into by the companies in connection with the spin-off, including the
agreement pursuant to which the distribution will be effected and an agreement
by GP Strategies to provide certain management services to National Patent
Development. See "Relationship Between GP Strategies and National Patent
Development." We also may not be able to develop our own management after the
termination of the agreement under which GP Strategies will provide management
services.
Following the spin-off, we will incur the costs and expenses associated
with the management of a public company. The spin-off may result in some
temporary disruption to the business operation, as well as to the organization
and personnel structure, of National Patent Development, which may reduce our
net income and working capital.
Our historical consolidated financial information may not be representative of
our historical results as an independent company; therefore, it may not be
reliable as an indicator of historical or future results.
Our historical consolidated financial information included in this
Prospectus may not reflect what our financial condition, results of operations
and cash flows would have been on a historical basis had we operated our
business as an independent company during the periods presented or what our
financial condition, results of operations and cash flows will be in the future.
This is because our historical consolidated financial statements include
allocations for services provided or procured by GP Strategies, which we may not
be able to procure or provide ourselves on the same basis. In addition, we have
not made adjustments to our historical consolidated financial information to
reflect other changes that will occur in our cost structure, financing and
operations as a result of the spin-off. These changes could potentially include
increased costs associated with reduced economies of scale and a higher cost of
capital, and also changes in how we fund our operations and development and
pursue our strategic objectives. Therefore, our historical consolidated
financial statements may not be indicative of our future performance as an
independent company.
GP Strategies and you would have federal income tax liabilities if the Tax
Ruling were revoked.
GP Strategies has received a ruling from the Internal Revenue Service,
or IRS, to the effect that, among other things, the spin-off will be tax free to
GP Strategies and GP Strategies stockholders under Section 355 of the Internal
Revenue Code of 1986. We refer to this ruling as the Tax Ruling. The Tax Ruling,
while generally binding upon the IRS, is based upon factual representations and
assumptions made in the ruling request. If those factual representations and
assumptions were untrue in any material respect, or the facts upon which the Tax
Ruling is based are materially different from the facts at the time of the
spin-off, the IRS could modify or revoke the Tax Ruling retroactively.
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If the spin-off failed to qualify under Section 355 of the Internal
Revenue Code, corporate tax would be payable by the consolidated group of which
GP Strategies is the common parent based upon the difference between the
aggregate fair market value of the stock of National Patent Development and the
adjusted tax basis of such stock to GP Strategies prior to the spin-off. The
corporate level tax would be payable by GP Strategies. We have agreed to
indemnify GP Strategies for this and other tax liabilities if they result from
certain actions taken by National Patent Development. See "Relationship between
GP Strategies and National Patent Development--Tax Sharing Agreement." In
addition, under the Internal Revenue Code's consolidated return regulations,
each member of GP Strategies' consolidated group (including National Patent
Development) is severally liable for these tax liabilities. If National Patent
Development is required to indemnify GP Strategies for these liabilities or
otherwise is found liable to the IRS for these liabilities, the resulting
obligation could materially decrease net income and working capital.
Additionally, if the spin-off were not to qualify under Section 355 of
the Internal Revenue Code, then each owner of GP Strategies stock who receives
shares of National Patent Development common stock in the spin-off would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of National Patent Development common stock
received on the date it is received.
Risks Related to our Business
MXL's revenue and net income could decline as a result of a loss of business
from significant customers.
For the six months ended June 30, 2004 and 2003 and the years ended
December 31, 2003, 2002 and 2001, revenue from MXL's three largest customers
represented approximately 32%, 36%, 37%, 52%, and 54% of MXL's revenue,
respectively. MXL's revenue has declined over the past three years, partly due
to the loss of business from its most significant customers. MXL has no
significant long-term supply contracts and therefore its operations are
dependent on its clients' continued satisfaction with its services and their
continued willingness to engage MXL, rather than its competitors, to deliver
such services.
MXL's source of raw materials may be limited and failure to obtain raw materials
with cost efficiency and on a timely basis may cause a disruption in MXL's
operations.
MXL's primary raw material is plastic resin (principally
polycarbonate). In the past, MXL primarily relied on one supplier for its raw
materials. Due to new entrants in the market to supply plastic resin, MXL
currently uses two suppliers and could choose from one or more other suppliers
for plastic resin. However, if the number of suppliers again declined to past
levels, MXL would be dependent on limited sources of supply for its raw
materials, and the failure of MXL to fulfill its raw material requirement could
disrupt its business and result in a decrease in net income.
If our subsidiaries are unable to compete successfully, our revenues may be
adversely affected.
Competition in the optical plastics industry is vigorous. MXL's
customers require state-of-the-art technology. In order to keep pace with MXL's
customers' needs, MXL is required to constantly develop and improve its
technology, facilities and production equipment and methods. MXL's future
success will depend upon its ability to gain expertise in technological advances
rapidly and respond quickly to evolving industry trends and client needs.
Competition within the do-it-yourself industry is intense. There are
large national distributors commonly associated with national franchises such as
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Ace and TruServ as well as smaller regional distributors, all of whom offer
products and services similar to those offered by Five Star. Moreover, in some
instances, manufacturers will bypass distributors and choose to sell and ship
their products directly to retail outlets. In addition, Five Star's customers
face stiff competition from Home Depot, which purchases directly from
manufacturers, and national franchises such as Ace and TruServ. Five Star
competes principally through its strategically placed distribution centers and
its extensive inventory of quality, name-brand products. Five Star will continue
to focus its efforts on supplying its products to its customers at a competitive
price and on a timely, consistent basis.
Our subsidiaries' inability to compete successfully would materially
decrease our results of operations and working capital.
Risks Related to Our Stock
Because there has not been any public market for our common stock, the market
price and trading volume of our common stock may be volatile and you may not be
able to resell your shares at or above the initial market price of our stock
following the distribution.
There has been no trading market for our common stock. In general, all
shares of common stock distributed in the distribution will be freely tradeable
and our common stock will be quoted on the OTC Bulletin Board. We cannot,
however, predict the extent to which investors' interest will lead to a liquid
trading market or whether the market price of our common stock will be volatile.
The market price of our common stock could fluctuate significantly for many
reasons, including in response to the risks described in this section and
elsewhere in this Prospectus or for reasons unrelated to our operations, such as
reports by industry analysts, investor perceptions or negative announcements by
our customers, competitors or suppliers regarding their own performance, as well
as industry conditions and general financial, economic and political
instability.
We have agreed to restrictions and adopted policies that could have possible
anti-takeover effects and reduce the value of our stock.
We have agreed to certain restrictions on our future actions to assure
that the spin-off will be tax-free, including restrictions with respect to an
acquisition of shares of National Patent Development common stock. If we fail to
abide by these restrictions, and, as a result, the spin-off fails to qualify as
a tax-free reorganization, National Patent Development will be obligated to
indemnify GP Strategies for any resulting tax liability. The potential tax
liability that could arise from an acquisition of shares of National Patent
Development common stock, together with our related indemnification obligations,
could have the effect of delaying, deferring or preventing a change in control
of National Patent Development. See "Relationship between GP Strategies and
National Patent Development--Tax Sharing Agreement."
Several provisions of our Certificate of Incorporation and Bylaws could
deter or delay unsolicited changes in control of National Patent Development.
These include limiting the stockholders' powers to amend the Bylaws or remove
directors, and prohibiting the stockholders from increasing the size of the
Board of Directors or acting by written consent instead of at a stockholders'
meeting. Our Board of Directors has the authority, without further action by the
stockholders to fix the rights and preferences of and issue preferred stock.
These provisions and others that could be adopted in the future could deter
unsolicited takeovers or delay or prevent changes in control or management of
National Patent Development, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
These provisions may limit the ability of stockholders to approve transactions
that they may deem to be in their best interests. See "Anti-Takeover Effects of
Certain Provisions" and "Description of Capital Stock."
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FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that are not based
on historical facts. We use words such as "expects," "intends" and "anticipates"
to indicate forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including those discussed under "Special
Considerations" and "Management's Discussions and Analysis of Financial
Condition and Results of Operations."
If any one or more of these expectations and assumptions proves
incorrect, actual results will likely differ materially from those contemplated
by the forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us.
THE SPIN-OFF
Reasons for the Spin-Off
The GP Strategies Board of Directors has determined that the
distribution of 100% of the outstanding common stock of National Patent
Development to owners of GP Strategies common stock and Class B capital stock
will enable the management of each of GP Strategies and National Patent
Development to operate and develop those businesses more effectively. The GP
Strategies Board of Directors has concluded that the spin-off is in the best
interests of GP Strategies, National Patent Development and GP Strategies'
stockholders because it believes that:
o by engaging in the spin-off, GP Strategies would improve its
access to capital and can significantly improve its borrowing
capacity, thereby satisfying its need to raise additional
funds as well as achieving other corporate benefits;
o having two separate public companies will enable financial
markets to evaluate each company more effectively, thereby
enhancing stockholder value over the long term for both
companies and making the stock of each more attractive as
currency for future acquisitions;
o the spin-off will provide National Patent Development's
management with increased strategic flexibility and
decision-making power to realize significant growth
opportunities; and
o having a separate management and ownership structure for
National Patent Development will provide equity based
compensation that is more closely related to the business in
which its employees work.
The GP Strategies Board of Directors explored various alternatives to
the spin-off, including the sale of MXL, Five Star, and the non-core assets, or
distributing certain of those assets directly to our existing shareholders. The
GP Strategies Board of Directors determined that a tax free spin-off would most
enhance shareholder value and improve liquidity for the shareholders.
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Actions to Be Taken Prior to the Distribution
Prior to the distribution of common stock of National Patent
Development to the stockholders of GP Strategies, or the Distribution, GP
Strategies and National Patent Development will have engaged in certain
transactions in preparation for the spin-off.
On October 17, 2003, GP Strategies transferred 1,000,000 of its shares
in Millennium Cell and its investment in Valera Pharmaceuticals to MXL in
repayment of approximately $10,000,000 of debt owed by GP Strategies to MXL. We
refer to this transaction as the "Repayment."
GP Strategies and National Patent Development agreed to allocate to
National Patent Development $1,875,000 of the $7,500,000 received for the sale
of certain notes and warrants to certain Gabelli funds. See "Relationship
between GP Strategies and National Patent Development-Gabelli Transaction
Mortgage" and "Description of Warrants." Prior to the Distribution, GP
Strategies will transfer these funds to National Patent Development. We refer to
this transaction as the "Gabelli Allocation."
On July 30, 2004, GP Strategies transferred to National Patent
Development the right to receive certain proceeds (if any) of a pending
litigation and arbitration claim, all of the MXL stock, and certain other
non-core assets, including its shares in Five Star, certain debt of Five Star
and approximately $1,250,000 of the Gabelli Allocation, in exchange for all of
the common stock of National Patent Development. Finally, on July 30, 2004,
National Patent Development transferred to MXL the interest in the litigation
and arbitration claim and the non-core assets it received together with the
$1,250,000, in exchange for additional MXL stock. We refer to the transactions
described in this paragraph as the "Contribution," and we refer to the
Repayment, the Gabelli Allocation, and the Contribution collectively as the
"Corporate Restructuring Transactions."
Manner of Effecting the Spin-Off
GP Strategies will effect the spin-off as of the close of business on ,
2004. At that time, GP Strategies will distribute all of the outstanding common
stock of National Patent Development to the stockholders of GP Strategies on a
pro-rata basis so that each holder of GP Strategies stock will receive one share
of National Patent Development common stock for each share of GP Strategies
common stock or Class B capital stock held as of the close of business on ,
2004.
National Patent Development stock will be issued as uncertificated
shares registered in book-entry form through the direct registration system. No
certificates representing National Patent Development common stock will be
mailed to registered holders of GP Strategies common stock in the ordinary
course. If you are a stockholder of record of GP Strategies stock on the record
date, National Patent Development's transfer agent, Computershare Investor
Services LLC, will hold your book-entry shares. On or about
, 2004, Computershare Investor Services LLC will mail you a direct
registration transaction advice reflecting your ownership interest in shares of
National Patent Development common stock. When you receive this advice, you will
receive information explaining the direct registration system and telling you
how to obtain physical certificates if you desire to do so. You may also retain,
transfer or sell the shares, or transfer the shares to a brokerage account.
Notwithstanding the foregoing, holders of legended stock certificates
representing GP common stock or Class B capital stock will receive legended
physical stock certificates representing their National Patent Development
common stock.
No owner of GP Strategies stock will be required to pay any cash or
other consideration for shares of National Patent Development received in the
15
spin-off or to surrender or exchange any shares of GP Strategies stock to
receive shares of National Patent Development. The actual total number of shares
of National Patent Development common stock to be distributed will be
approximately 17,681,487 shares, based on the approximately 17,681,487 shares of
GP Strategies common stock and Class B capital stock issued and outstanding as
of the close of business on , 2004. The shares of National Patent Development
common stock distributed in the spin-off will be fully paid and nonassessable
and will not be entitled to preemptive rights. See "Description of Capital
Stock."
Distribution Agreement
The spin-off will be made pursuant to a distribution agreement between
GP Strategies and National Patent Development, which we refer to as the
Distribution Agreement. The Distribution Agreement:
o sets forth the principal corporate transactions that are intended to
be effected prior to the spin-off, including the Corporate
Restructuring Transactions,
o provides for execution and delivery of certain of the agreements
described in "Relationship between GP Strategies and National Patent
Development,"
o provides for the allocation of certain assets and liabilities between
National Patent Development and GP Strategies, and for the transfer to
and assumption by the appropriate company of those assets and
liabilities,
o establishes the procedures to effect the spin-off, and
o provides for the distribution of the National Patent Development
common stock to the stockholders of GP Strategies.
Under the Distribution Agreement, the distribution is subject to the
satisfaction or waiver by the GP Strategies Board of Directors of certain
conditions. These include, among other customary conditions, the following:
o the registration statement filed with the Securities and Exchange
Commission in order to register the National Patent Development common
stock shall have been declared effective and no stop order shall be
entered, initiated or threatened,
o quotation of the National Patent Development common stock on the OTC
Bulletin Board,
o the Tax Ruling shall continue to be in effect,
o the Corporate Restructuring Transactions shall be completed,
o the National Patent Development Certificate of Incorporation and
Bylaws shall be in effect, and
o the National Patent Development Board of Directors, as named under
"Management--Directors," and the National Patent Development officers,
as named under "Management--Executive Officers," shall have been
elected.
Under the Distribution Agreement, GP Strategies and National Patent
Development have each agreed to retain certain books and records and to make
16
available to the other its personnel, property, books, records, and other data
and information relating to operations before the distribution as may be
required for the requesting party's business (but not for competitive purposes).
Each has also agreed to make generally available its officers, directors,
employees, and agents for fact finding, consultation or interviews, and as
witnesses in connection with certain legal actions.
Each of GP Strategies and National Patent Development has also agreed
to indemnify the other in connection with the liabilities it assumes and any
breach by it of the Distribution Agreement or other agreements entered into in
connection with the spin-off. In particular, GP Strategies and National Patent
Development each agreed that neither would take any action that might cause the
spin-off of National Patent Development to not qualify as a tax-free
distribution under Section 355 of the Internal Revenue Code. Should one party
take an action which causes the spin-off not to so qualify, then that party
would be liable to the other for any taxes incurred by the other from the
failure of the spin-off to qualify as a tax-free distribution. The Distribution
Agreement specifies procedures with respect to claims subject to indemnification
and related matters.
National Patent Development will bear the offering expenses incurred in
connection with the spin-off. Such expenses, which consist of legal and
accounting fees, printing and engraving, transfer agent and registrar fees, and
SEC registration fees, amounted to approximately $240,000.
The Distribution Agreement provides that it may be terminated or
amended, modified, or abandoned at any time prior to the Distribution in the
sole discretion of GP Strategies, without National Patent Development's approval
or the approval of GP Strategies' stockholders. In the event of a termination of
the Distribution Agreement, no party shall have any liability of any kind to any
other party. After the Distribution, the Distribution Agreement generally may
not be terminated except by an agreement in writing signed by GP Strategies and
National Patent Development.
Results of Spin-Off
After the spin-off, National Patent Development will be a separate
public company. Immediately after the spin-off, the number and identity of
stockholders of record of National Patent Development will be the same as the
number and identity of stockholders of record of GP Strategies on , 2004, the
record date for the spin-off, and the number of shares of National Patent
Development common stock issued and outstanding will equal the number of shares
of GP Strategies common stock and Class B capital stock issued and outstanding
on such record date. As of the close of business on , 2004, GP Strategies had
approximately 1,300 stockholders of record and 17,681,487 shares of common stock
and Class B capital stock issued and outstanding. The spin-off will not affect
the number of outstanding shares of GP Strategies stock or the rights of GP
Strategies stockholders. Shares of GP Strategies common stock will continue to
be listed on the New York Stock Exchange under the symbol "GPX."
Other Consequences
The exercise price of outstanding GP Strategies options and warrants
will be adjusted based on the relative fair market values of the GP Strategies
stock before and after the spin-off. National Patent Development has also agreed
to issue certain warrants following effectiveness of the spin-off. See
"Description of Warrants."
Material Federal Income Tax Consequences of the Spin-Off
The following summary discusses the material U.S. federal income tax
consequences of the spin-off of National Patent Development to United States
Holders of GP Strategies common stock or Class B capital stock. This discussion
17
is based on the Internal Revenue Code, the Treasury Regulations promulgated
thereunder, judicial opinions, published positions of the IRS, and all other
applicable authorities as of the date of this document, all of which are subject
to change (possibly with retroactive effect).
As used in this document, the term "United States Holder" means:
o a citizen or resident of the United States;
o a corporation, or other entity taxable as a corporation for U.S.
federal income tax purposes, created or organized in or under the laws
of the United States or of any political subdivision thereof; or
o an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
The term United States Holder also includes certain former citizens and
residents of the United States.
This discussion does not describe all of the tax consequences that may
be relevant to a holder in light of his particular circumstances or to holders
subject to special rules, such as:
o certain financial institutions;
o insurance companies;
o tax-exempt organizations;
o dealers in securities or foreign currencies;
o persons holding GP Strategies common stock or Class B capital stock as
part of a hedge;
o United States Holders whose functional currency is not the U.S.
dollar;
o partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
o persons subject to the alternative minimum tax;
o stockholders who acquired their GP Strategies common stock or Class B
capital stock through the exercise of options or otherwise as
compensation or through a tax-qualified retirement plan; or
o holders of options granted under any GP Strategies benefit plan.
In addition, this summary is limited to stockholders that hold their GP
Strategies common stock or Class B capital stock as capital assets. This
discussion also does not address any tax consequences arising under the laws of
any state, local or foreign jurisdiction.
Accordingly, each GP Strategies stockholder is strongly urged to
consult with a tax adviser to determine, in light of his or her particular
18
circumstances, the federal, state, local or foreign income or other tax
consequences to him or her of the spin-off.
GP Strategies has obtained the Tax Ruling from the IRS to the effect
that the spin-off will be tax-free to GP Strategies and its stockholders under
Sections 355 and 368(a) of the Internal Revenue Code. The Tax Ruling's
continuing validity is subject to factual representations and assumptions.
Neither GP Strategies nor National Patent Development is aware of any facts or
circumstances that would cause such representations and assumptions to be untrue
in any material respect.
Assuming the continuing effectiveness of the Tax Ruling, for U.S.
federal income tax purposes, the tax consequences of the spin-off are as
follows:
o no gain or loss will be recognized by, and no amount will be
included in the income of, GP Strategies upon the spin-off of
National Patent Development other than gains, if any, related
to certain intercompany transactions that will be triggered by
the spin-off;
o no gain or loss will be recognized by, and no amount will be
included in the income of, United States Holders of GP
Strategies common stock or Class B capital stock upon their
receipt of shares of National Patent Development common stock
in the spin-off;
o a United States Holder of GP Strategies common stock or Class
B capital stock will apportion the tax basis of such holder's
GP Strategies common stock or Class B capital stock on which
National Patent Development common stock is distributed
between such holder's GP Strategies stock and the National
Patent Development common stock received in the spin-off in
proportion to the fair market values of such GP Strategies
stock and National Patent Development common stock on the date
of the spin-off; and
o the holding period of the shares of National Patent
Development common stock received by a United States Holder of
GP Strategies common stock or Class B capital stock in the
spin-of will include the period during which such holder held
the GP Strategies common stock or Class B capital stock on
which the National Patent Development common stock is
distributed.
Current Treasury Regulations require each holder of GP Strategies
common stock or Class B capital stock who receives National Patent Development
common stock in the spin-off to attach to his or her federal income tax return
for the year in which the National Patent Development spin-off occurs a detailed
statement setting forth such data as may be appropriate in order to show the
applicability of Section 355 of the Code to the National Patent Development
spin-off. GP Strategies will provide the appropriate information to each of its
stockholders of record.
If the spin-off failed to qualify under Section 355 of the Internal
Revenue Code, corporate tax would be payable by the consolidated group of which
GP Strategies is the common parent based upon the difference between the
aggregate fair market value of the stock of National Patent Development and the
adjusted tax basis of such stock to GP Strategies prior to the spin-off. The
corporate level tax would be payable by GP Strategies. We have agreed to
indemnify GP Strategies for this and other tax liabilities if they result from
certain actions taken by National Patent Development. See "Relationship between
GP Strategies and National Patent Development--Tax Sharing Agreement." In
addition, under the Internal Revenue Code's consolidated return regulations,
each member of GP Strategies' consolidated group (including National Patent
Development) is severally liable for these tax liabilities. If National Patent
Development is required to indemnify GP Strategies for these liabilities or
otherwise is found liable to the IRS for these liabilities, the resulting
obligation could materially adversely affect our financial condition.
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Additionally, if the spin-off were not to qualify under Section 355 of
the Internal Revenue Code, then each owner of GP Strategies stock who receives
shares of National Patent Development common stock in the spin-off would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of National Patent Development common stock
received on the date it is received. In such a case, the distribution will be a
taxable dividend to the stockholder to the extent that the distribution is made
out of current or accumulated earnings and profits of GP Strategies. If the
amount of the distribution exceeds current and accumulated earnings and profits,
the excess amount will be a tax-free return of capital to the extent of the
stockholder's tax basis in the GP Strategies stock and then any remaining amount
will be taxable gain to the stockholder. No loss will be recognized. Any gain
recognized by a stockholder will be capital gain, provided the GP Strategies
shares are held as capital assets. Capital gains are long term if the GP
Strategies stock is held for more than twelve months at the time of the
distribution. For individuals, the maximum federal income tax rate applicable to
long-term capital gains and dividends is generally 15%.
Quotation of National Patent Development Common Stock
There currently is no public market for National Patent Development's
common stock and we do not intend to list National Patent Development common
stock on a securities exchange or Nasdaq. However, we expect National Patent
Development common stock to be quoted on the OTC Bulletin Board.
The prices at which the National Patent Development common stock will
trade following the spin-off will be determined by the marketplace and may be
influenced by many factors, including the depth and liquidity of the market for
National Patent Development common stock, investor perceptions of National
Patent Development, its business and prospects, results of operations, and
general economic and market conditions.
Prior to the record date for the spin-off, GP Strategies stock will
continue to trade on a regular basis reflecting the combined value of GP
Strategies and National Patent Development.
The Transfer Agent and Registrar for the National Patent Development
common stock will be Computershare Investor Services LLC, P.O. Box 2388,
Chicago, IL 60690-5430, Telephone: 312-360-5430. As of , 2004, there were
approximately 1,300 record holders of GP Strategies stock, which equals the
number of prospective record holders of National Patent Development common stock
immediately after the spin-off.
National Patent Development common stock distributed in the spin-off
generally will be freely transferable under the Securities Act except for
securities received by persons who may be deemed to be affiliates of National
Patent Development pursuant to Rule 405 under the Securities Act. Persons who
may be deemed to be affiliates of National Patent Development after the spin-off
generally include individuals or entities that control, are controlled by, or
are under common control with National Patent Development, including directors
of National Patent Development. Persons who are affiliates of National Patent
Development will be permitted to sell their shares of National Patent
Development common stock received in the spin-off only pursuant to an effective
registration statement under the Securities Act or pursuant to an exemption from
the registration requirements of the Securities Act, such as the exemption
provided by Rule 144 under the Securities Act (subject to the conditions set
forth in Rule 144, other than its holding period requirements).
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Use of Proceeds
We will receive no proceeds from the distribution of National Patent
Development common stock.
RELATIONSHIP BETWEEN GP STRATEGIES AND NATIONAL PATENT DEVELOPMENT
Prior to the spin-off, National Patent Development will continue to be
a wholly-owned subsidiary of GP Strategies. In the past, GP Strategies and
entities that will become National Patent Development's subsidiaries as a result
of the Corporate Restructuring Transactions, including MXL and Five Star (which
became a majority-owned subsidiary of GP Strategies commencing in the fourth
quarter of 2003), have engaged in various transactions with each other. These
relationships, which include financial and managerial support by GP Strategies
of these subsidiaries, will cease in their current forms at the time of the
spin-off, except for certain financial guarantees of each others' obligations.
GP Strategies and National Patent Development have entered or will enter into
contracts that will govern certain relationships between them following the
Distribution, including the Distribution Agreement and the agreements described
below. National Patent Development and GP Strategies believe that these
agreements are at fair market value and are on terms comparable to those that
would have been reached in arm's-length negotiations had the parties been
unaffiliated at the time of the negotiations.
The Distribution Agreement and the other agreements described below are
included as exhibits to National Patent Development's registration statement on
Form S-1 of which this Prospectus is a part. The Agreements will be effective on
or before the date of the Distribution. See "The Spin-Off--Distribution
Agreement."
Management Agreements
National Patent Development's executive officers are also executive
officers of GP Strategies and will remain on the payroll of GP Strategies. The
executive officers will not receive any salary from National Patent Development;
however, they will provide National Patent Development with management services
under a management agreement between GP Strategies and National Patent
Development to be entered into prior to completion of the spin-off. GP
Strategies will charge National Patent Development a management fee to cover an
allocable portion of the compensation of these officers, based on the time they
spend providing services to National Patent Development, in addition to an
allocable portion of certain other corporate expenses.
In connection with the spin-off, National Patent Development will also
enter into a separate management agreement with GP Strategies pursuant to which
National Patent Development will provide certain general corporate services to
GP Strategies. Under this management agreement, National Patent Development will
charge GP Strategies a management fee to cover an allocable portion of the
compensation of its employees, based on the time they spend providing services
to GP Strategies, in addition to an allocable portion of corporate overhead
related to services performed for GP Strategies and its subsidiaries.
Both management fees will be paid quarterly. Any disagreements over the
amount of such fees will be subject to arbitration. See the Unaudited Pro Forma
Statements of Operations for the year ended December 31, 2003 included elsewhere
in this Prospectus for the estimated impact of the management agreements on the
operations of National Patent Development. Each of the management agreements
will each have an initial term of three years, and, after two years, will be
terminable by each of GP Strategies and National Patent Development, upon six
months' prior written notice.
21
GPS provides legal, tax, business development, insurance and employee
benefit administration services to Five Star pursuant to a management services
agreement for a fee of up to $10,000 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.
The agreement was renewed for 2003 and 2004. The management fee increased to
$25,000 per month effective August 1, 2004. Prior to the Distribution, GP
Strategies will transfer to National Patent Development the rights and
obligations under the management services agreement with Five Star.
Credit Agreement
As of December 31, 2003, MXL provided security for General Physics'
Financing and Security Agreement, or the Credit Agreement. The Credit Agreement
provides for a maximum outstanding balance of $25 million and was secured by
certain of the assets of General Physics and the accounts receivable of MXL. The
Credit Agreement is also guaranteed by GP Strategies. MXL provided a limited
guaranty up to the value of its account receivable collateral securing the
Credit Agreement. For the continuation of the bank's security interest in MXL's
accounts receivable and the continuation of its limited guarantee after the
spin-off, General Physics paid MXL an annual guarantee fee of 2% of the value of
the borrowing base collateral attributable to MXL, calculated monthly. At
General Physics' option, General Physics could eliminate MXL's accounts
receivable from the borrowing base under the Credit Agreement, provided that
General Physics made a mandatory prepayment under the Credit Agreement to
eliminate any borrowing base deficiency. At such point, all obligations of MXL
relating to the Credit Agreement would terminate, MXL's limited guaranty of the
Credit Agreement would become void, and General Physics would no longer be
required to pay to MXL the guarantee fee. In March 2004 General Physics
eliminated MXL's accounts receivable from the borrowing base, no mandatory
prepayment was required by General Physics, and the guarantee fee was
eliminated.
Tax Sharing Agreement
The following is a summary of the Tax Sharing Agreement that will be
entered into between GP Strategies and National Patent Development.
National Patent Development is currently included in GP Strategies'
federal consolidated income tax group and National Patent Development's tax
liability will be included in the consolidated federal income tax liability of
GP Strategies until the time of the spin-off. The Tax Sharing Agreement will
provide for tax sharing payments between GP Strategies and National Patent
Development for periods prior to the spin-off, so that National Patent
Development will be generally responsible for the taxes attributable to its
lines of business and entities comprising it and GP Strategies will be generally
responsible for the taxes attributable to its lines of business and the entities
comprising it.
GP Strategies and National Patent Development will agree that taxes
related to intercompany transactions that are triggered by the National Patent
Development spin-off will be generally allocated to GP Strategies.
GP Strategies and National Patent Development will agree that joint
non-income tax liabilities will generally be allocated between GP Strategies and
National Patent Development based on the amount of such taxes attributable to
each group's line of business. If the line of business with respect to which the
liability is appropriately associated cannot be readily determined, the tax
liability will be allocated to GP Strategies.
Under the Distribution Agreement, GP Strategies and National Patent
Development each agreed that neither would take any action that might cause the
22
spin-off of National Patent Development to not qualify as a tax-free
distribution under Section 355 of the Code. Should one party take an action
which causes the spin-off not to so qualify, then that party would be liable to
the other for any taxes incurred by the other from the failure of the spin-off
to qualify as a tax-free distribution.
Gabelli Transaction Mortgage
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003,
GP Strategies issued and sold to four Gabelli funds $7,500,000 aggregate
principal amount of 6% Conditional Subordinated Notes due 2008, or the Gabelli
Notes, and 937,500 warrants, or the GP Warrants, each entitling the holder
thereof to purchase (subject to adjustment) one share of GP Strategies common
stock. See "Description of Warrants." The Gabelli Notes are secured by a
mortgage on GP Strategies' property located in Pawling, New York that was
contributed to MXL on July 30, 2004 in connection with the spin-off. See
"Business--Pawling Property." MXL will assume the mortgage, but without
liability for repayment of the Gabelli Notes or any other obligations of GP
Strategies under the Note and Warrant Purchase Agreement (other than foreclosure
on such property). If there is a foreclosure on the mortgage for payment of the
Gabelli Notes, GP Strategies has agreed to indemnify MXL for loss of the value
of the property. GP Strategies and National Patent Development agreed to
allocate to National Patent Development $1,875,000 of the $7,500,000 received
for the Gabelli Notes and GP Warrants. On July 30, 2004 GP Strategies
transferred $1,250,000 of these funds to National Patent Development pursuant to
the Gabelli Allocation. GPS will transfer the balance of the Gabelli Allocation
of $625,000 prior to the Distribution.
Financial Guarantees
GP Strategies has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year through the
first quarter of 2007. GP Strategies' guarantee of such leases was in effect
when the Five Star business was conducted by a wholly-owned subsidiary of GP
Strategies. In 1998, GP Strategies sold substantially all of the operating
assets of the Five Star business to the predecessor corporation of Five Star. As
part of this transaction, the landlord of the New Jersey and Connecticut
facilities and the lessor of the equipment did not consent to the release of GP
Strategies' guarantee. GP Strategies has also guaranteed the mortgages for MXL's
Illinois and Pennsylvania properties through June 2006 and March 2011,
respectively, as well as $700,000 in debt entered into by MXL on October 1, 2003
in connection with the acquisition of certain assets from AOtec, LLC. GP
Strategies' guarantees will continue after the spin-off.
CAPITALIZATION
The following table sets forth (a) the capitalization of National
Patent Development as of June 30, 2004, which gives effect to the Contribution,
and (b) our pro forma capitalization at that date, which also gives effect to
(i) the Gabelli Allocation and (ii) the Distribution.
The capitalization table below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our historical consolidated financial statements, and our unaudited
pro forma consolidated financial statements and the notes to those financial
statements included elsewhere in this Prospectus.
The capitalization table below may not be indicative of our
capitalization or financial condition had the Contribution been completed on the
date assumed. The capitalization table below may not reflect the capitalization
or financial condition that would have resulted had we been operated as a
separate, independent entity at that date and is not necessarily indicative of
our future capitalization or financial condition.
23
As of
June 30, 2004
----------------------------------------------------
(unaudited, in thousands, except per share data)
Actual Pro Forma(1)
Preferred stock, authorized 10,000,000 shares,
par value $.01 per share; none issued
Common stock, authorized 30,000,000
shares, par value $.01 per share; issued
and outstanding 17,669,474 shares (pro forma)(2) $177
Paid in capital 19,534
Stockholder's investment $17,836
Accumulated deficit (1,977) (1,977)
Accumulated other comprehensive income 260 260
------ -------
Total stockholders' equity $16,119 $17,994
======= =======
- --------------------
(1) See the pro forma consolidated financial information and notes thereto
included elsewhere herein.
(2) The number of shares outstanding is based upon the number of shares of GP
Strategies common stock and Class B capital stock outstanding at June 30,
2004. The actual number of shares ultimately to be issued by National
Patent Development and distributed will depend on the number of shares of
GP Strategies common stock and Class B capital common stock outstanding on
the record date of the Distribution.
DIVIDEND POLICY
We do not anticipate paying any dividends on our common stock in the
foreseeable future because we expect to retain our future earnings for use in
the operation and expansion of our business, including the repayment of debt,
future acquisitions, and capital expenditures. The payment and amount of any
dividends will be subject to the discretion of our board of directors. We expect
that our Board of Directors will periodically reevaluate this dividend policy,
taking into account our financial condition, results of operations, cash
requirements, capital needs, debt restrictions, prospects, and other factors.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
The historical financial statements of National Patent Development
assume that the Contribution had occurred as of the beginning of the period or
at the date indicated.
The following unaudited Pro Forma Consolidated Statement of Operations
for the six months ended June 30, 2004 and for the year ended December 31, 2003
present the results of operations of National Patent Development assuming (a)
additional overhead to be incurred by National Patent Development in connection
with the spin-off (we refer to this additional overhead as the "Additional
Overhead") and (b) the Distribution had occurred as of the beginning of the
period presented. The Additional Overhead reflects management's belief that the
operations of National Patent Development after the spin-off will require
greater overhead than the overhead allocation historically associated with the
National Patent Development business.
24
The following unaudited Pro Forma Consolidated Balance Sheet as of June
30, 2004 presents the balance sheet of National Patent Development assuming the
Gabelli Allocation and the Distribution had also occurred on that date.
In the opinion of management, the unaudited Pro Forma Consolidated
Financial Statements include all material adjustments necessary to reflect, on a
pro forma basis, the impact of the Additional Overhead, the Gabelli Allocation,
and the Distribution on National Patent Development's historical financial
information. The adjustments are described in the Notes to the Pro Forma
Consolidated Financial Information (Unaudited) and are set forth in the "Pro
Forma Adjustments" columns.
The unaudited Pro Forma Consolidated Financial Information of National
Patent Development should be read in conjunction with the historical financial
statements of National Patent Development beginning on page F-1. We have
presented unaudited pro forma financial information to give you a better picture
of what our financial statements might have looked like if the Additional
Overhead, the Gabelli Allocation, and the Distribution had occurred as of such
dates. Actual results may have differed from pro forma results. You should not
rely on the pro forma financial information as being indicative of the financial
position that would have resulted, the results of operations that would have
been attained or future results after the spin-off.
