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, 2002
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.)
777 Westchester Avenue, White Plains, New York, NY 10604
- -------------------------------------------------- -----
(Address of principle executive offices) (Zip code)
Registrant's telephone number, including area code: (914) 249-9700
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. / /
Indicate by check mark whether the registrant is an accelerated filer.
Yes ____ No x
The aggregate market value of the outstanding shares of the Registrant's Common
Stock, par value $.01 per share, held by non-affiliates as of June 28, 2002 was
approximately $1,269,431 based on the closing price of the Common Stock on the
OTC Bulletin Board, which is operated by the NASDAQ Stock Market, on June 28,
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 27, 2003
Common Stock, par value $.01 per share 14,946,867 shares
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties......................................................6
Item 3. Legal Proceedings...............................................6
Item 4. Submission of Matters to a Vote of Security Holders.............6
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters..................................7
Item 6. Selected Financial Data.........................................8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....11
Item 8. Financial Statements and Supplementary Data....................12
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.....................31
PART III
Item 10. Directors and Executive Officers of the Registrant............32
Item 11. Executive Compensation........................................34
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................................................40
Item 13. Certain Relationships and Related Transactions................41
Item 14. Controls and Procedures.......................................42
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................................43
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 promissory note ("Note") which bears interest at the rate of 8%,
payable quarterly, with the principal due on September 30, 2004.
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. As a result of this transaction, GP Strategies'
ownership of the Company increased to approximately 47% from approximately 37%
of the Company's outstanding shares of common stock.
Five Star is a leading distributor of home decorating, hardware and
finishing products in the northeast. For the year ended December 31, 2002 Five
Star had sales of approximately $94,000,000.
Additional information about Five Star, may be found at
www.fivestargroup.com
(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 leases two strategically located
warehouse distribution centers in New Jersey and Connecticut with approximately
347,000 square feet of space between them. All operations are coordinated by
senior management from offices in New Jersey. Five Star's sales force consists
almost entirely of employees.
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 $7 million annually. Five Star
services this new territory from its 236,000 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 has
enabled 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 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 the
Company'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
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.
Customers
Five Star's largest customer accounted for approximately 3.6% of its sales
in 2002 and its 10 largest customers accounted for approximately 11.6% 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 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.
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 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 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.
Five Star has a history of enhancing 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 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 in 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
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. Moreover,
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, 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 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. 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.
Employees
The Company employs approximately 275 people. Management-employee
relations are considered good at both of Five Star's warehouse facilities. The
Teamsters union represents approximately 95 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 20, 2003.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
Not Applicable.
Item 2. 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 Company's White Plains, New York 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, legal, tax,
business development, 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 proceeding, the outcome of
which is 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 2002 and 2001. 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
2002 First $0.15 $0.12
Second $0.22 $0.12
Third $0.18 $0.13
Fourth $0.13 $0.05
2001 First $0.15 $0.09
Second $0.21 $0.13
Third $0.25 $0.12
Fourth $0.15 $0.11
- ----------
The number of shareholders of record of the Common Stock as of March
27, 2003 was 3,595. On March 27, 2003, 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.
Equity Compensation Plan Information as of December 31, 2002
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
Plan category Number of securities Weighted-average Number of securities
Non-Qualified to be issued upon exercise price of remaining available for
Stock Option Plan exercise of outstanding, future issuance under
outstanding options, options warrants equity compensation
warrants and rights warrants and rights plans (excluding securities
reflected incolumn(a) (c)
(a) (b)
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
Equity compensation (outstanding options) (weighted average number of options left
plans not approved price)
by security holders 2,930,000 $0.16 1,070,000
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
Total 2,930,000 $0.16 1,070,000
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
For a description of the material terms of the Company's Non-Qualified
Stock Option Plan, see Note 10 in the Notes to the Consolidated Financial
Statements.
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,
2002 2001 2000 1999 1998*
---- ---- ---- ---- -----
Statement of Operations Data:
Revenue 94,074 $94,908 $93,878 $83,134 $17,080
Cost of goods sold 77,461 78,854 77,372 68,646 13,686
Selling, general and administrative
expenses 14,665 13,576 13,154 11,627 3,187
Net income (loss) 391 417 775 647 (664)
Income (loss) per share:
Basic and diluted
before extraordinary item .03 .03 .06 .05 (.03)
Basic and diluted .03 .03 .06 .05 (.05)
December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Current assets $34,214 $35,045 $34,983 $32,810 $32,291
Current liabilities 27,585 28,762 29,183 27,598 27,596
Non-current liabilities 4,500 5,000 5,000 5,000 5,000
Working capital 6,629 6,283 5,800 5,212 4,695
Total assets 35,366 36,184 36,188 33,828 33,179
Total stockholders' equity 3,281 2,422 2,005 1,230 583
*Statement of Operations Data include the operations of Five Star Group, Inc.
from September 30, 1998, the date of its acquisition by the Company.
