FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
OR
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 033-78252
FIVE STAR PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3729186
(State of Incorporation) (I.R.S. Employer Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principle executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 826-8976
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- -------
Indicate by check mark if disclosure of delinquent filers to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10- K. /X/
As of March 15, 2002, the aggregate market value of the outstanding shares of
the Registrant's Common Stock, par value $.01 per share, held by non-affiliates
was approximately $987,462 based on the closing price of the Common Stock on the
OTC Bulletin Board, which is operated by the NASDAQ Stock Market on March 15,
2002.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 15, 2002
- ----- -----------------------------
Common Stock, par value $.01 per share 13,001,140 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties..................................................7
Item 3. Legal Proceedings...........................................7
Item 4. Submission of Matters to a Vote of Security Holders.........7
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters..............................8
Item 6. Selected Financial Data.....................................9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...............................................12
Item 8. Financial Statements and Supplementary Data................13
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.................33
PART III
Item 10. Directors and Executive Officers of the Registrant........34
Item 11. Executive Compensation....................................34
Item 12. Security Ownership of Certain Beneficial
Owners and Management..............................................34
Item 13. Certain Relationships and Related Transactions............34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................35
PART I
Item 1. Business
(a) General Development of Business
On September 30, 1998, a newly formed wholly owned subsidiary of Five
Star Products, Inc. (the "Company"), Five Star Group, Inc. ("Five Star")
purchased from JL Distributors, Inc. ("JL"), a wholly owned subsidiary of GP
Strategies Corporation ("GP Strategies"), substantially all of the operating
assets of JL. The assets were purchased for $16,476,000 in cash and a $5,000,000
unsecured senior note. The unsecured senior note bears interest at the rate of
8% payable quarterly, with the principal due on September 30, 2004. Five Star is
a leading distributor of home decorating, hardware and finishing products in the
northeast. For the year ended December 31, 2001 Five Star had sales of
approximately $95,000,000.
The Company was organized in 1993, as a wholly owned subsidiary of GP
Strategies to initiate marketing and sales activities for generic pharmaceutical
and medical products in Russia and the Commonwealth of Independent States. NPD
Trading (USA) Inc. ("NPD Trading") was formed in January 1990 as a wholly owned
subsidiary of GP Strategies to provide consulting services to American and
Western corporations in Russia and Eastern Europe. The Company now has two
wholly owned subsidiaries, Five Star and NPD Trading. NPD Trading is currently
inactive. On August 10, 1999, the Company changed its name to Five Star
Products, Inc. from American Drug Company to reflect its new industry focus.
(b) Financial Information about Industry Segments
This item is not applicable because the Company has only a single line
of business.
(c) Narrative Description of Business
Five Star
Five Star is engaged in the wholesale distribution of home decorating,
hardware and finishing products. Five Star is composed of two strategically
located warehouse distribution centers and office locations in New Jersey and
Connecticut with over 360,000 square feet of space. All operations are
coordinated by senior management from the headquarters in New Jersey, with each
strategically located facility having its own sales force.
In January 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. In 2001 this new sales force generated
revenues in excess of $7,400,000. Five Star services this new territory from its
250,000 square foot East Hanover, New Jersey facility, from which it currently
services the Northeast. Five Star's ability to service this territory from its
existing New Jersey facility will enable Five Star to leverage its fixed costs
over a broader revenue base.
Five Star is a leading distributor of paint sundry items, interior and
exterior stains, brushes, rollers, caulking compounds and hardware products.
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 Minnesota Mining 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 at each facility.
Furthermore, 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 the
Company's operations. For example, sales managers require all sales
representatives to call on customers once every week. Each representative
transmits their orders through Five Star's automated sales system, to the IBM
AS400 computer located at the New Jersey facility. The salesperson system
combines the ability to scan product codes in the stores and download the
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 the
most efficient pattern for the orders to be picked. The orders are then relayed
to the appropriate location and 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
22,000 stock keeping units (SKUs). This numbering system allows the computer to
arrange picking in the most efficient order. The products are loaded onto Five
Star's trucks in the evening in the order that they will be unloaded, and are
then delivered directly to the customers' locations.
Customers
Five Star's largest customer accounted for approximately 3.5% of its sales
in 2001 and its 10 largest customers accounted for approximately 10% of such
sales. All such customers are unaffiliated and Five Star does not have a
long-term contractual relationship with any of them.
Management Information System
All of Five Star's inventory control, purchasing, accounts payable and
accounts receivable are now being fully automated on an IBM AS400 computer
system. In addition, Five Star's software alerts buyers to purchasing needs, and
monitors payables and receivables. This system allows senior management to
closely control all phases of Five Star's operations. Five Star also maintains a
salesperson-order-entry system, which allows the salesman to scan product and
then download the information to a laptop. The laptop contains all product and
customer information and interacts with the AS400.
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%,
as compared to industry averages as reported in trade publications of
approximately 87%.