25
NATIONAL PATENT DEVELOPMENTCORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(in thousands, except share data)
(unaudited)
Pro forma Pro forma
Historical Adjustments Consolidated
Sales $58,725 $58,725
Cost of sales 48,555 48,555
------------------------------------------ -------------- -------------------- ----------------
Gross margin 10,170 10,170
Selling, general and administrative (9,736) (200)(A) (9,936)
Interest expense (481) (481)
Investment and other loss (1,267) (1,267)
Loss before income taxes and minority
interest (1,314) (200) (1,514)
Income tax expense 142 142
Loss before minority interest (1,456) (200) (1,656)
Minority interest (207) (207)
Net loss $(1,663) $ (200) $(1,863)
Pro forma net (loss) per share:
Basic and diluted $ (.11)
======-
Number of common
shares outstanding (E) 17,669,474
==========
26
NATIONAL PATENT DEVELOPMENTCORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(in thousands, except share data)
(unaudited)
Pro forma Pro forma
Historical Adjustments Consolidated
Sales $103,698 $103,698
Cost of sales 84,116 84,116
------------------------------------------ -------------- -------------------- ----------------
------------------------------------------ -------------- -------------------- ----------------
Gross margin 19,582 19,582
Selling, general and administrative (18,274) (1,600)(A) (19,662)
212 (B)
Interest expense (864) (864)
Investment and other loss (61) (61)
------------------------------------------ -------------- -------------------- ----------------
Income (loss) before income taxes and
minority interest 383 (1,388) (1,005)
------------------------------------------ -------------- -------------------- ----------------
Income tax (benefit) expense 176 83 (C) 259
------------------------------------------ -------------- -------------------- ----------------
Income (loss) before minority interest 207 (1,471) (1,264)
------------------------------------------ -------------- -------------------- ----------------
Minority interest (311) (8)(D) (319)
------------------------------------------ -------------- -------------------- ----------------
Net income(loss) $(104) $ (1,479) $ (1,583)
------------------------------------------ -------------- -------------------- ----------------
Pro forma net (loss) per share:
Basic and diluted $ (.09)
Number of common
shares outstanding (E) 17,669,474
==========
27
NATIONAL PATENT DEVELOPMENT CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004
(in thousands)
(unaudited)
Pro forma Pro forma
Historical Adjustments Consolidated
Assets
Current assets
Cash and cash equivalents $ 185 $1,875(F) $ 2,060
Accounts and other receivables, net 17,356 17,356
Inventories 25,745 25,745
Receivable from GP Strategies 853 853
Deferred tax assets 46 46
Prepaid expenses and other current assets 272 272
--------------------------------------------------- -------------- ---------------- ---------------
Total current assets 44,457 1,875 46,332
--------------------------------------------------- -------------- ---------------- ---------------
Marketable securities available for sale 1,961 1,961
Property, plant and equipment, net 5,594 5,594
Other assets 3,420 3,420
--------------------------------------------------- -------------- ---------------- ---------------
$55,432 $1,875 $57,307
--------------------------------------------------- -------------- ---------------- ---------------
Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $ 399 $ 399
Short-term borrowing 22,451 22,451
Accounts payable and accrued expenses 11,725 11,725
--------------------------------------------------- -------------- ---------------- ---------------
Total current liabilities 34,575 34,575
--------------------------------------------------- -------------- ---------------- ---------------
Long-term debt less current maturities 3,001 3,001
Deferred tax liability 114 114
Interest rate collar, at market 57 57
Minority interest 1,566 1,566
Stockholder's equity
Common stock 177(G) 177
Capital in excess of par value 17,659(G) 19,534
1,875(F)
Stockholder's investment 17,836 (17,836)(G)
Accumulated deficit (1,977) (1,977)
Accumulated other comprehensive loss 260 260
--------------------------------------------------- -------------- ---------------- ---------------
Total stockholders' equity 16,119 1,875 17,994
--------------------------------------------------- -------------- ---------------- ---------------
$55,432 $1,875 $57,307
--------------------------------------------------- -------------- ---------------- ---------------
28
Notes to Pro forma Consolidated Financial Statements:
(A) To reflect estimated Additional Overhead consisting of (i) certain
general corporate expenses necessary for National Patent Development to
operate on a stand-alone basis, including compensation of certain
corporate personnel transferred to National Patent Development, net of
management fee estimated to be charged to GP Strategies for services
performed plus (ii) estimated allocation of compensation and other
expenses related to executive officers of both National Patent
Development and GP Strategies, who will remain on the payroll of GP
Strategies, for services estimated to be performed for National Patent
Development.
(B) To reduce the depreciation expense relating to property, plant and
equipment to reflect the reduction in property, plant and equipment
resulting from the allocation of negative goodwill arising in purchase
accounting.
(C) To record the tax effect of the negative goodwill arising in purchase
accounting, which reduced property, plant and equipment.
(D) To record additional minority interest to reflect a 54% ownership
interest in Five Star for the full fiscal year 2003.
(E) Pro forma basic and diluted (loss) per share is based upon the number
of shares of GP Strategies common stock and Class B capital stock
outstanding at June 30, 2004.
(F) Adjustment to reflect the Gabelli Allocation of $1,875,000, $1,250,000
of which was transferred to National Patent Development by GP
Strategies on July 30, 2004. See "Actions to Be Taken Prior to the
Distribution."
(G) To reflect the issuance of 17,669,474 shares of common stock based upon
the number of shares of GP Strategies common stock and Class B capital
stock outstanding on June 30, 2004. The actual number of shares
ultimately to be issued by National Patent Development and distributed
will depend on the number of shares of GP Strategies common stock and
Class B capital stock outstanding on the record date of Distribution.
The pro forma consolidated financial statements do not reflect warrants
to purchase common stock that will be issued to certain Gabelli funds
in connection with the spin-off. Such warrants may have a dilutive
effect. See "Description of Warrants."
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with the
audited consolidated financial statements and notes thereto included elsewhere
in this Prospectus. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. The forward-looking statements
are not historical facts, but rather are based on current expectations,
estimates, assumptions and projections about our industry, business and future
financial results. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those discussed in the sections of this Prospectus entitled "Special
Considerations" and "Forward-Looking Statements."
General Overview
The following is a discussion and analysis of the separate historical
consolidated financial statements of National Patent Development and should be
read in conjunction with those financial statements, which are found elsewhere
in this Prospectus.
The historical financial statements included herein may not be
indicative of the results of operations, financial position and cash flows of
National Patent Development in the future or had it operated as a separate,
independent company during the periods presented. GP Strategies has provided to
National Patent Development general management, legal, treasury, tax, and
financial reporting services. GP Strategies' costs have been allocated to
National Patent Development and included in the discussion herein on a basis
that management believes is reasonable based on the historical business of
National Patent Development. This allocation may not necessarily equal the costs
that would have been or will be incurred by National Patent Development on a
stand-alone basis. Management believes that the overhead of National Patent
Development after the spin-off will be greater than the overhead based on the
historical business of National Patent Development.
The historical financial information included herein gives effect to
the Contribution and the Repayment, but does not reflect the Additional
Overhead, the Gabelli Allocation, or the Distribution, all of which are
reflected in the unaudited pro forma financial information as of and for the six
months ended June 30, 2004 and for the year ended December 31, 2003.
National Patent Development was incorporated on March 10, 1998 as a
wholly-owned subsidiary of GP Strategies Corporation. In July 2002, GP
Strategies announced that it was actively considering transferring certain of
its non-core assets into National Patent Development and spinning-off National
Patent Development to the stockholders of GP Strategies. On November 14, 2002,
GP Strategies filed a ruling request with the Internal Revenue Service with
respect to the federal tax consequences of the proposed spin-off, and received a
favorable ruling on March 21, 2003. On February 12, 2004, National Patent
Development was recapitalized whereby the authorized capital was changed to
10,000,000 shares of preferred stock and 30,000,000 shares of common stock.
Following the Distribution, we will own 100% of the stock of MXL and a
64% interest in Five Star. We will operate in two segments: the Optical Plastics
segment, composed of MXL, and the Home Improvement Distribution segment,
composed of our interest in Five Star. We will also own certain of GP
Strategies' other non-core assets, including an investment in a publicly held
company, Millennium Cell; an approximately 15.3% interest in a private company,
Valera Pharmaceuticals; certain real estate; and the right to certain proceeds,
if any, from a litigation and arbitration claim. National Patent Development
30
monitors Millennium Cell for progress in the commercialization of Millennium
Cell's emerging technology and monitors Valera Pharmaceuticals for progress in
the FDA approval process.
MXL Overview
The primary business of MXL is the manufacture of polycarbonate parts
requiring adherence to strict optical quality specifications, and the
application of abrasion and fog resistant coatings to those parts. MXL also
designs and constructs injection molds for a variety of applications. Some of
the products that MXL produces include:
o facemasks and shields for recreation purposes and industrial safety
companies,
o precision optical systems, including medical optics, military eye wear
and custom molded and decorated products, and
o tools, including optical injection mold tools and standard injection
mold tools.
MXL's manufactures and sells its products to various commercial and
government customers, who utilize MXL's parts to manufacture products that will
be ultimately delivered to the end-user. MXL's government customers include
various offices of the Department of Defense, while MXL's commercial customers
are primarily in the recreation, safety, and security industries. MXL's
commitments to its customers, consisting of unfilled sales orders or backlog,
amounted to approximately $1.7 million as of December 2003. Some of MXL's
consumer based products are considered to be at the high-end of their respective
markets. As a result, sales of MXL's products may decline together with a
decline in discretionary consumer spending; therefore a key performance
indicator that the Company's management uses to manage the business is the level
of discretionary spending in key markets, specifically the United States and
Japan. Other key performance measures used by the Company's management to run
the business include:
o consumer confidence indices in key markets,
o sales levels of complementary items in the recreational vehicle
market, such as motorcycles, RV's and snowmobiles,
o levels of defense spending, and
o new OSHA safety standards.
MXL believes that the principal strengths of its business are its
state-of-the-art injection molding equipment, advanced production technology,
high quality standards, and on time deliveries. However, due to the focused
nature of the market, MXL has a limited customer base and tends to be adversely
affected by a loss in business from its significant customers. As a result of
losses of business from certain of its key customers, MXL sales and operating
profits for the past three years have shown a declining trend, reflecting a loss
in market share. To reverse the declining sales trend, a new management team
with significant sales and marketing experience has been established in 2004. To
further grow, MXL not only intends to regain market share in its existing
market, but to leverage its expertise as a molder and coater of optical quality
products by expanding into other markets and products. However, due to the
spin-off, MXL may have less financial resources at its disposal with which to
support and grow the business, as National Patent Development will have a
smaller market capitalization and less access to capital markets than GP
Strategies.
Five Star Overview
Five Star is a publicly held company that is a leading distributor in
the United States of home decorating, hardware, and finishing products. Five
Star offers products from leading manufacturers in the home improvement industry
31
and distributes those products to retail dealers, which include lumber yards,
"do-it yourself" centers, hardware stores and paint stores. Five Star has grown
to be one of the largest independent distributors in the Northeast United Stated
by providing a complete line of competitively priced products, timely delivery
and attractive pricing and financing terms to its customers.
The following key factors affect Five Star's financial and operation
performance:
o its ability to negotiate the lowest prices from its suppliers,
o its ability to increase revenue by obtaining new customers, while
maintaining a level fixed cost structure by utilizing its existing
warehouses,
o the housing market in general,
o consumers' confidence in the economy,
o consumers' willingness to invest in their homes, and
o weather conditions that are conducive to home improvement projects.
The following key performance measures are utilized by the Company's
management to run Five Star's business:
o new U.S. housing starts,
o sales of existing homes,
o sales of high margin products to its customers,
o purchases from each vendor, and
o performance benchmarks used by Home Depot and Lowe's, such as number
of stores and square footage, as well as financial benchmarks.
Five Star operates in the Home Improvement market, which has grown in
recent years and for which the Home Improvement Research Institute predicts
average annual industry growth of nearly 5% for the next several years.
Nonetheless, Five Star faces intense competition from large national
distributors, smaller regional distributors, and manufacturers that bypass the
distributor and sell directly to the retail outlet. The principal means of
competition for Five Star are its strategically placed distribution centers and
its extensive inventory of quality, name-brand products. In addition, Five
Star's customers face stiff competition from Home Depot and Lowe's, which
purchase directly from manufacturers. As a result of such competition, while the
Home Improvement market has expanded significantly in recent years, Five Star's
revenue has increased only incrementally, and such revenue would have declined
if Five Star had not entered into new geographic sales territories as described
below. In spite of this, the independent retailers that are Five Star's
customers remain a viable alternative to Home Depot and Lowe's, due to the
shopping preferences of and the retailer's geographic convenience for some
consumers.
Five Star has continued to expand its sales territory with an addition
of a sales force servicing the Mid-Atlantic States, as far south as North
Carolina, which has generated additional annual revenues of approximately $9
million since 2002. Five Star services this territory from its existing New
Jersey warehouse, enabling Five Star to leverage its fixed costs over a broader
revenue base. To further expand, Five Star will attempt to grow its revenue base
in the Mid-Atlantic States, to acquire complementary distributors and to expand
the distribution of its use of private-label products sold under the "Five Star"
name. However, due to the spin-off, Five Star may have less financial resources
at its disposal with which to support and grow the business, as National Patent
Development will have a smaller market capitalization and less access to capital
markets than GP Strategies.
32
Acquisition
On October 8, 2003, we converted $500,000 principal amount of the then
$3,500,000 Senior Unsecured 8% Note due June 30, 2005, as amended, or the Five
Star Note, of Five Star into 2,000,000 shares of Five Star common stock, which
increased our ownership in Five Star from approximately 48% to approximately 54%
of the then outstanding Five Star common stock (we refer to our obtaining
ownership of a majority of the outstanding Five Star common stock as the Five
Star Majority Ownership). As a result, effective October 8, 2003, Five Star was
consolidated in our financial statements.
The amount outstanding from Five Star under the Five Star Note
decreased from a balance of $4,500,000 at December 31, 2002 due to repayments of
$1,000,000 prior to the conversion described above, $500,000 due to such
conversion and a $200,000 repayment subsequent to such conversion. As of June
30, 2004 and December 31, 2003 the amount outstanding from Five Star to JL
Distributors, Inc., our wholly-owned subsidiary, under the Five Star Note was
$2,800,000. We converted $500,000 principal amount of the Five Star Note because
we believed that the common stock of Five Star represented an attractive
investment opportunity based on its valuation at that time.
Five Star Tender Offer
On February 6, 2004, Five Star announced that it would repurchase up to
5,000,000 shares, or approximately 30%, of its outstanding common stock, through
a tender offer for the shares at $0.21 per share, originally set to expire on
March 16, 2004. On March 17, 2004, Five Star announced that it had increased the
price it was offering to pay for the shares in the tender offer to $0.25 per
share and had extended the offer to March 31, 2004. Approximately 2,628,000
shares of Five Star common stock were tendered and acquired by Five Star. The
effect of the tender offer was to increase our ownership in Five Star to
approximately 64%.
If National Patent Development increases its ownership to at least 80%
of Five Star's common stock, Five Star would become, for federal tax purposes,
part of the affiliated group of which National Patent Development is the common
parent. As a member of such affiliated group, Five Star would be included in
National Patent Development's consolidated federal income tax returns, Five
Star's income or loss would be included as part of the income or loss of the
affiliated group and any of Five Star's income so included might be offset by
the consolidated net operating losses, if any, of the affiliated group. Five
Star has agreed to enter into a tax sharing agreement with GP Strategies (to be
assigned to National Patent Development as part of the spin-off) pursuant to
which Five Star will make tax sharing payments to National Patent Development,
if Five Star becomes a member of the consolidated group, equal to 80% of the
amount of taxes Five Star would pay if Five Star were to file separate
consolidated tax returns but did not pay as a result of being included in the
National Patent Development affiliated group.
The following table represents National Patent Development's pro forma
consolidated statement of operations for the six months ended June 30, 2004,
assuming the Five Star tender offer had been completed at the beginning of the
period, and we had a 64% ownership interest in Five Star. The pro forma
information is presented for comparative purposes only and does not purport to
be indicative of what would have occurred had the tender offer actually been
made at such date, nor is it necessarily indicative of future operating results
(in thousands, except per share data):
33
--------------------------------------------- -----------------
Sales $58,275
Loss before minority interest (483)
Minority interest (181)
--------------------------------------------- -----------------
--------------------------------------------- -----------------
Net loss $ (664)
--------------------------------------------- -----------------
--------------------------------------------- -----------------
Net loss per share
Basic and diluted $ (.04)
--------------------------------------------- -----------------
Consolidated Results of Operations
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
National Patent Development had losses before income taxes and minority
interest of $1,314,000 for the six months ended June 30, 2004 as compared to
income before income taxes and minority interest of $139,000 for the six months
ended June 30, 2003. The decrease in profitability of $1,453,000 is primarily
related to the following factors: (i) increased selling, general and
administrative expenses of $1,093,000, partly due to higher allocation of
expenses from GP Strategies and (ii) a decrease in investment and other income
of $1,271,000, primarily due to an impairment loss due to a decline in market
value considered other-than temporary of $1,081,000 on the National Patent
Development investment in Millennium Cell stock, in addition to a net loss on
sales of stock of Millennium Cell, and Hemispherx Biopharma, Inc., or HEB. The
decrease was partially offset by a higher gross margin of $947,000 which
increased in proportion with the increase in revenue of the Home Improvement
Distribution segment (consisting of Five Star).
Sales. For the six months ended June 30, 2004, sales increased by
$4,800,000 from $53,925,000 for the six months ended June 30, 2003 to
$58,725,000, mainly due to increased Home Improvement Distribution segment
revenue of $4,636,000. The increase was primarily a result of increased sales to
Five Star's existing customer base. Sales to existing customers have increased
mainly due to Five Star offering more product lines for the retailers to stock,
as well as Five Star conducting small local trade shows for its customers to
create additional sales. Revenue was favorably affected by clement weather in
the Northeast during the six months ended June 30, 2004, causing an increase in
home improvement projects. The increase in Optical Plastics segment (consisting
of MXL) revenue of $164,000 was a result of the increased revenues from MXL's
Massachusetts facility, which was purchased in September 2003. The increase in
sales from the Massachusetts facility was partly offset by a decrease in sales
from the Illinois and Lancaster facilities, primarily a result of market
fluctuations on tool purchases, lower levels of purchases from several key
customers and a discontinuance of a product line associated with diabetes
treatment produced by one of MXL's most significant customers following the
first quarter of 2003.
Gross margin. For the six months ended June 30, 2004, gross margin
increased by $947,000 from $9,223,000 for the six months ended June 30, 2003 to
$10,170,000 due to a $956,000 increase in Home Improvement Distribution segment
gross margin. The increase in Home Improvement Distribution gross margin dollars
was the result of increased sales and increased gross margin percentage, offset
in part by higher costs on purchases for the period. Home Improvement
Distribution gross margin as a percentage of sales increased from 17.0 % for the
six months ended June 30, 2003 to 17.3 % for the six months ended June 30, 2004,
mainly due to a favorable shift in the product mix sold, offset by a small
increase in warehousing costs. Five Star includes warehousing expenses as part
of cost of goods sold. The Optical Plastics Segment (MXL) gross margin of
$761,000, or 17.2% of sales, for the six months ended June 30, 2004 was
consistent with gross margin of $770,000, or 18.0% of sales, for the six months
ended June 30, 2003.
34
Selling, general and administrative. For the six months ended June 30,
2004, selling, general and administrative expenses increased by $1,093,000 from
$8,643,000 for the six months ended June 30, 2003 to $9,736,000 partially due to
increased allocations of GP Strategies corporate selling, general and
administrative expenses of $403,000. The Home Improvement Distribution segment's
selling, general and administrative expenses increased by $508,000 primarily due
to increased salesmen commissions, medical expenses, computer expenses and legal
and professional fees. The Optical Plastics segment's selling, general and
administrative expenses increased by $173,000 primarily due to increased
salaries and employee benefits, as well as rent associated with MXL's
Massachusetts facility.
Investment (loss) and other income, net. National Patent Development
incurred investment and other losses of $1,267,000 the six months ended June 30,
2004 mainly due an impairment loss due to a decline in market value considered
other-than temporary of $1,081,000 on National Patent Development investment in
Millennium Cell stock, as well as to a net loss on sales of Millennium and HEB
stock, as compared to other income of $4,000 for the six months ended June 30,
2003.
Income taxes. National Patent Development had an effective tax rate of
10.8% and 46% for the six months ended June 30, 2004 and June 30, 2003,
respectively. The rate was primarily due to operating losses of MXL unable to be
utilized on a stand-alone basis in 2004, non-deductible expenses and impairment
and realized losses for equity investments for which no benefit had been
provided.
Year Ended December 31, 2003 compared to Year Ended December 31, 2002
National Patent Development had income before income taxes and minority
interest of $383,000 for the year ended December 31, 2003 as compared to income
before income taxes and minority interest of $292,000 for the year ended
December 31, 2002. The increase in profitability of $91,000 is primarily related
to an increase in operating profit of $2,068,000 from the consolidation of Five
Star following the Five Star Majority Ownership. The increase in profitability
was partially offset by the following factors: (i) increased interest expense of
$656,000 mainly due to the consolidation of Five Star following the Five Star
Majority Ownership, (ii) a decrease in income from equity investee and
investment income of $509,000, from a gain of $448,000 mainly due to Five Star
income from equity investee, to a loss of $61,000 mainly due to a net loss on
sales of Millennium and HEB stock and (iii) a decrease in operating profit at
MXL of $460,000, due to lower sales and increased selling, general and
administrative expenses.
Sales. For the year ended December 31, 2003, sales increased by
$93,702,000 from $9,996,000 for the year ended December 31, 2002 to $103,698,000
mainly due to the consolidation of Five Star's revenue of $95,085,000 into
National Patent Development's financial statements as a result of the Five Star
Majority Ownership. Five Star's revenue was essentially flat from 2002,
increasing by approximately $9 million due to Five Star's expansion of its sales
territory with an addition of a sales force servicing the Mid-Atlantic States,
offset by a loss in revenue of approximately $8 million from its existing
customer base concentrated in the Northeast. The decrease in MXL's revenue of
$1,383,000 was primarily due to a discontinuance of a product line associated
with diabetes treatment produced by one of MXL's most significant customers,
which accounted for a loss in revenue of $1,196,000. The remainder of the
decline was due to less significant losses in revenue from MXL's other top ten
customers, mainly due to a decline in the overall economy, which caused a
reduction in discretionary spending for high-end products which MXL
manufactures.
Gross margin. For the year ended December 31, 2003, gross margin
increased by $17,483,000 from $2,099,000 for the year ended December 31, 2002 to
$19,582,000 mainly due to the consolidation of Five Star gross margin of
$17,719,000 into National Patent Development's financial statements as a result
of the Five Star Majority Ownership. Five Star's gross margin increased by
$1,106,000 from 2002 mainly due to increased revenue and a reduction in cost of
35
goods sold, mainly due to improved purchasing efficiencies from Five Star's
vendors. The purchasing efficiencies, including quantity and other discounts,
were the primary reason for the increase in gross margin percentage from 17.6%
in 2002 to 18.6% in 2003. The increase in Five Star gross margin was partially
offset by increased warehousing costs, with increases in payroll and related
expenses, rent and utilities, and repairs and maintenance expenses. The increase
in gross margin was offset by a decrease in MXL's gross margin of $236,000,
mainly due to the decline in MXL revenue. MXL's gross margin percentage rose
slightly from 21% in 2002 to 21.6% in 2003 due to the discontinued product line
which traditionally caused lower gross margin percentages to MXL.
Selling, general and administrative. For the year ended December 31,
2003, selling, general and administrative expenses increased by $16,227,000 from
$2,047,000 for the year ended December 31, 2002 to $18,274,000 mainly due to the
consolidation of Five Star's selling, general and administrative expenses of
$15,598,000 into National Patent Development's financial statements as a result
of the Five Star Majority Ownership. Five Star's selling, general and
administrative expenses increased by $933,000 from 2002 due to increases in
salary and bonuses, sales personnel and expenses incurred for business
development, sales territory expansion and computer system upgrades. Corporate
selling, general and administrative expenses increased by $445,000, mainly due
to increased allocations of GP Strategies corporate selling, general and
administrative expenses. MXL's selling, general and administrative expenses
increased by $184,000 primarily due to increases in employee benefits, bad debt
expense, general insurance and rent.
Investment (loss) and other income, net and income (loss) related to
equity investee. For the year ended December 31, 2003, National Patent
Development had zero income related to equity investee due to the consolidation
of Five Star into National Patent Development's financial statements as a result
of the Five Star Majority Ownership, as compared to income related to equity
investee of $439,000 for the year ended December 31, 2002. In addition, National
Patent Development incurred investment and other losses of $61,000 in 2003
mainly due to a net loss on sales of Millennium and HEB stock, a decrease of
$70,000 from investment income of $9,000 in 2002.
Income taxes. National Patent Development had an effective tax rate of
46.0% and 49.7% for the years ended December 31, 2003 and December 31, 2002,
respectively. The rate was primarily due to state and local taxes,
non-deductible expenses and impairment and realized losses for equity
investments for which no benefit had been provided.
Year Ended December 31, 2002 compared to Year Ended December 31, 2001
National Patent Development had income before income taxes of $292,000
for the year ended December 31, 2002 as compared to income before income taxes
of $764,000 for the year ended December 31, 2001. The decrease in profitability
of $472,000 was primarily related to a decrease in gross margin at MXL of
$717,000 from $2,816,000 to $2,099,000 for the year ended December 31, 2002, an
increase in selling, general and administrative expenses of $83,000, an increase
in income related to equity investee of approximately $180,000 to $439,000 and
an increase in investment (loss) and other income, net of $187,000 to $9,000
from $(178,000) for the year ended December 31, 2001.
Sales. For the year ended December 31, 2002, sales declined from
$11,184,000 to $9,996,000 or by $1,188,000. The decrease is primarily related to
the overall downturn in the economy, which caused a reduction in orders from
MXL's most significant customers. The decline in the economy caused a reduction
in discretionary spending for high-end products which MXL manufactures.
Gross margin. Gross margin of $2,099,000 for the year ended December
31, 2002 decreased by $717,000, compared to gross margin of $2,816,000 for the
36
year ended December 31, 2001. The reduction in gross margin was partially a
result of the reduction in MXL's sales levels for the period. MXL's gross margin
percentage declined from 25% in 2001 to 21% in 2002 due to a shift in product
mix to lower margin products from one of MXL's most significant customers.
Selling, general and administrative expenses. For the year ended
December 31, 2002, selling, general and administrative expenses of $2,047,000
increased $83,000 from $1,964,000 for the year ended December 31, 2001. The
increase was primarily attributable to increases in corporate selling, general
and administrative expenses of $37,000, mainly due to a higher allocation of GP
Strategies corporate selling, general and administrative expenses of $35,000 and
a decrease in a non-cash credit of approximately $13,000 relating to a deferred
compensation plan of GP Strategies in which certain employees of MXL
participated. MXL's selling, general and administrative expenses increased by
$46,000, mainly due to increased payroll expenses, including temporary help.
Investment (loss) and other income, net and income (loss) related to
equity investee. Investment (loss) and other income, net for the year ended
December 31, 2002 increased $187,000 to $9,000 compared to $(178,000) for the
year ended December 31, 2001. The increase was primarily as a result of the
recognition of an impairment loss of $200,000 from its Avenue Entertainment
marketable security investment during the year ended December 31, 2001. Income
(loss) related to equity investee for the year ended December 31, 2002 increased
$180,000 to $439,000 from $259,000 for the year ended December 31, 2001. The
increase was related to a write-down of $200,000 in the investment in Five Star
during the year ended December 31, 2001. In addition, effective January 1, 2002
upon adoption of FASB Statement No. 142 the amortization of goodwill allocable
to excess of the carrying value of investment in Five Star ceased.
Income taxes. National Patent Development had an effective tax rate of
49.7% and 51.7% for the years ended December 31, 2002 and December 31, 2001,
respectively. The rate was primarily due to certain nondeductible items, and in
2001, the effect of an impairment loss on the Avenue Entertainment marketable
security for which no tax benefit has been provided.
Liquidity and Capital Resources
At June 30, 2004, National Patent Development had cash and cash
equivalents totaling $185,000, 964,771 shares of common stock of Millennium Cell
with a market value of $1,823,000 and a receivable from GP Strategies of
$853,000. In addition, National Patent Development has been allocated $1,875,000
of the $7,500,000 received for the Gabelli Note pursuant to the Gabelli
Allocation. National Patent Development believes the aforementioned resources,
together with the cash received from the sale of other assets, will be
sufficient to fund the working capital and other requirements of National Patent
Development for at least the next twelve months. From time to time National
Patent Development may attempt to raise capital with potential equity
financings, although no such equity financings are currently anticipated.
For the six months ended June 30, 2004, National Patent Development's
working capital decreased by $683,000 to $9,882,000 from $10,565,000 as of
December 31, 2003. The working capital decrease was primarily a result of a net
loss for the period; additions to property, plant and equipment; and repayment
of long term debt.
The decrease in cash and cash equivalents of $417,000 for the six
months ended June 30, 2004 resulted from net cash used in operations of
$4,171,000; cash used in investing activities of $856,000, consisting of
additions to property, plant and equipment of $254,000, acquisition of minority
interest in Five Star Products pursuant to the tender offer of $657,000 and
advances to GP Strategies of $959,000, offset by proceeds on sale of investments
of $1,014,000; and cash provided by financing activities of $4,610,000,
37
consisting of proceeds of short term borrowing of $5,491,000, offset by
repayments of long-term debt of $197,000 and distributions to GP Strategies of
$684,000.
On March 8, 2001, MXL entered into a loan in the amount of $1,680,000,
secured by a mortgage covering the real estate and fixtures on its property in
Pennsylvania. At June 30, 2004, $1,355,000 of such loan was outstanding. The
loan requires monthly repayments of $8,333 plus interest at 2.5% above the one
month LIBOR rate and matures on March 8, 2011, when the remaining amount
outstanding of approximately $680,000 is due in full. The loan is guaranteed by
GP Strategies. The proceeds of the loan were used to repay a portion of the GP
Strategies' short-term borrowings under its prior credit agreement.
On July 3, 2001, MXL entered into a loan in the amount of $1,250,000,
secured by a mortgage covering the real estate and fixtures on its property in
Illinois. At June 30, 2004, $1,170,000 of such loan was outstanding. The loan
requires monthly payments of principal and interest in the amount of $11,046
with interest at a fixed rate of 8.75% per annum, and matures on June 26, 2006,
when the remaining amount outstanding of approximately $1,100,000 is due in
full. The loan is guaranteed by GP Strategies. The proceeds of the loan were
used to repay a portion of the GP Strategies' short-term borrowings under its
prior credit agreement.
On September 15, 2003, MXL purchased machinery, equipment and inventory
from AOtec, located in the Massachusetts area, for a purchase price of
$1,100,000, subject to adjustment. On August 1, 2003, MXL paid $100,000 of the
purchase price and issued three notes, in the amounts of $450,000, $275,000 and
$275,000, due October 1, 2003, August 5, 2004 and August 5, 2005, respectively
(collectively, the "AOtec Notes"). The AOtec Notes bear interest on the unpaid
principal amount at the rate of 4% per annum. On October 1, 2003, MXL borrowed
$700,000, or the AOtec Debt, from a bank to finance the purchase price and used
the proceeds to pay the $450,000 Note. The AOtec Debt is payable monthly for
three-years and is secured by the machinery and equipment purchased from AOtec.
GP Strategies guaranteed the AOtec Debt.
On June 20, 2003, Five Star obtained a new loan and security agreement
with Fleet Capital Corporation. The agreement has a maturity date of June 30,
2008 and provides for a $25,000,000 revolving credit facility, which allows Five
Star to borrow based upon specified percentages of eligible inventory and
eligible accounts receivable, as defined therein. The interest rates under the
agreement consist of LIBOR plus a credit spread for borrowings not to exceed
$15,000,000 and the prime rate plus a credit spread for borrowings in excess of
the above-mentioned LIBOR-based borrowings. The credit spreads can be reduced in
the event that Five Star achieves and maintains certain performance benchmarks.
At June 30, 2004 and December 31, 2003, approximately $22,176,000 and
$16,685,000 was outstanding under the loan and security agreement and
approximately $440,000 and $480,000 was available to be borrowed, respectively.
On June 20, 2003, GP Strategies entered into an Agreement of
Subordination and Assignments, or the Subordination Agreement, with Five Star
and its lenders that permits the annual repayment of principal on the Five Star
Note. Pursuant to the provisions of the Subordination Agreement, in each of June
and July 2003, GP Strategies received a partial repayment from Five Star in the
amount of $500,000, reducing the outstanding principal amount of the Five Star
Note from $4,500,000 to $3,500,000. On October 8, 2003, GP Strategies exchanged
$500,000 principal amount of the Five Star Note for 2,000,000 shares of Five
Star common stock, reducing the outstanding principal amount of the Five Star
Note to $3,000,000. Pursuant to the provision of the Subordination Agreement, in
December 2003, GP Strategies received a partial repayment from Five Star in the
amount of $200,000, further reducing the outstanding principal amount of the
Five Star Note to $2,800,000. The Five Star Note and all the shares of Five Star
38
common stock owned by GP Strategies, along with GP Strategies' rights under the
Subordination Agreement, will be transferred to National Patent Development
prior to the spin-off.
As of December 31, 2003 MXL provided security for General Physics'
Financing and Security Agreement. The Financing and Security Agreement provides
for a maximum outstanding balance of $25 million and was secured by certain of
the assets of General Physics and the accounts receivable of MXL. The Financing
and Security Agreement is also guaranteed by GP Strategies. MXL provided a
limited guaranty up to the value of its account receivable collateral securing
the Financing and Security Agreement. For the continuation of the bank's
security interest in MXL's accounts receivable and the continuation of its
limited guarantee after the spin-off, General Physics paid MXL a guarantee fee
of 2% of the value of the borrowing base collateral attributable to MXL,
calculated monthly. At General Physics' option, General Physics could eliminate
MXL's accounts receivable from the borrowing base under the Financing and
Security Agreement, provided that General Physics made a mandatory prepayment
under the Financing and Security Agreement to eliminate any borrowing base
deficiency. At such point, all obligations of MXL relating to the Financing and
Security Agreement terminated, MXL's limited guaranty of the Financing and
Security Agreement became void, and General Physics was no longer required to
pay to MXL the guarantee fee. In March 2004 General Physics eliminated MXL's
accounts receivable from the borrowing base, no mandatory prepayment was
required by General Physics, and the guarantee fee was eliminated.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003,
GP Strategies issued and sold to four Gabelli funds $7,500,000 aggregate
principal amount of Gabelli Notes, and 937,500 GP Warrants, each entitling the
holder thereof to purchase (subject to adjustment) one share of GP Strategies
common stock. See "Description of Warrants." The Gabelli Notes are secured by a
mortgage on GP Strategies property located in Pawling, New York that will be
contributed to MXL in connection with the spin-off. MXL will assume the
mortgage, but without liability for repayment of the Gabelli Notes or any other
obligations of GP Strategies under the Note and Warrant Purchase Agreement
(other than foreclosure on such property). If there is a foreclosure on the
mortgage for payment of the Gabelli Notes, GP Strategies has agreed to indemnify
MXL for loss of the value of the property.
GP Strategies has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year through the
first quarter of 2007. GP Strategies' guarantee of such leases was in effect
when Five Star was a wholly-owned subsidiary of GP Strategies. In 1998, GP
Strategies sold substantially all of the operating assets of the Five Star
business to the predecessor corporation of Five Star. As part of this
transaction, the landlord of the New Jersey and Connecticut facilities and the
lessor of the equipment did not consent to the release of GP Strategies'
guarantee.
Management discussion of critical accounting policies
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment
than others in their application. These include valuation of accounts
receivable, accounting for investments, and impairment of long-lived assets
which are summarized below. In addition, Note 1 to the audited financial
statements, included elsewhere in this Prospectus, includes further discussion
of our significant accounting policies.
39
Revenue recognition
Revenue on product sales is recognized at the point in time when the
product has been shipped, title and risk of loss has been transferred to the
customer, and the following conditions are met: persuasive evidence of an
arrangement exists, the price is fixed and determinable, and collectibility of
the resulting receivable is reasonably assured. Allowances for estimated returns
and allowances are recognized when sales are recorded.