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,
Five Star Group, Inc. ("Five Star") purchased from JL Distributors, Inc. ("JL"),
substantially all of the 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 promissory note. On August 2,
2002, GP Strategies converted $500,000 of the Note into 2,272,727 shares of the
Company's common stock at a conversion price of $.22 per share.
Five Star is a leading distributor of home decorating, hardware and finishing
products in the northeastern United States.
Liquidity and Capital Resources
At December 31, 2002, the Company had cash of $16,000 and working capital of
$6,629,000. 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% or, under certain circumstances, 55% of eligible inventory
and up to 80% of eligible accounts receivable. At December 31, 2002, the Company
had borrowed $13,808,000 and had $3,900,000 of additional availability under the
loan agreement.
The Company's operations provided $2,826,000 in cash in 2002. The operating cash
flow in 2002 was primarily the result of a decrease in the accounts receivable
balance and increases in accounts payable and accrued expenses principally
relating to increased inventory purchases during the fourth quarter of 2002,
payment for which was not due until the following quarter. The Company purchased
$229,000 of machinery and equipment in 2002. The Company's financing activities
used $2,641,000 in 2002 principally consisting of net repayments of short-term
borrowings. The Company's Board of Directors has authorized the repurchase of up
to 1,000,000 shares of the Company's common stock.
Management believes that cash generated from operations and borrowing
availability under existing credit agreements will be sufficient to fund the
Company's working capital requirements.
Results of operations
The Company had income before income taxes of $719,000 in 2002 as compared to
$714,000 in 2001. The relatively stable income before income taxes was
principally the result of an increase in gross margin and a decrease in interest
expense, offset by an increase in selling, general & administrative expenses as
discussed below.
Sales
The Company had sales of $94,074,000 in 2002 as compared to sales of $94,908,000
in 2001 and $93,878,000 in 2000. Sales were essentially flat from 2001 to 2002.
There was no significant change in the Company's customer base in 2002.
Gross margin
The Company had gross margin of $16,613,000 in 2002, $16,054,000 in 2001, and
$16,506,000 in 2000. The gross margin percentage in 2002 was 17.7%, essentially
in line with the 16.9% and the 17.6% gross margin percentages in 2001 and 2000,
respectively. The Company includes warehousing costs in the Cost of Goods Sold.
Selling, general and administrative expenses
The Company had Selling, general and administrative (SG&A) expense of
$14,665,000 in 2002, $13,576,000 in 2001, and $13,154,000 in 2000. The increase
in SG&A expense in 2002 was principally attributable to write-offs of
uncollectible receivables (see Note 13 to the Company's financial statements
included herein) and rising insurance costs. Insurance premiums rose
significantly in 2002 for two reasons. First, rates in the insurance market
increased drastically after the terrorist attacks in 2001. Second, in 2002 the
Company replaced its large-deductible workers' compensation policy with a
zero-deductible policy, paying a larger premium in consequence. The Company has
included delivery costs in SG&A expenses; delivery costs were not materially
changed from 2001 to 2002.
Interest expense
The Company had interest expense of $1,131,000 in 2002, $1,692,000 in 2001, and
$2,220,000 in 2000. The decreased interest expense in 2002 is the result of
lower interest rates, reduced borrowing under the Company's revolving loan, and
the reduction of the principal amount of the Company's long-term note payable to
GP Strategies (see Note 1 to the Company's financial statements included
herein).
Application of Critical Accounting Policies
The Company's consolidated condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting policies have a significant impact on amounts
reported in the financial statements. A summary of those significant accounting
policies can be found in Note 2 to the Company's financial statements included
herein. The Company has not adopted any significant new accounting policies
during the year ended December 31, 2002.
Among the significant judgments made by management in the preparation of the
Company's financial statements are the determination of the allowance for
doubtful accounts and adjustments of inventory valuations. These adjustments are
made each reporting period in the ordinary course of accounting.
Inflation
Inflation is not expected to have a significant impact on the Company's
business.
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.
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 13
Financial Statements:
Consolidated Balance Sheets - December 31, 2002 and
2001 14
Consolidated Statements of Operations - Years ended
December 31, 2002, 2001 and 2000 16
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31,
2002, 2001 and 2000 17
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000 18
Notes to Consolidated Financial Statements 19
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 (the "Company") as of December 31,
2002 and 2001, 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, 2002. 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 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 each
of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United
States of America.