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 effectively coordinate Five Star's activities. Notwithstanding senior
management's active involvement, the sales managers play an extremely critical
role in this day-to-day process.
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.
Marketing
The do-it-yourself industry relies on distributors to effectively 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.
The marketing efforts are directed by the Vice President of Sales at each
facility. These individuals are responsible for designing, implementing and
coordinating marketing policies. The Vice President of Sales at each facility
works 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
Vice President of Sales is responsible for overseeing the effort 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 on a draw plus commission. Five
Star has experienced a very low turnover in its sales force as evidenced by the
fact that most representatives have over five years of experience with Five
Star. Many sales reps often have retail experience in the paint or hardware
industry when they are 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 January, Five Star invites all of
its customers to a special trade show for Five Star's major suppliers, so that
suppliers may display their products and innovations. Five Star also
participates in a profitable advertising circular program in the spring and the
fall which contains discount specials and information concerning new product
innovations.
Five Star has continually enhanced its growth through complementary
acquisitions which have allowed it to preempt much of its competition as a
high-quality, competitively priced distributor.
Industry Dynamics
The Do-It-Yourself Industry
The paint sundry items distribution industry is closely related to the
do-it-yourself market, which has tended to exhibit elements of
counter-cyclicality. In times of recession, consumers tend to spend more on
home-improvements because they cannot afford contractor services or the cost to
trade up to bigger homes and in times of economic strength consumers spend
heavily in home improvements because they believe they can afford to complete
their home improvement projects. According to the Home Improvement Research
Institute, in 2001, Americans purchased more than $187 billion on home
improvement products. These purchases are expected to grow at a compounded rate
of 4.8% till 2006 according to the Home Improvement Research Institute.
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
Competition within the industry is intense. There are much larger
national companies commonly associated with national franchises such as Ace and
TruServ as well as smaller regional distributors, all of whom offer similar
products and services. Other than paint sundry item distributors, Five Star
faces stiff competition from Home Depot, which purchases directly from
manufacturers and dealer-owned distributors such as Ace and TruServ.
Additionally, in some instances manufacturers will bypass the distributor and
choose to sell and ship their products 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.
Five Star will continue to focus its efforts on supplying its products to its
customers at a competitive price and on a timely, and consistent basis. In the
future, Five Star will attempt to acquire complementary distributors and to
expand the distribution of its line of private-label products sold under the
"Five Star" name. Through internal growth and acquisitions, Five Star has
captured a leading share in its principal market, the Northeast. This
growth-oriented acquisition strategy of acquiring complementary distributors has
allowed Five Star to effectively compete against a substantial number of its
competitors. While other paint sundry items distributors sell to the same retail
networks as Five Star, they are at a distinct disadvantage versus Five Star's
experience, sophistication and size.
Concomitantly, 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.
NPD Trading
NPD Trading ceased its operations in the year 1999. NPD Trading
provided ICF Kaiser International ("ICF") with technical and commercial
assistance on a contract for a $250 million hot strip mini mill in the Czech
Republic. The Company had received $1 million for this assistance and had
expected to receive another $1 million payment contingent upon the completed
construction of the mini mill.
On March 17, 1998 and April 2, 1998, the Company was informed by
holders of an aggregate of $1,000,000 of the Company's convertible notes (the
"Notes") that they had elected to convert $1,000,000 of the Notes into an
aggregate of 82,306 shares of GP Strategies common stock. In accordance with the
terms of the original agreement, the Company and GP Strategies had agreed that
if the Notes were used to exercise the warrants issued by GP Strategies in
connection with the Note offering, GP Strategies had the right to receive from
the Company in exchange for the Notes shares of the Company's common stock at a
price equal to 60% of its then current market value. However, on April 30, 1998,
the Company and GP Strategies agreed that instead of issuing additional shares
of the Company's common stock which GP Strategies was entitled to, the Company
would assign to GP Strategies any future payments it would receive from ICF as a
success fee in connection with the completion of the Company's consulting
project in the Czech Republic.
Employees
The Company employs 260 people. Management-employee relations are
considered good at both of Five Star's warehouse facilities. Unions represent
approximately 95 of Five Star's employees. The Teamsters union represent the 95
union employees at New Jersey. Connecticut 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 20, 2003.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
Not Applicable.
Item 2. Properties
Five Star leases 250,000 square feet in New Jersey, 110,000 square feet
in Connecticut, 1,200 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 $1,129,327. Five Star's lease for
the Connecticut facility expires in February 2007 and its annual rent is
$401,120. The New York sales office pays $17,493 per year in rent and the
Maryland office pays $10,155. The Company's New York City office space is
provided by GP Strategies pursuant to the Management Services Agreement. As part
of the Management Services Agreement, GP Strategies receives up to $10,000 a
month for services provided by GP Strategies employees, such as management,
legal, tax, accounting, insurance and employee benefit administration services.