Valuation of accounts receivable
Provisions for allowance for doubtful accounts are made based on
historical loss experience adjusted for specific credit risks. Measurement of
such losses requires consideration of National Patent Development's historical
loss experience, judgments about customer credit risk, and the need to adjust
for current economic conditions. The allowance for doubtful accounts as a
percentage of total gross trade receivables was 5.8 % (unaudited), 5.6% and 1.3%
at June 30, 2004, December 31, 2003 and December 31, 2002, respectively.
Impairment of long-lived tangible assets
Impairment of long-lived tangible assets with finite lives results in a
charge to operations whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by determining the amount by which the
carrying amount of the assets exceeds the fair value of the asset. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost of sale.
The measurement of the future net cash flows to be generated is subject
to management's reasonable expectations with respect to National Patent
Development's future operations and future economic conditions which may affect
those cash flows.
As of June 30, 2004, National Patent Development holds undeveloped land
in Pawling, New York with a carrying amount of approximately $2.5 million and in
East Killingly, Connecticut with a carrying amount of approximately $0.4
million, which management believes is less than its fair value, less cost of
sale. However, the land in Pawling, New York is subject to a mortgage securing
indebtedness of GP Strategies. See "Description of Indebtedness."
Accounting for investments
National Patent Development's investment in marketable securities are
classified as available-for-sale and recorded at their market value with
unrealized gains and losses recorded as a separate component of stockholder's
equity. A decline in market value of any available-for-sale security below cost
that is deemed to be other than temporary results in an impairment loss which is
charged to earnings. National Patent Development has recorded impairment losses
of $1,081,000 in 2004 on its marketable security investment in Millennium Cell
and $200,000 in 2001 on its marketable security investment in Avenue
Entertainment Group. In addition, National Patent Development has recorded
impairment losses of $200,000 in 2001 on its investment in Five Star, which was
then accounted for using the equity method. Management determined those losses
to be other than temporary declines.
40
On October 8, 2003 National Patent Development acquired additional
shares of Five Star, bringing its ownership to 54%. Five Star is consolidated
into National Patent Development's consolidated financial statements and is no
longer accounted for as an equity investment effective as of that date.
Determination of whether an investment is impaired and whether an
impairment is other than temporary requires management to evaluate evidence as
to whether an investment's carrying amount is recoverable within a reasonable
period of time considering factors which include the length of time that an
investment's market value is below its carrying amount and the ability of the
investee to sustain an earnings capacity that would justify the carrying amount
of the investment.
On October 17, 2003, National Patent Development received GP
Strategies' shares of Valera Pharmaceuticals pursuant to the Repayment and
recorded such shares at zero representing their carrying amount to GP Strategies
after reflecting Valera losses. National Patent Development currently owns 100%
of Valera's common stock (15.3% assuming conversion of Valera outstanding
preferred stock) but no longer has financial and operating control of Valera. As
a condition of a private placement of preferred stock in December 2001, GP
Strategies contractually gave up operating control over Valera through an
Investors Rights Agreement. National Patent Development accounts for its
investment in Valera under the equity method. However, as National Patent
Development has not guaranteed obligations of Valera and has not otherwise
committed to provide further support for Valera, it has discontinued recognizing
additional losses of Valera. If Valera subsequently reports net income, National
Patent Development shall resume applying the equity method only after its share
of that net income equals the share of net losses not recognized during the
period the equity method was suspended.
Recent accounting pronouncements
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities that
have legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. This statement is effective for
National Patent Development in fiscal 2003. The application of SFAS No. 143 did
not have and is not expected to have a material impact on National Patent
Development's Consolidated Financial Statements.
During April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS No. 145"). Among other items, SFAS No. 145 updates and
clarifies existing accounting pronouncements related to reporting gains and
losses from the extinguishment of debt and certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of SFAS
No. 145 are generally effective for fiscal years beginning after May 15, 2002,
with earlier adoption of certain provisions encouraged. The application of SFAS
No. 145 did not have an impact on National Patent Development's Consolidated
Financial Statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS No. 146"). This Statement
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. National Patent Development is required to adopt the
provisions of SFAS No. 146 for exit or disposal activities, if any, initiated
after December 31, 2002. The adoption of SFAS No. 146 did not impact the
41
consolidated financial position or results of operations, although it can be
expected to impact the timing of liability recognition associated with future
exit activities, if any.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123" ("SFAS No. 148"), and the transition guidance and annual disclosure
provisions are effective for National Patent Development for the quarterly
interim periods beginning in 2003. SFAS No. 148 amends SFAS Statement No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation" and provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, the
statement amends the disclosure requirements of SFAS No. 123 to require more
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method
used. National Patent Development continues to account for stock-based
compensation using APB Opinion No. 25 and has not adopted the recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. National Patent
Development has adopted the disclosure provisions of SFAS No. 148 for the 2003
fiscal year.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative. It also clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
and did not have an impact on National Patent Development's Consolidated
Financial Statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or as an asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have an impact on National Patent
Development's Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 elaborates on
the disclosures for interim and annual reports regarding obligations under
certain guarantees issued by a guarantor. Under FIN No. 45, the guarantor is
required to recognize a liability for the fair value of the obligation
undertaken in issuing the guarantee at the inception of a guarantee. The
recognition and measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of FIN No. 45 did not have an impact on National Patent Development's
Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 explains how to
identify variable interest entities and how an enterprise assesses its interests
in a variable interest entity to decide whether to consolidate that entity. FIN
No. 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. The provisions of FIN No. 46 are
effective immediately for all entities with variable interests in variable
interest entities created after December 31, 2002. The provisions of FIN No. 46
are effective for public entities with a variable interest in a variable
interest entity created prior to January 1, 2003 no later than the end of the
42
first annual reporting period beginning after December 15, 2003. National Patent
Development evaluated FIN No. 46 and does not anticipate that its application
will affect its financial statements. If it is determined that National Patent
Development should consolidate any such entity, National Patent Development
would recognize certain assets and debt on its consolidated balance sheet and a
cumulative adjustment for the accounting change in the consolidated statement of
operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This Issue
provides guidance on when and how to separate elements of an arrangement that
may involve the delivery or performance of multiple products, services and
rights to use assets into separate units of accounting. The guidance in the
consensus is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The transition provision allows either
prospective application or a cumulative effect adjustment upon adoption. The
adoption of Issue No. 00-21 did not have an impact on National Patent
Development's Consolidated Financial Statements.
Quantitative and Qualitative Disclosures About Market Risk
National Patent Development is exposed to the impact of interest rate,
market risks and currency fluctuations. In the normal course of business,
National Patent Development employs internal processes to manage its exposure to
interest rate, market risks and currency fluctuations. National Patent
Development's objective in managing its interest rate risk is to limit the
impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. National Patent Development is exposed to the impact of
currency fluctuations because of its sales to customers in foreign countries.
Five Star is a party to an interest rate swap agreement designated as a
cash flow hedge whereby changes in the cash flows of the swap will offset
changes in the interest rate payments on Five Star's variable-rate revolving
loan, thereby reducing the Five Star's exposure to fluctuations in LIBOR.
Changes in the fair value of the interest rate swap are recognized in the
accumulated other comprehensive income, net of income taxes.
Effective July 1, 2004 through June 30, 2008, Five Star will pay a
fixed interest rate of 3.38% to Fleet National Bank on notional principal of
$12,000,000. In return, Fleet National Bank will pay to Five Star a floating
rate, namely, LIBOR, on the same notional principal amount. The credit spread
under the Loan and Security Agreement entered into by Five Star on June 20, 2003
is not included in, and will be paid in addition to, this fixed interest rate of
3.38%.
On June 17, 2004, Five Star has also entered into a derivative interest
rate collar transaction during the period from July 1, 2004 through June 30,
2008 on notional principal of $12,000,000. The transaction consists of an
interest rate floor of 2.25%, whereas if LIBOR is below 2.25%, Fleet National
Bank will pay to Five Star Group, Inc. the difference between LIBOR and 2.25%,
on the same notional principal amount. The transaction also consists of an
interest rate cap of 5.75%, whereas if LIBOR is above 5.75%, Five Star Group,
Inc. will pay to Fleet National Bank the difference between LIBOR and 5.75%, on
the same notional principal amount.
As of June 30, 2004, National Patent Development had $11,531,000 of
variable rate borrowings, not hedged by an interest rate swap. National Patent
Development estimates that for every 1% fluctuation in general interest rates,
assuming debt levels at June 30, 2004, interest expense would vary by $115,310.
43
BUSINESS
We are currently a wholly-owned subsidiary of GP Strategies. Following
the Distribution, we will own MXL, a 64% interest in Five Star, as well as
certain of GP Strategies' non-core assets, including an investment in a publicly
held company, Millennium Cell, an approximately 15.3% interest in a private
company, Valera Pharmaceuticals, certain real estate and the right to certain of
the proceeds from a litigation claim.
MXL Industries
General
Our wholly-owned subsidiary, MXL, is a molder and precision coater of
optical plastics. MXL is a specialist in the manufacture of polycarbonate parts
requiring adherence to strict optical quality specifications, and in the
application of abrasion and fog resistant coatings to those parts. Polycarbon is
the most impact resistant plastic utilized in optical quality molded parts.
MXL's products include shields, face masks and non-optical plastic products,
produced for over 50 clients in the safety, recreation, and military industries.
Additionally, MXL's Midwest operations, previously known as The Woodland Mold
and Tool Division of MXL, have the capability to design and construct injection
molds for a variety of applications (optical and non-optical).
Established over thirty years ago, MXL evolved into one of the leading
coaters of polycarbonate and acrylic parts. A growing insistence on quality
coating results led MXL to also establish itself as a specialist in the
injection molding of optical quality polycarbonate, thus enabling MXL to control
the process from start to finish. At its Lancaster, PA facility, molding
machines are housed in a climate controlled clean environment designed and built
by MXL. Coating lines also feature a controlled, enclosed environment and are
CFC -free.
MXL's Chicago division, Woodland Mold and Tool, was acquired by MXL in
1987 as MXL's business grew to include in-house optical injection molding.
Chicago's capabilities range from the production of long-life tooling for
standard molding applications to the design, construction and repair and
polishing of sophisticated optical mold.
On September 15, 2003, MXL acquired certain of the precision custom
optical assemblies inventory, machinery and equipment of AOtec for $1.1 million
in cash and notes, subject to adjustment. AOtec, located in the Massachusetts
area, is a successor to the American Optical Corporation, one of the pioneers in
optics research and development for over 160 years. MXL leased space in
Massachusetts for the newly purchased equipment. MXL paid $100,000 of the
purchase price in cash and issued three notes, in the amount of $450,000,
$275,000 and $275,000 each, due October 1, 2003, August 5, 2004 and August 5,
2005, respectively (which we refer to as the AOtec Notes). The AOtec Notes bear
interest on the unpaid principal amount at the rate of 4% per annum. On October
1, 2003, MXL borrowed $700,000 from a bank (which we refer to as the AOtec Debt)
and used the proceeds to pay the $450,000 note. The AOtec Debt is payable
monthly for three years and is secured by the machinery and equipment purchased
from AOtec. GP Strategies guaranteed the AOtec Debt.
MXL's contracts in the military and commercial arena often require
either vacuum deposited beam-splitter coatings, vacuum deposited anti-reflective
coatings, laser eye protection, or a combination of these technologies in
addition to MXL's historic capabilities of providing difficult and optically
correct molded and coated components. Prior to the acquisition of the equipment
and intellectual property assets from AOtec, MXL was required to enter into
subcontracting arrangements to secure these technologies. The laser eye
protection technology, vacuum deposition processing, and equipment acquired from
AOtec, will enable MXL to better service purchase orders for precision pilot
44
visors for next generation military fighter and attack aircraft, which require
beam-splitter and anti-reflective coatings and will shortly require laser eye
protection.
MXL has earned a reputation as a leading toolmaker, molder and coater
for optical quality products in the United States by consistently meeting its
customer's requirements, even in the case of the most difficult designs and
compound curve optics. This expertise has allowed MXL to expand its customer
base beyond the United States to Japan, the United Kingdom, Europe, the Middle
East, Mexico, Canada, Australia and other locales.
MXL's net sales in the regions it does business for the six months
ended June 30, 2004 and 2003 and for fiscal years ended December 31, 2003, 2002
and 2001, based upon the customers' locations, are as follows (in thousands):
Six Months Ended June 30, Year Ended December 31,
-------------------------------- -------------------------------------------
----------------- -------------- -------------- -------------- -------------
2004 2003 2003 2002 2001
---- ---- ---- ---- ----
-------------------------------- -------------- -------------- -------------
(unaudited)
United States 3,242 3,688 $6,930 $8,264 $9,465
Far East 657 404 1,230 1,266 1,150
Other North America 292 115 217 172 46
Western Europe 218 51 211 163 278
Other 23 10 25 131 245
--------- -- ----- -- ----- --- ------ ---
Total $4,432 $4,268 $8,613 $9,996 $11,184
====== ====== ====== ====== =======
MXL has been continuously and actively engaged in its optical plastics
business since 1968. GP Strategies has owned all of the MXL stock since 1973.
Industry Overview and Competition
The optical quality molding business requires expertise, experience and
an environment totally committed to the task. It requires the construction of a
facility designed and constructed expressly for precision injection molding and
personnel with the technical expertise to run such facility.
The markets for the products currently manufactured and sold by MXL are
characterized by extensive competition. The principal competitive factors of MXL
are its reputation for quality, service and integrity. MXL is able to provide
its customers with a breadth of experience, from mold design through mold
construction, to injection molding, coating, laser eye protection and/or high
technology optical coating. MXL is able to accomplish the most complex projects
for its customers. In addition, MXL's engineering, performance, availability and
reliability are important competitive factors.
Many existing and potential competitors have greater financial,
marketing and research resources than MXL.
Business Strengths
MXL has earned a reputation as one of the leading toolmakers, molders
and coaters for optical quality products in the Unites States by consistently
meeting its customers' requirements, even in the case of the most difficult
designs and compound curve optics.
45
As a pioneer in the optical plastic coating business, MXL offers
expertise in designing new parts and products for its customers. MXL has spent
over 30 years developing and perfecting its coating technology and materials.
The market for optical injection molding, tooling and coating is
focused, leading to intense competition. The following are major competitive
strengths and characteristics of MXL.
o Reputation for Quality and Service. MXL's on-going
commitment to quality has enabled it to meet the rigorous
requirements of its most valued customers and has earned
it a reputation as the premier optical injection molder in
the industry. MXL has a reputation for on-time delivery,
and its return rate is exceptionally low, representing
less than 1% of sales volume. As these customers continue
to focus on product quality, MXL's past performance and
long-term improvement programs should further strengthen
customer relationships.
o Superior Technical Skills and Expertise. The engineering
experience of MXL's senior management has enabled MXL to
take advantage of state-of-the-art injection molding
technology and effectively develop cost-effective and
efficient production facilities. MXL's proprietary
HYDRON(R) permanent anti-fog coating absorbs moisture to
form a barrier against fogging.
o ISO 9002 Certification. MXL's Pennsylvania and
Massachusetts facilities are ISO 9002 certified-a
universally accepted quality assurance designation
indicating the highest quality manufacturing standards. A
certification by the International Standards Organization
means that a company maintains a quality system that is
regularly assessed for compliance to ISO standards.
Meeting the ISO standard of quality confirms MXL's
commitment to manufacturing excellence.
o Integrated Plastics Business. The combination of MXL's
original business and its recently acquired equipment and
technology from AOtec, has created an integrated business
which offers clients a full range of design, production
and marketing services for molded and coated optical
plastic products.
o Modern Automated Manufacturing. MXL's presses and coating
lines, state-of-the-art for the molding business, are
efficiently designed and well maintained. The equipment
can be quickly reconfigured to meet specific job
requirements.
o Well-Qualified Management Team. MXL's senior management
has extensive experience in all aspects of the plastic
molding and coating industry. The senior management team
has in excess of 10 years of direct experience in the
industry.
o Attractive Growth Opportunities. With the leadership of
the senior management, MXL is poised to enter any plastic
molding and coating business. Its acquisition of certain
of the AOtec assets was a logical extension of its
position as a leading provider of optical quality
injection molds by allowing MXL to further expand its
business into the military arena. MXL believes that the
combination of its proprietary "Anti-Fog" coating, precise
processing of the "Anti-Scratch" coatings, precise molding
and proprietary grinding and polishing methods for its
injection tools as well as its vacuum deposited
anti-reflection coatings and laser eye protection
technology will provide it with the opportunity to expand
into related products.
Strategy
MXL intends to leverage its expertise as a molder and coater of optical
quality products by expanding into other markets and products. The performance
of MXL in the future will depend on its ability to develop and market new
products that will gain customer acceptance and loyalty, as well as its ability
to adapt its product offerings to meet changing pricing conditions and other
factors.
46
Markets and Products
MXL focuses its manufacturing capabilities in three distinct
capacities: injection molding, precision coating of optical plastics, and tool
and mold design and manufacture.
Injection Molding. MXL has the capability to manufacture a wide variety
of custom injection molding plastics for the recreation, industrial safety and
defense industries. Some of the products that MXL produces include facemasks and
shields for recreation purposes and industrial safety companies. All of MXL's
custom molding involves poly-carbon, which is a difficult resin to mold and has
required the development of sophisticated manufacturing skills. MXL's
closed-loop process control system monitors and provides quality-assurance for
every critical variable from resin drying, through mold temperature and
alignment, to robotic part removal. MXL's specially designed clean room
environment automatically removes dust and holds temperature and humidity
constant throughout the year.
Precision Coating. MXL's two coating lines allow it to offer a wide
range of coating technologies to its customers. These services include dual
coating processes, urethane hard coat, silicone hard coat, permanent anti-fog,
and finish application design. 80% of MXL's coating business is for abrasion
resistant purposes and 20% is for anti-fog applications. MXL's two coating lines
were designed and built in-house, and allow for maximum flexibility and quality
throughout the coating process. All functions are controlled by state-of-the-art
programmable controllers and A.C. Linear drives and robotics. These highly
flexible dip and spray operations can deliver a variety of coatings for parts as
large as eight inches by twenty-six inches, including anti-scratch on all
surfaces, anti-fog on all surfaces, one coating on one side only or dual coating
with anti-scratch on one side and anti-fog on the opposite side.
Tool Manufacturing. The Midwest operations use nine tool and die makers
to produce optical injection mold tools and standard injection mold tools in
sizes up to 36 inches x 36 inches x 36 inches.
AOtec. MXL serves as the prime contractor for several major development
programs in industry and government at its Massachusetts facility which is
separated into several independent groups: precision optical systems, including
medical optics, military eye wear and custom molded and decorated products. In
order to maintain its competitive position, MXL has traditionally invested in
state of the art equipment, including molding presses ranging from 60 to 485
tons, automation equipment, clean room facilities, and vacuum and dip coating
equipment. MXL utilizes computer aided design software to design its optical
products. In addition, modern computer controlled molding machinery is used to
fabricate precision optic components.
Manufacturing and Raw Materials
MXL's primary raw materials are plastic resin (principally
polycarbonate), silicone hard coatings and HYDRON(R) anti-fog coating. MXL is
able to fulfill its requirements for plastic resin through arrangements with
various distributors and is able to fulfill its requirements for silicone hard
coating from manufacturers. The prices for MXL's primary raw materials do not
significantly fluctuate, and have been relatively steady in the past two years
due to increased competition in the market that supplies MXL's raw materials.
MXL manufactures its proprietary HYDRON(R), which is applied as a fog resistant
coating to its optical products.
Customers
As the market for optical injection molded plastics is relatively
focused, MXL serves virtually all of the major users. The customer base of MXL
includes over 50 commercial customers in 27 states and Japan, the United
47
Kingdom, Europe, the Middle East, Mexico, Canada and Australia. These commercial
customers are primarily in the recreation, safety, and security industries.
MXL's largest three customers comprised approximately 13%, 12% and 12%,
respectively, of its total sales in 2003, and its two largest customers
comprised approximately 12% and 11%, respectively, of its total sales for the
six months ended June 30, 2004.
MXL's government customers include various offices of the Department of
Defense. MXL is required to comply with various federal regulations including
military specifications and Federal Acquisition Regulations for military end use
applications. There are no government contracts subject to renegotiation or
termination at the election of the government.
Sales and Distribution
Because of the narrow niche MXL serves, its sales and marketing effort
concentrates on industry trade shows, such as the Society of Plastics Engineers,
and advertising in industry journals. Its senior management team, as well as
four marketing and sales executives, are responsible for the sales and marketing
effort. It also utilizes one sales representative to market its products.
Backlog
MXL's sales order backlog as of December 31, 2003 was approximately
$1,703,000 and most of the orders are expected to be completed during fiscal
2004.
Patents, Trademarks, and other Intellectual Property
The names MXL and HYDRON are registered trademarks. In connection with
the AOtec transaction, MXL entered into an exclusive, royalty-free perpetual
license (with the right to grant sublicenses) to use the trademarks AOTEC(TM)
and AOGUARD(TM) for military eye protection products, electro-optical systems
and precision molded and coated plastic components.
Environmental Matters and Governmental Regulations
For its manufacturing work as a subcontractor in the military industry,
MXL is required to comply with various federal regulations including Military
Specifications and Federal Acquisition Regulations for military end use
applications. In addition, MXL's activities may subject it to federal, state and
local environmental laws and regulations. MXL believes that it is in compliance
in all material respects with such government regulations and environmental
laws.
Employees
As of December 31, 2003, MXL employed approximately 92 persons,
including 49 at its Lancaster facility, 10 in its Chicago facility and 33 at its
new Massachusetts facility. Of the MXL employees, 47 are in production or
shipping, with the remainder serving in executive, administrative office and
sales capacities. None of MXL's employees are subject to collective bargaining
agreements. MXL believes its relationship with its employees is good.
Properties
In 1976, MXL purchased a 4.5 acre property in Lancaster, Pennsylvania
and constructed a two-story, 35,000 square foot facility, which serves as both
headquarters and operating facilities. MXL added a 15,000 square foot addition
in 1997. The facility includes five injection presses and two coating lines
48
which are housed in a climate controlled clean environment and were designed and
built in-house. The Chicago division, formerly its Woodland Mold and Tool
division, purchased in September 1988 a single tract, 55,000 square foot
facility in Downer's Grove, Illinois, which is its headquarters and operating
facility. In September 2003, MXL entered into a one year lease with two renewal
options for a 55,000 square foot storage and manufacturing facility in
Southbridge, Massachusetts for its newly purchased equipment from AOtec. MXL's
Pennsylvania and Massachusetts facilities are ISO 9002 certified, indicating
achievement of the highest standards of manufacturing excellence. MXL believes
that all of its facilities and equipment are in good condition and are well
maintained and able to continue to operate at present levels and as anticipated
by our present business strategy.
Five Star Products
General
Five Star is engaged in the wholesale distribution of home decorating,
hardware and finishing products. It serves over 3,500 independent retail dealers
in twelve states, making Five Star one of the largest distributors of its kind
in the Northeast. Five Star operates two state -of -the -art warehouse
facilities, located in Newington, CT and East Hanover, NJ. All operations are
coordinated from Five Star's New Jersey headquarters.
In the first quarter of 2000, Five Star expanded its sales territory
with the addition of an established, dedicated sales force servicing the
Mid-Atlantic States, as far south as Virginia. This new addition to the sales
force generates revenues of approximately $9 million annually. Five Star
services this new territory from its 236,000 square foot East Hanover, New
Jersey facility, from which it also services the Northeast, enabling Five Star
to leverage its fixed costs over a broader revenue base.
Five Star offers products from leading manufacturers such as Cabot
Stain, William Zinsser & Company, DAP, General Electric Corporation, American
Tool, USG, Stanley Tools, Minwax and 3M Company. Five Star distributes its
products to retail dealers, which include lumber yards, "do-it yourself"
centers, hardware stores and paint stores principally in the northeast region.
It carries an extensive inventory of the products it distributes and provides
delivery, generally within 24 to 72 hours. Five Star has grown to be one of the
largest independent distributors in the Northeast by providing a complete line
of competitively priced products, timely delivery and attractive pricing and
financing terms to its customers. Much of Five Star's success can be attributed
to a continued commitment to provide customers with the highest quality service
at reasonable prices.
As one of the largest distributors of paint sundry items in the
Northeast, Five Star enjoys cost advantages and favorable supply arrangements
over the smaller distributors in the industry. This enables Five Star to compete
as a "low cost" provider. Five Star uses a fully computerized warehouse system
to track all facets of its distribution operations. Five Star has enhanced the
sophistication of its warehouse and office facilities to take full advantage of
economies of scale, speed the flow of orders and to compete as a low cost
distributor. Nearly all phases of the selling process from inventory management
to receivable collection are automated and tracked; all operations are overseen
by senior management at the New Jersey facility. Five Star is able to capitalize
on manufacturer discounts by strategically timing purchases involving large
quantities.
Management takes a proactive approach in coordinating all phases of
Five Star's operations. For example, sales managers require all sales
representatives to call on customers once every week. Each salesperson transmits
his or her orders through Five Star's automated sales system, to the IBM AS/400
computer located at the New Jersey facility. The salesperson system combines the
ability to scan product codes in the customers' stores and download the
49
information to a laptop computer for final transmission. Based on the floor plan
of each warehouse and the location of products therein, the computer designs a
pattern for the orders to be picked. The orders are then relayed to the
appropriate location and typically picked in the evening. The warehouse
facilities are well-maintained and skillfully organized. A bar-coded part number
attached to the racking shelves identifies the location of each of the
approximately 23,000 stock keeping units (SKUs). The products are loaded onto
Five Star's trucks in the evening in the order that they will be unloaded, and
are delivered directly to the customers locations the following morning.
Five Star purchased its business from GP Strategies in 1998 for
approximately $16,500,000 in cash and the Five Star Note in the original
principal amount of $5,000,000. On October 8, 2003, we converted $500,000
principal amount of Five Star Note into 2,000,000 shares of Five Star common
stock which increased our ownership in Five Star from approximately 48% to
approximately 54% of the outstanding Five Star common stock. As a result, as of
and for the year ended December 31, 2003 Five Star is consolidated in our
financial statements. As a result of a tender offer made by Five Star to
purchase Five Star common stock which expired on March 31, 2004, we further
increased our ownership in Five Star to approximately 64%. In addition, we
continue to own the remaining $2.8 million principal amount of the Five Star
Note.
On June 20, 2003, Five Star obtained a new Loan and Security Agreement
(which we refer to as the Loan Agreement) with Fleet Capital Corporation. The
Loan Agreement has a five-year term, with a maturity date of June 30, 2008. The
Loan Agreement provides for a $25,000,000 revolving credit facility, which
allows Five Star to borrow based upon specified percentages of eligible
inventory and eligible accounts receivable, as defined therein. The interest
rates under the Loan Agreement are LIBOR plus a credit spread for borrowings not
to exceed $15,000,000 and the prime rate plus a credit spread for borrowings in
excess of the above-mentioned LIBOR-based borrowings. The credit spreads can be
reduced in the event that Five Star achieves and maintains certain performance
benchmarks. In addition, under a Subordination Agreement between the GP
Strategies and Fleet Capital Corporation dated June 20, 2003, Five Star may make
annual cash payments of principal to GP Strategies provided Five Star achieves
certain financial performance benchmarks. The Five Star Note and all the shares
of Five Star common stock owned by GP Strategies, along with GP Strategies'
rights under the Subordination Agreement, will be transferred to National Patent
Development prior to the spin-off. See "Description of Indebtedness." At June
30, 2004 and December 31, 2003, approximately $22,176,000 and $16,685,000 was
outstanding under the Loan Agreement and approximately $440,000 and $480,000 was
available to be borrowed, respectively.
Industry Overview and Competition
The paint sundry items distribution industry is closely related to the
do-it-yourself retail market, which has tended to exhibit elements of
counter-cyclicality. In times of recession, consumers tend to spend more on home
improvements if they cannot afford to trade up to bigger homes. In times of
economic strength, consumers tend to spend heavily on home improvements because
they believe they can afford to complete their home improvement projects.
According to the National Retail Hardware Association, total retail sales by
home improvement retailers were $199 billion in 2002, and are projected to grow
at a 5.7% compound rate through 2006.
Painting is the quintessential do-it-yourself project. Painting has to
be done more frequently than most remodeling jobs, and it is a relatively
inexpensive way to update the appearance of a home. For these reasons, the paint
and paint sundry items industry tends to be counter-cyclical and a solid growth
segment of the do-it-yourself market.
Competition within the do-it yourself industry is intense. There are
large national distributors commonly associated with national franchises such as
50
Ace and TruServ as well as smaller regional distributors, all of whom offer
similar products and services. Moreover, in some instances manufacturers will
bypass the distributor and choose to sell and ship their products directly to
the retail outlet. In addition, Five Star's customers face stiff competition
from Home Depot, which purchases directly from manufacturers. The principal
means of competition for Five Star are its strategically placed distribution
centers and its extensive inventory of quality, name-brand products. Five Star
will continue to focus its efforts on supplying its products to its customers at
a competitive price and on a timely, consistent basis. While other paint sundry
items distributors sell to the same retail networks as Five Star, they are at a
distinct disadvantage due to Five Star's experience, sophistication and size.
Hardware stores that are affiliated with the large, dealer-owned
distributors such as Ace also utilize Five Star's services because they are
uncomfortable with relying solely on their dealer network. Most cooperative-type
distributors lack the level of service and favorable credit terms that
independent hardware stores enjoy with Five Star. Five Star effectively competes
with the dealer-owned distributors because it provides more frequent sales
calls, faster deliveries, better financing terms and a full line of vendors and
products to choose from.
Business Strengths
As one of the largest distributors of paint sundry items in the
Northeast, Five Star enjoys cost advantages and favorable supply arrangements
over the smaller distributors in the industry. This enables Five Star to compete
as a "low cost" provider. Five Star uses a fully computerized warehouse system
to track all facets of its distribution operations. Five Star has enhanced the
sophistication of its warehouse and office facilities to take full advantage of
economies of scale, speed the flow of orders and to compete as a low cost
distributor. Nearly all phases of the selling process from inventory management
to receivable collection are automated and tracked; all operations are overseen
by senior management at the New Jersey facility. Five Star is able to capitalize
on manufacturer discounts by strategically timing large quantity purchases.
Strategy
Five Star carries an extensive inventory of the products it distributes
and provides delivery, generally within 24 to 72 hours. Five Star believes that
it will continue to grow its business by providing a complete line of
competitively priced products, timely delivery and attractive pricing and
financing terms to its customers. In the future, Five Star will attempt to
acquire complementary distributors and to expand the distribution of its use of
private-label products sold under the "Five Star" name. Through internal growth
and acquisitions, Five Star has already captured a leading share in its
principal market the Northeast. This growth-oriented acquisition strategy of
acquiring complementary distributors has allowed Five Star to compete against a
substantial number of its competitors.
Markets, Products and Sales
The do-it-yourself industry relies on distributors to link
manufacturer's products to the various retail networks. The do-it-yourself
market operates on this two-step distribution process, i.e., manufacturers deal
through distributors who in turn service retailers. This occurs principally
because most retailers are not equipped to carry sufficient inventory in order
to be cost effective in their purchases from manufacturers. Thus, distributors
add significant value by effectively coordinating and transporting products to
retail outlets on a timely basis. Five Star distributes and markets products
from hundreds of manufacturers to all of the various types of retailers from
regional paint stores, to lumber yards, to independent paint and hardware
stores.
51
The marketing efforts are directed by regional sales managers. These
individuals are responsible for designing, implementing and coordinating
marketing policies. They work closely with senior management to coordinate
company-wide marketing plans as well as to service Five Star's major multi-state
customers. In addition, each regional sales manager is responsible for
overseeing the efforts of his sales representatives.
The sales representatives, by virtue of daily contact with Five Star's
customers, are the most integral part of Five Star's marketing strategy. It is
their responsibility to generate revenue, ensure customer satisfaction and
expand the customer base. Each representative covers an assigned geographic
area. The representatives are compensated based solely on commission. Five Star
has experienced low turnover in its sales force; most representatives have a
minimum of five years' experience with Five Star. Many sales representatives had
retail experience in the paint or hardware industry when they were hired by Five
Star.
Five Star's size, solid reputation for service, large inventory and
attractive financing terms provide sales representatives with tremendous
advantages relative to competing sales representatives from other distributors.
In addition, the representatives' efforts are strengthened by company-sponsored
marketing events. For example, each year in the first quarter, Five Star invites
all of its customers to special trade shows for Five Star's major suppliers, so
that suppliers may display their products and innovations. Five Star also
participates in advertising circular programs in the spring and the fall which
contain discount specials and information concerning new product innovations.
Management Information System
All of Five Star's inventory control, purchasing, accounts payable and
accounts receivable are fully automated on an IBM AS/400 computer system. In
addition, Five Star's software alerts buyers to purchasing needs, and monitors
payables and receivables. This system allows senior management to control
closely all phases of Five Star's operations. Five Star also maintains a
salesperson-order-entry system, which allows the salesperson to scan product and
then download the information to a laptop. The laptop contains all product and
customer information and interacts with the AS/400.
Purchasing
Five Star relies heavily upon its purchasing capabilities to gain a
competitive advantage relative to its competitors. Five Star's capacity to stock
the necessary products in sufficient volume and its ability to deliver them
promptly upon demand is one of the strongest components of service in the
distribution business, and is a major factor in Five Star's success.
Since retail outlets depend upon their distributor's ability to supply
products quickly upon demand, inventory is the primary working capital
investment for most distribution companies, including Five Star. Through its
strategic purchasing decisions, Five Star carries large quantities of inventory
relative to its competitors and thus can boast fill ratios of approximately 95%.
All purchasing decisions based on current inventory levels, sales
projections, manufacturer discounts and recommendations from sales
representatives, are made by the merchandising group, located in New Jersey, in
order to coordinate effectively Five Star's activities. In addition to senior
management's active involvement, regional sales managers play an extremely
critical role in this day-to-day process.
52
Five Star has developed strong, long-term relationships with the
leading suppliers since its predecessor company, J. Leven, was founded in 1912.
As a major distributor of paint sundry items, suppliers rely on Five Star to
introduce new products to market. Furthermore, suppliers have grown to trust
Five Star's ability to penetrate the market. As a result, Five Star is often
called on first by manufacturers to introduce new products into the marketplace.
For example, Minwax, Best Liebco and Cabot Stain have utilized Five Star to
introduce and distribute some of their new product innovations.
Customers
Five Star's largest customer accounted for approximately 3.6% of its
sales in 2003 and its 10 largest customers accounted for approximately 12.4% of
its sales. All such customers are unaffiliated and Five Star does not have a
long-term contractual relationship with any of them.
Backlog
Five Star does not have any significant backlog.
Patents, Trademarks, and other Intellectual Property
Except for its line of private-label products, Five Star does not have
any material patents, trademarks or other intellectual property. Five Star
intends to expand the distribution of its line of private-label products sold
under the "Five Star" name.
Environmental Matters and Governmental Regulations
Five Star's activities may subject it to federal, state and local
environmental laws and regulations and OSHA regulations. Five Star believes that
it is in compliance in all material respects with such environmental and federal
laws and regulations.
Employees
Five Star employed approximately 260 people as of December 31, 2003.
Management-employee relations are considered good at both of Five Star's
warehouse facilities. The Teamsters union represents approximately 94 union
employees at the New Jersey warehouse facility. The Connecticut warehouse
facility is completely non-unionized. Five Star has never experienced a labor
strike at its facilities. Five Star's contract with Local No. 11, affiliated
with the International Brotherhood of Teamsters expires on December 19, 2008.
Properties
Five Star leases 236,000 square feet in New Jersey, 111,000 square feet
in Connecticut, 1,300 square feet of sales offices in New York and 800 square
feet in Maryland. Five Star's operating lease for the New Jersey facility
expires in March, 2007, and the annual rent is $1,187,000. Five Star's lease for
the Connecticut facility expires in February, 2007, and its annual rent is
$402,000. The New York sales office pays $19,000 per year in rent and the
Maryland office pays $11,000. The facilities leased by Five Star are considered
to be suitable and adequate for their intended uses and are considered to be
well maintained and in good condition.