Eisner LLP
New York, New York
March 19, 2003
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
======== =========
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,
2002 2001
------------ -------------
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
--------- ---------
Commitments
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.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2002 2001 2000
----------- ---------- ----------
Sales $ 94,074 $ 94,908 $ 93,878
Cost of goods sold 77,461 78,854 77,372
--------- --------- ---------
Gross margin 16,613 16,054 16,506
Selling, general and
administrative expenses (14,665) (13,576) (13,154)
Management fee to GP Strategies (98) (72) (85)
Interest expense (including amounts
to affiliates of $384, $400 and $400) (1,131) (1,692) (2,220)
--------- ----- --------
Income before income taxes 719 714 1,047
Income tax expense (328) (297) (272)
------- ----- ---------
Net income $ 391 $ 417 $ 775
======== ======== ========
Earnings per share
Basic and diluted $ .03 .03 .06
--------- ---------- ----------
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except number of shares)
Common Stock Treasury Stock
------------ ---------------
Capital in Number Total
Number of Par Excess of Accumulated of Stockholders'
Shares Value Par Value Deficit Shares Cost Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 13,020,155 $130 $7,589 $(6,489) 0 $ - $1,230
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 775 775
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 13,020,155 130 7,589 (5,714) 0 - $2,005
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 417 417
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 13,020,155 130 7,589 (5,297) 0 - $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.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------
2002 2001 2000
-------- ------- --------
Cash flows from operating activities:
Net income $ 391 $ 417 $ 775
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 267 263 234
Deferred income taxes (51) (30) (163)
Issuance of compensatory stock options 3 - -
Changes in other operating items:
Accounts receivable 1,053 (100) (1,007)
Inventory (339) 285 (1,056)
Prepaid expenses and other current assets 73 (107) (124)
Accounts payable and accrued expenses 1,429 (661) 1,606
----- ---- --------
Net cash provided by operating activities 2,826 67 265
----- ----- ---------
Cash flows from investing activities:
Additions to machinery and equipment (229) (169) (290)
------- ------ ----------
Cash flows from financing activities:
Net (repayments of) proceeds from
short-term borrowings (2,606) 111 (21)
Purchase of treasury stock (35) - -
----------- ----- -----
Net cash (used in) provided by
financing activities (2,641) 111 (21)
--------- --- ----
Net (decrease) increase in cash (44) 9 (46)
Cash at beginning of period 60 51 97
------ --------- ----------
Cash at end of period $ 16 $ 60 $ 51
========== ======== ==========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 1,148 $ 1,863 $ 2,304
======== ======= ========
Income tax $ 171 $ 562 $ 548
========= ======== =========
Non-cash financing activity:
Conversion of long-term debt to
GP Strategies to common stock $ 500 $ - $ -
========= =========== ==========
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 (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 47% 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
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
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.
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 2000
---- ---- ----
Reported net income $ 391 $ 417 $ 775
Stock-based employee compensation
determined under the fair-value based
method, net of tax (33) (5) $ (35)
-------- --------- -------
Pro forma net income $ 358 $ 412 $ 740
====== ====== =====
Basic and diluted income
per share As reported $ .03 $ .03 $ .06
Pro forma $ .03 $ .03 $ .05
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
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
There were no options granted during the year ended December 31, 2000.
Revenue recognition. Revenue is recognized upon shipment of product to
customers. Allowances for estimated returns and allowances 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, 2002, 2001 and 2000 to purchase
approximately 1,700,000, 1,025,000, 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 year ended December 31, 2000 to purchase 6,017,775 shares of
common stock were not included in the diluted per share computation
because their effect would be anti-dilutive. Such warrants expired in
August 2000.
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 $57,000, $43,000 and $56,000 for the years
ended December 31, 2002, 2001 and 2000, 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, $137,000 and $120,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.
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, 2001, and 2000 was $267,000, $263,000 and $234,000, respectively.
6. Long-term debt, related party
The Company has an unsecured note payable to 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, 2001, and 2000 was
$384,000, $400,000 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 Note 1).
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued
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, 2001, and 2000 are summarized below (in
thousands):
December 31,
2002 2001 2000
---- ---- ----
Transactions with GP Strategies
Management fees incurred $ 98 $ 72 $ 85
Interest expense incurred 384 400 400
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, $72,000, and $85,000 for each of the years
ended December 31, 2002, 2001 and 2000. 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
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued
7. Related party transactions (Continued)
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.
8. Income taxes
The components of income tax expense (benefit) are as follows (in
thousands):
Years ended December 31, 2002 2001 2000
-----------------------------------------------------------------
Current
Federal $ 286 $ 251 $ 305
State and local 93 76 130
------ -------- ------
Total current expense 379 327 435
------ ------- ---
Deferred
Federal (38) (23) (124)
State and local (13) (7) (39)
------- ---------- -------
Total deferred (benefit) (51) (30) (163)
------- --------- -----
Total income tax expense $ 328 $ 297 $ 272
------- ------- -------
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Income taxes (Continued)
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 2000
---------------------------------------------------------------------------------
Tax at U.S. statutory rate $ 245 $ 243 $ 356
State and local taxes net of
Federal benefit 51 49 84
Items not deductible 19 27 24
Valuation allowance adjustment 1 - (185)
Other 12 (22) (7)
----------------------------------------------------------------------------------
Income taxes $ 328 $ 297 $ 272
---------------------------------------------------------------------------------
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. The valuation allowance decreased by
$185,000 for the year ended December 31, 2000.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. Major customers
For the years ended December 31, 2002, 2001 and 2000 no customer
accounted for more than 10% of the Company's revenue.