The facilities leased by the Company and Five Star are considered to be
suitable and adequate for their intended uses and are considered to be well
maintained and in good condition.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings the outcome of
which are believed by management to have a reasonable likelihood of having any
material adverse effect upon the financial condition of the Company
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The following table presents the high and low prices for the Common
Stock for 2001 and 2000. The Company's Common Stock, $.01 par value, is quoted
on the OTC Bulletin Board, which is operated by the NASDAQ Stock Market.
Quarter High Low
2001 First $0.15 $0.09
Second $0.21 $0.13
Third $0.25 $0.12
Fourth $0.15 $0.11
2000 First $0.53 $0.18
Second $0.36 $0.25
Third $0.30 $0.20
Fourth $0.24 $0.10
- ----------
The number of shareholders of record of the Common Stock as of March
15, 2002 was 3,736. On March 15, 2002, the average of the closing bid and asked
prices on the OTC Bulletin Board was $0.14. The Company has not declared any
cash dividends during or since its two most recent fiscal years. The current
policy of the Company's Board of Directors is to retain earnings, if any, to
finance the operation of the Company's business. The payment of cash dividends
on the Common Stock in the future will depend on the Company's earnings,
financial condition and capital needs and on other factors deemed pertinent by
the Company's Board of Directors.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
Item 6. Selected Financial Data
Years Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Revenue $94,908 $93,878 $83,134 $17,080 $ 2,047
Cost of goods sold 78,854 77,372 68,646 13,686 936
General and administrative
expenses 13,576 13,154 11,627 3,187 1,385
Net income (loss) 417 775 647 (664) (857)
Income (loss) per share:
Basic and diluted
before extraordinary item .03 .06 .05 (.03) (.07)
Basic and diluted .03 .06 .05 (.05) (.07)
December 31,
------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Current assets $35,045 $35,112 $32,810 $32,291 $ 514
Current liabilities 28,762 29,312 27,598 27,596 199
Non current liabilities 5,000 5,000 5,000 5,000 4,933
Working capital 6,283 5,800 5,212 4,695 315
Total assets 36,184 36,317 33,828 33,179 552
Total stockholders' equity (deficiency) 2,422 2,005 1,230 583 (4,580)
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Overview
On September 30, 1998 a newly formed wholly owned subsidiary of the Company, the
Five Star Group, Inc. (Five Star) purchased from JL Distributors, Inc. (JL),
(formerly Five Star Group, Inc.) certain operating assets of JL. JL is a wholly
owned subsidiary of GP Strategies Corporation (GP Strategies). The assets were
purchased for $16,476,000 in cash and a $5,000,000 unsecured five year senior
note. Five Star is a leading distributor of home decorating, hardware and
finishing products in the northeast.
The purchase by the Company of certain assets of Five Star has changed the focus
of the Company. Since September 30, 1998, the Company had to focus its efforts
on growing the distribution business, and has taken several steps to reduce its
traditional operations from both a business and cost perspective including
closing its Washington, DC, Prague and Moscow offices. For the years ended
December 31, 2000 and December 31, 1999, the Company incurred losses of $0 and
$105,000 before income taxes related to the business of NPD Trading. Of this
total, approximately $74,000 pertained to severance and shut down costs related
to Washington and Prague offices.
Liquidity and Capital Resources
At December 31, 2001 the Company had cash of $60,000 and working capital of
$6,283,000. On November 1, 2001, Five Star renewed a $25,000,000 loan and
security agreement with a group of banks. The credit facility allowed Five Star
to borrow up to 50% of eligible inventory and up to 80% of eligible accounts
receivable. At December 31, 2001, the Company had borrowed $16,414,000 and had
$1,761,000 of additional availability under the loan agreement.
The Company believes it has sufficient borrowing availability under existing
credit agreements, and cash anticipated to be generated through the operations
of the Company, to fund the working capital requirements of Five Star.
Results of operations
The Company had income before income taxes of $714,000 for the year ended
December 31, 2001 compared to $1,047,000 for the year ended December 31, 2000.
The decrease in income before income taxes is the result of increased sales,
which was more than offset by a decrease in gross margin coupled with increased
selling, general and administrative expenses. Income tax expense in 2001 was
$297,000 and $272,000 in 2000. The effective rate of 26% in 2000 is due to the
reversal of a $185,000 valuation reserve against deferred tax assets.
Sales
The Company had sales of $94,908,000 in 2001 compared to sales of $93,878,000 in
2000 and $83,134,000 in 1999. The increased sales were attributable to internal
growth within the Company's established customer base. The increased sales in
2000 over 1999 were attributable to the expansion of Five Star's sales territory
through the addition of an established, dedicated sales force servicing the Mid
Atlantic States, as far south as Virginia, as well as internal growth within the
Company's established customer base.
Gross margin
The Company had gross margin of $16,054,000 in 2001, $16,506,000 in 2000 and
$14,488,000 in 1999. The gross margin percentage in 2001 was 16.9%, slightly
lower than the 17.6% recorded in 2000. The slightly lower gross margin
percentage was caused primarily by rising warehouse costs. The gross margin in
2000 was essentially the same as for 1999.