53
Other Assets
Valera Pharmaceuticals
We own 100% of the common stock of Valera Pharmaceuticals (formerly
Hydro Med Sciences, Inc.), which amounts to a 15.3% ownership interest assuming
conversion of Valera outstanding preferred stock and exercise of stock options
held by employees of Valera. Valera is a specialty pharmaceutical company
focused on the acquisition, development and commercialization of novel
prescription pharmaceuticals, particularly for the treatment of urological
conditions and disorders. Valera intends to develop new formulations using its
hydron drug delivery technology, which is a subcutaneous implant that controls
the amount, timing and location of the release of drug compounds into the body.
Valera's lead product is a twelve-month implant that delivers the
luteinizing hormone releasing hormone, or LHRH, histrelin for the palliative
treatment of metastatic prostate cancer. LHRH agonists are the premium standard
of care in the palliative treatment for metastatic breast cancer. On October 13,
2004, Valera announced that the FDA approved the marketing of Vantas(TM), the
name for Valera's long-acting LHRH implant for treating prostate cancer.
Prior to June 2000, Valera operated as a division of GP Strategies. In
connection with an offering of GP Strategies 6% Convertible Subordinated
Exchangeable Notes due June 2003, Valera was incorporated as a separate company
and became a wholly-owned subsidiary of GP Strategies through GP Strategies'
ownership of 100% of the common stock of Valera. Following the spin-off,
National Patent Development will hold all of this common stock.
In December 2001, Valera completed a $7 million private placement of
Series A convertible preferred stock to certain institutional investors. As a
condition of the private placement, GP Strategies contractually gave up
operating control over Valera through an Investors Rights Agreement, which gave
GP Strategies the right to designate one director on Valera's board of directors
and gave the other stockholders the right to designate the other directors.
After the spin-off, National Patent Development will be subject to the Investors
Rights Agreement. Accordingly, while on completion of the spin-off we will own
100% of Valera's common stock, we will not have financial and operating control
of Valera.
In the second quarter of 2003, Valera completed a private placement
offering pursuant to which Valera raised approximately $12 million in gross
proceeds from the sale of Series B convertible preferred stock. As part of such
transaction, GP Strategies was granted an option until March 31, 2004 (with a
closing by June 30, 2004), to purchase up $5 million of the Series B convertible
preferred stock at the offering price of $0.725 per share, which was
subsequently verbally extended to June 30, 2004. On June 30, 2004, GP Strategies
transferred a portion of its option to an institutional investor, which
exercised such option and purchased from Valera 3,448,276 shares of Series B
convertible preferred stock for $0.725 per share. The balance of the option
expired unexercised. In consideration of such transfer, such institutional
investor granted us an option until October 28, 2004 to purchase up to 2,068,966
shares of Series B convertible preferred stock owned by such institutional
investor for prices ranging from $0.725 to $0.7685 per share. There can be no
assurance that the financing necessary for us to purchase such shares can be
obtained or that the option will be exercised. On August 16, 2004 Valera sold
11,600,000 shares of Series C preferred stock and received gross proceeds of
$11.6 million. Assuming conversion of all of the outstanding shares of Series A,
Series B and Series C convertible preferred stock and exercise of stock options
held by employees of Valera the Company would own approximately 15.3% of Valera.
Assuming we exercise the option to purchase 2,068,966 shares of the Series B
convertible preferred stock and conversion of all of the outstanding shares of
Series A, Series B and Series C convertible preferred stock, and exercise of
stock options held by employees of Valera, we would own approximately 18.4% of
Valera.
54
Millennium Cell
Millennium Cell is a publicly traded emerging technology company
engaged in the business of developing innovative fuel systems for the safe
storage, transportation and generation of hydrogen for use as an energy source.
At December 31, 2002, we had 293,271 shares of Millennium Cell with a market
value on that date of $698,000. On October 17, 2003, National Patent Development
received pursuant to the Repayment an additional 1,000,000 shares of common
stock of Millennium Cell with a market value on that date of approximately
$3,500,000. At December 31, 2003, we had 1,188,271 shares of common stock of
Millennium Cell with a market value of $2,769,000. At June 30, 2004, we had
964,771 shares of common stock of Millennium Cell with a market value of
$1,823,000.
Pawling Property
We own an approximately 980 acre parcel of undeveloped land in Pawling,
New York, which includes an approximately 50 acre lake, Little Whaley Lake. The
Boy Scouts of America operated a camp located along the western side of Little
Whaley Lake, which was closed in the early 1980's, and the site is currently
unoccupied. GP Strategies purchased this property in 1986. In connection with
the sale of the Gabelli Notes and GP Warrants, GP Strategies mortgaged this
property to the holders of the Gabelli Notes, and GP Strategies transferred it
to us subject to that mortgage. See "Relationship between GP Strategies and
National Patent Development-Gabelli Transaction Mortgage."
Properties
The following information describes the material physical properties
owned or leased by us and our subsidiaries.
We lease approximately 10,000 square feet of space for our White
Plains, New York principal executive offices.
MXL owns 50,200 square feet of warehouse and office space in Lancaster,
PA and 55,000 square feet of warehouse and office space in Downer's Grove, IL,
both of which are subject to mortgages. In September 2003, MXL entered into a
three-year lease for a 55,000 square foot storage and manufacturing facility in
Southbridge, Massachusetts for its newly purchased equipment from AOtec.
Five Star leases 236,000 square feet in New Jersey, 111,000 square feet
in Connecticut, 1,300 square feet of sales offices in New York and 800 square
feet in Maryland. Five Star's operating lease for the New Jersey facility
expires in March, 2007 and the operating lease for the Connecticut facility
expires in February, 2007.
The facilities owned or leased by us are considered to be suitable and
adequate for their intended uses and are considered to be well maintained and in
good condition.
Legal Proceedings
Claims Relating to Learning Technologies Acquisition
On January 3, 2001, GP Strategies commenced an action alleging that MCI
Communications Corporation, or MCI, MCI's Systemhouse subsidiaries, or
Systemhouse, and Electronic Data Systems Corporation, as successor to
Systemhouse, or EDS, committed fraud in connection with GP Strategies' 1998
acquisition of Learning Technologies from the defendants for $24.3 million. GP
Strategies seeks actual damages in the amount of $117.9 million plus interest,
55
punitive damages in an amount to be determined at trial, and costs.
The complaint, which is pending in the New York State Supreme Court,
alleges that the defendants created a doctored budget to conceal the poor
performance of the United Kingdom operation of Learning Technologies. The
complaint also alleges that the defendants represented that Learning
Technologies would continue to receive new business from Systemhouse even though
the defendants knew that the sale of Systemhouse to EDS was imminent and that
such new business would cease after such sale. In February 2001, the defendants
filed answers denying liability. No counterclaims against the plaintiffs have
been asserted. Although discovery had not yet been completed, defendants made a
motion for summary judgment, which was submitted in April 2002. The motion was
denied by the court due to the MCI bankruptcy described below, but with leave to
the other defendants to renew.
The defendants other than MCI then made an application to the court to
stay the fraud action until a later-commenced arbitration, alleging breach of
the acquisition agreement and of a separate agreement to refer business to
General Physics on a preferred provider basis and seeking actual damages in the
amount of $17.6 million plus interest, is concluded. In a decision dated May 9,
2003, the court granted the motion and stayed the fraud action pending the
outcome of the arbitration. Limited discovery was conducted in connection with
the arbitration. The arbitration hearings began on May 17, 2004 and concluded on
May 24, 2004 before JAMS, a private dispute resolution firm. On September 10,
2004 General Physics received a $12 million interim award in its arbitration
against EDS. The arbitrator found that the sellers of Learning Technologies
breached certain representations and warranties contained in the acquisition
agreement. The arbitrator directed the parties to attempt to reach agreement
with respect to certain other matters, including whether General Physics is
entitled to pre-award interest and, if so, in what amount. The parties were
unable to reach agreement. The arbitrator has set forth a briefing schedule,
which the parties agreed to modify and now concludes on November 1, 2004. The
interim arbitration award is not subject to appeal but, once the arbitration
award becomes final, General Physics will file in New York state court an
application for an order confirming the award and EDS will have the right to
seek to vacate the award.
MCI filed for bankruptcy protection in July 2002. As a result, the
action was automatically stayed as to MCI. GP Strategies and its subsidiary,
General Physics, both filed timely Proofs of Claim in the United States
Bankruptcy Court against MCI and WorldCom, Inc., among others. On or around
April 22, 2003, MCI served objections to these Proofs of Claim. On May 15, 2003,
GP Strategies and General Physics submitted their opposition to the objections.
GP Strategies and General Physics subsequently made a motion in Bankruptcy Court
to lift the automatic stay to permit the litigation to proceed against MCI. In
February 2004, the Bankruptcy Court granted the motion of GP Strategies and
General Physics to the extent that they sought to have the stay lifted so that
the state court could rule on the merits of MCI's summary judgment motion. On
February 19, 2004, GP Strategies and General Physics notified the state court of
the Bankruptcy Court's decision.
On July 30, 2004 GP Strategies made a capital contribution to National
Patent Development, which in turn on July 30 ,2004 transferred to MXL, the right
to receive the first $5 million of any proceeds (net of litigation expenses),
and 50% of any proceeds (net of litigation expenses) in excess of $15 million,
received with respect to the foregoing claims.
MXL and Five Star are from time to time subject to litigation or other
legal proceedings arising in the ordinary course of business. National Patent
Development believes that the outcome of such proceedings will not have a
material adverse effect on its financial condition, results of operations, and
cash flows.
56
MANAGEMENT
Directors
The National Patent Development Board will initially consist of seven
directors. National Patent Development's Certificate of Incorporation provides
that the number of directors may be fixed by or in the manner provided in the
Bylaws. The Bylaws provide that the Board may increase or decrease the number of
directors by resolution. There is no cap on the number of directors. On the
Distribution Date, the directors will be the persons named below.
Principal Occupation or
Name Age Employment for the Past Five Years
Harvey P. Eisen 61 Harvey P. Eisen has been Chairman and Managing Member of Bedford Oak
Management, LLC since 1998. Prior thereto, Mr. Eisen served as Senior Vice
President of Travelers, Inc. and of Primerica prior to its merger with
Travelers in 1993. Mr. Eisen has over thirty years of asset management
experience, is often consulted by the national media for his views on all
phases of the investment marketplace, and is frequently quoted in The Wall
Street Journal, The New York Times, PensionWorld, U.S. News & World Report,
Financial World and Business Week, among others. Mr. Eisen also appears
regularly on such television programs as Wall Street Week, CNN, and CNBC.
Mr. Eisen is a trustee of the University of Missouri Business School where
he established the first accredited course on the Warren Buffet Principles
of Investing. He has been a Director of GP Strategies since July 2002. He
is also a trustee of Rippowam Cisqua School in Bedford, New York and the
Northern Westchester Hospital Center.
Jerome I. Feldman 75 Jerome I. Feldman is founder and since 1959 has been Chief Executive
Officer and a Director of GP Strategies. He has also been Chairman of the
Board of GP Strategies since 1999 and was President of GP Strategies from
1959 until 2001. He has been Chairman of the Board of Five Star since 1994,
a director of GSE Systems, Inc. since 1994, and Chairman of the Board of
GSE since 1997. Mr. Feldman is also Chairman of the New England Colleges
Fund and a Trustee of Northern Westchester Hospital Center.
Scott N. Greenberg 47 Scott N. Greenberg has been a Director of GP Strategies since 1987 and
President and Chief Financial Officer since 2001. He was Executive Vice
President and Chief Financial Officer from 1998 to 2001, Vice President and
Chief Financial Officer from 1989 to 1998, and Vice President, Finance from
1985 to 1989. He has been a director of GSE since 1999 and was a director
of Five Star from 1998 to March, 2003.
57
Roald Hoffmann 66 Roald Hoffmann has been the Frank H. T. Rhodes Professor of Humane Letters
and Professor of Chemistry since 2001, and from 1974 to 2001 was the John
Newman Professor of Physical Science at Cornell University. Dr. Hoffmann
is a member of the National Academy of Sciences and the American Academy of
Arts and Sciences. In 1981, he shared the Nobel Prize in Chemistry with
Dr. Kenichi Fukui. He has been a director of GP Strategies Corporation
since 1988.
Ellen Havdala 38 Ellen Havdala is a Managing Director of Equity Group Investments, L.L.C.,
an affiliate of EGI - Fund (02-04) Investors, L.L.C. Ms. Havdala joined
Equity in 1990 as a member of the Zell/Chilmark Fund, L.P. During her
tenure at Equity and its affiliated companies, she has served as Vice
President of Scott Sports Group, Inc. and Executive Vice President of
Equity International Properties, Ltd.
Thomas C. Kinnear 61 Thomas C. Kinnear is Eugene Applebaum Professor of Entrepreneurial Studies,
Executive Director of the Samuel Zell and Robert H Lurie Institute for
Entrepreneurial Studies, and Professor of Marketing at the University of
Michigan Business School. Mr. Kinnear has worked in consulting and
executive development for firms such as: Aetna, Amgen, AT&T, Alcatel,
Chrysler, Domino's Pizza, Inc., Eli Lilly, General Motors, General
Electric, Helmac Products, Kodak, L'Air Liquide (France), Mann + Hummel,
and Travelers. He also has served or is serving as a member of the Board
of Directors or Corporate Advisory Boards for several companies and
community organizations including: Avail Networks, Inc., Bard
Manufacturing, Inc., Bluegill Technologies, Inc., Copernicus, Inc.,
Domino's Pizza, Inc., Ecliptic Systems, Inc., Greenhills School, Helmac
Products, Inc., Interpretive Software, Inc., Network Express, Inc., and TAL
Materials.
Talton R. Embry 58 Talton R. Embry has been Chairman of Magten Asset Management Corp. since
1978. Mr. Embry is a director of First Union Real Estate Equity and
Mortgage Investments and ORBIMAGE, Inc. He was formerly co-chairman and a
director of Revco Drug Stores (now CVS Corp.). He has been a director of
Anacomp, BDK Holdings, Capsure Holdings (now CAN Surety), Combinued
Broadcasting, Salant, Texscan, Thermadyne, Varco International and
Westpoint Stevens.
Committees of the National Patent Development Board
The National Patent Development Board of Directors will have three
standing committees: an Audit Committee, a Compensation Committee, and an
Investment Committee. The following are the functions of the standing committees
of the National Patent Development Board.
Audit Committee. The Audit Committee will act in accordance with a
written charter, which will set forth the responsibilities of the Audit
Committee. These responsibilities will include, among other things:
58
o reviewing the independence, qualifications, services, fees and
performance of the independent auditors;
o appointing, replacing and discharging the independent auditors;
o approving the professional services provided by the independent
auditors;
o reviewing the scope of the annual audit and quarterly reports and
recommendations submitted by the independent auditors; and
o reviewing our financial reporting, the system of internal financial
controls, and accounting policies, including any significant changes,
with management and the independent auditors.
The Audit Committee will initially consist of Messrs. Hoffmann, Embry,
and Kinnear.
Compensation Committee. The Compensation Committee will assist the
Board and management in overseeing the appropriateness and cost of compensation
and benefits, particularly for executive officers. It will, among other things:
o assess the performance of, and have the authority to act with respect
to the compensation of, our executive officers;
o generally review benefits and compensation for all of our executive
officers;
o administer our stock option plan and any other incentive plans and
o make awards under the stock option plan.
The Compensation Committee will initially consist of Messrs. Hoffmann,
Eisen, and Embry.
Investment Committee. The Investment Committee will review all our
prospective investments of more than $1 million. The Investment Committee will
initially consist of Ms. Havdala and Messrs. Kinnear and Feldman.
Compensation of Directors
Each of our non-employee directors will receive an annual fee of
$5,000, payable quarterly, half of which will be paid in cash and half in shares
of our common stock. Non-employee directors will also receive $1,000 for each
Board meeting and committee meeting attended. Employee directors will receive no
compensation for their service on our Board.
Executive Officers
On the effective date of the Distribution, Mr. Feldman will be our
Chief Executive Officer and Mr. Greenberg will be our Chief Financial Officer.
The other executive officers of National Patent Development are expected to be
as follows:
Andrea D. Kantor will be our Vice President and General Counsel. Ms.
Kantor has been Vice President and General Counsel of GP Strategies since 2001,
and was Vice President and Corporate Counsel from 1999 to 2001, and Associate
59
General Counsel from 1988 to 1999. She has been a director of GSE since October
2003. Ms. Kantor practiced law as a corporate associate in New York City at
Schulte Roth & Zabel LLP, and prior to that at Sidley Austin Brown & Wood LLP.
Ms. Kantor is a member of the Association of the Bar of the City of New York and
a member of the Corporate and Securities Law Committee of the American Corporate
Counsel Association. Age 46.
Steve Cliff has been the President of MXL from 1983 through June 30,
2004, and was previously Vice President, Manufacturing of MXL. Mr. Cliff will
become a consultant for MXL for a two-year period beginning July 1, 2004. James
Eberle has been appointed President of MXL effective July 1, 2004, but will not
be considered an executive officer of National Patent Development.
Charles Dawson has been President of Five Star Products since January
2002 and Vice President and a director of Five Star since 1999. Since 1993, Mr.
Dawson has held several managerial positions with Five Star. Age 47.
EXECUTIVE COMPENSATION
General
The following table and notes present the aggregate compensation paid
in 2003by MXL and Five Star to their presidents. These persons will be
considered executive officers of National Patent Development following the
spin-off. National Patent Development's other executive officers have not
received any significant salary or bonus from National Patent Development or any
of its subsidiaries, and immediately after the spin-off will not receive any
compensation from National Patent Development or any of its subsidiaries. They
will, however, provide certain services to National Patent Development pursuant
to the provisions of the management agreement with GP Strategies and the cost of
these services will be allocated to National Patent Development. See
"Relationship between GP Strategies and National Patent Development--Management
Agreements."
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
Salary Bonus Stock All Other
Name and Principal Position Year ($) ($) (#) ($)
- --------------------------- ---- ---------- ------- -------------- ------------
Charles Dawson 2003 234,018 40,000 -0- 695(2)
President of Five Star 2002 226,615 20,000 -0- 602(2)
2001 188,009 -0- 150,000(1) 404(2)
Steven Cliff 2003 226,614 -0- -0- 7,980 (3)
President of MXL 2002 225,367 30,000 -0- 6,270 (3)
2001 224,159 -0- -0- 5,985 (3)
(1) Consists of options to purchase shares of common stock granted pursuant
to Five Star's 1994 Non-Qualified Stock Option Plan.
(2) Consists of premiums for executive life insurance.
(3) Consists of matching contributions to 401(k) Savings Plan.
60
Option Grants in 2003
No options were granted to the named executive officers in 2003.
Employment Agreements
Charles Dawson. As of November 28, 2001, Charles Dawson and Five Star
entered into an employment agreement pursuant to which Mr. Dawson is employed as
President of Five Star for a period commencing January 1, 2002 until December
31, 2005, (the "Employment Term"), unless sooner terminated.
Commencing January 1, 2002, Mr. Dawson's base salary is $225,000, with
annual increases of at least 3% effective on the second year of the Employment
Term. Mr. Dawson will receive a target bonus of $100,000, calculated based upon
the following two components: (1) earnings growth of Five Star and (2) an
achievement by Five Star of certain goals, weighted 75% and 25% respectively.
Mr. Dawson's target bonus for the years 2004 and 2005, will be $120,000, and
$130,000, respectively, which will be determined by components and weighting
factors based upon the goals and objectives of Five Star, mutually agreed upon.
Pursuant to the employment agreement, Five Star granted Mr. Dawson under Five
Star's option plan, five-year options to purchase 150,000 shares of Five Star's
common stock at an exercise price of $0.14 per share. Such options vest 20% per
annum, commencing on November 28, 2001. Five Star is also required to provide
Mr. Dawson with an automobile.
Five Star may terminate the employment agreement for cause which is
defined as (i) breach by Mr. Dawson of any of the terms of the employment
agreement, provided that Five Star has given fifteen days notice prior to
termination for any breach of any of the terms of the employment agreement which
are capable of cure, (ii) gross neglect by Mr. Dawson of his duties continuing
for 30 days after written warning issued to Mr. Dawson setting forth the conduct
constituting such gross neglect, (iii) conviction of Mr. Dawson for any felony
or any crime involving moral turpitude, (iv) the conviction of Mr. Dawson of any
offense involving the property of Five Star or any of its affiliates,(v) the
commission by Mr. Dawson of any act of fraud or dishonesty, (vi) the engagement
by Mr. Dawson in misconduct resulting in serious injury to Five Star, or (vii)
the physical or mental disability of Mr. Dawson, whether totally or partially,
if he is unable to perform substantially his duties for a period of (i) two
consecutive months or (ii) shorter periods aggregating three months during any
twelve month period, such termination to be effective thirty days after written
notice of such decision delivered to Mr. Dawson. If Mr. Dawson is terminated for
cause, he shall not be entitled to any compensation, including without
limitation, the bonus, if any, after the date of termination for the year in
which the termination takes place. If Mr. Dawson's employment is terminated by
his death or disability, Five Star is required to pay Mr. Dawson his base salary
then in effect for the month during which termination occurred, and four months
thereafter. In the event that termination occurs more than six months after the
start of the then-current contract year, Mr. Dawson shall receive a bonus for
that year prorated through the date of termination.
If Five Star terminates the employment agreement for any reason, other
than those set forth in the employment agreement, Five Star is obligated to
continue to pay Mr. Dawson's base salary as then in effect for the period
commencing from the date of termination and ending on the termination date of
the employment agreement and shall only be obligated to pay the Bonus, if any,
through the date of termination on a pro rata basis.
61
National Patent Development Executive Incentive Compensation Plan
On November 3, 2003, the sole stockholder and the Board of Directors of
National Patent Development adopted National Patent Development's 2003 Incentive
Stock Plan, or the 2003 Plan. The aggregate number of shares of National Patent
Development common stock available for issuance under the 2003 Plan will not
exceed 1,750,000.
The 2003 Plan is integral to National Patent Development's compensation
strategies and programs and will maintain the flexibility that National Patent
Development needs to keep pace with its competitors and effectively recruit,
motivate and retain the caliber of employees essential for achievement of
National Patent Development's success. The Board of Directors believes that the
2003 Plan will enhance the long-term stockholder value of National Patent
Development by offering participants opportunities to acquire a proprietary
interest in National Patent Development and to link their interests and efforts
to the long-term interests of National Patent Development's stockholders.
The 2003 Plan will permit awards of incentive stock options,
nonqualified stock options, restricted stock, stock units, performance shares,
performance units and other incentives payable in cash or in shares of National
Patent Development's common stock. Stockholder approval of the 2003 Plan permits
performance-based awards available under the 2003 Plan to qualify for
deductibility under Section 162(m) of the Internal Revenue Code.
Awards and grants under the 2003 Plan are referred to collectively as
"Awards." Those eligible for Awards under the 2003 Plan include any employee,
officer or director of National Patent Development or any entity that is
directly or indirectly controlled by National Patent Development. Consultants,
agents, advisors and independent contractors who provide services to National
Patent Development are also eligible to receive Awards. Persons who receive
Awards are referred to as "Participants."
Shares Available for Issuance
The aggregate number of shares of common stock available for issuance
under the 2003 Plan will not exceed 1,750,000. No Participant may receive in any
one calendar year Awards relating to more than 250,000 shares of Company stock.
If there is any change in National Patent Development stock by reason
of any stock split, stock dividend, spin-off, recapitalization, merger,
consolidation, combination, or exchange of shares, distribution to stockholders
other than a normal cash dividend or other change in National Patent
Development's corporate or capital structure, the maximum number and kind of
securities (i) available for issuance under the 2003 Plan, (ii) available for
issuance as incentive stock options, (iii) that may be subject to Awards
received by any Participant in any one calendar year, (iv) that may be subject
to different types of Awards and (v) that are subject to any outstanding Award
and the price of each security may be equitably adjusted by the Compensation
Committee in its discretion.
Shares covered by an Award will not count against the shares available
for issuance under the 2003 Plan until they are actually issued and delivered to
a Participant. If an Award granted under the 2003 Plan lapses, expires,
terminates or is forfeited, surrendered or canceled without having been fully
exercised or without the issuance of all of the shares subject to the Award, the
shares covered by such Award will again be available for use under the 2003
Plan. In addition, shares that are (i) tendered by a Participant or retained by
National Patent Development as payment for the purchase price of an Award or to
satisfy tax withholding obligations, (ii) covered by an Award that is settled in
cash, or (iii) reacquired by National Patent Development on the open market
62
using cash proceeds received by National Patent Development from the exercise of
Stock Options, will be available for issuance under the 2003 Plan.
Administration
The 2003 Plan will be administered by the Compensation Committee of the
Board of Directors.
Awards
Performance Share and Performance Unit Awards. The Compensation
Committee may grant Awards of performance shares and/or performance units to
Participants. Each Award of performance shares will entitle the Participant to a
payment in the form of shares of National Patent Development stock upon the
attainment of specified performance goals. Each Award of performance units will
entitle the Participant to a cash payment upon the attainment of specified
performance goals. No Participant who is a "covered employee" for purposes of
Section 162(m) of the Internal Revenue Code may earn more than $500,000 pursuant
to a performance unit award in any one calendar year. The performance units may
be paid in National Patent Development stock, at the discretion of the
Compensation Committee.
Restricted Stock and Stock Unit Awards. Restricted stock consists of
shares of National Patent Development stock that are transferred or sold by
National Patent Development to a Participant, but are subject to substantial
risk of forfeiture and to restrictions on their sale or other transfer by the
Participant. Stock Units are the right to receive shares of National Patent
Development stock, cash or a combination of shares and cash at a future date in
accordance with the terms of such grant upon the attainment of certain
conditions specified by the Compensation Committee. Upon a Participant's
satisfaction of any terms, conditions and restrictions, as determined by the
Compensation Committee, the shares covered by a restricted stock Award will be
transferred to the Participant, and stock units will be paid in cash, shares of
National Patent Development stock or a combination of both. The Compensation
Committee may determine whether restricted stock or stock unit Awards accrue
dividends or dividend equivalents with respect to the shares of National Patent
Development stock underlying any Award.
Stock Options. The Compensation Committee may grant stock options to
Participants either in the form of incentive stock options or nonqualified stock
options. The exercise price of any shares subject to a stock option may be no
less than 100% of the fair market value of the shares for the date the stock
option is granted. For purposes of the 2003 Plan, for National Patent
Development stock traded on the OTC Bulletin Board, fair market value means the
average of the closing bid and asked prices on such date (or, if no shares were
traded that day, on the last sale date, provided it was within a reasonable
period of time before the grant date); if National Patent Development stock is
traded on a national exchange or on the Nasdaq market, fair market value means
the closing price of such stock on the date the stock option is granted (or, if
no shares were traded that day, on the last sale date, provided it was within a
reasonable period of time before the grant date); if National Patent Development
stock is not traded in the OTC Bulletin Board and is not listed on a national
exchange or on the Nasdaq market (or if it is so listed or traded, but no shares
were traded within a reasonable period of time before the grant date), fair
market value is determined by the Compensation Committee from all relevant
available facts. The term of a stock option cannot exceed ten years. At the time
of grant, the Compensation Committee in its sole discretion will determine when
stock options are exercisable and when they expire.
Performance Criteria. Awards of performance shares, performance units,
restricted stock, stock units and other Awards under the 2003 Plan may be made
63
subject to the attainment of performance goals relating to one or more business
criteria within the meaning of Section 162(m) of the Internal Revenue Code.
These business criteria are profits (including, but not limited to, profit
growth, net operating profit or economic profit); profit-related return ratios;
return measures (including, but not limited to, return on assets, capital,
equity or sales); cash flow (including, but not limited to, operating cash flow,
free cash flow or cash flow return on capital); earnings (including, but not
limited to, net earnings, earnings per share, or earnings before or after
taxes); net sales growth; net income (before or after taxes, interest,
depreciation and/or amortization); gross or operating margins; productivity
ratios; share price (including, but not limited to, growth measures and total
stockholder return); expense targets; margins; operating efficiency; customer
satisfaction; and working capital targets. Any performance criteria may be used
to measure the performance of National Patent Development as a whole or any
business unit of National Patent Development. Any performance criteria may
include or exclude nonrecurring items, which are items deemed by the
Compensation Committee not to be reflective of National Patent Development's
core operating performance, including exogenous events, acquisitions,
divestitures, changes in accounting principles or extraordinary items determined
under generally accepted accounting principles.
Amendment and Termination of the 2003 Plan
The Board or the Compensation Committee may amend the 2003 Plan, except
that if any applicable statute, rule or regulation, including those of any
securities exchange, requires stockholder approval with respect to any amendment
of the 2003 Plan, then to the extent so required, stockholder approval will be
obtained. The 2003 Plan specifically provides that the Compensation Committee
may not, without the prior approval of National Patent Development's
stockholders, cancel any outstanding option for the purpose of reissuing the
option to the Participant at a lower exercise price or reduce the exercise price
of an outstanding option. Unless sooner terminated by the Board, the 2003 Plan
will terminate ten years from the date stockholders approve the 2003 Plan.
Federal Income Tax Consequences
National Patent Development has been advised by counsel that the
material tax consequences as they relate to Awards under the 2003 Plan to
National Patent Development and to its employees who are U.S. citizens under
current U.S. federal income tax laws are as follows:
Performance Shares, Restricted Stock and Stock Units. A Participant who
receives an Award of performance shares, restricted stock or stock units does
not generally recognize taxable income at the time the Award is granted.
Instead, the Participant recognizes ordinary income in the first taxable year in
which his or her interest in the shares underlying the Award becomes either (i)
freely transferable or (ii) no longer subject to substantial risk of forfeiture.
The amount of taxable income is equal to the fair market value of the shares
less the cash, if any, paid for the shares.
A Participant may elect to recognize income at the time he or she
receives restricted stock in an amount equal to the fair market value of the
restricted stock (less any cash paid for the shares) on the date the Award is
granted.
National Patent Development receives a compensation expense deduction
in an amount equal to the ordinary income recognized by the Participant in the
taxable year in which restrictions lapse (or in the taxable year of the Award
if, at that time, the Participant had filed a timely election to accelerate
recognition of income).
Incentive Stock Options. A Participant does not generally recognize
taxable income upon the grant or upon the exercise of an incentive stock option.
Upon the sale of shares subject to an incentive stock option, the Participant
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recognizes income in an amount equal to the difference, if any, between the
exercise price of the shares and the fair market value of those shares on the
date of sale. The income is taxed at long-term capital gains rates if the
Participant has not disposed of the stock within two years after the date of the
grant of the incentive stock option and has held the shares for at least one
year after the date of exercise and National Patent Development is not entitled
to a federal income tax deduction. The holding period requirements are waived
when a Participant dies.
The exercise of an incentive stock option may in some cases trigger
liability for the alternative minimum tax.
If a Participant sells shares subject to an incentive stock option
before having held them for at least one year after the date of exercise and two
years after the date of grant, the Participant recognizes ordinary income to the
extent of the lesser of (i) the gain realized upon the sale; or (ii) the
difference between the exercise price and the fair market value of the shares on
the date of exercise. Any additional gain is treated as long-term or short-term
capital gain depending upon how long the Participant has held the shares prior
to disposition. In the year of disposition, National Patent Development receives
a federal income tax deduction in an amount equal to the ordinary income that
the Participant recognizes as a result of the disposition.
Nonqualified Stock Options. A Participant does not recognize taxable
income upon the grant of a nonqualified stock option. Upon the exercise of a
nonqualified stock option, the Participant recognizes ordinary income to the
extent the fair market value of the shares received upon exercise of the
nonqualified stock option on the date of exercise exceeds the exercise price.
National Patent Development receives an income tax deduction in an amount equal
to the ordinary income that the Participant recognizes upon the exercise of the
nonqualified stock option.
General. National Patent Development may not deduct compensation of
more than $1 million that is paid to an individual who, on the last day of the
taxable year, is either National Patent Development's chief executive officer or
is among one of the four other most highly-compensated officers for that taxable
year. The limitation on deductions does not apply to certain types of
compensation, including qualified performance-based compensation. National
Patent Development believes that Awards in the form of performance stock,
performance units, performance-based restricted stock, performance-based stock
units and stock options may qualify as performance-based compensation and, as
such, be exempt from the $1 million limitation on deductible compensation.
65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS
OF NATIONAL PATENT DEVELOPMENT
The current stockholders of GP Strategies, including certain of the
executive officers and directors of National Patent Development, will receive
shares of National Patent Development common stock in the spin-off. In addition
certain directors and executive officers of National Patent Development may be
granted options to purchase shares of National Patent Development common stock.
The following table sets forth the beneficial ownership of National
Patent Development common stock by each person National Patent Development
believes will own beneficially more than 5% of National Patent Development's
common stock, based on their ownership of GP Strategies common stock and Class B
capital stock as of March 31, 2004. Footnotes refer to filings made with the
Securities and Exchange Commission, or SEC, with respect to securities of GP
Strategies.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
Bedford Oak Partners, L.P. 2,431,500 shares(1) 13.8%
100 South Bedford Road
Mt. Kisco, NY 10549
Gabelli Asset Management, Inc. 1,869,445 shares(2) 10.6%
One Corporate Center
Rye, NY 10580
EGI-Fund (02-04) Investors, L.L.C. 1,390,000 shares(3) 7.9%
Two N. Riverside Plaza
Chicago, IL 60606
Caxton International Limited 1,251,200 shares(4) 7.1%
315 Enterprise Drive
Plainsboro, NJ 08536
Dimensional Fund Advisors, Inc. 878,955 shares(5) 5.0%
1299 Ocean Avenue
Santa Monica, CA 90401
- ----------
(1) Based on a Schedule 13D filed jointly by Bedford Oak Partners, L.P.
("Bedford Oak"), Bedford Oak Advisors, LLC and Harvey P. Eisen with the
SEC on July 25, 2002. Mr. Eisen is deemed to have beneficial ownership
of such shares by virtue of his position as managing member of Bedford
Oak Advisors, LLC, the investment manager of Bedford Oak.
(2) Based on a Schedule 13D filed jointly by Gabelli Funds, LLC, GAMCO
Investors, Inc. , MJG Associates, Inc., Gabelli Advisers, Inc., Gabelli
Group Capital Partners, Inc. , Gabelli Asset Management, Inc. and Mario
J. Gabelli. Mario Gabelli directly or indirectly controls or acts as
66
chief investment officer for these entities. Includes 1,394,745 shares
estimated to be issuable upon exercise of warrants to purchase shares of
National Patent Development common stock. See "Description of Warrants."
(3) Based on a Schedule 13D filed jointly by EGI-Fund (02-04) Investors,
L.L.C., or the EGI Purchaser, EGI-Managing Member (02-04), L.L.C. and SZ
Investments, L.L.C. with the SEC on May 13, 2002 and information
supplied by such entities. EGI-Managing Member is the managing member of
EGI Purchaser and SZ Investments is the managing member of EGI-Managing
Member. Samuel Zell is the President of EGI Purchaser, EGI-Managing
Member and SZ Investments. and is the Chairman of the Board of Directors
of Equity Group Investments, L.L.C. SZ Investments is indirectly owned
by various trusts established for the benefit of Samuel Zell and his
family.
(4) Based on a Schedule 13D/A filed jointly by Caxton International Limited,
Caxton Associates, L.L.C., Bruce S. Kovner, Caxton Equity Growth (BVI)
Ltd. and Caxton Equity Growth LLC. Mr. Kovner is Chairman of Caxton
Corporation. Caxton Corporation is the manager and majority owner of
Caxton Associates.
(5) Based on a Schedule 13G filed by Dimensional Fund Advisors Inc.
("Dimensional") with the SEC on February 3, 2003. Dimensional has stated
that the shares are owned by advisory clients of Dimensional and that
Dimensional disclaims beneficial ownership of such shares.