10. 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
(a) Stock option plan (Continued)
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, 2001 and 1999 vest 20% on date of grant
with the balance vesting in equal annual installments over four years.
There were no options granted in 2000, and all options granted prior to
1999 were fully vested as of December 31, 2002.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
10. 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, 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
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:
Weighted Weighted Weighted
Range Average Average Average
of Exercise Number Exercise Years Number Exercise
Price Outstanding Prices Remaining Exercisable Price
---------------------------------------------------------------------------------------------
$.13 - $.13 1,400,000 $.13 .44 1,400,000 $.13
.14 - .14 925,000 .14 3.96 275,000 .14
.15 - .15 50,000 .15 4.24 25,000 .15
.16 - .16 150,000 .16 4.64 30,000 .16
.33 - .33 405,000 .33 1.29 330,000 .33
------------------------------------------------------------------------------------------
$.13 - $.33 2,930,000 $.16 1.95 2,060,000 $.16
---------------------------------------------------------------------------------
(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)
11. Earnings per share
Earnings per share (EPS) for the years ended December 31, 2002, 2001
and 2000 are as follows (in thousands, except per share amounts):
Year ended December 31,
2002 2001 2000
---- ---- ----
Basic EPS
Net income $ 391 $ 417 $ 775
Weighted average shares
outstanding 13,742 13,020 13,020
-------- -------- --------
Basic earnings per share $ .03 $ .03 $ .06
---------- ---------- ----------
Diluted EPS
Net income $ 391 $ 417 $ 775
--------- --------- ---------
Weighted average shares
outstanding 13,742 13,020 13,020
Dilutive effect of stock options (a) 74 153 719
--------- --------- ----------
Weighted average shares
outstanding, diluted 13,816 13,173 13,739
-------- -------- --------
Diluted earnings
per share $ .03 $ .03 $ .06
--------- ---------- ----------
(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.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
12. Commitments and contingencies (Continued)
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, 2001, and 2000, the Company incurred $2,882,000,
$2,721,000, and $3,412,000, 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.
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 2000
---- ---- ----
Balance at beginning of year $ 631 $ 681 $ 616
Charged (credited) to expense 438 (47) 80
Uncollectable accounts written off,
net of recoveries (429) (3) (15)
----- ------- ---------
Balance at end of year $ 640 $ 631 $ 681
====== ======= =======
14. Subsequent events
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.
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
The following table sets forth certain information concerning the
directors and officers of the Company:
Name Age Position
- ------------------------------------------------------
Jerome I. Feldman 74 Chairman of the Board
Charles Dawson 46 President and Director
Bruce Sherman 50 Executive Vice President, Sales and Director
Steven Schilit 56 Executive Vice President, and Chief Operating Officer
and Director
Joseph Leven 50 Vice President
John Moran 52 Director
Carll Tucker 50 Director
Jerome I. Feldman has been Chairman of the Board of the Company since
1994. In 1959 he founded GP Strategies Corporation ("GPS"), which today is a
workforce development company, and is Chief Executive Officer and a Director of
GPS. He also has been Chairman of the Board of GPS since 1999 and was President
of GPS until June 2001. He has been a director of GSE Systems, Inc., ("GSE"), a
software design and development company 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.
Charles Dawson has been President of the Company and of Five Star
Group, Inc. ("Five Star") since January 2002 and Vice President and a director
of the Company since 1999. Since 1993 Mr. Dawson has held several managerial
positions with Five Star.
Bruce Sherman has been Executive Vice President, Sales of the Company
and of Five Star since January 2002, Vice President and a director of the
Company since 1999 and Vice President of Sales of Five Star since 1993. He is a
member of the New York and New Jersey Paint and Decorating Association.
Steven Schilit has been Executive Vice President, Chief Operating
Officer of the Company and of Five Star since January 2002, Vice President and a
director of the Company since 1999 and since 1981 has held several executive
positions with Five Star.
Joseph Leven has been Vice President of the Company since 1999, Vice
President of Operations of Five Star since 1995 and since 1976 has held various
managerial positions with Five Star.
John Moran has been a director of the Company since January 2002. He
has been Vice President of GPS since August 2001, President and Chief Executive
Officer of GP e-Learning Technologies, Inc. from 2000 to August 2001 and from
1994 to 2000 he was Group President, Training and Technologies Group of General
Physics Corporation.
Carll Tucker has been a director of the Company since January 2002. In
1986 he founded Trader Publications and was its President until 1999, which
published The Patent Trader newspaper and various local magazines, newsletters
and programs for cultural institutions in Westchester, Putnam and Fairfield
counties. Trader Publications was sold to Gannett Corporation in 1999. Mr.
Tucker is the author of a weekly newspaper column in the Westchester Patent
Trader, "Looseleaves", since 1983. Mr. Tucker is also a Trustee of Northern
Westchester Hospital Center and was its Chairman of the Board from 1999-2001.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's securities, to file reports of ownership and changes in ownership with
the SEC and NASDAQ. Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of copies of such forms received by it and
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during the period January
1, 2002 to March 18, 2003, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with, except that
Carll Tucker and GP Strategies filed one late report.