Selling, general and administrative expense
The Company had Selling, general and administrative (SG&A) expense of
$13,576,000 in 2001, $13,154,000 in 2000 and $11,627,000 in 1999. The slightly
increased SG&A in 2001 is attributable to increased delivery expenses resulting
from the increased sales volume and the increase of fuel prices. The increased
SG&A in 2000 is due to the same factors.
Interest expense
The Company had interest expense of $1,692,000 in 2001, $ 2,220,000 in 2000 and
$1,692,000 in 1999. The decreased interest expense in 2001 is the result of
lower interest rates in short-term borrowings incurred by Five Star. The
increased interest expense in 2000 is the result of both the increased
borrowings incurred by Five Star under its credit facility due to its growth
(see Note 4 to the consolidated financial statements), as well as interest
incurred on the $5,000,000 unsecured senior note (see Note 1 to the consolidated
financial statements).
Forward-Looking Statements. This report contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, all of which are
difficult to predict and many of which are beyond the control of the Company,
including, but not limited to the risks and uncertainties detailed in the
Company's periodic reports and registration statements filed with the Securities
and Exchange Commission.
Inflation
Inflation is not expected to have a significant impact on the Company's
business.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 7A is not applicable to the
Company's business.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 14
Financial Statements:
Consolidated Balance Sheets - December 31, 2001 and
2000 15
Consolidated Statements of Operations - Years ended
December 31, 2001, 2000 and 1999 17
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31,
2001, 2000 and 1999 18
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999 19
Notes to Consolidated Financial Statements 20
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Five Star Products, Inc.
We have audited the accompanying consolidated balance sheets of Five
Star Products, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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 enumerated above
present fairly, in all material respects, the consolidated financial
position of Five Star Products, Inc. and subsidiaries as of December
31, 2001 and 2000, and the consolidated results of their operations and
their cash flows for each of the years in the three-year period ended
December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
Richard A. Eisner & Company, LLP
New York, New York
March 20, 2002
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, December 31,
2001 2000
---------- -------------
ASSETS
Current assets
Cash $ 60 $ 51
Accounts receivable, trade, less allowance
for doubtful accounts of $631 and $681
in 2001 and 2000 11,215 11,115
Inventory 23,325 23,610
Prepaid expenses and other current assets 445 336
--------- ---------
Total current assets 35,045 35,112
Machinery and equipment, net 904 998
Deferred tax asset 193 163
Other assets 42 44
---------- ----------
$ 36,184 $ 36,317
========= =========
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share and per share data)
December 31, December 31,
2001 2000
------------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 16,414 $ 16,303
Accounts payable and accrued expenses
(including due to affiliates of $354 and $536) 12,348 13,009
-------- ----------
Total current liabilities 28,762 29,312
-------- ----------
Long-term debt to GP Strategies 5,000 5,000
--------- ---------
Commitments and contingencies (Note 13)
Stockholders' equity
Common stock, authorized 30,000,000 shares,
par value $.01 per share; 13,020,155 shares
issued and outstanding 130 130
Capital in excess of par value 7,589 7,589
Accumulated deficit (5,297) (5,714)
-------- ---------
Total stockholders' equity 2,422 2,005
-------- ----------
$ 36,184 $ 36,317
======== ========
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2001 2000 1999
-------- --------- ----------
Sales $ 94,908 $ 93,878 $ 83,134
Cost of goods sold 78,854 77,372 68,646
--------- --------- ---------
Gross margin 16,054 16,506 14,488
Selling, general and
administrative expenses (13,576) (13,154) (11,627)
Management fee to GP Strategies (72) (85) (120)
Consulting revenues 98
Interest expense (including amounts
to affiliates of $400, $400 and $400) (1,692) (2,220) (1,692)
-------- -------- ----------
Income before income taxes 714 1,047 1,147
Income tax expense (297) (272) (500)
--------- --------- -----------
Net income $ 417 $ 775 $ 647
======== ======== ========
Income per share
Basic and diluted .03 .06 .05
--------- ---------- ----------
See accompanying notes to the consolidated financial statements.