The following table sets forth the beneficial ownership of National Patent
Development common stock by each National Patent Development director, each of
National Patent Development's executive officers, and all National Patent
Development directors and executive officers as a group, based on their
ownership of GP Strategies common stock and Class B capital stock as of March
31, 2004.
Total Number Percent
of Shares of of Common
Common stock Stock
Beneficially Owned
Name Owned
Harvey P. Eisen............. 2,432,999(1) 13.8%
Jerome I. Feldman........... 611,242(2) 3.5%
Scott N. Greenberg.......... 27,059(3) *
Roald Hoffmann.............. 3,116 *
Ellen Havdala............... - (4) *
Andrea D. Kantor............ 5,301(5) *
Charles Dawson.............. - *
Steven Cliff................ 2,739(6) *
Thomas C. Kinnear........ - *
Talton R. Embry........... - *
Directors and Executive Officers
as a Group (10 persons). 3,082,456 (4)(7) 17.5%
- ----------
*The number of shares owned is less than one percent of the outstanding
shares.
(1) Includes 2,431,500 shares of common stock beneficially owned by Bedford
Oak. Mr. Eisen is deemed to have beneficial ownership of such shares by
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virtue of his position as managing member of Bedford Oak Advisors, LLC,
the investment manager of Bedford Oak. See footnote 1 to 5%
stockholders table.
(2) Includes 1,173 shares of common stock held by members of Mr. Feldman's
family, and 4,419 shares of common stock allocated to Mr. Feldman's
account pursuant to the provisions of the GP Retirement Savings Plan
(the "GP Plan"). Mr. Feldman disclaims beneficial ownership of the
1,173 shares of common stock held by members of his family.
(3) Includes 4,000 shares of common stock held by members of Mr.
Greenberg's family, and 5,341 shares of common stock allocated to Mr.
Greenberg's account pursuant to the provisions of the GP Plan. Mr.
Greenberg disclaims beneficial ownership of the 4,000 shares of common
stock held by members of his family.
(4) Does not include 1,390,000 shares of common stock beneficially owned by
EGI Purchaser. Ms. Havdala does not have voting or dispositive power
over such shares and thus does not have beneficial ownership of such
shares.
(5) Includes 5,301 shares of common stock allocated to Ms. Kantor's account
pursuant to the provisions of the GP Plan.
(6) Includes 2,739 shares of common stock allocated to Mr. Cliff's account
pursuant to the provisions of the GP Plan.
(7) Includes 17,800 shares of common stock allocated pursuant to the
provisions of the GP Plan.
DESCRIPTION OF CAPITAL STOCK
Authorized Shares
Under National Patent Development's Certificate of Incorporation, the
authorized capital stock of National Patent Development consists of 30,000,000
shares of common stock, par value $.01 per share, and 10,000,000 shares of
preferred stock, $.01 par value per share. GP Strategies currently owns all
outstanding shares of common stock. No shares of preferred stock have been
issued. Immediately after the spin-off, based on the number of shares of common
stock and Class B capital stock of GP Strategies outstanding at , 2004 and the
distribution ratio of one share of National Patent Development common stock for
every share of GP Strategies common stock and Class B capital stock,
approximately 17,681,487 shares of the National Patent Development common stock
and no shares of the preferred stock will be issued and outstanding. GP
Strategies will not own shares of National Patent Development common stock after
the spin-off.
Common Stock
Each outstanding share of National Patent Development common stock
entitles the holder to one vote on all matters requiring a vote of stockholders.
Since the common stock does not have cumulative voting rights, the holders of
shares having more than 50% of the voting power, if they choose to do so, may
elect all the directors of National Patent Development and the holders of the
remaining shares would not be able to elect any directors. See "Security
Ownership of Certain Beneficial Owners, Directors and Executive Officers of
National Patent Development."
Subject to the rights of holders of any series of preferred stock that
may be issued in the future, the holders of the common stock are entitled to
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receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
voluntary or involuntary liquidation of National Patent Development, all
stockholders are entitled to a pro rata distribution of the assets of National
Patent Development remaining after payment of claims of creditors and
liquidation preferences of any preferred stock. Holders of common stock have no
conversion or preemptive rights.
Preferred Stock
The Certificate of Incorporation authorizes the Board, without any vote
or action by the holders of common stock, to issue preferred stock from time to
time in one or more series. The Board is authorized to determine the number of
shares and to fix the powers, designations, preferences and relative,
participating, optional or other special rights of any series of preferred
stock. Issuances of preferred stock would be subject to any applicable rules of
organizations on which National Patent Development stock is then quoted or
listed. Depending upon the terms of preferred stock established by the Board of
Directors, any or all series of preferred stock could have preference over the
common stock with respect to dividends and other distributions and upon
liquidation of National Patent Development. If any shares of preferred stock are
issued with voting powers, or if additional shares of common stock are issued,
the voting power of the outstanding common stock would be diluted.
National Patent Development believes that the availability of preferred
stock will provide increased flexibility to facilitate possible future
financings and acquisitions and to meet other corporate needs that might arise.
Transfer Agent and Registrar
Computershare Investor Services LLC will be the transfer agent and
registrar for the National Patent Development common stock immediately following
the spin-off.
DESCRIPTION OF WARRANTS
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003,
GP Strategies issued and sold to four Gabelli funds $7,500,000 aggregate
principal amount of 6% Conditional Subordinated Notes due 2008, or the Gabelli
Notes, and 937,500 warrants, or the GP Warrants. The aggregate purchase price of
the Gabelli Notes and GP Warrants was $7,500,000.
The Note and Warrant Purchase Agreement provides that, on completion of
the spin-off, National Patent Development will issue warrants, or the Warrants,
to the holders of the GP Warrants. The Warrants will entitle the holders to
purchase, in the aggregate, a number of shares of National Patent Development
common stock equal to 8% of the number of shares outstanding at completion of
the spin-off, subject to reduction for any GP Warrants exercised prior to the
spin-off. The Warrants will be issued to the holders of the GP Warrants on the
record date for the spin-off, and allocated among them pro-rata based on the
respective number of GP Warrants held by them on such date. The exercise price
of the Warrants will be 160% of the average closing price of the National Patent
Development common stock over the 20 consecutive trading days commencing on the
record date of the spin-off. The Warrants will be exercisable at any time after
their exercise price is calculated through August 2008. The Warrants will
contain anti-dilution provisions for stock splits, reorganizations, mergers, and
similar transactions. National Patent Development has agreed to file a
registration statement to register the resale of the shares of its common stock
issuable on exercise of the Warrants, and to certain other registration rights
in favor of the holders of the Warrants.
69
The Gabelli Notes are secured by a mortgage on GP Strategies property
located in Pawling, New York that will be contributed to MXL in connection with
the spin-off. MXL will assume the mortgage, but without liability for repayment
of the Gabelli Notes or any other obligations of GP Strategies under the Note
and Warrant Purchase Agreement (other than foreclosure on such property). If
there is a foreclosure on the mortgage for payment of the Gabelli Notes, GP
Strategies has agreed to indemnify MXL for loss of the value of the property.
DESCRIPTION OF INDEBTEDNESS
On March 8, 2001, MXL entered into a loan in the amount of $1,680,000,
secured by a mortgage covering the real estate and fixtures on its property in
Pennsylvania. At June 30, 2004, $1,355,000 of such loan was outstanding. The
loan requires monthly repayments of $8,333 plus interest at 2.5% above the one
month LIBOR rate and matures on March 8, 2011, when the remaining amount
outstanding of approximately $680,000 is due in full. The loan is guaranteed by
GP Strategies. The proceeds of the loan were used to repay a portion of the GP
Strategies' short-term borrowings under its prior credit agreement.
On July 3, 2001, MXL entered into a loan in the amount of $1,250,000,
secured by a mortgage covering the real estate and fixtures on its property in
Illinois. At June 30, 2004, $1,170,000 of such loan was outstanding. The loan
requires monthly payments of principal and interest in the amount of $11,046
with interest at a fixed rate of 8.75% per annum, and matures on June 26, 2006,
when the remaining amount outstanding of approximately $1,100,000 is due in
full. The loan is guaranteed by GP Strategies. The proceeds of the loan were
used to repay a portion of the GP Strategies' short-term borrowings under its
prior credit agreement.
On September 15, 2003, MXL purchased machinery, equipment and inventory
from AOtec, located in the Massachusetts area, for a purchase price of
$1,100,000, subject to adjustment. On August 1, 2003, MXL paid $100,000 of the
purchase price and issued three notes, in the amounts of $450,000, $275,000 and
$275,000, due October 1, 2003, August 5, 2004 and August 5, 2005, respectively
(collectively, the "AOtec Notes"). The AOtec Notes bear interest on the unpaid
principal amount at the rate of 4% per annum. On October 1, 2003, MXL borrowed
$700,000, or the AOtec Debt, from a bank to finance the purchase price and used
the proceeds to pay the $450,000 Note. The AOtec Debt is payable monthly for
three-years and is secured by the machinery and equipment purchased from AOtec.
GP Strategies guaranteed the AOtec Debt.
On June 20, 2003, Five Star obtained a new loan and security agreement
with Fleet Capital Corporation. The agreement has a maturity date of June 30,
2008 and provides for a $25,000,000 revolving credit facility, which allows Five
Star to borrow based upon specified percentages of eligible inventory and
eligible accounts receivable, as defined therein. The interest rates under the
agreement consist of LIBOR plus a credit spread for borrowings not to exceed
$15,000,000 and the prime rate plus a credit spread for borrowings in excess of
the above-mentioned LIBOR-based borrowings. The credit spreads can be reduced in
the event that Five Star achieves and maintains certain performance benchmarks.
At June 30, 2004 and December 31, 2003, approximately $22,176,000 and
$16,685,000 was outstanding under the loan and security agreement and
approximately $440,000 and $480,000 was available to be borrowed, respectively.
On June 20, 2003, GP Strategies entered into an Agreement of
Subordination and Assignments, or the Subordination Agreement, with Five Star
and its lenders that permits the annual repayment of principal on the Five Star
Note. Pursuant to the provisions of the Subordination Agreement, in each of June
and July 2003, GP Strategies received a partial repayment from Five Star in the
amount of $500,000, reducing the outstanding principal amount of the Five Star
Note from $4,500,000 to $3,500,000. On October 8, 2003, GP Strategies exchanged
$500,000 principal amount of the Five Star Note for 2,000,000 shares of Five
70
Star common stock, reducing the outstanding principal amount of the Five Star
Note to $3,000,000. Pursuant to the provision of the Subordination Agreement, in
December 2003, GP Strategies received a partial repayment from Five Star in the
amount of $200,000, further reducing the outstanding principal amount of the
Five Star Note to $2,800,000. The Five Star Note and all the shares of Five Star
common stock owned by GP Strategies, along with GP Strategies' rights under the
Subordination Agreement, will be transferred to National Patent Development
prior to the spin-off.
As of December 31, 2003 MXL provided security for General Physics'
Financing and Security Agreement. The Financing and Security Agreement provides
for a maximum outstanding balance of $25 million and was secured by certain of
the assets of General Physics and the accounts receivable of MXL. The Financing
and Security Agreement is also guaranteed by GP Strategies. MXL provided a
limited guaranty up to the value of its account receivable collateral securing
the Financing and Security Agreement. For the continuation of the bank's
security interest in MXL's accounts receivable and the continuation of its
limited guarantee after the spin-off, General Physics paid MXL a guarantee fee
of 2% of the value of the borrowing base collateral attributable to MXL,
calculated monthly. At General Physics' option, General Physics could eliminate
MXL's accounts receivable from the borrowing base under the Financing and
Security Agreement, provided that General Physics made a mandatory prepayment
under the Financing and Security Agreement to eliminate any borrowing base
deficiency. At such point, all obligations of MXL relating to the Financing and
Security Agreement terminated, MXL's limited guaranty of the Financing and
Security Agreement became void, and General Physics was no longer required to
pay to MXL the guarantee fee. In March 2004 General Physics eliminated MXL's
accounts receivable from the borrowing base, no mandatory prepayment was
required by General Physics, and the guarantee fee was eliminated.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003,
GP Strategies issued and sold to four Gabelli funds $7,500,000 aggregate
principal amount of Gabelli Notes, and 937,500 GP Warrants, each entitling the
holder thereof to purchase (subject to adjustment) one share of GP Strategies
common stock. See "Description of Warrants." The Gabelli Notes are secured by a
mortgage on GP Strategies property located in Pawling, New York that will be
contributed to MXL in connection with the spin-off. MXL will assume the
mortgage, but without liability for repayment of the Gabelli Notes or any other
obligations of GP Strategies under the Note and Warrant Purchase Agreement
(other than foreclosure on such property). If there is a foreclosure on the
mortgage for payment of the Gabelli Notes, GP Strategies has agreed to indemnify
MXL for loss of the value of the property.
GP Strategies has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,347,000 per year through the
first quarter of 2007, and an aggregate of $116,000 for certain equipment leases
through April 2004. GP Strategies' guarantee of such leases was in effect when
Five Star was a wholly-owned subsidiary of GP Strategies. In 1998, GP Strategies
sold substantially all of the operating assets of the Five Star business to the
predecessor corporation of Five Star. As part of this transaction, the landlord
of the New Jersey and Connecticut facilities and the lessor of the equipment did
not consent to the release of GP Strategies' guarantee.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS
National Patent Development's Certificate of Incorporation and Bylaws
and the Delaware General Corporation Law contain provisions that may discourage
or delay the acquisition of control of National Patent Development by means of a
tender offer, open market purchases, a proxy contest or otherwise.
71
Purposes of Provisions
The relevant provisions of the Certificate of Incorporation and Bylaws
are intended to discourage certain types of transactions that may involve an
actual or threatened change of control of National Patent Development and to
encourage any person who might seek to acquire control of National Patent
Development to negotiate with the Board of Directors. Management of GP
Strategies and National Patent Development believe that generally the interests
of the stockholders would be served best if any change in control results from
negotiations with the National Patent Development Board of the proposed terms,
such as the price to be paid, the form of consideration and the anticipated tax
effects of the transaction. However, to the extent that these provisions do
discourage takeover attempts, they could make it more difficult to accomplish
transactions that are opposed by the incumbent Board and could deprive
stockholders of opportunities to realize takeover premiums for their shares or
other advantages that large accumulations of stock would provide.
The Certificate of Incorporation and the Bylaws will be effective on or
before the Distribution Date, and are filed as exhibits to National Patent
Development's registration statement on Form S-1 of which this Prospectus is a
part.
Delaware Section 203
Section 203 of the Delaware General Corporation Law provides that,
subject to certain exceptions, a corporation shall not engage in any "business
combination" with any "interested stockholder" for a three-year period following
the time that such stockholder becomes an interested stockholder unless:
o prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
o upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding certain shares); or
o on or subsequent to such time, the business combination is approved by
the board of directors of the corporation and by the affirmative vote
of at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder.
Section 203 generally defines an "interested stockholder" to include:
o any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately
prior to the relevant date; and
o the affiliates and associates of any such person.
o Section 203 generally defines a "business combination" to include:
72
o mergers and sales or other dispositions of 10% or more of the assets
of the corporation with or to an interested stockholder;
o certain transactions resulting in the issuance or transfer to the
interested stockholder of any stock of the corporation or its
subsidiaries;
o certain transactions which would result in increasing the
proportionate share of the stock of the corporation or its
subsidiaries owned by the interested stockholder; and
o receipt by the interested stockholder of the benefit (except
proportionately as a stockholder) of any loans, advances, guarantees,
pledges, or other financial benefits.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
certificate of incorporation or stockholder-adopted bylaws may exclude a
corporation from the restrictions imposed thereunder. Neither our Certificate of
Incorporation nor our Bylaws exclude us from the restrictions imposed under
Section 203. It is anticipated that the provisions of Section 203 may encourage
companies interested in acquiring us to negotiate in advance with the Board of
Directors since the stockholder approval requirement would be avoided if the
Board approves, prior to the time the acquirer becomes an interested
stockholder, either the business combination or the transaction that results in
the acquirer becoming an interested stockholder.
Number of Directors; Removal; Vacancies
The Board currently consists of seven persons. Our Certificate of
Incorporation provides that the Board, by resolution, may increase or decrease
the authorized number of directors and that stockholders do not have the right
to increase or decrease the number of directors. Directors may be removed only
for cause and only by a vote of the holders of two-thirds of the stockholders
entitled to vote thereon. Interim vacancies on the Board, or vacancies created
by an increase in the number of directors, may be filled by a majority of the
directors then in office.
Stockholder Action
The Certificate of Incorporation requires all stockholder action to be
taken at an annual or special meeting of stockholders and prohibits stockholder
action by written consent. The Certificate of Incorporation and Bylaws also
73
provide that special meetings of stockholders may be called by the Board of
Directors, the Chairperson or the President. Stockholders may not call special
meetings.
The provisions prohibiting stockholder action by written consent and
not permitting any stockholder or group thereof to call a special meeting may
have the effect of delaying consideration of a stockholder proposal until the
next annual meeting of the stockholders.
Amendment of Bylaws
The Certificate of Incorporation also authorizes stockholders to adopt,
amend, or repeal Bylaws, but only by the affirmative vote of the holders of 75%
of the voting power of the shares of capital stock entitled to vote thereon. The
Board of Directors is also authorized to adopt, amend, or repeal Bylaws.
Stockholder Proposals and Nominations
National Patent Development's Bylaws establish an advance notice
procedure for nominations of candidates for election as directors at, and for
proposals to be brought before, an annual meeting of stockholders. This
procedure provides that only such nominations may be considered and such
business may be conducted at an annual meeting as have been specified in the
notice of such meeting or brought before the meeting by or at the direction of
the Board or by a stockholder who has given to the Secretary of National Patent
Development timely written notice, in proper form, of the same.
To be timely, notice of nominations or other business to be brought
before an annual meeting must be received by the Secretary of National Patent
Development not less than 90 days prior to the anniversary of the preceding
year's annual meeting or, if the annual meeting date is not within 30 days
before or after such anniversary date, within 10 days after public disclosure of
the annual meeting date.
To be in proper form, each notice must set forth:
o if such notice relates to a stockholder proposal a brief description
of the business proposed to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting,
o If such notices relates to a nomination for director, the name, age,
business address and residence address, and principal occupation or
employment of the nominee, the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of
record by the nominee and any other information relating to the
nominee that would be required to be disclosed in a proxy statement or
other filings require to be made in connection with solicitations of
proxies for election of directors pursuant to Section 14 of the
Exchange Act, and the rules and regulations promulgated thereunder.
o the name and record address of such stockholder,
o the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by such
stockholder,
o if such notices relates to a stockholder proposal a description of all
arrangements or understandings between such stockholder and any other
person or persons (including their names) in connection with the
proposal of such business by such stockholder and any material
interest of such stockholder in such business,
o If such notice relates to a nomination for director, a description of
all arrangements or understandings between such stockholder and each
proposed nominee and any other person or persons (including their
names pursuant to which the nomination(s) are to be made by such
stockholder,
o If such notice relates to a nomination for director, any other
information relating to such stockholder that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder,
74
o If such notice relates to a nomination for director, a written consent
of each proposed nominee to being named as a nominee and to serve as a
director if elected, and
o a representation that such stockholder intends to appear in person or
by proxy at the annual meeting to make such nomination or bring such
business before the meeting.
Preferred Stock and Additional Common Stock
The Board's authority to issue of shares of common stock and preferred
stock and to fix by resolution the terms and conditions of each series of
preferred stock may either impede or facilitate the completion of a merger,
tender offer or other takeover attempt. For example, the issuance of new shares
might impede a business combination if the terms of those shares include series
voting rights that would enable the holder to block business combinations or the
issuance of new shares might facilitate a business combination if those shares
have general voting rights sufficient to cause an applicable percentage vote
requirement to be satisfied. The Board of Directors will make any determination
regarding issuance of additional shares based on its judgment as to the best
interest of its stockholders, customers, employees or other constituencies.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Indemnification
Our Certificate of Incorporation and Bylaws provide for indemnification
of our officers and directors to the extent permitted by Delaware law for
expenses (including counsel fees and disbursements), judgments, fines, and
amounts paid in settlement. The Certificate of Incorporation and Bylaws also
provide with respect to officers and directors covered by indemnity that:
o the rights conferred on the covered officers and directors thereby are
not exclusive of any other rights which the officer or director may
have or thereafter acquire under any statute, provision of the
Certificate of Incorporation, the Bylaws, agreement, vote of
stockholders or disinterested directors, or otherwise,
o such indemnification will not be paid if it is determined by the Board
of Directors by a majority vote of a quorum consisting of directors
who were not parties to the proceeding giving rise to such
indemnification, or (b) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (c) by the
stockholders, that indemnification of the director or officer is not
proper in the circumstances because he has not met the applicable
standards of conduct set forth in Delaware law,
o expenses will be advanced if the officer or director undertakes to
repay such expenses if it is determined that such director or officer
is not entitled to be indemnified, and
o any repeal or modification of the relevant provisions of the Bylaws
will not adversely affect any right or protection thereunder of any
covered officer or director in respect of any act or omission
occurring prior to the time of such repeal or modification.
Insofar as the provisions of our Certificate of Incorporation and
Bylaws provide for indemnification of directors or officers for liabilities
arising under the Securities Act of 1933, we have been informed that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable.
75
Elimination of Liability in Certain Circumstances
The Certificate of Incorporation eliminates the personal liability of
directors to National Patent Development or its stockholders for monetary
damages for breach of fiduciary duty, except that directors remain liable for:
o breaches of their duty of loyalty to National Patent Development and its
stockholders, o acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, o for unlawful distributions, under a
provision of the Delaware General Corporation Law that makes directors
personally liable
and which expressly sets forth a negligence standard with
respect to such liability, and
o transactions from which a director derives improper personal benefit.
These provisions pertain only to breaches of duty by directors as
directors and not in any other corporate capacity, including as officers. As a
result of the inclusion of these provisions, stockholders may be unable to
recover monetary damages against directors for actions taken by them which
constitute negligence or gross negligence or which are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders in any particular case, stockholders may not
have any effective remedy against the challenged conduct.
LEGAL MATTERS
Certain legal matters with respect to the shares of common stock
offered by this Prospectus have been passed upon by Andrea D. Kantor, our Vice
President and General Counsel. As of the date hereof, Ms. Kantor beneficially
owns no shares of National Patent Development common stock and 55,301 shares of
the common stock of GP Strategies.
EXPERTS
EISNER LLP, independent registered public accounting firm, have audited
our consolidated balance sheets as of December 31, 2003 and 2002 and the related
consolidated statements of operations, comprehensive loss, cash flows and
stockholder's equity for each of the years in the three year period ended
December 31, 2003, as set forth in their report. We've included our consolidated
balance sheets and the related consolidated statements of operations,
comprehensive loss, cash flows and stockholder's equity in the Prospectus and
elsewhere in the registration statement of which this Prospectus is a part in
reliance on EISNER LLP's report, given on their authority as experts in
accounting and auditing.
76
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
National Patent Development Corporation
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Operations - Years ended December
31, 2003, 2002 and 2001 and six months ended June 30, 2004
and June 30, 2003 (unaudited) F-3
Consolidated Statements of Comprehensive Income (Loss)-
Years ended December 31, 2003, 2002 and 2001 and six
months ended June 30, 2004 and June 30, 2003 (unaudited) F-3
Consolidated Balance Sheets - December 31, 2003 and 2002
and June 30, 2004 (unaudited) F-4
Consolidated Statements of Cash Flows - Years ended
December 31, 2003, 2002 and 2001 and six months ended
June 30, 2004 and June 30, 2003 (unaudited) F-5
Consolidated Statements of Changes in Stockholder's Equity -
Years ended December 31, 2003, 2002 and 2001 and six months
ended June 30, 2004 (unaudited) F-7
Notes to Consolidated Financial Statements F-9
SUPPLEMENTARY DATA
Selected Quarterly Financial Data (unaudited) F-37
Schedule II - Valuation and Qualifying Accounts F-38
Five Star Products, Inc.
Report of Independent Registered Public Accounting Firm F-39
Consolidated Balance Sheets - December 31, 2002 and 2001 F-40
Consolidated Statements of Operations - Years ended
December 31, 2002 and 2001 F-41
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 2002 and 2001 F-42
Consolidated Statements of Cash Flows - Years ended
December 31, 2002 and 2001 F-43
Notes to Consolidated Financial Statements F-44
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of
National Patent Development Corporation:
We have audited the accompanying consolidated balance sheets of National Patent
Development Corporation and subsidiaries (the "Company") as of December 31, 2003
and 2002 and the related consolidated statements of operations, comprehensive
loss, cash flows and stockholder's equity for each of the years in the three
year period ended December 31, 2003. Our audit also included the financial
statement schedule listed in the accompanying index. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Patent
Development Corporation and subsidiaries as of December 31, 2003 and 2002, and
the consolidated results of their operations and their cash flows for each of
the years in the three year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the Unites States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note 8 to the consolidated financial statements, effective
January 1, 2002 the Company changed its accounting method for goodwill.
EISNER LLP
New York, New York
May 19, 2004, except for Note 1, as to which
the date is July 30, 2004
F-2
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Six Months Ended
June 30, Year Ended December 31,
- ----------------------------------------------------- ---------------------------- ---------------------------------------------
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
200 2003 2003 2002 2001
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
- ----------------------------------------------------- ---------------------------- --------------- -------------- --------------
(unaudited)
Sales $58,725 $53,925 $103,698 $9,996 $11,184
Cost of sales 48,555 44,702 84,116 7,897 8,368
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Gross margin 10,170 9,223 19,582 2,099 2,816
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Selling, general and administrative expenses (9,736) (8,643) (18,274) (2,047) (1,964)
Income related to equity investee 439 259
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Operating profit 434 580 1,308 491 1,111
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Interest expense (481) (445) (864) (208) (169)
Investment and other income (loss) (1,267) 4 (61) 9 (178)
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Income (loss) before income taxes and minority (1,314) 139 383 292 764
interest
Income tax expense 142 63 176 145 395
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Income (loss) before minority interest (1,456) 76 207 147 369
Minority interest (207) (159) (311)
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Net income (loss) $(1,663) $(83) $(104) $147 $369
- ----------------------------------------------------- -------------- ------------- --------------- -------------- --------------
Pro forma net income (loss) per share
Basic and diluted (unaudited) $ (.09) $.00 $ (.01) $ .01 $ .03
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Six Months Ended
June 30, Year Ended December 31,
- -------------------------------------------------------- ----------------------------- ---------------------------------------------
- -------------------------------------------------------- --------------- ------------- --------------- -------------- --------------
2004 2003 2003 2002 2001
- -------------------------------------------------------- --------------- ------------- --------------- -------------- --------------
- -------------------------------------------------------- ----------------------------- --------------- -------------- --------------
(unaudited)
Net income (loss) $(1,663) $(83) $(104) $147 $369
Other comprehensive income (loss), before tax:
Net unrealized loss on available-for-sale-securities
(411) (164) (902) (833) (1,475)
Reclassification adjustment for loss on securities
sold included in net loss 173
Reclassification adjustment for impairment loss on
securities included in net loss 1,081
Net unrealized gain on interest rate swap, net of
minority interest 112 43
--------------- ------------- --------------- -------------- --------------
Comprehensive loss before tax (708) (247) (963) (686) (1,106)
Income tax benefit (expense) related to
items of other comprehensive loss (160) 64 116 325 575
--------------- ------------- --------------- -------------- --------------
Comprehensive loss $(868) $(183) $(847) $(361) $(531)
====== ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
F-3
F-54
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
2004 2003 2002
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 185 $ 602 $ 562
Accounts and other receivables less allowance
for doubtful accounts of $762, $739 and $37 17,356 13,192 2,544
Inventories 25,745 28,300 1,380
Receivable from GP Strategies Corporation 853 709
Deferred tax assets 46 80
Prepaid expenses and other current assets 272 845 247
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
Total current assets 44,457 43,728 4,733
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
Receivable from GP Strategies Corporation 10,116
Investment in and note receivable from equity investee 6,260
Marketable securities available for sale 1,961 2,981 756
Property, plant and equipment, net 5,594 5,725 4,829
Goodwill 182 182 182
Other assets 3,238 3,132 2,994
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
$55,432 $55,748 $29,870
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
Liabilities and stockholder's equity
Current liabilities
Current maturities of long-term debt $ 399 $ 389 $ 205
Short term borrowings 22,451 16,960
Accounts payable and accrued expenses 11,725 15,814 574
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
Total current liabilities 34,575 33,163 779
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
Long-term debt less current maturities 3,001 3,203 2,670
Deferred tax liability 114 102 970
Interest rate collar, at market 57
Minority interest 1,566 2,044
Stockholder's equity (Note 14(b))
Stockholder's investment 17,836 18,124 18,565
Retained earnings (deficit) (1,977) (353) 6,678
Accumulated other comprehensive income (loss) 260 (535) 208
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
Total stockholder's equity 16,119 17,236 25,451
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
$55,432 $55,748 $29,870
- ---------------------------------------------------------------- ------------------ ------------------ ------------------
See accompanying notes to consolidated financial statements.
F-4
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30, Year ended December 31,
- -------------------------------------------------------------- --------------------------- -----------------------------------------
- -------------------------------------------------------------- ------------- ------------- ------------- -------------- ------------
2004 2003 2003 2002 2001
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
- --------------------------------------------------------------- --------------------------- ------------- -------------- -----------
(unaudited)
Cash flows from operations:
Net income (loss) $(1,663) $(83) $(104) $147 $369
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 353 265 593 510 351
Minority Interest 207 48
Income related to equity investee, prior to acquiring a
controlling financial interest (143) (256) (55) (59)
Net loss on marketable securities 131 36
Deferred income taxes (62) (107) (296) 77 (50)
Allocation of expenses and taxes from GP Strategies 1,295 336 1,150 593 944
Impairment charge of securities 1,081 400
Changes in other operating items,
net of effects of acquisitions in 2003:
Accounts and other receivables (4,164) 416 2,620 (293) 293
Inventories 2,555 (45) (6,348) 354 (191)
Prepaid expenses and other assets 184 (63) 225 (69) (113)
Accounts payable and accrued expenses (4,088) (77) 5,027 147 (418)
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
Net cash provided by (used in) operations (4,171) 499 2,695 $1,411 $1,526
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment, net (254) (68) (525) $(368) $(435)
Proceeds from sales of fixed assets 203
Proceeds from sale of investments 1,014 521
Advances to GP Strategies (959) (234) (1,310) (400) (3,698)
Payments for acquisition of AOtec assets, net of
cash ($6) acquired in Five Star acquisition (544)
Acquisition of minority interest in Five Star Products
pursuant to the tender offer (657)
Repayment of note from Five Star Products 500 1,000
Recovery of investment in Five Star Products 475 475 33
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
Net cash provided by (used in) investing activities (856) 673 (180) $(735) $(4,133)
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
Cash flows from financing activities:
Distribution to GP Strategies (684) (1,155) (1,985) (360) (477)
Proceeds from issuance of long-term debt 700 3,338
Proceeds from (repayment of) short-term borrowings 5,491 (932)
Repayment of long-term debt (197) (118) (258) (290) (345)
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
Net cash (used in) provided by financing activities 4,610 (1,273) (2,475) (650) 2,516
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
Net (decrease) increase in cash and cash equivalents (417) (101) 40 26 (91)
Cash and cash equivalents at beginning of period 602 562 562 536 627
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
Cash and cash equivalents at end of period $185 $461 $602 $562 $536
- --------------------------------------------------------------- ------------- ------------- ------------- -------------- -----------
See accompanying notes to consolidated financial statements.
F-5
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30, Year ended December 31,
- ---------------------------------------------------------------------- ----------- ----------- ------------ ----------- -----------
2004 2003 2003 2002 2001
- ---------------------------------------------------------------------- ----------------------- ------------ ----------- -----------
(unaudited)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $257 $93 $ 398 $208 $169
Income taxes 150 - 201 2 38
Non-cash investing activities:
Conversion of Five Star Products Note Receivable
into common stock of Five Star Products 500 500
Repayment of receivable from GP Strategies
with marketable and other securities 10,000
Contribution of HEB shares from GP Strategies 550
Purchase of certain assets from AOtec:
Fixed assets $900
Inventory 350
Accrued expenses (150)
Issuance of notes (exclusive of $450,000 note paid in 2003) (550)
------
Cash paid $ 550
=======
F-6
See accompanying notes to consolidated financial statements.
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEARS ENDED DECEMBER 31,
2003, 2002, AND 2001
(in thousands)
Accumulated
Retained other Total
Stockholder's earnings comprehensive stockholder's
investment (deficit) income (loss) equity
- ----------------------------------------------------------- ------------------ ------------- -------------------- ------------------
- ----------------------------------------------------------- ------------------ ------------- -------------------- ------------------
Balance at December 31, 2000 $19,018 $5,946 $1,616 $26,580
- ----------------------------------------------------------- ------------------ ------------- -------------------- ------------------
Net unrealized loss on available
for sale securities, net of tax (900) (900)
Net income 369 369
Allocation of expenses from GP Strategies 46 46
Reclassification (a) (384) 384
Income tax provision deemed
contributed by GP Strategies 407 407
Distributions to GP Strategies (477) (477)
- ----------------------------------------------------------- ------------------ ------------- -------------------- ------------------
Balance at December 31, 2001 $18,610 $6,699 $716 $26,025
- ----------------------------------------------------------- ------------------ ------------- -------------------- ------------------
Net unrealized loss on available
for sale securities, net of tax (508) (508)
Net income 147 147
Allocation of expenses from GP Strategies 81 81
Reclassification (a) 168 (168)
Income tax provision deemed
contributed by GP Strategies 66 66
Distributions to GP Strategies (360) (360)
- ----------------------------------------------------------- ------------------ ------------- -------------------- ------------------
Balance at December 31, 2002 $18,565 $6,678 $208 $25,451
- ----------------------------------------------------------- ------------------ ------------- -------------------- ------------------
F-7
See accompanying notes to consolidated financial statements.
NATIONAL PATENT DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEARS ENDED DECEMBER 31,
2003, 2002, AND 2001
(in thousands)
Accumulated
Retained other Total
Stockholder's earnings comprehensive stockholder's
investment (deficit) income (loss) equity
- --------------------------------------------------------------- ------------------ -------------- ------------------- --------------
Balance at December 31, 2002 $18,565 $6,678 $208 $25,451
- --------------------------------------------------------------- ------------------ -------------- ------------------- --------------
Net unrealized loss on available
for sale securities, net of tax (769) (769)
Net unrealized gain on interest rate swap,
net of tax and minority interest 26 26
Net loss (104) (104)
Allocation of expenses from GP Strategies 449 449
Reclassification (a) 427 (427)
Balance of receivable from GP Strategies in excess
of carryover basis of assets received in repayment (6,500) (6,500)
Income tax benefit deemed distributed to GP Strategies (16) (16)
Capital contribution by GP Strategies 550 550
Distributions to GP Strategies (1,985) (1,985)
Other 134 134
- --------------------------------------------------------------- ------------------ -------------- ------------------- --------------
Balance at December 31, 2003 $18,124 $(353) $(535) $17,236
- --------------------------------------------------------------- ------------------ -------------- ------------------- --------------
Net unrealized loss on available
for sale securities, net of tax (411) (411)
Reclassification adjustment for loss on securities sold
included in net loss, net of tax 173 173
Net unrealized gain on interest rate swap,
net of tax and minority interest 60 60
Reclassification adjustment for impairment loss on securities
included in net loss, net of tax 973 973
Net loss (1,663) (1,663)
Allocation of expenses from GP Strategies 580 580
Reclassification (a) (39) 39
Income tax benefit deemed distributed to GP Strategies (145) (145)
Distributions to GP Strategies (684) (684)
Balance at June 30, 2004 17,836 $(1,977) $260 16,119
- --------------------------------------------------------------- ------------------ -------------- ------------------- --------------
(a) Principally represents net income (loss) attributable to non-core assets not
operated as separate entities.
See accompanying notes to consolidated financial statements.