Item 11. Executive Compensation
Executive Compensation
The following table and notes present the aggregate compensation paid
by the Company's subsidiary, Five Star, to its President and to its most highly
compensated executive officers for services rendered to Five Star in 2002.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
Salary Bonus Stock All Other
Name and Principal Position Year ($) ($) (#)(1) ($)
- --------------------------- ---- ------- ------- ----------------- ------------------
Charles Dawson 2002 226,615 -0- -0- 20,602(2)
President 2001 188,009 -0- 150,000 404(3)
2000 161,544 -0- -0- 379(3)
Steven Schilit 2002 201,475 -0- -0- 5,391(4)
Executive Vice President and 2001 172,596 -0- 150,000 4,676(4)
Chief Operating Officer 2000 167,055 -0- -0- 4,665(4)
Bruce Sherman 2002 221,650 -0- -0- 25,118(5)
Executive Vice President, 2001 221,571 -0- 150,000 4,842(6)
Sales 2000 171,586 15,000 -0- 4,701(6)
Joseph Leven 2002 117,350 -0- -0- 3,186(7)
Vice President 2001 115,190 -0- -0- 2,764(7)
2000 113,800 -0- -0- 2,050(7)
(1) Consists of options to purchase shares of Common Stock granted
pursuant to the Company's 1994 Non-Qualified Stock Option Plan.
(2) Consists of $602 for executive life insurance premiums and a $20,000
bonus.
(3) Consists of premiums for executive life insurance.
(4) Consists of $4,400, $4,080 and $4,196 as matching contributions made
by the Company to the 401(k) Savings Plan for 2002, 2001 and 2000,
respectively, and $991, $596 and $469 for executive life insurance
premiums for 2002, 2001 and 2000, respectively.
(5) Consists of $4,400 as matching contributions made by the Company to
the 401(k) Savings Plan, $718 for executive life insurance premiums
and a $20,000 bonus.
(6) Consists of $4,080 and $3,953 as matching contributions made by the
Company to the 401(k) Savings Plan for 2001 and 2000, respectively,
and $762 and $748 for executive life insurance premiums for 2001 and
2000, respectively.
(7) Consists of $2,833, $2,449 and $1,768 as matching contributions made
by the Company to the 401(k) Savings Plan for 2002, 2001 and 2000,
respectively, and $353, $315 and $282 for executive life insurance
premiums for 2002, 2001 and 2000, respectively.
Option Grants in 2002
No options were granted to the named executive officers in 2002.
Aggregate Option Exercises in 2002
And Fiscal Year-End Option Values
The following table and notes contain information concerning the
exercise of stock options under the Plan during 2002 and unexercised options
under the Plan held at the end of 2002 by the named executive officers. Unless
otherwise indicated, options are to purchase shares of Common Stock.
Shares Exercisable/Unexercisable Value of Unexercised
Acquired on Value Options at In-the-Money Options at
Exercise Realized December 31, 2002(#) December 31, 2002($)(1)
-------------------- -----------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --- --- ----------- ------------- ----------- -------------
Charles Dawson............. -0- -0- 120,000 105,000 -0- -0-
Steven Schilit............. -0- -0- 120,000 105,000 -0- -0-
Bruce Sherman.............. -0- -0- 120,000 105,000 -0- -0-
Joseph Leven............... -0- -0- 60,000 15,000 -0- -0-
(1) Calculated based on $0.08, which was the closing price of the Common
Stock as quoted on the OTC Bulletin Board, which is operated by the
NASDAQ Stock Market, on December 31, 2002, (which was below the
exercise price of the stock options.)
Board Report on Executive Compensation
During the year ended December 31, 2002, the Company did not have a
Compensation Committee. Accordingly, the full Board of Directors is responsible
for determining and implementing the compensation policies of the Company.
The Board's executive compensation policies are designed to offer
competitive compensation opportunities for all executives which are based on
personal performance, individual initiative and achievement, as well as
assisting the Company in attracting and retaining qualified executives. The
Board also endorses the position that stock ownership by management and
stock-based compensation arrangements are beneficial in aligning management's
and shareholders' interests in the enhancement of shareholder value.
Compensation paid to the Company's executive officers generally
consists of the following elements: base salary, annual bonus and long-term
compensation in the form of stock options and the 401(k) Savings Plan. The
compensation for the other executive officers of the Company is determined by a
consideration of each officer's initiative and contribution to overall corporate
performance and the officer's managerial abilities and performance in any
special projects that the officer may have undertaken. Competitive base salaries
that reflect the individual's level of responsibility are important elements of
the Company's executive compensation philosophy. Subjective considerations of
individual performance are considered in establishing annual bonuses and other
incentive compensation.