18
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
(in thousands, except number of shares)
Shares of Capital in Total
Common Stock Common Excess of Accumulated Stockholders'
Outstanding Stock Par Value Deficit Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 13,020,155 $130 $7,589 $(7,136) $ 583
- -------------------------------------------------------------------------------------------------------------------------------
Net income 647 647
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 13,020,155 130 7,589 (6,489) 1,230
- -------------------------------------------------------------------------------------------------------------------------------
Net income 775 775
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands
Years Ended December 31,
--------------------------------------
2001 2000 1999
------- --------- -------
Cash flows from operating activities:
Net income $ 417 $ 775 $ 647
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 263 234 196
Deferred income taxes (30) (163)
Changes in other operating items:
Accounts receivable (100) (1,007) (411)
Inventory 285 (1,056) (108)
Prepaid expenses and other current assets (107) (124) (22)
Accounts payable and accrued expenses (661) 1,606 649
------- -------- --------
Net cash provided by operating activities 67 265 951
-------- --------- --------
Cash flows from investing activities:
Additions to machinery and equipment (169) (290) (326)
-------- ----------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of)
short-term borrowings 111 (21) (647)
------ ------ -----
Net increase (decrease) in cash 9 (46) (22)
Cash at beginning of period 51 97 119
-------- ---------- --------
Cash at end of period $ 60 $ 51 $ 97
======== ========== =======
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. At December 31, 2001,
GP Strategies owned approximately 37% of the Company's common stock.
The Company's consulting business, which had been acquired from GP
Strategies in 1994 and conducted through a wholly-owned subsidiary, NPD
Trading, has been inactive since 1999.
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. 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.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
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.
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.
Reclassifications. Certain reclassifications have been made to conform
to current year presentation.
Revenue recognition. Revenue is recognized upon shipment of product to
customers. Allowances for estimated discounts and returns are
recognized when sales are recorded.
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, 2001, 2000 and 1999 to purchase
approximately 1,025,000, 650,000 and 650,000 shares of common stock,
respectively, were not included in the diluted per share computation
because their effect would be anti-dilutive. Warrants outstanding
during the years ended December 31, 2000 and 1999 to purchase 6,017,775
shares of common stock, respectively, were not included in the diluted
per share computation because their effect would be anti-dilutive.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
Advertising costs. The Company expenses advertising costs as incurred.
Advertising expense was $43,000, $56,000 and $74,000 for the years
ended December 31, 2001, 2000, and 1999, respectively.
3. Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance related to revenue
recognition and was effective the first fiscal quarter of fiscal years
beginning after December 15, 1999, and requires companies to report any
changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation, in accordance with APB Opinion
20, "Accounting Changes". Subsequently, SAF Nos. 101A and 101B were
issued to delay the implementation of SAB No. 101. Management believes
that the adoption had no effect on the Company's revenue recognition
policies. The Company adopted this pronouncement during the fiscal year
ended December 31, 2000.
In 2000, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation", an interpretation of APB Opinion No. 25, "Stock
Issued to Employees". Interpretation No. 44 clarifies the application
of APB No. 25 for the definition of an employee for purposes of
applying APB No. 25, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequences of
various modifications to the terms of previously granted stock options
or awards and the accounting for an exchange of stock compensation
awards in a business combination. The Company adopted this
interpretation during the fiscal year ended December 31, 2000.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. It also
specifies the types of acquired intangible assets that are required to
be recognized and reported separately from goodwill. SFAS No. 142
requires that goodwill and intangibles with indeterminate lives will no
longer be amortized, but instead tested for impairment. SFAS No. 142 is
required to be applied starting with fiscal years beginning after
December 15, 2001, with early application permitted in certain
circumstances. The Company
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
3. Recent accounting pronouncements (Continued)
will adopt SFAS No. 142 in 2002 and does not expect any impairment of
goodwill upon adoption.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The statement retains the
previously existing accounting requirements related to the recognition
and measurement of the impairment of long-lived assets to be held and
used while expanding the measurement requirements of long-lived assets
to be disposed of by sale to include discontinued operations. It also
expands on the previously existing reporting requirements for
discontinued operations to include a component of an entity that either
has been disposed of or is classified as held for sale. The Company is
required to implement SFAS No. 144 on January 1, 2002. Management does
not expect this statement to have a material impact on the Company's
financial position or results of operations.
4. 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 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% of eligible inventory and 80% of eligible accounts receivable,
as defined in the Loan Agreement. The interest rate under the Loan
Agreement is based on LIBOR and an adjusted prime rate, which rates can
be reduced in the event Five Star achieves and maintains certain
performance benchmarks. At December 31, 2001, approximately $16,414,000
was outstanding under the Loan Agreement and approximately $1,761,000
was available to be borrowed. As of December 31, 2001, the LIBOR rate
was 4.28% and the adjusted prime rate was 5.15%. The weighted average
interest rate on the Company's short-term debt at December 31, 2001 is
4.35%. Substantially all of the Company's assets are pledged as
collateral for these borrowings.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
5. 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 by participants pursuant to Section
401(k) of the Internal Revenue Code of 2% to 12% of base compensation.
The Company matches 40% of the participants' eligible contributions
based on a formula set forth in the Savings Plan. Participants are
fully vested in their contributions and may withdraw such contributions
at time of employment termination, or at age 59 1/2 or earlier in the
event of financial hardship. Amounts otherwise are paid at retirement
or in the event of death or disability. Employer contributions vest at
the rate of 20% per year.