F-8
NATIONAL PATENT DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as it relates to the six months ended June 30, 2004 and 2003
is unaudited)
1. The Company and basis of presentation
In July 2002, the Board of Directors of GP Strategies Corporation ("GPS" or "GP
Strategies") approved a spin-off of certain of its non-core assets into a
separate corporation to be named National Patent Development Corporation
("National Patent Development" or the "Company"). GP Strategies will own and
operate the manufacturing & process business and information technology business
through its subsidiary, General Physics Corporation, and retain a 58% interest
in GSE Systems Inc. The Company will own and operate the optical plastics
business through its wholly-owned subsidiary, MXL Industries, Inc. ("MXL"), the
home improvement distribution business through its partially owned subsidiary
Five Star Products, Inc. and will also own certain other non-core assets. The
separation of these businesses will be accomplished through a pro-rata
distribution (the "Distribution") of 100% of the outstanding common stock of
National Patent Development to the stockholders of GPS on the record date for
the Distribution.
On November 14, 2002, GPS filed a ruling request with the Internal Revenue
Service (the "IRS"). On March 21, 2003, the IRS issued a favorable tax ruling
which would enable the Distribution to be tax-free. As a result, each GPS
stockholder would receive tax-free one share of National Patent Development
common stock for every share of GPS common stock or Class B capital stock owned
on the record date of the Distribution.
National Patent Development was incorporated on March 10, 1998 as a wholly-owned
subsidiary of GPS. On February 12, 2004, National Patent Development was
recapitalized whereby the authorized capital was changed to 10,000,000 shares of
preferred stock and 30,000,000 shares of common stock. On July 30, 2004, GPS
contributed the following non-core assets to National Patent Development in
exchange for 17,672,837 shares of common stock:
1. 100% of the outstanding common stock of MXL.
2. 9,133,417 common shares of Five Star Products, Inc. ("Five Star" or
"FSP") (a publicly traded corporation) representing an approximately
64% ownership interest (see Notes 4 and 6).
3. 293,271 common shares of Millennium Cell Inc. (a publicly traded
corporation) (see Note 5).
4. 1,067,900 common shares of Avenue Entertainment Group, Inc. (a publicly
traded corporation) (see Note 5).
5. 100% of the common stock of JL Distributors, Inc. whose sole asset is a
$2,800,000 senior unsecured 8% note from Five Star due June 30, 2005,
as amended (see Note 4).
6. An option to acquire 500,000 shares of common stock (an approximate 4%
interest) of Red Storm Scientific Inc., a privately held company (see
Note 14(c)).
7. Approximately 1,000 acres of undeveloped real property located in
Pawling, New York (see Note 2).
8. 100% of the common stock of Chestnut Hill Reservoir Company whose sole
asset is certain undeveloped property located in East Killingly,
Connecticut (see Note 2).
F-9
1. The Company and basis of presentation (Continued)
National Patent Development then transferred all of the above assets other than
the MXL stock to MXL for additional MXL stock. Prior to the contribution,
National Patent Development was inactive and had no operations.
In addition to the above, on July 30, 2004 GPS made a capital contribution to
National Patent Development, which in turn on July 30, 2004 transferred to MXL,
$1,250,000 in cash (a portion of the "Gabelli Allocation") and the right to
receive certain proceeds of pending litigation and arbitration claims (see Notes
15 and 16(b)). GPS intends prior to the Distribution to transfer an additional
$625,000, representing the balance of the Gabelli Allocation. The Gabelli
Allocation is not reflected in the accompanying consolidated financial
statements.
The accompanying consolidated financial statements present the historical
results of operations, cash flows, assets, liabilities and changes in
stockholder's equity of MXL combined with the non-core assets and their effect
on results of operations and cash flows as if the contribution referred to above
had occurred at the beginning of the periods presented. Commencing in 2003, as a
result of the acquisition of a controlling financial interest in Five Star, its
accounts have been consolidated in the accompanying financial statements as
described below. In 2002 and 2001, the investment in Five Star was accounted for
by the equity method. Results of operations reflect charges for allocations of
corporate expense incurred by GPS (see Note 14(a)). All significant intercompany
balances and transactions have been eliminated. Consolidated stockholder's
equity consists of GPS's carrying value for its investment in the non-core
assets contributed together with its investment in and retained earnings of MXL
together with the retained earnings of Five Star from the date of consolidation.
Reference to National Patent Development or the Company in the notes refers to
MXL, Five Star and the non-core assets contributed to National Patent
Development.
On October 8, 2003, GPS exchanged $500,000 principal amount of the $3,500,000
Senior Unsecured 8% Note due June 30, 2005, as amended, of Five Star for
2,000,000 shares of Five Star common stock, increasing GPS's ownership in Five
Star from approximately 48% to approximately 54% of the then outstanding Five
Star common stock and obtained a controlling financial interest. As a result,
commencing as of such date the accounts of Five Star have been consolidated in
the Company's financial statements. As permitted by Accounting Research Bulletin
No. 51 "Consolidated Financial Statements", Five Star's results of operations
are included in the 2003 consolidated statement of operations as though a
controlling financial interest had been acquired by the Company at the beginning
of such year and, accordingly, Five Star's sales, cost of sales and expenses are
included for the twelve months ended December 31, 2003. Minority interest in
earnings includes, in addition to the 46% interest in Five Star not owned by the
Company, pre acquisition earnings attributable to the acquired 6% interest. This
method presents results which are more indicative of the current status of the
Company, and facilitates future comparison with subsequent years. The minority
interest balance as of June 30, 2004 and December 31, 2003 reflected in the
consolidated balance sheets is comprised of the 36 percent (after completion of
the tender offer described in Note 6) and the 46 percent minority share in Five
Star which the Company did not own, respectively.
MXL owns 100% of the common stock of Valera Pharmaceuticals, Inc. ("Valera")
(which amounts to a 15.3% ownership interest assuming conversion of Valera
outstanding preferred stock and exercise of stock options held by employees of
Valera); however, it no longer has financial and operating control of the
entity. On December 27, 2001, Valera completed a $7 million private placement of
Valera Series A Convertible Preferred Stock to certain institutional investors.
As a condition of the private placement, GPS contractually gave up operating
control over Valera through an Investors Rights Agreement,
F-10
1. The Company and basis of presentation (Continued)
and accordingly, MXL, which acquired 100% of the common stock of Valera on
October 17, 2003 from GPS in partial repayment of a receivable due from GPS,
accounts for its investment in Valera under the equity method (see Note 4).
The financial statements included herein may not necessarily be indicative of
the results of operations, financial position and cash flows of National Patent
Development in the future or had it operated as a separate, independent company
during the periods presented.
2. Description of business and a summary of significant accounting policies
Description of business. MXL is a specialist in the manufacture of polycarbonate
parts requiring strict adherence to optical quality specifications, and in the
application of abrasion and fog resistant coating to these parts. Products
include shields and face masks and non-optical plastic products. Five Star is
engaged in the wholesale distribution of home decorating, hardware and finishing
products. It serves over 3,500 independent retail dealers in twelve states in
the Northeast. Products distributed include paint sundry items, interior and
exterior stains, brushes, rollers, caulking compounds and hardware products
Cash and cash equivalents. Cash and cash equivalents consist of cash and highly
liquid debt instruments with original maturities of three months or less.
Marketable securities. Marketable securities consist of U.S. corporate equity
securities. The Company classifies its marketable securities as trading or
available-for-sale investments. Trading and available-for-sale securities are
recorded at their fair value. Trading securities are held principally for the
purpose of selling them in the near term. Unrealized holding gains and losses on
trading securities are included in earnings. Unrealized holding gains and losses
on available-for-sale securities are excluded from earnings and are reported as
a separate component of stockholders' equity in accumulated other comprehensive
income, net of the related tax effect, until realized. A decline in the market
value of any available-for-sale security below cost, that is deemed to be other
than temporary, results in a reduction in carrying amount to fair value. The
impairment is charged to earnings, and a new cost basis is established. Realized
gains and losses are derived using the average cost method for determining the
cost of securities sold. Available-for-sale securities consist of the common
stock of Millennium Cell Inc. and Avenue Entertainment Group, Inc. Trading
securities, which consist of the common stock of Hemispherx Biopharma, Inc., are
included in other current assets at December 31, 2003. National Patent
Development fully disposed of its trading securities in the six months ended
June 30, 2004.
Inventories. Inventories are valued at the lower of cost or market, using the
first-in, first-out method.
Revenue recognition. Revenue on product sales is recognized at the point in time
when the product has been shipped, title and risk of loss has been transferred
to the customer, and the following conditions are met: persuasive evidence of an
arrangement exists, the price is fixed and determinable, and collectibility of
the resulting receivable is reasonably assured. Allowances for estimated returns
and allowances are recognized when sales are recorded.
Shipping and handling costs. Shipping and handling costs are included as a part
of selling, general and administrative expense. These cost amounted to
$2,361,000 (unaudited) and $2,309,000 (unaudited) for the six months ended June
30, 2004 and June 30, 2003, respectively, and $4,514,000, $82,000 and $73,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
F-11
2. Description of business and a summary of significant accounting policies
(Continued)
Property, plant and equipment. Property, plant and equipment are carried at
cost. Major additions and improvements are capitalized while maintenance and
repairs which do not extend the lives of the assets are expensed as incurred.
Gain or loss on the disposition of property, plant and equipment is recognized
in operations when realized.
Depreciation. The Company provides for depreciation of property, plant and
equipment primarily on a straight-line basis over estimated useful lives of 5 to
40 years for buildings and improvements and 3 to 7 years for machinery,
equipment and furniture and fixtures.
Long-Lived Assets. The recoverability of long-lived assets, other than goodwill,
is assessed whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through future undiscounted
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment is measured by determining the amount
by which the carrying value of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less costs to sell.
The Company has investments in land in Pawling, New York with a carrying value
of $2.5 million and in East Killingly, Connecticut with a carrying value of $0.4
million, which are included in other assets in the Consolidated Balance Sheets
(see Note 16(b)). Management believes the fair value of these investments exceed
their carrying value.
Fair value of financial instruments. The carrying value of cash and cash
equivalents, accounts receivable and accounts payable approximate estimated fair
values because of short maturities. The carrying value of the receivable from
GPS approximates estimated fair value (see Note 14(b)). The carrying value of
short term borrowings approximates estimated fair value because borrowings
accrue interest which fluctuates with changes in LIBOR or prime. The carrying
value for the Company's long-term debt, certain of which have variable interest
rates, approximates fair value.
Marketable securities, other than those accounted for on the equity basis, are
carried at fair value based upon quoted market prices. Derivative instruments
are carried at fair value representing the amount the Company would receive or
pay to terminate the derivative.
Derivatives and hedging activities. The interest rate swap and interest rate
collar entered into by the Five Star in connection with its loan agreement (see
Note 8) is being accounted for under SFAS No. 133, as amended, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires all
derivatives to be recognized in the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through earnings. If the
derivative is a cash flow hedge, changes in the fair value of the derivative are
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value is
immediately recognized in earnings. Changes in the fair value of the interest
rate swap, which has been designated as a cash flow hedge, were recognized in
other comprehensive income. Changes in the fair value of the interest rate
collar are recognized in earnings. Such change from June 17, 2004, the date the
interest rate collar was entered into, through June 30, 2004 amount to
approximately $57,000, which has been charged to earnings during the six months
ended June 30, 2004.
F-12
2. Description of business and a summary of significant accounting policies
(Continued)
Stock based compensation. The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for options to acquire GP Strategies common stock granted to MXL
employees under the GP Strategies stock option plan. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. The difference between the
quoted market price as of the date of the grant and the contractual purchase
price of shares is charged to operations over the vesting period. SFAS No. 123,
"Accounting for Stock-Based Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
Pro forma net income (loss) and earnings (loss) per share disclosures as if the
Company recorded compensation expense based upon the fair value of the GPS
stock-based awards pursuant to SFAS No. 123 has not been presented since no
options have been granted to MXL employees during the periods presented and
previously granted options to MXL employees vested immediately.
Pro forma net income and earnings per share disclosures as if compensation
expense was recorded based on the fair value of options granted under the Five
Star Products, Inc. 1994 Five Star Plan (see Note 11) have been presented in
accordance with the provisions of SFAS No. 123, is as follows for the six months
ended June 30, 2004 and for the year ended December 31, 2003 (in thousands,
except per share amounts):
Six months ended Year ended
June 30, December 31,
2004 2003
Net loss - As reported $(1,663) $(104)
Compensation expense, net of tax
Five Star stock options (4) (1) (10) (1)
-------- --------
Pro forma net loss $(1,667) $ (114)
Basic and diluted loss per share
As reported $(.09) $ (.01)
Pro forma net loss per share $(.09) $ (.01)
(1) Expense relates to option grants made by Five Star prior to the acquisition
of a controlling interest in Five Star by the Company.
Pro forma per share data (unaudited). Pro forma basic and diluted income (loss)
per share is based upon the weighted average number of shares issued being equal
to the weighted average number of outstanding shares of GPS common stock and
Class B capital stock, as if the distribution had occurred prior to the periods
presented.
Pro forma income (loss) per share for the six months ended June 30, 2004 and
2003, and for the years ended December 31, 2003, 2002 and 2001 are as follows
(in thousands, except per share amounts):
F-13
2. Description of business and a summary of significant accounting policies
(Continued)
Six Months ended
June 30, Year ended December 31,
2004 2003 2003 2002 2001
---- ---- ---- ---- ----
(unaudited)
Basic and Diluted EPS
Net income (loss) $(1, 663) $(83) $(104) $147 $369
Weighted average shares
outstanding, basic and diluted 17,600 16,866 17,139 15,370 13,209
Basic and diluted income (loss) per share $ (.09) $.00 $(.01) $.01 $(.03)
Comprehensive income. Comprehensive income consists of net income (loss) and
net unrealized gains (losses) on available-for-sale securities and the interest
rate swap
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date (see Note 9.)
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments, accounts receivable from customers and the receivable from GP
Strategies. The Company places its cash investments with high quality financial
institutions and limits the amount of credit exposure to any one institution.
See Note 14(b) with respect to the repayment of the receivable from GP
Strategies.
Interim financial information. The financial information as of June 30, 2004 and
for the six months ended June 30, 2004 and 2003 is unaudited but includes all
adjustments (consisting of normal recurring accruals) that management considers
necessary for a fair presentation of its financial position, results of
operations, cash flows and changes in shareholder's equity. Results for the six
months ended June 30, 2004 are not necessarily indicative of results to be
expected for the full fiscal year 2004 or for any future period.
F-14
2. Description of business and a summary of significant accounting policies
(Continued)
Accumulated other comprehensive income. The components of accumulated other
comprehensive income are as follows (in thousands):
- ---------------------------------------------------- ------------------ ------------------ -------------------
June 30, December 31, December 31,
2004 2003 2002
- ---------------------------------------------------- ------------------ ------------------ -------------------
Net unrealized gain (loss) on
available-for-sale-securities $ 277 $ (567) $ 341
Net unrealized gain on interest rate swap 148 46 -
------ --------- ---------
Accumulated other comprehensive
income before tax 425 (521) 341
------ ---------- --------
Accumulated income tax expense
related to items of other comprehensive loss (165) (14) (133)
------- ---------- ----------
Accumulated other comprehensive
income, net of tax $ 260 $ (535) $ 208
------ --------- -------
3. Inventories
Inventories are comprised of the following (in thousands):
June 30, December 31,
-------- ------------
2004 2003 2002
---- ---- ----
(unaudited)
Raw materials $ 984 921 $784
Work in process 498 383 131
Finished goods 24,263 26,996 465
------- ------ --------
$25,745 $28,300 $1,380
======= ======= ======
4. Investments in and note receivable from equity investee
Five Star Products
On September 30, 1998, GP Strategies sold substantially all of the operating
assets of the Five Star business to American Drug, an entity which was then
37.5% owned by GP Strategies, and received a five- year 8% unsecured senior note
in the original principal amount of $5,000,000 (the "Five Star Note") as partial
consideration. American Drug then changed its name to Five Star Products, Inc.
On August 31, 1998, GP Strategies entered into a voting agreement with Five Star
(the "Voting Agreement") pursuant to which GP Strategies agreed that for a
period of three years it would vote its shares of Five Star common stock (i)
such that not more than 50% of Five Star's directors would be officers or
directors of GP Strategies and (ii) on all matters presented to a vote of
stockholders, other than the election of directors, in the same manner and in
the same proportion as the remaining stockholders of Five Star vote. On June 30,
2002, GP Strategies and Five Star extended the Voting Agreement until June 30,
2004.
F-15
4. Investment in and note receivable from equity investee (Continued)
The Five Star Note was amended in November 2001 to provide for the extension of
its maturity date until September 30, 2004, and on March 31, 2004 the maturity
date of the Five Star Note was further extended until June 30, 2005. Under a
separate Subordination Agreement between GP Strategies and the banks providing
Five Star's $25,000,000 revolving loan, Five Star may make annual cash payments
of principal to GP Strategies provided Five Star achieves certain financial
performance benchmarks.
On August 2, 2002, GP Strategies exchanged $500,000 principal amount of the Five
Star Note for 2,272,727 shares of Five Star's common stock, reducing the
outstanding principal amount of the Five Star Note to $4,500,000 and increasing
GP Strategies ownership of the Five Star common stock to 7,133,417 shares,
approximately 48% of the then outstanding shares. The transaction valued the
Five Star common stock at $0.22 a share, which was at a premium to the market
value at that time. At December 31, 2002, the Company owned approximately 48% of
Five Star.
Pursuant to the provisions of the Subordination Agreement, on June 27, 2003,
July 2, 2003 and July 7, 2003, Five Star made principal payments on the Five
Star Note to GP Strategies in the amounts of $500,000, $300,000, and $200,000,
respectively, reducing the outstanding principal amount of the Five Star Note to
$3,500,000. On October 8, 2003, GP Strategies exchanged $500,000 principal
amount of the Five Star Note for 2,000,000 shares of Five Star common stock,
reducing the outstanding principal balance of the Five Star Note to $3,000,000
and increasing GP Strategies' ownership of Five Star's common stock to 9,133,417
shares, approximately 54% of the then outstanding shares. In consideration for
GP Strategies agreeing to exchange at a price of $0.25 per share, which was at a
significant premium to the market price of the Five Star common stock on the day
prior to approval of the transaction, Five Star agreed to terminate the Voting
Agreement and thereby GP Strategies obtained a controlling financial interest in
Five Star. Accordingly, as described in Note 1, Five Star's financial statements
have been consolidated with those of the Company commencing as of such date. On
July 30, 2004, GP Strategies transferred the Five Star Note to National Patent
Development (See Note 1); accordingly the Five Star Note has been eliminated
from the consolidated balance sheet as of June 30, 2004 and December 31, 2003 as
an intercompany balance. The balance of the Five Star Note is $2,800,000 as of
June 30, 2004 and December 31, 2003, and no principal repayments are required
prior to the June 30, 2005 maturity date.
The Company accounted for its investment in Five Star using the equity method
prior to obtaining a controlling financial interest. A write down on this
investment of $200,000 was recorded in 2001, which is included in (loss) income
related to equity investee. Such write down reflected a loss in value which
management determined to be other than a temporary decline. GPS's excess of its
investment in Five Star over its basis of the underlying net assets, was
approximately $208,000 at December 31, 2002. In 2003, 2002 and 2001, the Company
received $475,000, $33,000 and $115,000, respectively, representing a recovery
of a portion of its investment in Five Star.
Information relating to the Company's investment in Five Star as of December 31,
2002 and for the years ended December 31, 2002 and 2001 is as follows (in
thousands):
F-16
4. Investment in and note receivable from equity investee (Continued)
December 31,
2002 2001
------------------------------------------ ------------- --------------
------------------------------------------ ------------- --------------
Long-term note receivable $4,500
Number of shares 7,133
Carrying value of shares $1,760
Valuation of shares, based
on quoted market price $ 571
Interest income on note (1) $ 384 $ 400
Equity interest in net income (2) $ 55 $ 59
Write down of investment (1) $ (200)
(1) Included in income related to equity investee.
(2) Net of depreciation of property, plant and equipment and amortization
of goodwill (attributable to excess of the carrying value of investment
in Five Star over underlying equity in its net assets) of $107,000 and
$96,000 for years ended December 31, 2002 and 2001, respectively.
Effective January 1, 2002, upon adoption of FASB Statement No. 142,
amortization of goodwill ceased (see Note 8).
Condensed financial information for Five Star as of December 31, 2002 and for
the years ended December 31, 2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Current assets $34,214
Non current assets 1,152
Current liabilities 27,585
Non current liabilities 4,500
Stockholders' equity 3,281
Sales $94,074 $94,908
Gross profit 16,613 16,054
Net income 391 417
Valera Pharmaceuticals
Valera is a specialty pharmaceutical company engaged in the development and
commercialization of prescription pharmaceuticals principally utilizing Valera's
patented Hydron drug delivery technology. Valera's lead product is a
twelve-month implant that delivers the luteinizing hormone releasing hormone, or
LHRH, histrelin for the palliative treatment of metastatic prostate cancer. LHRH
agonists are the premium standard of care in the palliative treatment for
metastatic breast cancer. On October 13, 2004, Valera announced that the FDA
approved the marketing of Vantas(TM), the name for Valera's long-acting LHRH
implant for treating prostate cancer. Prior to June 2000, Valera operated as a
division of GP Strategies. In connection with an offering of GP Strategies 6%
Convertible Subordinated Exchangeable Notes due June 2003, Valera was
incorporated as a separate company and became a wholly-owned subsidiary of GP
Strategies through GP Strategies' ownership of 100% of the common stock of
Valera.
F-17
4. Investment in and note receivable from equity investee (Continued)
In December 2001, Valera completed a $7 million private placement of Series A
convertible preferred stock to certain institutional investors. As a condition
of the private placement, GP Strategies contractually gave up operating control
over Valera through an Investors Rights Agreement, which gave GP Strategies' the
right to designate one director on Valera's board of directors and gave the
other stockholders the right to designate the other directors, and subsequent
thereto accounted for the investment under the equity method. As a result of
Valera operating losses, GP Strategies investment was written down to zero.
In the second quarter of 2003, Valera completed a private placement offering
pursuant to which Valera raised approximately $13.5 million in gross proceeds
from the sale of Series B convertible preferred stock. As part of such
transaction, GP Strategies was granted an option until March 31, 2004, to
purchase up to $5 million of the Series B convertible preferred stock at the
offering price of $0.725 per share, which was subsequently verbally extended to
June 30, 2004. On June 30, 2004, GP Strategies transferred a portion of its
option to an institutional investor, which exercised such option and purchased
from Valera 3,448,276 shares of Series B convertible preferred stock for $0.725
per share. The balance of the option expired unexercised. In consideration of
such transfer, such institutional investor granted National Patent Development
an option until October 28, 2004 to purchase up to 2,068,966 shares of Series B
convertible preferred stock owned by such institutional investor for prices
ranging from $0.725 to $0.7685 per share. On August 16, 2004 Valera sold
11,600,000 shares of Series C preferred stock and received gross proceeds of
$11.6 million.
The Series A preferred stock, Series B preferred stock and Series C preferred
stock, which are convertible into Valera's common stock at any time, have voting
rights on an as-converted basis on all matters submitted to the stockholders and
are also entitled to receive dividends on an as-converted basis with shares of
common stock when, as and if declared by the Board of Directors. In addition the
Series B preferred stock accrues cumulative dividends at the rate of 10% of the
Series B stated value, payable when and as declared by the Board of Directors.
In the event of liquidation, the holders of the preferred stock shall be
entitled to receive preferential distributions before any payment shall be made
in respect of the common stock. Assuming conversion of all of the outstanding
shares of Series A, Series B and Series C convertible preferred stock and
exercise of stock options held by employees of Valera the Company would own
approximately 15.3% of Valera. Assuming the Company exercises the option to
purchase 2,068,966 shares of the Series B convertible preferred stock and
conversion of all of the outstanding shares of Series A, Series B and Series C
convertible preferred stock, and exercise of stock options held by employees of
Valera, the Company would own approximately 18.4% of Valera.
As described in Note 14(b), on October 17, 2003, MXL received from GPS in
partial payment of a note receivable the common shares of Valera and recorded
such shares at zero representing their carrying amount to GPS. As a result of
the Investors Rights Agreement referred to above, the Company is accounting for
its investment in Valera under the equity method. However as the Company has not
guaranteed obligations of Valera and has not otherwise committed to provide
further support for Valera, it has discontinued recognizing additional losses of
Valera. If Valera subsequently reports net income, the Company shall resume
applying the equity method only after its share of that net income equals the
share of net losses not recognized during the period the equity method was
suspended.
F-18
5. Marketable securities
Marketable securities, which are carried at market value, were comprised of the
following (in thousands):
Available-for-sale securities
June 30, December 31,
2004 2003 2002
---- ---- ----
(unaudited)
Millennium Cell Inc. $1,823 $2,769 $698
Avenue Entertainment Group, Inc. 138 212 58
------- -------- ------
$1,961 $2,981 $756
====== ====== ====
Millennium Cell Inc. ("Millennium")
Millennium is a publicly traded emerging technology company engaged in the
business of developing innovative fuel systems for the safe storage,
transportation and generation of hydrogen for use as an energy source. At
December 31, 2002 and 2001 the Company held 293,271 shares of Millennium with a
market value on those dates of $698,000 and $1,531,000, respectively and
unrealized gains of $341,000 and $1,174,000, respectively. On October 17, 2003
the Company received from GP Strategies in partial payment of a receivable an
additional 1,000,000 shares of common stock of Millennium with a market value on
that date of approximately $3,500,000. From October 17, 2003 through December
31, 2003 the Company sold 105,000 of such Millennium shares for $272,000 and
recognized a loss of $95,000, which is included in Investment and other income
(loss). At December 31, 2003 the Company held 1,188,271 shares of common stock
of Millennium Cell, representing approximately a 3% interest in the company,
with a market value of $2,769,000 and an unrealized loss of $721,000, which
resulted from reductions in market value during the year ended December 31,
2003. For the six months ended June 30, 2004 the Company sold 223,500 shares of
Millennium shares received in October 2003 for $609,000 and recognized a loss of
$173,000, which is included in Investment and other income (loss). At June 30,
2004, the Company held 964,771 shares of common stock of Millennium Cell with a
market value of $1,823,000, representing approximately a 3% ownership interest
and an unrealized loss of $884,000 reflecting further unrealized losses during
the six months ended June 30, 2004.
The Company believes that the reduction in market value of Millennium correlates
with the general trend of the market for emerging technology companies and
reflects the volatility of Millennium's stock price. The Company has evaluated
the near-term prospects of Millennium in relation to the severity and duration
of the impairment. Based on that evaluation and the Company's ability and intent
to hold this investment for a reasonable period of time sufficient for a
forecasted recovery of fair value, the Company does not consider its investment
in Millennium to be other-than-temporarily impaired at December 31, 2003.
However, at June 30, 2004, based on the increase in the severity and duration of
the impairment and the absence of sufficient evidence to support a recovery of
fair value within a reasonable period of time, the Company considers the
investment in the 671,500 remaining shares acquired in October 2003 to be
other-than-temporarily impaired and accordingly has recorded an impairment loss
of $1,081,000 related to such shares in Investment and other income (loss) in
the six-month period ended June 30, 2004. The balance of 293,271 Millennium
shares held by the Company prior to October 2003 has an unrealized gain of
$197,000 at June 30, 2004.
F-19
5. Marketable securities (Continued)
Avenue Entertainment Group, Inc ("Avenue")
The Company owns 1,067,900 shares of Avenue, which is an independent
entertainment company that produces feature films, series for television, made
for television/cable movies and one hour profiles of Hollywood stars. Impairment
losses of $200,000 on the stock of Avenue were charged to operations during the
year ended December 31, 2001 and are included in Investment and other income
(loss), net. As of December 31, 2002, the market value of Avenue approximated
its adjusted cost. As of December 31, 2003 and June 30, 2004 the market value of
Avenue approximated $212,000 and $138,000, respectively, resulting in an
unrealized gain of $154,000 and $80,000, respectively.
Trading securities
Hemispherx Biopharma Inc. ("HEB")
In the fourth quarter of 2003 MXL received a capital contribution of 267,296
shares of HEB from GP Strategies with a market value of $550,000 and
subsequently sold 107,700 of the shares for $249,000. For the year ended
December 31, 2003, the Company realized a gain of $27,000 on the sale of these
shares and unrealized holding gains of $32,000 on the remainder of the shares,
which are both included in Investment and other income (loss). The approximately
160,000 shares remaining at December 31, 2003 are classified as trading
securities. These shares had a fair value of approximately $361,000 at December
31, 2003 and were sold in the first quarter of 2004 for $404,000. The Company
recorded a realized gain of $43,000 on the sale of these shares, which is
included in Investment and other income (loss).
6. Five Star acquisition
As described in Note 4, on October 8, 2003, the Company increased its ownership
interest in Five Star's outstanding common stock from 48% to 54%, obtained a
controlling financial interest in Five Star and accordingly commenced
consolidating Five Star's financial statements with those of the Company. The
increase in ownership occurred because the Company believed that the common
stock of Five Star represented an attractive investment opportunity based on its
valuation at that time. Five Star comprises the Company's new Home Improvement
Distribution Segment.
The acquisition of a controlling financial interest was accounted for as a
purchase transaction, and accordingly, the net assets acquired were recorded at
their fair value at the date of the acquisition. The excess of the net assets
acquired over carrying value of the Company's investment in Five Star was
recorded as a reduction to property, plant and equipment.
F-20
6. Five Star acquisition (Continued)
The components of the net assets at date of acquisition, minority interest and
the Company's cost of its acquired interest were as follows (in thousands):
Accounts receivable $13,267
Inventory 20,222
Property, plant & equipment and other assets 1,228
- ------------------------------------------------------------- -------------
Total assets 34,717
- ------------------------------------------------------------- -------------
Short term borrowings 17,616
Accounts payable and accrued expenses 10,063
Debt to GP Strategies 3,000
- ------------------------------------------------------------- -------------
- ------------------------------------------------------------- -------------
Total liabilities assumed 30,679
- ------------------------------------------------------------- -------------
- ------------------------------------------------------------- -------------
Five Star net assets 4,038
- ------------------------------------------------------------- -------------
- ------------------------------------------------------------- -------------
Less minority interest in net assets 1,996
- ------------------------------------------------------------- -------------
- ------------------------------------------------------------- -------------
Cost of net assets acquired $2,042
- ------------------------------------------------------------- -------------
The following table represents the Company's unaudited pro forma consolidated
statements of operations for the years ended December 31, 2003 and 2002, as if
the acquisition of a controlling financial interest in Five Star had been
completed at the beginning of each period. The pro forma information is
presented for comparative purposes only and does not purport to be indicative of
what would have occurred had the acquisition actually been made at such dates,
nor is it necessarily indicative of future operating results (in thousands,
except per share data):
---------------------------------------- ----------------- ------------------
Years ended December 31, 2003 2002
---------------------------------------- ----------------- ------------------
---------------------------------------- ----------------- ------------------
Sales $103,698 $104,070
Income before minority interest 61 585
Minority interest (319) (180)
Net income $ 32 $ 405
Net income per share
Basic and diluted $ .00 $ .03
---------------------------------------- ----------------- ------------------
On February 6, 2004 Five Star announced that it will repurchase up to 5,000,000
shares, or approximately 30% of its common stock currently outstanding, through
a tender offer for the shares at $0.21 per share, originally set to expire on
March 16, 2004. On March 17, 2004 Five Star announced that it had increased the
price it was offering to pay for the shares in the tender offer to $0.25 per
share and extended the offer to March 31, 2004. Based on the final tabulation by
the depositary for the tender offer, approximately 2,627,790 shares of common
stock were tendered and acquired by Five Star effective March 31, 2004 at a cost
of $657,000. The effect of the tender offer was to increase the Company's
ownership in Five Star to approximately 64%. The minority interest in Five Star
has been adjusted to reflect the tender offer in the accompanying balance sheet
at June 30, 2004.
F-21
7. Property, plant and equipment
Property, plant and equipment consist of the following (in thousands):
June 30, December 31,
2004 2003 2002
---- ---- ----
(unaudited)
Land $ 915 $ 915 $ 915
Buildings and improvements 4,269 4,228 3,525
Machinery and equipment 7,892 7,755 6,843
Furniture and fixtures 1,201 1,071 199
--------------- --------- --------
--------------- --------- --------
14,277 13,969 11,482
--------------- --------- --------
--------------- --------- --------
Accumulated depreciation and amortization (8,683) (8,244) (6,653)
--------------- --------- --------
--------------- --------- --------
5,594 $ 5,725 $4,829
8. Goodwill
Goodwill, which represents the excess of cost over the fair value of the
identifiable net assets of a business acquired by MXL, was being amortized
through December 31, 2001 on a straight line basis over 20 years.
Effective January 1, 2002, the Company adopted FASB Statement No. 142, Goodwill
and Other Intangible Assets. Statement No. 142 requires that goodwill no longer
be amortized but instead tested for impairment at least annually in accordance
with the provisions of Statement No. 142. The Company did not recognize any
impairment as a result of the adoption of this statement. In addition, Statement
142 requires that upon adoption, the excess of cost over the underlying equity
in net assets of an investee accounted for using the equity method that has been
recognized as goodwill no longer be amortized. For the years ended December 31,
2003 and 2002 the Company performed a test for potential impairment of goodwill
and determined that there was no impairment. The Company will continue to
perform such impairment tests on an annual basis with the date of assessment
being December 31.
The changes in the carrying amount of goodwill during the period are as follows
(in thousands):
Balance as of December 31, 2000 202
Amortization (20)
-----
Balance as of December 31, 2001, 2002 and 2003 and June 30, 2004 $182(a)
====
a) Reduced by accumulated amortization of $208
Pro forma net income for the year ended December 31, 2001, as adjusted to remove
the amortization of goodwill, would increase net income for the period by
$20,000 to $389,000, which would not have an impact on the Company's pro forma
basic and diluted earnings per share.
F-22
9. Long-term debt and short term borrowings
Long-term debt is comprised of the following (in thousands):
June 30, December 31,
2004 2003 2002
---- ---- ----
(unaudited)
MXL Pennsylvania Mortgage (a) $1,355 $1,405 $1,505
MXL Illinois Mortgage (b) 1,170 1,185 1,212
AOtec Debt and Notes (c) 813 922
Other 62 80 158
- ---------------------------------------------------------- ----------------- -------------- -------------
- ---------------------------------------------------------- ----------------- -------------- -------------
3,400 3,592 2,875
Less current maturities (399) (389) (205)
- ---------------------------------------------------------- ----------------- -------------- -------------
- ---------------------------------------------------------- ----------------- -------------- -------------
$3,001 $3,203 $2,670
- ---------------------------------------------------------- ----------------- -------------- -------------
(a) On March 8, 2001, MXL mortgaged its real estate and fixtures on its property
in Pennsylvania for $1,680,000. The loan requires monthly repayments of $8,333
plus interest at 2.5% above the one month LIBOR rate and matures on March 8,
2011, when the remaining amount outstanding of approximately $680,000 is due in
full. The loan is guaranteed by GPS.
(b) On July 3, 2001, MXL mortgaged its real estate and fixtures on its property
in Illinois for $1,250,000. The loan requires monthly payments of principal and
interest in the amount of $11,046 with interest at a fixed rate of 8.75% per
annum, and matures on June 26, 2006, when the remaining amount outstanding of
approximately $1,100,000 is due in full. The loan is guaranteed by GPS.
(c) In September 2003, MXL purchased machinery, equipment and inventory from
AOtec LLC ("AOtec"), located in the Massachusetts area, for $1,100,000, subject
to adjustment. In connection with this purchase, the Company valued the
machinery and equipment at approximately $900,000, the inventory at
approximately $350,000 and recorded an accrued expense of $150,000. MXL paid
$100,000 of the purchase price in cash and issued three notes, in the amount of
$450,000, $275,000 and $275,000 each, due October 1, 2003, August 5, 2004 and
August 5, 2005, respectively (collectively, the "AOtec Notes"). The AOtec Notes
bear interest on the unpaid principal amount at the rate of 4% per annum. On
October 1, 2003, MXL borrowed $700,000 from a bank under an agreement to finance
the purchase price (the "AOtec Debt") and used a portion of the proceeds to pay
the $450,000 note. The AOtec Debt bears interest at the rate of 5.89 % per
annum, is payable monthly for three-years and is secured by the machinery and
equipment purchased from AOtec. GPS guaranteed the AOtec Debt. The Aotec Note
due August 5, 2004 of $275,000 is classified as short term borrowings on the
Company's Consolidated Balance Sheets and is not included in the table above.