The Company has certain broad-based employee benefit plans in which all
employees, including the named executives, are permitted to participate on the
same terms and conditions relating to eligibility and subject to the same
limitations on amounts that may be contributed. In 2002, the Company also made
matching contributions to the 401(k) Savings Plan for those participants.
Mr. Dawson's Compensation
Mr. Dawson's compensation in 2002 was determined principally by the
terms of his employment agreement with Five Star. Effective November 28, 2001,
Five Star and Mr. Dawson entered into an employment agreement which is described
below. In considering the terms of Mr. Dawson's employment agreement the Board
of Directors considered Mr. Dawson's significant contribution to the improved
financial performance of the Company.
Mr. Dawson, has decades of experience in the industry and has strong
relationships with manufacturing companies that are the Company's suppliers. In
addition, Mr. Dawson helped lead management's efforts in expanding the Company's
sales territory to encompass the Mid-Atlantic states.
Employment Agreements
Charles Dawson. As of November 28, 2001, Charles Dawson and Five Star
Group, Inc. entered into an employment agreement pursuant to which Mr. Dawson is
employed as President of the Company 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 the Company, and (2) an
achievement of certain Company goals, weighted 75% and 25% respectively. The
goals component of the bonus for 2002 will be determined by the Steering Team at
the conclusion of the year. The Steering Team consists of Jerome I. Feldman,
John Moran, Steve Schilit, Bruce Sherman and Charles Dawson. The Board of
Directors shall determine whether earnings growth resulting from acquisitions
will be included in Mr. Dawson's bonus determination. In any determination by
the Steering Team of Mr. Dawson's bonus, Mr. Dawson shall recuse himself from
any such proceedings. Mr. Dawson's target bonus for the years 2003, 2004 and
2005, will be $110,000, $120,000, and $130,000, respectively, which will be
determined by components and weighting factors based upon the goals and
objectives of the Company, mutually agreed upon. Pursuant to the employment
agreement, the Company granted Mr. Dawson under the Company's option plan,
options to purchase 150,000 shares of the Company's Common Stock at an exercise
price of $0.14 per share. Such options vest 20% immediately and 20% on each
November 28, commencing November 28, 2001 and terminating on November 28, 2005.
The Company is also required to provide Mr. Dawson with an automobile.
The Company 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 the Company 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 the Company 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 the Company, 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, the Company 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 the Company terminates the employment agreement for any reason,
other than those set forth in the employment agreement, the Company 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.
Bruce Sherman As of November 28, 2001, Bruce Sherman and Five Star
Group, Inc. entered into an employment agreement pursuant to which Mr. Sherman
is employed as Executive Vice President, Sales of the Company for a period
commencing January 1, 2002 until December 31, 2005, (the "Employment Term"),
unless sooner terminated.
Commencing January 1, 2002, Mr. Sherman's base salary is $220,000, with
annual increases of at least 3% effective on the second year of the Employment
Term. Mr. Sherman will receive a target bonus of $100,000, calculated based upon
the following two components: (1) earnings growth of the Company, and (2) an
achievement of certain Company goals, weighted 75% and 25% respectively. The
goals component of the bonus for 2002 will be determined by the Steering Team at
the conclusion of the year. The Steering Team consists of Jerome I. Feldman,
John Moran, Steve Schilit, Charles Dawson and Bruce Sherman. The Board of
Directors shall determine whether earnings growth resulting from acquisitions
will be included in Mr. Sherman's bonus determination. In any determination by
the Steering Team of Mr. Sherman's bonus, Mr. Sherman shall recuse himself from
any such proceedings. Mr. Sherman's target bonus for the years 2003, 2004 and
2005, will be $110,000, $120,000, and $130,000, respectively, which will be
determined by components and weighting factors based upon the goals and
objectives of the Company, mutually agreed upon. Pursuant to the employment
agreement, the Company granted Mr. Sherman under the Company's option plan,
options to purchase 150,000 shares of the Company's Common Stock at an exercise
price of $0.14 per share. Such options vest 20% immediately and 20% on each
November 28, commencing November 28, 2001 and terminating on November 28, 2005.
The Company is also required to provide Mr. Sherman with an automobile.
The Company may terminate the employment agreement for cause which is
defined as (i) breach by Mr. Sherman of any of the terms of the employment
agreement, provided that the Company 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. Sherman of his duties continuing
for 30 days after written warning issued to Mr. Sherman setting forth the
conduct constituting such gross neglect, (iii) conviction of Mr. Sherman for any
felony or any crime involving moral turpitude; (iv) the conviction of Mr.
Sherman of any offense involving the property of the Company or any of its
affiliates; (v) the commission by Mr. Sherman of any act of fraud or dishonesty;
(vi) the engagement by Mr. Sherman in misconduct resulting in serious injury to
the Company, or (vii) the physical or mental disability of Mr. Sherman, 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. Sherman. If Mr.
Sherman 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. Sherman's employment
is terminated by his death or disability, the Company is required to pay Mr.
Sherman 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. Sherman
shall receive a bonus for that year prorated through the date of termination.