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 $137,000, $120,000 and $132,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
6. Machinery and equipment
Major classes of machinery and equipment consist of the following (in
thousands):
December 31, Estimated
------------------- ---------
2001 2000 useful lives
---- ---- ------------
Machinery and equipment $ 304 $ 296 3 years
Furniture and fixtures 525 429 5 years
Leasehold improvements 828 763 3-9 years
------- -------
1,657 1,488
Less accumulated depreciation
and amortization (753) (490)
------- -----
$ 904 $ 998
======= =======
Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999 was $263,000, $234,000 and $196,000, respectively.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
7. Long-term debt, related party
The Company has an unsecured note payable o GP Strategies in the amount
of $5,000,000. The note bears interest at 8%, payable quarterly, with
the principal due September 30, 2004. The note is subordinated to the
Loan Agreement (See note 4). Interest expense for the year ended
December 31, 2001, 2000 and 1999 was $400,000, $400,000 and $400,000,
respectively.
8. 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, 2001, 2000, and 1999 are summarized below (in
thousands):
December 31,
---------------------------------------
2001 2000 1999
---- ---- ----
Revenue:
Consulting fees earned from affiliate $ $ $ 98
Expenses:
Transactions with GP Strategies
Management fees incurred $ 72 $ 85 $ 120
Interest expense incurred 400 400 400
In 1999 the Company provided services to GSE Systems, Inc. (GSES), an
affiliate of GP Strategies, in assisting that affiliate to obtain a
contract to provide the Temelin Nuclear Power Plant and the St.
Petersburg Nuclear Power Plant with full scope simulators. GSES is a
successor to General Physics International Engineering and Simulation,
Inc. Revenues from GSES amounted to $0, $0 and $98,000, respectively,
for the years ended December 31, 2001, 2000, and 1999.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Transactions with affiliates (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
management, legal, tax, accounting, insurance and employee benefit
administration services. The Company paid 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 2001 and 2002. Fees incurred to GP Strategies under this
agreement totaled $72,000, $85,000 and $120,000 for each of the years
ended December 31, 2001, 2000 and 1999. At December 31, 2001 and 2000,
the amount due to GP Strategies for expenses and interest, which is
included in accounts payable and accrued expenses on the consolidated
balance sheets, was $354,000 and $536,000, respectively
9. Income taxes
The components of income tax expense (benefit) are as follows (in
thousands):
Years ended December 31, 2001 2000 1999
---------------------------------------------------------------------
Current
Federal $ 251 $ 305 $ 390
State and local 76 130 110
-------- ------ ------
Total Current Expense 327 435 500
------- --- ---
Deferred
Federal (23) (124) 0
State and Local (7) (39) 0
---------- ------- ------
Total Deferred (Benefit) (30) (163) 0
--------- ----- ------
Total Income Tax Expense $ 297 $ 272 $ 500
------ ------ ------
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. Income taxes (Continued)
As of December 31, 2001 and 2000, the Company had approximately
$231,000 and $323,000, respectively, of deferred tax assets and no
deferred tax liabilities. The tax effects that gave rise to these
deferred tax assets and the valuation allowance consist of the
following (in thousands):
December 31, December 31,
2001 2000
-------- ----------
Deferred tax assets
Allowance for doubtful accounts $ 31 $ 46
Machinery and equipment 115 65
Deferred compensation 38 160
Inventory 47 52
-------- --------
Deferred tax assets 231 323
------- -------
Valuation allowance (38) (160)
------ -------
Net deferred tax assets after
valuation allowance $ 193 $ 163
======== ========
A reconciliation between the Company's tax provision and the U.S.
statutory rate follows:
Years ended December 31, 2001 2000 1999
--------------------------------------------------------------------
Tax at U.S. statutory rate $ 243 $ 356 $ 390
State and local taxes net of
Federal benefit 49 84 111
Items not deductible 27 24
Net operating loss utilization - (42)
Valuation allowance adjustment - (185) 41
Other (22) (7)
--------------------------------------------------------------------
Income Taxes $ 297 $ 272 $ 500
--------------------------------------------------------------------
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, 2001 and December 31, 2000 for the deferred tax asset
relating to the deferred compensation as the realization of such asset
is uncertain.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. Income taxes (Continued)
The valuation allowance for the year ended December 31, 2001 decreased
by $122,000 as a result of the underlying warrants giving rise to the
deferred compensation tax asset expired during the year. The valuation
allowance decreased by $185,000 for the year ended December 31, 2000
and increased by $41,000 for the year ended December 31, 1999.
10. Major customers
For the years ended December 31, 2001, 2000 and 1999 no customer
accounted for more than 10% of the Company's revenue.
11. Stock options and warrants
(a) 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 2001 and 1999 vest over five years in equal
annual installments. All other outstanding options were fully vested as
of December 31, 2001.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. Stock options and warrants (Continued)
(a) Stock option plan (Continued)
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the financial
statements for stock options issued to employees of the Company. 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):
2001 2000 1999
---- ---- ----
Net income As reported $ 417 $775 $647
Pro forma 412 740 606
Basic and diluted income
per share As reported .03 .06 .05
Pro forma .03 .05 .04
Stock option activity during the periods indicated is as follows:
An aggregate of 450,000 options were granted in 2001 to three
individuals pursuant to Employment Agreements.