Aggregate annual maturities of long-term debt at December 31, 2003 are as
follows (in thousands):
2004 $ 389
2005 687
2006 1,411
2007 100
2008 100
Thereafter 905
--------------------------------
Total $3,592
F-23
9. Long-term debt and short term borrowings (Continued)
Short-term borrowings
On June 20, 2003, Five Star obtained a new Loan and Security Agreement (the
"Loan Agreement") with Fleet Capital Corporation. The Loan Agreement has a
five-year term, with a maturity date of June 30, 2008. The Loan Agreement
provides for a $25,000,000 revolving credit facility, which allows Five Star to
borrow based upon specified percentages of eligible inventory and eligible
accounts receivable, as defined therein. The interest rates under the Loan
Agreement are LIBOR plus a credit spread for borrowings not to exceed
$15,000,000 and the prime rate plus a credit spread for borrowings in excess of
the above-mentioned LIBOR-based borrowings. The credit spreads can be reduced in
the event that Five Star achieves and maintains certain performance benchmarks.
At June 30, 2004 and December 31, 2003, approximately $22,176,000 and
$16,685,000 was outstanding under the Loan Agreement and approximately $440,000
and $480,000 was available to be borrowed, respectively. Five Star's assets
having a book value of $40,138,000 and $38,732,000 at June 30, 2004 and December
31, 2003, respectively, are pledged as collateral for the outstanding
borrowings. Under the Loan Agreement, Five Star is subject to covenants
requiring minimum net worth, limitations on losses, if any, and minimum or
maximum values for certain financial ratios.
In connection with the Loan Agreement, Five Star also entered into a derivative
transaction with Fleet National Bank on June 20, 2003. The derivative
transaction is an interest rate swap which has been designated as a cash flow
hedge. Effective July 1, 2004 through June 30, 2008, Five Star will pay a fixed
interest rate of 3.38% to Fleet National Bank on notional principal of
$12,000,000. In return, Fleet National Bank will pay to Five Star a floating
rate, namely, LIBOR, on the same notional principal amount. The credit spread
under the Loan Agreement is not included in and will be paid in addition to this
fixed interest rate of 3.38%. At December 31, 2003, the interest rate swap had a
fair value of $122,000, which is included in other assets. As a result of
expected future increases in LIBOR during the six months ended June 30, 2004,
the value of the swap increased by $109,000 resulting in a value of $231,000 at
June 30, 2004. On June 17, 2004, Five Star has also entered into a derivative
interest rate collar transaction during the period from July 1, 2004 through
June 30, 2008 on notional principal of $12,000,000. The transaction consists of
an interest rate floor of 2.25%, whereas if LIBOR is below 2.25%, Fleet National
Bank will pay to Five Star the difference between LIBOR and 2.25%, on the same
notional principal amount. The transaction also consists of an interest rate cap
of 5.75%, whereas if LIBOR is above 5.75%, Five Star will pay to Fleet National
Bank the difference between LIBOR and 5.75%, on the same notional principal
amount.
10. Income taxes
MXL's operating results together with those of the non-core assets historically
have been included in consolidated federal income tax returns filed by GPS. In
addition, MXL files separate state income tax returns in Pennsylvania and
Illinois. Income tax expense (benefit) in the accompanying financial statements
has been computed as if MXL filed its own separate federal and state income tax
returns including transactions related to the non-core assets. As GPS does not
own 80% of its common stock, Five Star files its own separate consolidated
federal income tax return, as well as separate state and local income tax
returns.
Through June 30, 2004, no tax sharing agreement was in effect and no amounts
were charged or credited to MXL as if it filed its own separate federal income
tax returns. Accordingly, the provision for current federal income taxes
(exclusive of amounts pertaining to Five Star for 2003 and 2004) and current
state
F-24
10. Income taxes (Continued)
and local income taxes related to the results of non-core assets has been
accounted for as an adjustment to stockholder's investment.
The components of income tax expense (benefit) are as follows (in thousands):
Six Months Ended June 30,
Year Ended December 31,
2004 2003 2003 2002 2001
- ------------------------------------------ ---------------------------- ------------- ------------- --------------
(unaudited)
Current
Federal 161 142 $359 $57 $374
State and local 43 28 113 11 71
- ------------------------------------------ -------------- ------------- ------------- ------------- --------------
Total current 204 170 472 68 445
- ------------------------------------------ -------------- ------------- ------------- ------------- --------------
Deferred
Federal (57) (89) (246) 64 (42)
State and local (5) (18) (53) 13 (8)
- ------------------------------------------ -------------- ------------- ------------- ------------- --------------
Total deferred (62) (107) (296) 77 (50)
- ------------------------------------------ -------------- ------------- ------------- ------------- --------------
Total income tax expense 142 63 $176 $145 $395
- ------------------------------------------ -------------- ------------- ------------- ------------- --------------
The deferred expense (benefit) excludes activity in the net deferred tax
liability relating to tax on appreciation (depreciation) in available-for-sale
securities and the interest rate swap, which is recorded directly to
stockholder's equity.
The difference between the expense (benefit) for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit) is as follows:
Six Months Ended June 30,
Year Ended December 31,
2004 2003 2003 2002 2001
- ------------------------------------------------------------------- -------------- ----------- ------------ ---------- -------------
- ------------------------------------------------------------------- -------------------------- ------------ ---------- -------------
(unaudited)
Federal income tax rate (35.0%) 35.0% 35.0% 35.0% 35.0%
State and local taxes, net of federal benefit 1.9 7.0 7.0 5.2 6.0
Non-deductible expenses 2.2 9.3 9.3 7.6 2.7
Impairment and realized losses for investment in partially owned
companies for which no benefit has been provided 27.8 3.4 3.4 - 8.6
Net operating loss of MXL unable to be utilized on a stand alone
basis for which no tax benefit has been provided 19.1 - - - -
Other (5.2) (8.7) (8.7) 1.9 (.6)
- ------------------------------------------------------------------- -------------- ----------- ------------ ---------- -------------
Effective tax rate expense (benefit) 10.8% 46.0% 46.0% 49.7% 51.7%
- ------------------------------------------------------------------- -------------- ----------- ------------ ---------- -------------
The tax effects of temporary differences between the financial reporting and tax
bases of assets and liabilities that are included in the net deferred tax
(liability) asset are summarized as follows:
F-25
10. Income taxes (Continued)
June 30, December 31,
2004 2003 2002
- ------------------------------------------------------------------------ -------------- ------------ ------------
(unaudited)
Deferred tax assets:
Property and equipment $ 153 $ 176 $ -
Allowance for doubtful accounts 78 78 14
Accrued liabilities 45 45 2
Interest rate swap - - -
Investment in partially owned companies 314 221 -
Inventory 46 47 11
- ------------------------------------------------------------------------ -------------- ------------ ------------
Deferred tax assets 636 567 27
- ------------------------------------------------------------------------ -------------- ------------ ------------
Deferred tax liabilities:
Property and equipment - - 221
Interest rate swap and collar 73 51 -
Investment in partially owned companies 278 278 776
- ------------------------------------------------------------------------ -------------- ------------ ------------
Deferred tax liabilities 351 329 997
- ------------------------------------------------------------------------ -------------- ------------ ------------
Net deferred tax assets (liabilities) 285 238 (970)
- ------------------------------------------------------------------------ -------------- ------------ ------------
Less valuation allowance (353) (260) -
- ------------------------------------------------------------------------ -------------- ------------ ------------
Net deferred tax assets (liabilities) $ (68) $ (22) $ (970)
- ------------------------------------------------------------------------ -------------- ------------ ------------
Under the Internal Revenue Code's consolidated return regulations, each member
of GP Strategies consolidated group (including MXL) is jointly and severally
liable for the consolidated federal income tax liabilities. GPS, National Patent
Development and their respective subsidiaries intend to enter into a Tax Sharing
Agreement that defines the parties' rights and obligations with respect to
deficiencies and refunds of federal, state and other taxes relating to the
National Patent Development business for tax years prior to the spin-off and
with respect to certain tax attributes of National Patent Development after the
spin-off. In general, GPS will be responsible for filing consolidated federal
tax returns and paying any associated taxes for periods through the date of the
spin-off (the "Distribution Date"). National Patent Development will be required
to pay GPS an amount equivalent to federal taxes relating to National Patent
Development and its subsidiaries allocated taxable income includable in GPS's
consolidated federal income tax return for the taxable period that ends on the
Distribution Date. National Patent Development is responsible for filing its own
tax returns and paying taxes for periods beginning on or after the Distribution
Date. GPS and National Patent Development will agree to cooperate with each
other and to share information in preparing such tax returns and in dealing with
other tax matters. GPS and National Patent Development will be responsible for
their own taxes other than those described above.
National Patent Development has agreed not to take any actions or enter into any
transactions that would cause the spin-off not to qualify as tax-free. National
Patent Development also has agreed to indemnify GPS to the extent that any
action National Patent Development takes gives rise to a tax incurred by GPS
with respect to the spin-off.
If National Patent Development increases its ownership to at least 80% of Five
Star's common stock, Five Star would become, for federal tax purposes, part of
the affiliated group of which National Patent Development is the common parent.
As a member of such affiliated group, Five Star would be included in National
Patent Development's consolidated federal income tax returns, Five Star's income
or loss would be included as part of the income or loss of the affiliated group
and any of Five Star's income so included might be offset by the consolidated
net operating losses, if any, of the affiliated group. Five Star
F-26
10. Income taxes (Continued)
has agreed to enter into a tax sharing agreement with GP Strategies (to be
assigned to National Patent Development as part of the spin-off) pursuant to
which Five Star will make tax sharing payments to National Patent Development
once Five Star becomes a member of the consolidated group equal to 80% of the
amount of taxes Five Star would pay if Five Star were to file separate
consolidated tax returns but did not pay as a result of being included in
National Patent Development affiliated group.
11. Capital Stock, stock option and employee benefit plans
The Board of Directors without any vote or action by the holders of common stock
is authorized to issue preferred stock from time to time in one or more series
and to determine the number of shares and to fix the powers, designations,
preferences and relative, participating, optional or other special rights of any
series of preferred stock.
Under GPS's non-qualified stock option plan, employees of MXL were granted
options to purchase shares of common stock of GPS. Although the plan permits
options to be granted at a price not less than 85% of the fair market value, the
plan options primarily are granted at the fair market value of the common stock
at the date of the grant and are exercisable over periods not exceeding ten
years from the date of grant. Changes in options outstanding granted to MXL
employees during the years ended December 31, 2001, 2002, and 2003 are as
follows:
Number Number Weighted Average
Price Range Of Options Of Options Exercise Years
Per share Outstanding Exercisable Price Remaining
- -------------------------------------------- ------------------ --------------- --------------- --------------- --------------
December 31, 2000 $ 9.98 -13.125 5,000 5,000 $12.33 2 years
- -------------------------------------------- ------------------ --------------- --------------- --------------- --------------
Expired $13.125 (3,750) $13.125
- -------------------------------------------- ------------------ --------------- --------------- --------------- --------------
December 31, 2001 $ 9.98 1,250 1,250 $ 9.98 1 year
- -------------------------------------------- ------------------ --------------- --------------- --------------- --------------
Expired $ 9.98 (1,250) $ 9.98
- -------------------------------------------- ------------------ --------------- --------------- --------------- --------------
December 31, 2002, December 31, 2003 and - - - -
June 30, 2004 -
- -------------------------------------------- ------------------ --------------- --------------- --------------- --------------
On November 3, 2003, GPS and the Board of Directors of National Patent
Development adopted an Incentive Stock Plan under which 1,750,000 shares of
common stock will be available for grant to employees, directors and outside
service providers. The plan will permit awards of incentive stock options,
nonqualified stock options, restricted stock, stock units, performance shares,
performance units and other incentives payable in cash or in shares of National
Patent Development's common stock.
Five Star Stock Option plan
On January 1, 1994, Five Star's Board of Directors adopted the Five Star
Products, Inc. 1994 Five Star Plan (the "Five Star Plan"), which became
effective August 5, 1994. On January 1, 2002, the Board of Directors amended the
Five Star Plan increasing the total number of shares of common stock to
4,000,000 shares reserved for issuance, subject to adjustment in the event of
stock splits, stock dividends, recapitalizations, reclassifications or other
capital adjustments. Unless designated as "incentive stock options" intended to
qualify under Section 422 of the Internal Revenue Code, options granted under
the Five Star Plan are intended to be nonqualified options. Options may be
granted to any director, officer or other key employee of Five Star and its
subsidiaries, and to consultants and other individuals providing services to
Five Star.
F-27
11. Capital Stock, stock option and employee benefit plans (Continued)
The term of any option granted under the Five Star Plan will not exceed ten
years from the date of the grant of the option and, in the case of incentive
stock options granted to a 10% or greater holder in the total voting stock of
Five Star, three years from the date of grant. The exercise price of any option
will not be less than the fair market value of the Common Stock on the date of
grant or, in the case of incentive stock options granted to a 10% or greater
holder in the total voting stock, 110% of such fair market value.
Options granted vest 20% on date of grant with the balance vesting in equal
annual installments over four years.
Activity relating to stock options granted by Five Star commencing at the date
the Company acquired a controlling financial interest follows:
Options Outstanding Number of Weighted Average
Shares Exercise Price
-------------------------------------------------------------- ------------------- ------------------------
October 8, 2003 2,930,000 $.16
-------------------------------------------------------------- ------------------- ------------------------
Granted
Exercised
Terminated (1,400,000) .13
-------------------------------------------------------------- ------------------- ------------------------
December 31, 2003 1,530,000 .19
-------------------------------------------------------------- ------------------- ------------------------
Granted
Exercised
Terminated (430,000) .30
-------------------------------------------------------------- ------------------- ------------------------
June 30, 2004 1,100,000 $.14
-------------------------------------------------------------- ------------------- ------------------------
-------------------------------------------------------------- ------------------- ------------------------
Options Exercisable at December 31, 2003 975,000 $.22
-------------------------------------------------------------- ------------------- ------------------------
Options Exercisable at June 30, 2004 570,000 $.14
-------------------------------------------------------------- ------------------- ------------------------
The following table summarizes information about the Five Star Plan's options at
December 31, 2003:
Weighted Weighted Weighted
Average Average Average
Exercise Number Exercise Years Number Exercise
Price Outstanding Prices Remaining Exercisable Price
-------------- ----------------- -------------- --------------- ---------------- ----------------
-------------- ----------------- -------------- --------------- ---------------- ----------------
$.14 925,000 .14 2.95 460,000 .14
.15 50,000 .15 3.24 50,000 .15
.16 150,000 .16 3.64 60,000 .16
.33 405,000 .33 .29 405,000 .33
-------------- ----------------- -------------- --------------- ---------------- ----------------
-------------- ----------------- -------------- --------------- ---------------- ----------------
1,530,000 $.19 .90 975,00 $.22
Five Star Employee Benefit Plan
Five Star maintains a 401(k) Savings Plan for employees who have completed one
year of service. The Savings Plan permits pre-tax contributions to the plan of
2% to 50% of compensation by participants pursuant to Section 401(k) of the
Internal Revenue Code. Five Star matches 40% of the participants' first 6% of
compensation contributed, not to exceed an amount equivalent to 2.4% of that
F-28
11. Capital Stock, stock option and employee benefit plans
(Continued)
participant's compensation. Five Star's contribution to the plan was
approximately $125,000 for the year ended December 31, 2003 and $75,000 and
$62,000 for the six months ended June 30, 2004 and 2003, respectively.
12. Commitments
Five Star has several noncancellable leases for real property and machinery and
equipment. In addition MXL has a noncancellable lease for real property and two
noncancellable leases for machinery and equipment. Such leases expire at various
dates with, in some cases, options to extend their terms.
As of December 31, 2003, minimum rentals under long-term operating leases
are as follows (in thousands):
Real Machinery &
property equipment Total
----------------------------------------- ------------------ ---------------- --------------
2004 $1,807 $883 $2,690
2005 1,608 492 2,100
2006 1,605 284 1,889
2007 314 253 567
2008 63 63
Thereafter
----------------------------------------- ------------------ ---------------- --------------
Total $5,334 $1,975 $7,309
----------------------------------------- ------------------ ---------------- --------------
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 $980,000 (unaudited) and $839,000 (unaudited) for the
six months ended June 30, 2004 and 2003, respectively, and $3,037,000, $81,000
and $71,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
GPS has guaranteed the leases for Five Star's New Jersey and Connecticut
warehouses, having annual rentals of $1,589,000 and expiring in the first
quarter of 2007.
13. Segment Information
The operations of the Company currently consist of the following two business
segments, by which the Company is managed.
The Optical Plastics Segment, which consists of MXL, manufactures precision
coated and molded optical plastic products. MXL is a specialist in the
manufacture of polycarbonate parts requiring adherence to strict optical quality
specifications, and in the application of abrasion and fog resistant coatings to
those parts.
The Home Improvement Distribution Segment, which consists of Five Star,
distributes paint sundry items, interior and exterior stains, brushes, rollers,
caulking compounds and hardware products on a regional basis. The Company
acquired additional shares of Five Star in fourth quarter of 2003, bringing its
ownership to 54% (see Note 4). Five Star's operations are consolidated in the
Company's financial statements commencing January 1, 2003.
The following tables set forth the sales and operating profit attributable to
each line of business (in thousands):
F-29
13. Segment Information (Continued)
Six Months Ended
June 30, Year Ended December 31,
- ----------------------------------------------- ------------- ------------ ------------ ----------- --------------
2004 2003 2003 2002 2001
- ----------------------------------------------- -------------------------- ------------ ----------- --------------
(unaudited)
Sales
Optical Plastics $ 4,432 $ 4,268 $ 8,613 $9,996 $11,184
Home Improvement Distribution 54,293 49,657 95,085
- ----------------------------------------------- ------------- ------------ ------------ ----------- --------------
$58,725 $53,925 $103,698 $9,996 $11,184
- ----------------------------------------------- ------------- ------------ ------------ ----------- --------------
Operating Profit
Optical Plastics $ (422) $ (240) $ (280) $ 180 $ 1,172
Home Improvement Distribution 1,499 1,051 2,068 439(a) 259(a)
Corporate and other (643) (231) (480) (128) (320)
- ----------------------------------------------- ------------- ------------ ------------ ----------- --------------
$ 434 $ 580 $ 1,308 $ 491 $ 1,111
- ----------------------------------------------- ------------- ------------ ------------ ----------- --------------
(a) Income related to equity in net income of Five Star
Additional information relating to the Company's business segments is as follows
(in thousands):
June 30, December 31,
2004 2003 2002
------------------------------- ------------------ ------------- --------------
(unaudited)
Total Assets
Optical Plastics $13,186 $14,261 $20,632
Home Improvement Distribution 40,138 38,732 6,260 (b)
Corporate and other 2,108 2,755 2,978
------------------------------- ------------------ ------------- --------------
$55,432 $55,748 $29,870
------------------------------- ------------------ ------------- --------------
(b) Represents investment in and note receivable from Five Star
Six Months Ended
June 30, Year Ended December 31,
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
2004 2003 2003 2002 2001
- ------------------------------------------------- ------------------------- ------------ ------------ ------------
(unaudited)
Additions to property,
plant, and equipment
Optical Plastics $ 104 $ 68 $ 1,135 $368 $435
Home Improvement Distribution 150 159
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
$254 $ 68 $1,294 $368 $435
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
Depreciation and amortization
Optical Plastics $300 $265 $ 565 $510 $351
Home Improvement Distribution 53 28
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
$353 $265 $ 593 $510 $351
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
F-30
13. Segment Information (Continued)
For the year ended December 31, 2003 and the six months ended June 30, 2004 and
2003, no customer accounted for 10% or more of the Company's sales. The
Company's major customers of the Optical Plastics segment accounted for the
following percentage of total sales for the years ended December 31, 2002 and
2001:
Year Ended December 31,
2002 2001
---- ----
A 23% 27%
B 21% 17%
C 8% 10%
-- ---
Total 52% 54%
=== ===
Information about the Company's net sales in different regions, which are
attributable to countries based upon location of customers, is as follows (in
thousands):
Six Months Ended
June 30, Year Ended December 31,
- ---------------------------------------------- ------------------------ ------------------------------------------
2004 2003 2003 2002 2001
- ---------------------------------------------- ------------------------ ------------- -------------- -------------
(unaudited)
United States $57,535 $53,345 $102,015 $8,264 $9,465
Far East 657 404 1,230 1,266 1,150
Other North America 292 115 217 172 46
Western Europe 218 51 211 163 278
Middle East 23 10 25 131 245
- ---------------------------------------------- ----------- ------------ ------------- -------------- -------------
$58,725 $53,925 $103,698 $9,996 $11,184
- ---------------------------------------------- ----------- ------------ ------------- -------------- -------------
All assets of the Company are in the United States.
14. Related party transactions
(a) GPS provides certain administrative services including but not limited to
tax and financial accounting, legal, human resources, employee benefits and
insurance. The costs of these services were allocated to National Patent
Development based on specific identification and, to the extent that such
identification was not practical, on the basis of sales or other method which
management believes to be a reasonable reflection of the utilization of services
provided or the benefit received by National Patent Development. These
allocations resulted in charges of $741,000, $332,000, $680,000, $321,000 and
$286,000 being recorded in selling, general and administrative expenses in the
accompanying consolidated statements of operations for the six months ended June
30, 2004 and 2003 and the years ended December 31, 2003, 2002 and 2001,
respectively. Allocated expenses in excess of amounts which reduced the
receivable balance due from GPS (see (b) below) have been recorded as a capital
contribution resulting in an increase to stockholder's investment. The expenses
allocated to National Patent Development for these services are not necessarily
indicative of the expenses that would have been incurred if National Patent
Development had been a separate, independent entity and had otherwise managed
these functions.
GPS provides legal, tax, business development, insurance and employee benefit
administration services to Five Star pursuant to a management services agreement
for a fee of up to $10,000 per month. agreement is automatically renewable for
F-31
14. Related party transactions (Continued)
successive one-year termsunless one of
the parties notifies the other in writing at least six months prior to the end
of any renewal thereof. The agreement was renewed for 2003 and 2004. The
management fee will increase to $25,000 per month effective August 1, 2004.
Prior to the Distribution, GP Strategies will transfer to National Patent
Development the rights and obligations under the management services agreement
with Five Star. Fees paid by Five Star to GPS under this agreement, which are
included in selling, general and administrative expenses, totaled $100,000 for
the year ended December 31, 2003 and $60,000 and $66,000 for the six months
ended June 30, 2004 and 2003, respectively. At December 31, 2003 and June 30,
2004 fees due to GPS, which are included in accounts payable and accrued
expenses, amounted to $308,000 and $18,000, respectively.
In connection with the spin-off, certain general corporate expenses previously
incurred by GP Strategies at the holding company level, including compensation
of certain corporate personnel, will be incurred by National Patent Development.
National Patent Development will enter into a management agreement with GP
Strategies pursuant to which National Patent Development will provide certain
general corporate services to GP Strategies. Under this management agreement,
National Patent Development will charge GP Strategies a management fee to cover
an allocable portion of the compensation of its employees, based on the time
they spend providing services to GP Strategies, in addition to an allocable
portion of corporate overhead related to services performed for GP Strategies
and its subsidiaries.
National Patent Development's executive officers are also executive officers of
GP Strategies and will remain on the payroll of GP Strategies. The executive
officers will not receive any salary from National Patent Development; however,
they will provide National Patent Development with management services under a
separate management agreement between GP Strategies and National Patent
Development to be entered into prior to completion of the spin-off. GP
Strategies will charge National Patent Development a management fee to cover an
allocable portion of the compensation of these officers, based on the time they
spend providing services to National Patent Development, in addition to an
allocable portion of certain other corporate expenses.
Both management fees will be paid quarterly. Any disagreements over the amount
of such fees will be subject to arbitration. Each of the management agreements
will each have an initial term of three years, and, after two years will be
terminable by each of GP Strategies and National Patent Development, upon six
months prior written notice.
See the Unaudited Pro Forma Statements of Operations for the six months ended
June 30, 2004 and the year ended December 31, 2003 included elsewhere herein for
the estimated impact of the management agreements on the operations of National
Patent Development.
(b) The receivable from GPS, which arose principally from cash advances by MXL,
is non-interest bearing. Transactions affecting the receivable, together with
the average balances, follow (in thousands):
F-32
14. Related party transactions (Continued)
Six Months ended
June 30, Year Ended December 31,
--------------------- -------------------------------------------------
--------------------- ------------- -- -------------- -- --------------
2004 2003 2002 2001
--------------------- ------------- -------------- --------------
---------------------
Balance at beginning of period $ 709 $10,116 $10,162 $6,955
Management fee and
other charges from GPS (1) (815) (717) (446) (491)
Repayments (10,000)
Advances 959 1,310 400 3,698
-------- -------- ---------- ---------
Balance at end of period $ 853 $ 709 $ 10,116 $ 10,162
------- -------- -------- --------
Average balance $1,213 $ 7,734 $ 10,096 $ 9,424
====== ======= ======== =========
(1) Includes a management fee paid to GPS by MXL of $120,000 for the six months
ended June 30, 2004 and $240,000 for each of the fiscal years ended December 31,
2003, 2002 and 2001, respectively.
On October 17, 2003, GPS transferred 100% of the outstanding common stock in
Valera (formerly Hydro Med Sciences, Inc.) valued at $6.5 million (based on an
independent valuation) and 1,000,000 shares of common stock of Millennium with a
quoted market price of $3.50 per share to MXL in repayment of $10 million of the
receivable. The balance of the receivable will be settled through future
transactions and/or paid in cash.
MXL recorded the Valera investment at zero and the Millennium common shares at
$3,500,000, representing their carrying amounts to GPS, and accounted for the
excess of the $10,000,000 balance of the receivable over such carrying amounts
as a distribution to GPS with a corresponding reduction of $6,500,000 in
stockholder's equity.
(c) In 2002, GPS and Redstorm Scientific, Inc. ("RSS") entered into an agreement
pursuant to which GPS agreed to provide general business and administrative
support to RSS. RSS is a privately held computational drug design company
focused on utilizing bio-informatics and computer aided molecular design to
assist pharmaceutical and biotechnology companies. GPS performed and completed
all necessary services for RSS during the third quarter of 2002. In
consideration for such services, RSS agreed to grant GPS a five-year option to
purchase 500,000 shares of RSS common stock (an approximate 4% interest) at $1
per share. GPS also has an option to purchase additional equity in RSS upon the
occurrence of certain events. GPS ascribed no value to the options, due to the
adverse financial condition of RSS at that time. Michael Feldman is the Chief
Executive Officer of RSS and owns approximately 25.5% of the outstanding common
stock of RSS. Michael Feldman is the son of Jerome Feldman, Chief Executive
Officer and a director of the Company and GPS. Jerome Feldman owns less than 1%
of the outstanding common stock of RSS.
In addition, Roald Hoffmann, a director of the Company and GPS, is also a
director of RSS and has options to purchase shares of RSS common stock.
15. Litigation
On July 30, 2004 GP Strategies made a capital contribution to National Patent
Development, which in turn on July 30, 2004 transferred to MXL, the right to
receive the first $5 million of any proceeds (net of litigation expenses), and
F-33
15. Litigation (Continued)
50% of any proceeds (net of litigation expenses) in excess of $15 million,
received with respect to the claims described below.
On January 3, 2001, GP Strategies commenced an action alleging that MCI
Communications Corporation ("MCI"), MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse ("EDS"), committed fraud in connection with GP Strategies' 1998
acquisition of Learning Technologies from the defendants for $24.3 million. GP
Strategies seeks actual damages in the amount of $117.9 million plus interest,
punitive damages in an amount to be determined at trial, and costs.
The complaint alleges that the defendants created a doctored budget to conceal
the poor performance of the United Kingdom operation of Learning Technologies.
The complaint also alleges that the defendants represented that Learning
Technologies would continue to receive new business from Systemhouse even though
the defendants knew that the sale of Systemhouse to EDS was imminent and that
such new business would cease after such sale. In February 2001, the defendants
filed answers denying liability. No counterclaims against the plaintiffs have
been asserted. Although discovery had not yet been completed, defendants made a
motion for summary judgment, which was submitted in April 2002. The motion was
denied by the court due to the MCI bankruptcy described below, but with leave to
the other defendants to renew.
The defendants other than MCI then made an application to the court to stay the
fraud action until a later-commenced arbitration, alleging breach of the
acquisition agreement and of a separate agreement to refer business to General
Physics on a preferred provider basis and seeking actual damages in the amount
of $17.6 million plus interest, is concluded. In a decision dated May 9, 2003,
the court granted the motion and stayed the fraud action pending the outcome of
the arbitration. Limited discovery was conducted in connection with the
arbitration. The arbitration hearings began on May 17, 2004 and concluded on May
24, 2004 before JAMS, a private dispute resolution firm. On September 10, 2004
General Physics received a $12 million interim award in its arbitration against
EDS. The arbitrator found that the sellers of Learning Technologies breached
certain representations and warranties contained in the acquisition agreement.
The arbitrator directed the parties to attempt to reach agreement with respect
to certain other matters, including whether General Physics is entitled to
pre-award interest and, if so, in what amount. The parties were unable to reach
agreement. The arbitrator has set forth a briefing schedule, which the parties
agreed to modify and now concludes on November 1, 2004. The interim arbitration
award is not subject to appeal but, once the arbitration award becomes final,
General Physics will file in New York state court an application for an order
confirming the award and EDS will have the right to seek to vacate the award.
MCI filed for bankruptcy protection in July 2002. As a result, the action was
automatically stayed as to MCI. GP Strategies and its subsidiary, General
Physics, both filed timely Proofs of Claim in the United States Bankruptcy Court
against MCI and WorldCom, Inc., among others. On or around April 22, 2003, MCI
served objections to these Proofs of Claim. On May 15, 2003, GP Strategies and
General Physics submitted their opposition to the objections. GP Strategies and
General Physics subsequently made a motion in Bankruptcy Court to lift the
automatic stay to permit the litigation to proceed against MCI. In February
2004, the Bankruptcy Court granted the motion of GP Strategies and General
Physics to the extent that they sought to have the stay lifted so that the state
court could rule on the merits of MCI's summary judgment motion. On February 19,
2004, GP Strategies and General Physics notified the state court of the
Bankruptcy Court's decision.
F-34
15. Litigation (Continued)
National Patent Development is not a party to any legal proceeding, the outcome
of which is believed by management to have a reasonable likelihood of having a
material adverse effect upon the financial condition of National Patent
Development.
16. GPS borrowings
(a) As of December 31, 2002, the stock of MXL and its assets together with all
of the non-core assets collateralized the outstanding bank debt under the GPS
credit facility. In addition, MXL was a guarantor of the bank debt. In August
2003, GPS entered into a new credit facility which replaced the existing
facility and in connection therewith the security interests of the banks were
terminated and MXL was released from its guarantee under the previous credit
facility. MXL provided a limited guarantee of the bank debt under the new credit
facility of up to $1.5 million of its accounts receivable, which were pledged as
collateral for the new bank debt. However, the guarantee was released in March
2004 as MXL's accounts receivable were no longer needed in the borrowing base.
(b) Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, GPS
issued and sold to four Gabelli funds $7,500,000 aggregate principal amount of
6% Conditional Subordinated Notes due 2008 (the "Notes") and 937,500 warrants
("GP Warrants"), each entitling the holder thereof to purchase (subject to
adjustment) one share of GPS's common stock. The aggregate purchase price for
the Notes and GP Warrants was $7,500,000. GP Strategies and National Patent
Development agreed to allocate to National Patent Development pursuant to the
Gabelli Allocation $1,875,000 of the $7,500,000 received for the Notes and
Warrants. This allocation is not reflected in the accompanying consolidated
financial statements.
The Notes are secured by a non-recourse mortgage on the property located in
Pawling, New York (the "Property") which was transferred to MXL. MXL has no
liability for repayment of the Notes or any other obligations of GPS under the
Note and Warrant Purchase Agreement (other than foreclosure on such property).
If there is a foreclosure on the mortgage for payment of the Notes, GPS has
agreed to indemnify MXL for loss of the value of the Property.
At any time that less than $1,875,000 principal amount of Notes are outstanding,
GPS may defease the obligations secured by the mortgage and obtain a release of
the lien of the mortgage by depositing with an agent for the Noteholders bonds
or government securities with an investment grade rating by a nationally
recognized rating agency which, without reinvestment, will provide cash on the
maturity date of the Notes in an amount not less than the outstanding principal
amount of the Notes.
The Note and Warrant Purchase Agreement provides that, on completion of the
spin-off, National Patent Development will issue warrants ("National Patent
Development Warrants") to the holders of the GP Warrants. The National Patent
Development Warrants will entitle the holders to purchase, in the aggregate, a
number of shares of National Patent Development common stock equal to 8% of the
number of shares of such stock outstanding at completion of the spin-off,
subject to reduction for any GP Warrants exercised prior to the spin-off. The
National Patent Development Warrants will be issued to the holders of the GP
Warrants on the record date for the spin-off, and allocated among them pro-rata
based on the respective number of GP Warrants held by them on such date.
F-35
16. GPS borrowings (Continued)
The exercise price of the National Patent Development Warrants will be 160% of
the average closing price of the National Patent Development common stock over
the 20 consecutive trading days commencing on the record date of the spin-off.
The National Patent Development Warrants will be exercisable at any time after
their exercise price is calculated through August 2008. The National Patent
Development Warrants will have anti-dilution provisions similar to those of the
GP Warrants. National Patent Development has agreed to provide the holders of
the National Patent Development Warrants with registration rights similar to
those provided by GPS to the holders of the GP Warrants.
F-36
NATIONAL PATENT DEVELOPMENT CORPORATION
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited) (in thousands)
- --------------------------------- --------------------------------------------------------------------
Three months ended
March 31, June 30, September 30, December. 31,
2003 2003 2003 2003
- --------------------------------- -------------- -------------- ------------------ -------------------
Sales $27,431 $26,494 $27,310 $22,463
Gross margin 4,671 4,552 5,267 5,092
- --------------------------------- -------------- -------------- ------------------ -------------------
Net income (loss) $ (48) $ (35) $ 50 $ (71)
- --------------------------------- -------------- -------------- ------------------ -------------------
Pro forma net income (loss) per share:
Basic and Diluted $ .00 $ .00 $ .00 $ (.01)
--------- ---------- -------- ----------
(Unaudited) (in thousands)
- --------------------------------- ----------------------------------------------------------------------
Three months ended
March 31, June 30, September 30, December. 31,
2002 2002 2002 2002
- --------------------------------- -------------- -------------- -------------------- -------------------
Sales $2,756 $2,714 $2,221 $2,305
Gross margin 546 700 445 408
- --------------------------------- -------------- -------------- -------------------- -------------------
Net income (loss) 57 98 19 (27)
- --------------------------------- -------------- -------------- -------------------- -------------------
Pro forma net income (loss) per share:
Basic and Diluted $ .00 $ .01 $ .00 $ .00
------- ------ ------ ------
F-37
NATIONAL PATENT DEVELOPMENT CORPORATION
SCHEDULE II
Valuation and qualifying accounts (in thousands)
- -------------------------------------------------------------------------------------------------------------------
Additions
Additional Charged to Balance at
Beginning Allowance Costs & End of
of Period Acquired (a) Expenses Deductions (b) Period
Year ended December 31, 2003:
Allowance for doubtful accounts 37 700 163 (161) 739
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002:
Allowance for doubtful accounts 99 16 (78) 37
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001:
Allowance for doubtful accounts 56 43 - 99
- -------------------------------------------------------------------------------------------------------------------
(a) Represents the allowance for doubtful accounts of Five Star at date of
consolidation.
(b) Write-off of uncollectible accounts, net of recoveries.