If the Company terminates the employment agreement for any reason,
other than those set forth in the employment agreement, the Company is obligated
to continue to pay Mr. Sherman'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.
Steven Schilit As of November 28, 2001, Steven Schilit and Five Star
Group, Inc. entered into an employment agreement pursuant to which Mr. Schilit
is employed as Executive Vice President and Chief Operating Officer of the
Company for a period commencing January 1, 2002 until December 31, 2005, (the
"Employment Term"), unless sooner terminated.
Commencing January 1, 2002, Mr. Schilit's base salary is $200,000, with
annual increases of at least 3% effective on the second year of the Employment
Term. Mr. Schilit will receive a target bonus of $100,000, calculated based upon
the following two components: (1) earnings growth of the Company, and (2) an
achievement of certain Company goals, weighted 75% and 25% respectively. The
goals component of the bonus for 2002 will be determined by the Steering Team at
the conclusion of the year. The Steering Team consists of Jerome I. Feldman,
John Moran, Charles Dawson, Bruce Sherman and Steven Schilit. The Board of
Directors shall determine whether earnings growth resulting from acquisitions
will be included in Mr. Schilit's bonus determination. In any determination by
the Steering Team of Mr. Schilit's bonus, Mr. Schilit shall recuse himself from
any such proceedings. Mr. Schilit's target bonus for the years 2003, 2004 and
2005, will be $110,000, $120,000, and $130,000, respectively, which will be
determined by components and weighting factors based upon the goals and
objectives of the Company, mutually agreed upon. Pursuant to the employment
agreement, the Company granted Mr. Schilit under the Company's option plan,
options to purchase 150,000 shares of the Company's Common Stock at an exercise
price of $0.14 per share. Such options vest 20% immediately and 20% on each
November 28, commencing November 28, 2001 and terminating on November 28, 2005.
The Company is required also to provide Mr. Schilit with an automobile.
The Company may terminate the employment agreement for cause which is
defined as (i) breach by Mr. Schilit of any of the terms of the employment
agreement, provided that the Company 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. Schilit of his duties continuing
for 30 days after written warning issued to Mr. Schilit setting forth the
conduct constituting such gross neglect, (iii) conviction of Mr. Schilit for any
felony or any crime involving moral turpitude; (iv) the conviction of Mr.
Schilit of any offense involving the property of the Company or any of its
affiliates; (v) the commission by Mr. Schilit of any act of fraud or dishonesty;
(vi) the engagement by Mr. Schilit in misconduct resulting in serious injury to
the Company, or (vii) the physical or mental disability of Mr. Schilit, 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. Schilit. If Mr.
Schilit 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. Schilit's employment
is terminated by his death or disability, the Company is required to pay Mr.
Schilit 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. Schilit
shall receive a bonus for that year prorated through the date of termination.
If the Company terminates the employment agreement for any reason,
other than those set forth in the employment agreement, the Company is obligated
to continue to pay Mr. Schilit'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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 14,
2003, with respect to shares of Common Stock which are beneficially owned by (a)
each person who owns more than 5% of the Company's Common Stock, (b) each
director of the Company, (c) each of the persons named in the Summary
Compensation Table and (d) all officers and directors of the Company as a group.
Beneficial Ownership
Number of Percentage
Name and Address Common Shares of Class
GP Strategies Corporation 7,102,831(1) 47.5%
777 Westchester Avenue
White Plains, NY 10604
Jerome I. Feldman 7,757,467(2) 51
Charles Dawson 312,308(3) 2.1
Bruce Sherman 312,308(3) 2.1
Steven Schilit 312,308(3) 2.1
Joseph Leven 267,308(3) 1.8
John Moran 85,000(3) *
Carll Tucker 50,000(3) *
All directors and officers
as a group (8 persons) 2,074,493(3) 13.0
- --------------
* The number of shares owned is less than one percent of the outstanding shares
of Common Stock.
(1) GP Strategies has entered into a Voting Agreement which limits its
ability, to a certain degree, to control the affairs of the Company.
See "Certain Relationships and Related Transactions."
(2) Includes (i) 7,102,831 shares of Common Stock beneficially owned by GP
Strategies, (ii) 93,463 shares of Common Stock held by Mr. Feldman
(iii) 1,173 shares of Common Stock which are held by certain members of
Mr. Feldman's family and (iv) 560,000 shares of Common Stock issuable
upon exercise of currently exercisable stock options (of which 250,000
options were granted pursuant to GP Strategies Five Star Stock Option
Plan) held by Mr. Feldman. Mr. Feldman disclaims beneficial ownership
of the shares owned by GP Strategies and his family.
(3) Includes (i) 192,308 shares of Common Stock held by each of Messrs.
Dawson, Sherman, Schilit and Leven, and 863,320 shares for all
executives and officers as a group, and (ii) 120,000 shares of Common
Stock issuable upon exercise of currently exercisable stock options
held by each of Messrs. Dawson, Sherman, Schilit, 235,000, 75,000,
85,000 and 50,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options held by Messrs. Leven, Moran and
Tucker, respectively and 1,210,000 shares for all executives and
officers as a group.