The per share weighted-average fair value of stock options granted
during 2001 and 1999 were $.11, and $.30, respectively, on the dates of
grant using the Black Scholes option-pricing model with the following
assumptions: 2001 - expected dividend yield 0%, risk-free interest rate
of 4.24%, expected volatility of 106% and expected life of 5 years,
1999 - expected dividend yield .0%, risk-free interest rate of 5.05%,
expected volatility of 146% and expected life of 3 years.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. Stock options and warrants (Continued)
Activity relating to stock options granted by the Company:
Number of Weighted-Average
Shares Exercise Price
Balance at December 31, 1998 1,600,000 .15
Granted 650,000 .33
Cancelled (100,000) .50
---------
Balance at December 31, 1999 2,150,000 .19
Cancelled (25,000) .13
-------------
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
===========
Exercisable at December 31,
2001 1,910,000 .17
===========
The following table summarizes information about the Plan's options at
December 31, 2001:
Weighted Weighted
Weighted Average Average
Number Average Years Number Exercise
Outstanding Exercise Prices Remaining Exercisable Price
-----------------------------------------------------------------------------------------
1,475,000 .13 1.42 1,475,000 .13
450,000 .14 4.92 90,000 .14
575,000 .33 2.25 345,000 .33
--------------------------------------------------------------------------------------
2,500,000 .18 2.24 1,910,000 .17
--------------------------------------------------------------------------------------
(b) Warrants to purchase common stock
Warrants to purchase a total of 6,017,775 shares of the Company's
common stock, which the Company had issued during 1994 in connection
with its acquisition of NPD Trading from GP Strategies, were extended
in 1996 at an exercise price of $.50 per share and in 1998 at an
exercise price of $.75 per share. These warrants expired in August
2000.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
12. Earnings per share
Earnings per share (EPS) for the years ended December 31, 2001, 2000
and 1999 are as follows (in thousands, except per share amounts):
Year ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Basic EPS
Net income $ 417 $ 775 $ 647
Weighted average shares
Outstanding 13,020 13,020 13,020
-------- -------- --------
Basic earnings per share $ .03 $ .06 $ .05
---------- ---------- ----------
Diluted EPS
Net income $ 417 $ 775 $ 647
--------- --------- --------
Weighted average shares
outstanding 13,020 13,020 13,020
Dilutive effect of stock options
and warrants (a) 153 719 806
---------- ---------- ---------
Weighted average shares
outstanding, diluted 13,173 13,739 13,826
-------- -------- -------
Diluted earnings
per share $ .03 $ .06 $ .05
---------- ---------- ---------
(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.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
13. Commitments and contingencies
The Company has several noncancellable leases which cover real
property, machinery and equipment. Such leases expire at various dates
with, in some cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows(in thousands):
Real Machinery and
- --------------------------------------------------------------------------
property equipment Total
- --------------------------------------------------------------------------
2002 1,315 936 2,251
2003 1,313 736 2,049
2004 1,288 373 1,661
2005 1,288 18 1,306
2006 1,288 - 1,288
After 2006 252 - 252
- --------------------------------------------------------------------------
Total $ 6,744 $ 2,063 $ 8,807
- --------------------------------------------------------------------------
During 2001, 2000 and 1999, the Company incurred $2,721,000, $3,412,000 and
$3,359,000, respectively, of rental expenses. GP Strategies has guaranteed the
leases for the Company's New Jersey and Connecticut warehouses, totaling
approximately $1,513,000 per year through 2007.
14. 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):
2001 2000 1999
---- ---- ----
Balance at beginning of year $ 681 $ 616 $ 1,630
Charged to expense (47) 80 45
Uncollectable accounts written off,
net of recoveries (3) (15) (1,059)
------- -------- -------
Balance at end of year $ 631 $ 681 $ 616
======= ======== =========
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15. Subsequent Event
On February 8, 2002, the Company entered into two consulting agreements with its
former President and Chief Executive Officer and its Controller. One agreement
provides for payments of $150,000 per annum, for a five-year period and the
granting of options at the quoted market price on the date of grant, which will
vest annually over the term in equal installments. . The other agreement
provides for annual payments of $110,000 for an eighteen-month term. The two
former employees will provide consulting and advisory services to the Company.
The agreements also provide for the repurchase by the Company of 269,231 shares
of the Company's common stock held by the consultants for an aggregate purchase
price of $35,000.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors and Executive Officers
of the Company is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, which proxy statement will be filed
not later than 120 days after the end of the fiscal year covered by this Report.