F-38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Five Star Products, Inc.
We have audited the accompanying consolidated balance sheets of Five
Star Products, Inc. and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Five Star Products, Inc. and subsidiaries as of December 31, 2002 and
2001, and the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Eisner LLP
New York, New York March 17, 2004 except for Note 14(d), as to which
the date is March 31, 2004.
F-39
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, December 31,
2002 2001
----------- -------------
ASSETS
Current assets
Cash $ 16 $ 60
Accounts receivable, less allowance
for doubtful accounts of $640 and $631 10,162 11,215
Inventory 23,664 23,325
Prepaid expenses and other current assets
(including due from affiliates of $33 in 2002) 372 445
-------- --------
Total current assets 34,214 35,045
Machinery and equipment, net 866 904
Deferred income taxes 244 193
Other assets 42 42
--------- -----------
$ 35,366 $ 36,184
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 13,808 $ 16,414
Accounts payable and accrued expenses
(including due to affiliates of $354 in 2001) 13,777 12,348
-------- --------
Total current liabilities 27,585 28,762
-------- --------
Long-term debt to GP Strategies 4,500 5,000
--------- ---------
Stockholders' equity
Common stock, authorized 30,000,000 shares, par value $.01 per share; 15,292,882
shares issued and 15,023,651 outstanding in 2002
and 13,020,155 shares issued and outstanding in 2001 153 130
Capital in excess of par value 8,069 7,589
Accumulated deficit (4,906) (5,297)
Treasury stock, at cost (35) -
----------- -----------
Total stockholders' equity 3,281 2,422
--------- --------
$ 35,366 $ 36,184
======== =======
See accompanying notes to the consolidated financial statements.
F-40
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2002 2001
----------- --------
Sales $ 94,074 $ 94,908
Cost of goods sold 77,461 78,854
--------- ---------
Gross margin 16,613 16,054
Selling, general and
administrative expenses (14,665) (13,576)
Management fee to GP Strategies (98) (72)
Interest expense (including amounts
to affiliates of $384 and $400) (1,131) (1,692)
--------- -----
Income before income taxes 719 714
Income tax expense (328) (297)
------- -----
Net income $ 391 $ 417
======== ========
Earnings per share
Basic and diluted $ .03 $ .03
--------- ---------
See accompanying notes to the consolidated financial statements.
F-41
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002 and 2001
(in thousands, except number of shares)
Common Stock Treasury Stock
------------ --------------
Capital in Number Total
Number of excess of Accumulated of Stockholders'
Share Par value par value deficit shares Cost Equity
- ---------------------------------- ----------------- ------------ --------------- ------------ --------- -------- --------------
Balance at December 31, 2000 13,020,155 $130 $7,589 $(5,714) - $ - $2,005
- ---------------------------------- ----------------- ------------ --------------- ------------ --------- -------- --------------
Net income 417 417
- ---------------------------------- ----------------- ------------ --------------- ------------ --------- -------- --------------
Balance at December 31, 2001 13,020,155 130 7,589 (5,297) - 2,422
- ---------------------------------- ----------------- ------------ --------------- ------------ --------- -------- --------------
Net income 391 391
Purchase of treasury stock 269,231 (35) (35)
Issuance of common stock in
payment of indebtedness to
GP Strategies 2,272,727 23 477 500
Issuance of compensatory
stock options 3 3
- ---------------------------------- ----------------- ------------ --------------- ----------- ---------- -------- -------------
Balance at December 31, 2002 15,292,882 $153 $8,069 $(4,906) 269,231 $(35) $3,281
- ---------------------------------- ----------------- ------------ --------------- ----------- ---------- --------- -------------
See accompanying notes to the consolidated financial statements.
F-42
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2002 2001
--------- -------
Cash flows from operating activities:
Net income $ 391 $ 417
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 267 263
Deferred income taxes (51) (30)
Issuance of compensatory stock options 3 -
Changes in other operating items:
Accounts receivable 1,053 (100)
Inventory (339) 285
Prepaid expenses and other current assets 73 (107)
Accounts payable and accrued expenses 1,429 (661)
----- ----
Net cash provided by operating activities 2,826 67
----- -----
Cash flows from investing activities:
Additions to machinery and equipment (229) (169)
------- ------
Cash flows from financing activities:
Net (repayments of) proceeds from
short-term borrowings (2,606) 111
Purchase of treasury stock (35) -
----------- ------
Net cash (used in) provided by
financing activities (2,641) 111
--------- ---
Net (decrease) increase in cash (44) 9
Cash at beginning of period 60 51
------ ---------
Cash at end of period $ 16 $ 60
========== ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 1,148 $ 1,863
======== =======
Income tax $ 171 $ 562
========= ========
Non-cash financing activity:
Exchange of long-term debt to
GP Strategies for common stock $ 500 $ -
========= =========
See accompanying notes to the consolidated financial statements.
F-43
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
1. Acquisition of the assets and business of Five Star
Five Star Products, Inc. (the "Company" or "Five Star") owns 100% of Five Star
Group, Inc. which is a wholesale distributor of home decorating hardware and
finishing products in the northeastern United States.
The Company's business was purchased on September 30, 1998 from GP Strategies
Corporation ("GP Strategies") for approximately $16,476,000 in cash and a
$5,000,000 unsecured promissory note (the "Note"). Under a separate
Subordination Agreement with GP Strategies in favor of the banks providing the
Company's $25,000,000 revolving loan (see Note 3), which Note is subordinate to
the revolving loan, Five Star may make annual payments of principal to GP
Strategies if the Company achieves certain financial performance benchmarks. On
August 2, 2002 the Company entered into a transaction to reduce its long-term
debt to GP Strategies. The principal amount of the Note was reduced by $500,000
to $4,500,000. In connection with this debt reduction, GP Strategies received
2,272,727 shares of the Company's common stock. The transaction valued the
Company's common stock at $0.22 per share, which was a premium to the open
market value at that time. At December 31, 2002, GP Strategies owned
approximately 48% of the Company's common stock.
2. Summary of significant accounting policies
Principles of consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Inventory. Inventory is valued at the lower of cost, using the first-in,
first-out (FIFO) method, or market. Inventory consists solely of finished
products.
Machinery and equipment. Fixed assets are carried at cost less accumulated
depreciation. Major additions and improvements are capitalized, while
maintenance and repairs that do not extend the lives of the assets are expensed
currently. Gain or loss, if any, on the disposition of fixed assets is
recognized currently in operations. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets.
Income taxes. Income taxes are provided for based on the asset and liability
method of accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Use of estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
F-44
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
Concentration of credit risk. Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist primarily of
accounts receivable. Sales are made principally to independently owned paint and
hardware stores in the northeast United States.
Stock-based compensation. The Company has elected to continue to account for its
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees". Under the provisions of APB No. 25, employee compensation
is measured as the excess, if any, of the quoted market price of the Company's
common stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Had the Company determined compensation cost based on the fair value method at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been changed to the pro forma amounts indicated below (in
thousands, except per share amounts):
2002 2001
---- ----
Reported net income $ 391 $ 417
Stock-based employee compensation
determined under the fair-value based
method, net of tax (33) (5)
-------- ---------
Pro forma net income $ 358 $ 412
====== ======
Basic and diluted income
per share As reported $ .03 $ .03
Pro forma $ .03 $ .03
The weighted-average fair value of options granted in 2002 and 2001 was
approximately $.08 and $.11, respectively, using the Black-Scholes
option-pricing model with the following assumptions:
2002 2001
---- ----
Volatility 73% 106%
Risk-free interest rate 2.52% - 4.14% 4.24%
Expected life in years 3 5
Dividend yield 0 0
Revenue recognition. Revenue on product sales is recognized at the point in time
when the product has been shipped, title and risk of loss has been transferred
to the customer, and the following conditions are met: persuasive evidence of an
arrangement exists, the price is fixed and determinable, and collectibility of
the resulting receivable is reasonably assured. Allowances for estimated returns
and allowances are recognized when sales are recorded.
F-45
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
Shipping and handling costs. Shipping and handling costs are included as a part
of selling, general and administrative expense. These costs amounted to
$4,441,000 and $4,471,000 for the years ended December 31, 2002 and 2001,
respectively.
Earnings per share. Basic earnings per share (EPS) is based upon the weighted
average number of common shares outstanding during the period. Diluted EPS is
based upon the weighted average number of common shares outstanding during the
period assuming the issuance of common shares for all dilutive potential common
shares outstanding. Options outstanding at December 31, 2002 and 2001 to
purchase approximately 1,700,000 and 1,025,000, shares of common stock,
respectively, were not included in the diluted per share computation because
their effect would be anti-dilutive.
Advertising costs. The Company expenses advertising costs as incurred.
Advertising expense was $57,000 and $43,000 for the years ended December 31,
2002 and 2001, respectively.
3. Short-term borrowings
On November 1, 2001, the Company's wholly-owned subsidiary, Five Star Group,
Inc., renewed its Loan and Security Agreement (the "Loan Agreement") by and
among three banks, which now matures on September 30, 2004. The Loan Agreement
provides for a $25,000,000 revolving credit facility, which allows Five Star to
borrow based upon a formula of up to 50% and, under certain circumstances, 55%
of eligible inventory and 80% of eligible accounts receivable, as defined in the
Loan Agreement. The interest rates under the Loan Agreement are based upon LIBOR
or the Prime rate, and can be reduced in the event Five Star achieves and
maintains certain performance benchmarks. At December 31, 2002, approximately
$13,808,000 was outstanding under the Loan Agreement and approximately
$3,900,000 was available to be borrowed. As of December 31, 2002, the
LIBOR-based rates averaged 3.56% and the Prime-based rate was 4.25%. The
weighted average interest rate on the Company's short-term debt at December 31,
2002 was 3.78%. Substantially all of the Company's assets are pledged as
collateral for these borrowings. Under the Loan Agreement Five Star is subject
to covenants requiring minimum net worth, limitations on losses, if any, and
minimum or maximum values for certain financial ratios.
4. 401(k) plan
The Company maintains a 401(k) Savings Plan for employees who have completed one
year of service. The Savings Plan permits pre-tax contributions to the Savings
Plan of 2% to 50% of compensation by participants pursuant to Section 401(k) of
the Internal Revenue Code. The Company matches 40% of the participants' first 6%
of compensation contributed, not to exceed an amount equivalent to 2.4% of that
participant's compensation.
The Savings Plan is administered by a trustee appointed by the Board of
Directors of the Company and all contributions are held by the trustee and
invested at the participants' directions in various mutual funds. The Company's
expense associated with the Savings Plan was approximately $110,000 and,
$137,000 for the years ended December 31, 2002 and 2001, respectively.
F-46
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
5. Machinery and equipment
Machinery and equipment consist of the following (in thousands):
December 31, Estimated
2002 2001 useful lives
---- ---- ------------
Machinery and equipment $ 308 $ 304 5-7 years
Furniture and fixtures 735 521 5 years
Leasehold improvements 839 828 3-9 years
------- -------
1,882 1,653
Less accumulated depreciation
and amortization (1,016) (749)
------- --------
$ 866 $ 904
======= =======
Depreciation and amortization expense for the years ended December 31,
2002 and 2001 was $267,000 and $263,000, respectively.
6. Long-term debt, related party
The Company has an unsecured note payable to JL Distributors, Inc., a
wholly-owned subsidiary of GP Strategies in the amount of $4,500,000. The note
bears interest at 8%, payable quarterly, with the principal due September 30,
2004. The note is subordinated to the indebtedness under the Loan Agreement (see
note 3). Interest expense for the years ended December 31, 2002 and 2001 was
$384,000 and $400,000, respectively. A subordination agreement between the
Company and GP Strategies permits the annual repayment of principal under
certain circumstances (see Note 1).
In August 2002, the principal amount of this indebtedness was reduced from
$5,000,000 to $4,500,000 through issuance by the Company of 2,272,727 shares of
its common stock to GP Strategies (see Notes 1 and 14).
7. Related party transactions
(a) Transactions with affiliates
Transactions with GP Strategies and its subsidiaries, other than loans, as
disclosed elsewhere in the financial statements, during the years ended December
31, 2002 and 2001 are summarized below (in thousands):
December 31,
2002 2001
---- ----
Transactions with GP Strategies
Management fees incurred $ 98 $ 72
Interest expense incurred 384 400
F-47
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
7. Related party transactions (Continued)
As of January 1, 1994, the Company and GP Strategies entered into a three-year
Management Services Agreement pursuant to which certain direct and indirect
services will be provided to the Company by GP Strategies. The services to be
provided by GP Strategies include legal, tax, business development, insurance
and employee benefit administration services. The Company pays GP Strategies a
fee of up to $10,000 per month during the term of the agreement. 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
the initial term of any renewal thereof. The Agreement was renewed for 2002 and
2003. Fees incurred to GP Strategies under this agreement totaled $98,000 and
$72,000 for each of the years ended December 31, 2002 and 2001. At December 31,
2002, the amount receivable from GP Strategies, which is included in prepaid
expenses and other current assets, was $33,000. At December 31, 2001, the amount
due to GP Strategies for expenses and interest, which is included in accounts
payable and accrued expenses, was $354,000.
(b) Other related party transactions
On February 8, 2002, the Company entered into a Consulting and Severance
Agreement (the "Agreement") with Richard Grad, the former President and Chief
Executive Officer of the Company. Pursuant to the Agreement, Mr. Grad will
receive $145,000 per year for consulting services to be rendered to the Company
and a severance fee at the rate of $5,000 per year, for a five-year period
ending December 31, 2006. In addition, in August, 2002, Mr. Grad was granted
options to purchase 150,000 shares of the Company's Common Stock at the quoted
market price on the date of grant, which options will vest annually over the
term of the Agreement in equal installments. Such options were valued at an
aggregate amount of $13,000. The Agreement also provided for the repurchase by
the Company of 192,308 shares of the Company's Common Stock held by Mr. Grad for
an aggregate purchase price of $25,000. During this five-year period, Mr. Grad
is also receiving certain benefits, including medical benefits, life insurance
and use of an automobile.
On February 8, 2002, the Company entered into a Consulting and Severance
Agreement (the "Agreement") with Cynthia Krugman, the former Controller of the
Company. Pursuant to the Agreement, Ms. Krugman will receive $105,000 per year
for consulting services to be rendered to the Company and a severance fee of
$5,000 per year, for an eighteen-month period ending June 30, 2003. The
Agreement also provided for the repurchase by the Company of 76,923 shares of
the Company's Common Stock held by Ms. Krugman for an aggregate purchase price
of $10,000. During this period, Ms. Krugman is receiving certain benefits,
including medical benefits. Ms. Krugman is the daughter of Richard Grad.
Severance fees payable to Mr. Grad and Ms. Krugman under the aforementioned
agreements are included in accrued expenses at December 31, 2002.
F-48
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Income taxes
The components of income tax expense (benefit) are as follows (in thousands):
Years ended December 31, 2002 2001
----------------------------------------------------------------
Current
Federal $ 286 $ 251
State and local 93 76
-------- --------
Total current expense 379 327
------- -------
Deferred
Federal (38) (23)
State and local (13) (7)
---------- ----------
Total deferred (benefit) (51) (30)
-------- ---------
Total income tax expense $ 328 $ 297
------- -------
As of December 31, 2002 and 2001, the Company had approximately $244,000 and
$193,000, respectively, of deferred tax assets net of valuation allowances. The
tax effects that gave rise to these deferred tax assets and the valuation
allowance consist of the following (in thousands):
December 31,
2002 2001
------ --------
Deferred tax assets
Allowance for doubtful accounts $ 35 $ 31
Machinery and equipment 158 115
Deferred compensation 39 38
Accrued compensation 10 -
Inventory 41 47
------- -------
Deferred tax assets 283 231
------ ------
Valuation allowance (39) (38)
-------- ------
Net deferred tax assets after
valuation allowance $ 244 $ 193
======= =======
A reconciliation between the Company's tax provision and the U.S. statutory rate
follows:
Years ended December 31, 2002 2001
--------------------------------------------------------------
Tax at U.S. statutory rate $ 245 $ 243
State and local taxes net of
Federal benefit 51 49
Items not deductible 19 27
Valuation allowance adjustment 1 -
Other 12 (22)
---------------------------------------------------------------
Income taxes $ 328 $ 297
--------------------------------------------------------------
F-49
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Income taxes (Continued)
Under SFAS No. 109, a valuation allowance is provided when it is more likely
than not that some portion of deferred tax assets will not be realized. The
Company has provided a full valuation allowance at December 31, 2002 and
December 31, 2001 for the deferred tax asset relating to the deferred
compensation as the realization of such asset is uncertain.
The valuation allowance increased $1,000 for the year ended December 31, 2002.
The valuation allowance for the year ended December 31, 2001 decreased by
$122,000 as a result of the expiration during 2001 of the underlying warrants
which gave rise to the deferred tax asset relating to certain deferred
compensation.
9. Major customers
For the years ended December 31, 2002 and 2001 no customer accounted for more
than 10% of the Company's revenue.
10. Stock option plan
On January 1, 1994, the Company's Board of Directors adopted the Five Star
Products, Inc. 1994 Stock Option Plan (the "Stock Option Plan"), which became
effective August 5, 1994. On January 1, 2002, the Board of Directors amended the
Stock Option Plan increasing the total number of shares of Common Stock to
4,000,000 shares reserved for issuance, subject to adjustment in the event of
stock splits, stock dividends, recapitalizations, reclassifications or other
capital adjustments. Unless designated as "incentive stock options" intended to
qualify under Section 422 of the Internal Revenue Code, options granted under
the Stock Option Plan are intended to be nonqualified options. Options may be
granted to any director, officer or other key employee of the Company and its
subsidiaries, and to consultants and other individuals providing services to the
Company.
The term of any option granted under the Stock Option Plan will not exceed ten
years from the date of the grant of the option and, in the case of incentive
stock options granted to a 10% or greater holder in the total voting stock of
the Company, three years from the date of grant. The exercise price of any
option will not be less than the fair market value of the Common Stock on the
date of grant or, in the case of incentive stock options granted to a 10% or
greater holder in the total voting stock, 110% of such fair market value.
Options granted during 2002 and 2001 vest 20% on date of grant with the balance
vesting in equal annual installments over four years. All options granted prior
to 1999 were fully vested as of December 31, 2002.
Activity relating to stock options granted by the Company:
F-50
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
10. Stock options and warrants (Continued)
Number of Weighted-Average
Shares Exercise Price
------------------------------------------------- ---------------- -------------------------
------------------------------------------------- ---------------- -------------------------
Balance at December 31, 2000 2,125,000 .19
------------------------------------------------- ---------------- -------------------------
------------------------------------------------- ---------------- -------------------------
Granted 450,000 .14
Cancelled (75,000) .33
------------
------------------------------------------------- ---------------- -------------------------
------------------------------------------------- ---------------- -------------------------
Balance at December 31, 2001 2,500,000 .18
------------------------------------------------- ---------------- -------------------------
------------------------------------------------- ---------------- -------------------------
Granted 675,000 .15
Cancelled (245,000) .27
-----------
------------------------------------------------- ---------------- -------------------------
------------------------------------------------- ---------------- -------------------------
Balance at December 31, 2002 2,930,000 .16
=========
------------------------------------------------- ---------------- -------------------------
------------------------------------------------- ---------------- -------------------------
Exercisable at December 31, 2002 2,060,000 .16
============
------------------------------------------------- ---------------- -------------------------
The following table summarizes information about the Plan's options at December
31, 2002:
Number Exercise Weighted-Average Number Exercise
Outstanding Price Years Remaining Exercisable Price
------------------ --------------- ------------------------- --------------- -----------------
------------------ --------------- ------------------------- --------------- -----------------
1,400,000 .13 .44 1,400,000 $.13
925,000 .14 3.95 275,000 .14
50,000 .15 4.24 25,000 .15
150,000 .16 4.64 30,000 .16
405,000 .33 1.29 330,000 .33
------------------ --------------- ------------------------- --------------- -----------------
------------------ --------------- ------------------------- --------------- -----------------
2,930,000 $.16 1.95 2,060,000 $.16
------------------ --------------- ------------------------- --------------- -----------------
11. Earnings per share
Earnings per share (EPS) for the years ended December 31, 2002 and 2001 are as
follows (in thousands, except per share amounts):
Year ended December 31,
2002 2001
---- ----
Basic EPS
Net income $ 391 $ 417
Weighted average shares
outstanding 13,742 13,020
-------- --------
Basic earnings per share $ .03 $ .03
---------- ----------
Diluted EPS
Net income $ 391 $ 417
--------- ---------
F-51
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. Earnings per share (Continued)
Year ended December 31,
2002 2001
---- ----
Weighted average shares
outstanding 13,742 13,020
Dilutive effect of stock options (a) 74 153
--------- ---------
Weighted average shares
outstanding, diluted 13,816 13,173
-------- --------
Diluted earnings
per share $ .03 $ .03
--------- ----------
(a) Diluted earnings per share are based upon the weighted average number
of common shares outstanding during the period, assuming the issuance
of common shares for all dilutive potential common shares outstanding.
12. Commitments and contingencies
The Company has several noncancellable leases which cover real property,
machinery and equipment. Such leases expire at various dates and some of them
have options to extend their terms.
Minimum rental obligations under long-term operating leases are indicated in the
table below (in thousands). Figures for real property include estimated amounts
of supplemental lease obligations, such as pro-rated assessments for property
taxes or common-area expenses.
Real Machinery and
property equipment Total
---------------------------------------------------------------------
2003 $ 1,616 $1,098 $ 2,714
2004 1,589 796 2,385
2005 1,589 376 1,965
2006 1,589 29 1,618
2007 314 7 321
---------------------------------------------------------------------
Total $ 6,697 $ 2,306 $ 9,003
During 2002 and 2001, the Company incurred $2,882,000 and $2,721,000,
respectively, of rental expenses. GP Strategies has guaranteed the leases for
the Company's New Jersey and Connecticut warehouses, totaling approximately
$1,589,000 per year through the first quarter of 2007.
F-52
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
13. Valuation and Qualifying Accounts
The following is a summary of the allowance for doubtful accounts related to
accounts receivable for the years ended December 31 (in thousands):
2002 2001
---- ----
Balance at beginning of year $ 631 $ 681
Charged (credited) to expense 438 (47)
Uncollectible accounts written off,
net of recoveries (429) (3)
----- -------
Balance at end of year $ 640 $ 631
====== ========
14. Subsequent events
(a) The Company's Board of Directors has authorized the repurchase of up to
1,000,000 shares of the Company's common stock. In January, 2003, the Company
purchased 76,000 shares of its common stock on the open market at prices per
share ranging from $0.08 to $0.10. In February, 2003, the Company purchased
10,000 shares of its common stock on the open market at a price per share of
$0.10.
(b) On June 20, 2003, the Company's wholly-owned subsidiary, Five Star Group,
Inc., obtained a new Loan and Security Agreement (the "new Loan Agreement") with
Fleet Capital Corporation as sole lender to replace the Loan and Security
Agreement by and among three banks which was to have matured on September 30,
2004 (the "old Loan Agreement"). The new Loan Agreement has a five-year term,
with a maturity date of June 30, 2008. The new Loan Agreement provides for a
$25,000,000 revolving credit facility, which allows Five Star Group, Inc. to
borrow based upon a formula of up to 55% of eligible inventory and 80% of
eligible accounts receivable, as defined therein. The interest rates under the
new Loan Agreement consist of LIBOR plus a credit spread of 2% for borrowings
not to exceed $15,000,000 and the prime rate for borrowings in excess of the
above-mentioned LIBOR-based borrowings. The credit spreads can be reduced in the
event that Five Star Group, Inc. achieves and maintains certain performance
benchmarks. Substantially all of the Company's assets are pledged as collateral
for those borrowings. Under the Loan Agreement Five Star is subject to covenants
requiring minimum net worth, limitations on losses, if any, and minimum or
maximum values for certain financial ratios.
In connection with the new Loan Agreement, Five Star Group, Inc. also entered
into a derivative transaction with Fleet National Bank on June 20, 2003. The
derivative transaction is an interest rate swap and has been designated as a
hedge. Effective July 1, 2004 through June 30, 2008, Five Star Group, Inc. will
pay a fixed interest rate of 3.38% to Fleet National Bank on notional principal
of $12,000,000. In return, Fleet National Bank will pay to Five Star Group, Inc.
a floating rate, namely, LIBOR, on the same notional principal amount. The
credit spread under the new Loan Agreement is not included in, and will be paid
in addition to, this fixed interest rate of 3.38%.
(c) On June 30, 2003, the Company entered into an Agreement of Subordination and
Assignment (the "Agreement") with JL Distributors, Inc., whereby in accordance
with the provisions of the Agreement on June 27, 2003, July 2, 2003 and July 7,
2003 Five Star Group, Inc. made principal payments in the amounts of $500,000,
$300,000, and $200,000 reducing the outstanding principal amount of the note
F-53
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
14. Subsequent events (Continued)
payable to JL Distributors, Inc. from $4,500,000 to $3,500,000.
On October 8, 2003, the Company entered into a transaction to reduce the
principal amount of the note payable by $500,000 to a new principal amount of
$3,000,000. In exchange, GP Strategies received 2,000,000 shares of the
Company's common stock. In consideration for GP Strategies' agreeing to exchange
the debt for common stock at a conversion price of $0.25 per share, which was
more than twice the $0.11 closing market price of the Company's common stock on
the day prior to approval of the transaction, the Company agreed to terminate
the voting agreement between GP Strategies and itself, described below.
The voting agreement, which by its terms would in any case have terminated on
June 30, 2004, provided that GP Strategies (i) would vote its shares of the
Company's common stock so that not more than 50% of the members of the Company's
board of directors would be officers or directors of GP Strategies and (ii)
would vote on matters other than the election of directors in the same
proportion as the Company's other shareholders. The transaction was approved by
a Special Committee of the Company's board of directors; the Special Committee
consisted of an independent non-management director who is unaffiliated with GP
Strategies. As a result of this transaction, GP Strategies' ownership of the
Company increased to approximately 54% from approximately 48% of the Company's
outstanding shares of common stock, and the Company has become a subsidiary of
GP Strategies.
(d) On February 6, 2004 the Company announced that it will repurchase up to
5,000,000 shares, or approximately 30% of its common stock currently
outstanding, through a tender offer for the shares at $0.21 per share,
originally set to expire on March 16, 2004. On March 17, 2004 the Company
announced that it had increased the price it was offering to pay for the shares
in the tender offer to $0.25 per share and extended the offer to March 31, 2004.
Based upon the final tabulation by the depository for the tender offer,
2,627,790 shares of common stock valued at $656,947 were tendered by the Company
as of March 31, 2004.
F-54
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
- ------- -------------------------------------------
The following table sets forth all expenses to be paid by the
registrant in connection with this offering. All amounts shown are estimates
except for the registration fee.
- ----------------------------------------------------- ------------------
Amount to be
Paid
- ----------------------------------------------------- ------------------
SEC registration fee $ 1,680.18
- ----------------------------------------------------- ------------------
Printing and engraving 25,000.00
- ----------------------------------------------------- ------------------
Legal fees and expenses 100,000.00
- ----------------------------------------------------- ------------------
Accounting fees and expenses 100,000.00
- ----------------------------------------------------- ------------------
Transfer agent and registrar fees 10,000.00
- ----------------------------------------------------- ------------------
Miscellaneous 3,319.82
-----------
- ----------------------------------------------------- ------------------
Total $240,000.00
===========
- ----------------------------------------------------- ------------------
Item 14. Indemnification of Directors and Officers.
- ------- -----------------------------------------
Under Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL"), a corporation may indemnify its directors, officers,
employees and agents and its former directors, officers, employees and agents
and those who serve, at the corporation's request, in such capacities with
another enterprise, against expenses (including attorney's fees), as well as
judgments, fines and settlements in nonderivative lawsuits, actually and
reasonably incurred in connection with the defense of any action, suit or
proceeding in which they or any of them were or are made parties or are
threatened to be made parties by reason of their serving or having served in
such capacity. The DGCL provides, however, that such person must have acted in
good faith and in a manner he or she reasonably believed to be in (or not
opposed to) the best interests of the corporation and, in the case of a criminal
action, such person must have had no reasonable cause to believe his or her
conduct was unlawful. In addition, the DGCL does not permit indemnification in
an action or suit by or in the right of the corporation, where such person has
been adjudged liable to the corporation, unless, and only to the extent that, a
court determines that such person fairly and reasonably is entitled to indemnity
for costs the court deems proper in light of liability adjudication. Indemnity
is mandatory to the extent a claim, issue or matter has been successfully
defended.
The registrant's Certificate of Incorporation and By-Laws provide that
the registrant shall, subject to the limitations contained in the DGCL, as
amended from time to time, indemnify all persons whom it may indemnify pursuant
thereto.
The registrant's Certificate of Incorporation provides that no director
shall be liable for monetary damages to the Registrant or its stockholders for
any breach of fiduciary duty as a director, provided that this provision does
not eliminate the liability of the director (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the DGCL, or (iv) for any
transaction from which such director derived an improper personal benefit.
II-1
These indemnification provisions may be sufficiently broad to permit
indemnification of the registrant's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities Act.
Reference is made to the registrant's Certificate of Incorporation and
By-Laws, filed as exhibits to this registration statement, regarding relevant
indemnification provisions described above and elsewhere herein.
Item 15. Recent Sales of Unregistered Securities.
- ------- ---------------------------------------
The registrant has sold and issued the following securities in the past
three years without registration under the Securities Act of 1933:
On July 30, 2004, GP Strategies Corporation ("GP Strategies")
transferred to the registrant the right to receive certain proceeds (if any) of
a pending litigation and arbitration claim, all of the stock of MXL Industries,
Inc. ("MXL"), and certain other non-core assets, including its shares in and
certain debt of Five Star Products, Inc., in exchange for all of the common
stock of registrant. Such sale of registrant's common stock is exempt from
registration under Section 4(2) of the Securities Act of 1933 as a transaction
by an issuer not involving a public offering of securities.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003,
GP Strategies issued and sold to four Gabelli funds $7,500,000 aggregate
principal amount of 6% Conditional Subordinated Notes due 2008 (the "Gabelli
Notes") and 937,500 warrants (the "GP Warrants"). The Note and Warrant Purchase
Agreement also provides that, on completion of the spin-off, the registrant will
issue warrants (the "Warrants") to the holders of the GP Warrants. The aggregate
purchase price of the Gabelli Notes, GP Warrants, and the Warrants was
$7,500,000, of which $1,875,000 was allocated to the registrant. Such sale was
exempt from registration under Section 4(2) of the Securities Act of 1933 as a
transaction by an issuer not involving a public offering of securities.
Item 16. Exhibits and Financial Statement Schedules.
(a) List of Exhibits.
The attached Exhibit Index is incorporated by reference.
(b) Financial Statement Schedules.
All schedules are omitted as the information required is
either included elsewhere in the consolidated financial
statements herein or is not applicable.
Item 17. Undertakings.
- ------- ------------
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
II-2
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 1 to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of White Plains, State of New York, on October 14, 2004.
NATIONAL PATENT DEVELOPMENT CORPORATION
By: Jerome I. Feldman
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment no. 1 to the registration statement has been signed by the following
persons in the capacities and on the date indicated.
Date: October 14, 2004 Jerome I. Feldman
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: October 14, 2004 Scott N. Greenberg*
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
Date: October 14, 2004 Harvey P. Eisen*
Director
Date: October 14, 2004 Roald Hoffmann*
Director
Date: October 13, 2004 Ellen Havdala*
Director
Date: October 14, 2004 Thomas C. Kinnear*
Director
Date: October 14, 2004 Talton R. Embry*
Director
* By Jerome I. Feldman
Attorney-in-fact
II-4
EXHIBIT INDEX
Number Description
2.1 Form of Distribution Agreement between GP Strategies
Corporation and the Registrant.*
3.1 Form of Amended and Restated Certificate of Incorporation of
National Patent Development Corporation. *
3.2 Amended and Restated Bylaws of National Patent Development
Corporation. *
4.1 Form of certificate representing shares of common stock, par
value $0.01 per share, of National Patent Development
Corporation. *
4.2 Form of National Patent Development Corporation Warrant
Certificate. Incorporated herein by reference to Exhibit
10.03 of GP Strategies Corporation Form10-Q for the quarter
ended June 30, 2003.
5.1 Opinion of Andrea Kantor, Esq.*
10.1 Form of Management Agreement between GP Strategies
Corporation and the Registrant. *
10.2 Form of Management Agreement between the Registrant and GP
Strategies Corporation. *
10.3 Financing and Security Agreement dated August 13, 2003 by
and between General Physics Corporation, MXL Industries,
Inc. and Wachovia Bank, National Association. Incorporated
herein by reference to Exhibit 10.10 of GP Strategies
Corporation Form 10-Q for the quarter ended June 30, 2003.
10.4 Form of Tax Sharing Agreement between GP Strategies
Corporation and the Registrant. *
10.5 Note and Warrant Purchase Agreement, dated as of August 8,
2003, among GP Strategies Corporation, the Registrant, MXL
Industries, Inc., Gabelli Funds, LLC, as Agent, and the
Purchasers listed in Schedule 1.2 thereof. Incorporated
herein by reference to Exhibit 10 of GP Strategies Form 10-Q
for the quarter ended June 30, 2003.
10.6 Mortgage, Security Agreement and Assignment of Leases dated
August 14, 2003, between GP Strategies Corporation and
Gabelli Funds, LLC. Incorporated herein by reference to
Exhibit 10.04 of GP Strategies Corporation Form 10-Q for the
quarter ended June 30, 2003.
10.7 Indemnity Agreement dated August 14, 2003 by GP Strategies
Corporation for the benefit of the Registrant and MXL
Industries, Inc. Incorporated herein by reference to Exhibit
10.07 of GP Strategies Corporation Form 10-Q for the quarter
ended June 30, 2003.
10.8 National Patent Development Corporation 2003 Incentive Stock
Plan. *
10.9 Employment Agreement, dated as of November 28, 2001, between
Charles Dawson and Five Star Group, Inc. Incorporated herein
by reference to Exhibit 10.12 of Five Star Products, Inc.
Form 10-K for the year ended December 31, 2001.
10.10 Loan and Security Agreement dated as of June 20, 2003 by and
between Five Star Group, Inc. and Fleet Capital Corporation.
Incorporated herein by reference to Exhibit 10.1 of Five
Star Products, Inc. Form 10-Q for the quarter ended June 30,
2003.
10.11 Agreement of Subordination & Assignment dated as of June 20,
2003, by JL Distributors, Inc. in favor of Fleet Capital
Corporation as Lender to Five Star Group, Inc. Incorporated
herein by reference to Exhibit 10.1 of Five Star Products,
Inc. Form 10-Q for the quarter ended June 30, 2003.
10.12 Lease dated as of February 1, 1986 between Vernel Company
and Five Star Group, Inc., as amended on July 25, 1994.
Incorporated herein by reference to Exhibit 10.6 of Five
Star Products, Inc. Form 10-K for the year ended December
31, 1998.
10.13 Lease dated as of May 4, 1983 between Vornado, Inc., and
Five Star Group, Inc. Incorporated herein by reference to
Exhibit 10.7 of Five Star Products, Inc. Form 10-K for the
year ended December 31, 1998.
10.14 Credit Agreement dated March 8, 2001 by and between Allfirst
Bank and MXL Industries, Inc. *
10.15 Mortgage, Security Agreement, Assignment of Leases and Rents
and Fixture Filing dated June 26, 2001 by MXL Industries,
Inc. to LaSalle Bank National Association. *
10.16 Amended and Restated Investor Rights Agreement dated as of
May 30, 2003 by and among Hydro Med Sciences and certain
Institutional Investors. *
10.17 Stock Purchase Option Agreement dated as of June 30, 2004 by
and among GP Strategies Corporation, National Patent
Development Corporation, Valera Pharmaceuticals Inc. and
certain Institutional Investors. *
21.1 List of Subsidiaries. *
23.1 Consent of Eisner LLP **
23.2 Consent of Andrea D. Kantor, Esq. (contained in Exhibit 5.1)
24.1 Powers of Attorney *
* Previously filed_________
** Filed herewith