Item 13. Certain Relationships and Related Transactions
On September 30, 1998, a newly formed wholly owned subsidiary of the
Company, Five Star, purchased from JL Distributors, Inc. ("JL"), a wholly owned
subsidiary of GP Strategies, substantially all of the operating assets of JL.
The assets were purchased for approximately $16,476,000 in cash and a $5,000,000
unsecured promissory note (the "Note"). The Note, which bears interest at the
rate of 8% payable quarterly to GP Strategies, was amended in November, 2001, to
provide for the extension of the due date of the Note until September 30, 2004.
Under a separate Subordination Agreement between GP Strategies and the banks
providing the Company's $25,000,000 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 said debt was reduced
by $500,000 to a new principal amount of $4,500,000. The Company executed a new
promissory note to GP Strategies but under the same terms and conditions as the
original note. 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 stock at $0.22 a share, which was at a premium to the open market
value at that time. As a result of this transaction, GP Strategies' ownership of
the Company has increased to approximately 47% from approximately 37% of the
Company's outstanding shares of common stock.
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,
accounting, 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. The Agreement was renewed for 2002 and 2003.
Five Star leases 236,000 square feet in New Jersey and 111,000 square
feet in Connecticut. 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 Company's White Plains, New York office space is provided by GP
Strategies pursuant to the Management Services Agreement. 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 holds 7,102,831 shares of Common Stock, representing
approximately 48% of the Common Stock issued and outstanding on March 14, 2003
(without taking into account outstanding options and warrants). The Company's
by-laws do not provide for cumulative voting. GP Strategies had entered into a
Voting Agreement pursuant to which it had agreed that, for a period of three
years from August 31, 1998 it would vote its shares of Common Stock (i) such
that not more than 50% of the Company's directors will 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 the Company vote. See "Principal
Stockholders." GP Strategies and the Company renewed the Voting Agreement until
June 30, 2004.
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 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. 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.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, the
Company's management, including the President and the Chief Financial Officer,
conducted an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as defined in Exchange Act Rule
13a-14(c). Based on that evaluation, the President and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of the date of that evaluation. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.
PART IV
Item 15. 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' Report........................................13
Financial Statements:
Consolidated Balance Sheets -
December 31, 2002 and 2001..........................................14
Consolidated Statements of
Operations - Years ended
December 31, 2002, 2001 and 2000....................................16
Consolidated Statements of Changes in
Stockholders' Equity - Years
ended December 31, 2002, 2001 and 2000..............................17
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000........................18
Notes to Consolidated Financial Statements..........................19
(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, 2002.
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 14, 2003
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
Charles Dawson President, and Director
(Principal Executive and Operating Officer)
Jerome I. Feldman Chairman of the Board
Bruce Sherman
Executive Vice President, Sale and Director
Steven Schilit
Executive Vice President, Chief Operating Officer
and Director
Roger Antaki Chief Financial Office
(Principal Financial and Accounting Officer)
John Moran Director
3
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Charles Dawson, President of Five Star Products, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Five Star
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and board of
directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
Charles Dawson
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Roger P. Antaki, Chief Financial Officer of Five Star Products,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Five Star
Products, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and board of
directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
Roger P. Antaki
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. Incorporated herein by reference to Exhibit 10 of the
Registrant's Form 10-K for the year ended December 31, 2001.
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 Amended Voting Agreement, dated as of June 30, 2002 between
Registrant and GP Strategies Corporation.*
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 Note in the amount of $4,500,000 dated August 2, 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. Incorporated herein by
reference to Exhibit 10.11 of the Registrant's Form 10-K for the
year ended December 31, 2001.
10.12 Employment Agreement dated as of November 28, 2001 between the
Registrant and Charles Dawson. Incorporated herein by reference
to Exhibit 10.12 of the Registrant's Form 10-K for the year ended
December 31, 2001.
10.13 Employment Agreement dated as of November 28, 2001 between the
Registrant and Bruce Sherman. Incorporated herein by reference to
Exhibit 10.13 of the Registrant's Form 10-K for the year ended
December 31, 2001.
10.14 Employment Agreement dated as of November 28, 2001 between the
Registrant and Steven Schilit. Incorporated herein by reference
to Exhibit 10.14 of the Registrant's Form 10-K for the year ended
December 31, 2001.
10.15 Consulting and Severance Agreement dated as of February 8, 2002
between the Registrant and Cynthia Krugman.*
21. Subsidiaries*
22. N/A
23. Consent of Eisner LLP, (formerly,Richard A. Eisner & Company,
LLP) Independent Auditors*
99.1 Certification Pursuant to 18 U.S.C. Section 1350 of President*
99.2 Certification Pursuant to 18 U.S.C. Section 1350 of Chief
Financial Officer*
*Filed herewith