Item 11. Executive Compensation
Information with respect to Executive Compensation of the
Company is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, which proxy statement will be filed not
later than 120 days after the end of the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the Security Ownership of Certain
Beneficial Owners and Management of the Company is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, which proxy statement will be filed not later than 120 days after the end
of the fiscal year covered by this Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to the Certain Relationships and Related
Transactions of the Company is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, which proxy statement
will be filed not later than 120 days after the end of the fiscal year covered
by this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
Page
Independent Auditors' Reports.......................................15
Financial Statements:
Consolidated Balance Sheets -
December 31, 2001 and 2000..........................................16
Consolidated Statements of
Operations - Years ended
December 31, 2001, 2000 and 1999....................................18
Consolidated Statements of Changes in
Stockholders' Equity - Years
ended December 31, 2001, 2000 and 1999..............................19
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999........................20
Notes to Consolidated Financial Statements..........................21
(a)(2) Schedules have been omitted because they are not required
or are not applicable, or the required information has been
included in the financial statements or the notes thereto.
(a)(3) See accompanying Index to Exhibits
There were no reports filed by the Registrant on Form 8-K for the
period ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIVE STAR PRODUCTS, INC.
Charles Dawson, President
Dated: April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title
Jerome I. Feldman Chairman of the Board
Charles Dawson President and Director
(Principal Executive and Operating Officer)
Roger Antaki Director of Finance
(Principal Financial and Accounting Officer)
Scott N. Greenberg Director
John Moran
Director
Steven Schilit Executive Vice President, Chief Operating
Officer and Director
Bruce Sherman Executive Vice President, Sales and Director
April 1, 2001
INDEX TO EXHIBITS
Exhibit No. Document Page
- ----------- -------- ----
3. Amended Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
3.1 By-laws of the Registrant. Incorporated herein by reference to
Exhibit 3.2 of the Registrant's Registration Statement on Form S-1
filed on July 22, 1994, Registration Statement No. 33-78252.
10 1994 Stock Option Plan of the Registrant as amended on January 1,
2002.*
10.1 Management Services Agreement, dated as of August 5, 1994,
between GP Strategies Corporation and the Registrant. Incorporated
herein by reference to Exhibit 10.3 of the Registrant's
Registration Statement on Form S-1 filed on July 22,1994,
Registration Statement No. 33-78252.
10.2 Consulting Agreement, dated as of January 1, 1994, between
Jerome I. Feldman and the Registrant. Incorporated herein by
reference to Exhibit 10.5 of the Registrant's Registration
Statement on Form S-1 filed on July 22, 1994, Registration
Statement No. 33-78252.
10.3 Voting Agreement, dated as of August 31, 1998, from GP
Strategies Corporation. Incorporated herein by reference to Exhibit
10.5 of the Registrant's Form 10-K for the year ended December 31,
1998.
10.4 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 the Registrant's Form 10-K for the year ended
December 31, 1998.
10.5 Lease dated as of May 4, 1983 between Vornado, Inc., and Five
Star Group, Inc. Incorporated herein by reference to Exhibit 10.7
of the Registrant's Form 10-K for the year ended December 31, 1998.
10.6 Lease Modification and Extension Agreement dated July 6, 1996
between Hanover Public Warehousing, Inc. and Five Star Group, Inc.
Incorporated herein by reference to Exhibit 10.8 of the
Registrant's Form 10-K for the year ended December 31, 1998.
10.7 Agreement between Five Star Group and Local No. 11 affiliated
with International Brotherhood of Teamsters dated December 12,
2000. Incorporated herein by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2000.
10.8 Asset Purchase Agreement dated as of August 31, 1998 between
Five Star Products, Inc. and Five Star Group, Inc. Incorporated
herein by Reference to Exhibit 10 of the Registrant's Form 8-K
dated September 15, 1998.
10.9 Loan and Security Agreement by and between the Registrant, as
Borrower and Summit Business Capital Corp. doing business as Fleet
Capital-Business Finance Division as Agent. Incorporated herein by
reference to Exhibit 10 of the Registrant's Form 10-Q for the
quarter ended September30, 2001.
10.10 Amended and Restated Note in the Amount of $5,000,000 dated
November 1, 2002, between the Registrant and GP Strategies
Corporation.*.
10.11 Consulting and Severance Agreement dated as of February 8, 2002
between the Registrant and Richard Grad.*
10.12 Employment Agreement dated as of November 28, 2001 between the
Registrant and Charles Dawson.*
10.13 Employment Agreement dated as of November 28, 2001 between the
Registrant and Bruce Sherman.*
10.14 Employment Agreement dated as of November 28, 2001 between the
Registrant and Steven Schilit.*
21. Subsidiaries.*
22. N/A
23. Consent of Richard A. Eisner & Company, LLP
Independent Auditors*
*Filed herewith
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-3 of our report dated March 20, 2002 on the financial statements of Five
Star Products, Inc. and subsidiaries, included in the 2001 Annual Report on Form
10-K.
/s/ Richard A. Eisner & Company, LLP
New York, New York
March 29, 2002