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, 2003
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
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(State of Incorporation) (I.R.S. Employer
Identification No.)
777 Westchester Avenue, White Plains, New York, NY 10604
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(Address of principal 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
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(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
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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 30, 2003 was
approximately $624,596 based on the closing price of the Common Stock on the OTC
Bulletin Board, which is operated by the NASDAQ Stock Market, on June 30, 2003.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 15, 2004
Common Stock, par value $.01 per share 16,937,367 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders are incorporated herein by reference into Part III
hereof.
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties.....................................................8
Item 3. Legal Proceedings..............................................8
Item 4. Submission of Matters to a Vote of Security Holders............8
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters.................................9
Item 6. Selected Financial Data.......................................10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...13
Item 8. Financial Statements and Supplementary Data...................14
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure....................35
Item 9A. Controls and Procedures......................................35
PART III
Item 10. Directors and Executive Officers of the Registrant...........36
Item 11. Executive Compensation.......................................36
Item 12. Security Ownership of Certain Beneficial
Owners and Management. and Related Stockholder Matters................36
Item 13. Certain Relationships and Related Transactions...............36
Item 14. Principal Accounting Fees and Services.......................36
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...................................................36
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. In 2001, the maturity of the Note was extended until
September 30, 2004 and on March 31, 2004, the maturity date of the Note was
further extended until June 30, 2005.
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 48% from approximately 37%
of the Company's outstanding shares of common stock.
On June 27, 2003, July 2, 2003 and July 7, 2003 Five Star Group, Inc.
made principal payments in the amounts of $500,000, $300,000, and $200,000
reducing the outstanding principal amount of the Note Payable from $4,500,000 to
$3,500,000.
On October 8, 2003, the Company entered into a transaction to reduce
the principal amount of the Note Payable by $500,000 to a new principal amount
of $3,000,000. In exchange, GP Strategies received 2,000,000 shares of the
Company's common stock. In consideration for GP Strategies' agreeing to convert
the debt at a conversion price of $0.25 per share, which was more than twice the
$0.11 closing market price of the Company's common stock on the day prior to
approval of the transaction, the Company agreed to terminate the voting
agreement between GP Strategies and itself.
The voting agreement, which by its terms would in any case have
terminated on June 30, 2004, provided that GP Strategies (i) would vote its
shares of the Company's common stock so that not more than 50% of the members of
the Company's board of directors would be officers or directors of GP Strategies
and (ii) would vote on matters other than the election of directors in the same
proportion as the Company's other shareholders. The transaction was approved by
a Special Committee of the Company's board of directors; the Special Committee
consisted of an independent non-management director who is unaffiliated with GP
Strategies. As a result of this transaction, as of December 31, 2003, GP
Strategies' ownership of the Company has increased to approximately 54% from
approximately 48% of the Company's outstanding shares of common stock, causing
the Company to become a subsidiary of GP Strategies.
In December 2003, in accordance with the terms of the new Loan
Agreement, described in Note 3 to the Consolidated Financial Statements, Five
Star Group made another principal payment in the amount of $200,000 reducing the
outstanding principal amount of the Note Payable from $3,000,000 to $2,800,000
as of December 31, 2003.
On February 6, 2004 the Company announced that it will repurchase up to
5,000,000 shares, or approximately 30% of its common stock currently
outstanding, through a tender offer for the shares at $0.21 per share,
originally set to expire on March 16, 2004. On March 17, 2004 the Company
announced that it had increased the price it was offering to pay for the shares
in the tender offer to $0.25 per share and extended the offer to March 31, 2004.
If the Company acquires at least 3,750,000 shares pursuant to the
tender offer, GP Strategies' percentage ownership of the Company common stock
would increase to approximately 77 %. The Company entered into an agreement with
GP Strategies pursuant to which, provided that if at least 3,750,000 shares of
common stock are acquired pursuant to this offer, GP Strategies will exchange
for common stock, as soon as legally permissible following termination of the
offer, a sufficient principal amount of the Company's 8% Senior Unsecured Note
due September 30, 2004 at the same price the Company is paying to its
stockholders in this offer to allow GP Strategies to increase its ownership in
the Company to at least 80%. If GP Strategies increases its ownership to at
least 80% of the Company's common stock, the Company would become, for federal
tax purposes, part of the affiliated group of which GP Strategies is the common
parent As a member of such affiliated group, the Company would be included in GP
Strategies' consolidated federal income tax returns, the Company's income or
loss would be included as part of the income or loss of the affiliated group and
any of the Company's income so included might be offset by the consolidated net
operating losses, if any, of the affiliated group. As part of this agreement,
the Company has agreed to enter into a tax sharing agreement with GP Strategies
pursuant to which the Company will make tax sharing payments to GP Strategies
once the Company becomes a member of the consolidated group equal to 80% of the
amount of taxes the Company would pay if the Company were to file separate
consolidated tax returns but did not pay as a result of being included in GP
Strategies affiliated group.
In July 2002, GP strategies announced that it was actively considering
a spin-off of certain of its assets, including a majority interest in the
Company and the Note Payable ("Spin-off"), into a separate corporation named
National Patent Development Corporation ("NPDC"). If GP Strategies completes the
Spin-off, the tax sharing agreement would be assigned by GP Strategies to NPDC.
Five Star is a leading distributor of home decorating, hardware and
finishing products in the northeast. For the year ended December 31, 2003 Five
Star had sales of approximately $95,000,000.
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.
Beginning in 2000, Five Star has expanded its sales territory with an
established, dedicated sales force servicing the Mid-Atlantic States, as far
south as North Carolina. This addition to the sales force generates revenues of
approximately $9 million annually. Five Star services this 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 reverse of 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 2003 and its 10 largest customers accounted for approximately 12.4% 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 frequent 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 $208 billion in 2003, and are projected to grow
at a 4.3% 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 large national
distributors commonly associated with national franchises such as Ace and
TruServ as well as smaller regional distributors, all of whom offer similar
products and services. Five Star's customers face stiff competition from Home
Depot and Lowe's, which purchase 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 260 people. Management-employee
relations are considered good at both of Five Star's warehouse facilities. The
Teamsters union represents approximately 94 union employees at the New Jersey
warehouse facility. The Connecticut warehouse facility is completely
non-unionized. Five Star has never experienced a labor strike at its facilities.
Five Star's contract with Local No. 11, affiliated with the International
Brotherhood of Teamsters expires on December 20, 2008.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
Not Applicable.
Risk Factors
Competition Could Adversely Affect our Performance
Competition within the do-it-yourself industry is intense. There are
large national distributors commonly associated with national franchises such as
Ace and TruServ as well as smaller regional distributors, all of whom offer
products and services similar to those offered by Five Star. Moreover, in some
instances, manufacturers will bypass distributors and choose to sell and ship
their products directly to retail outlets. In addition, Five Star's customers
face stiff competition from Home Depot, and Lowe's, which purchases directly
from manufacturers, and national franchises such as Ace and TruServ. Five Star
competes principally through its strategically placed distribution centers and
its extensive inventory of quality, name-brand products. Five Star will continue
to focus its efforts on supplying its products to its customers at a competitive
price and on a timely, consistent basis.
Our subsidiaries' inability to compete successfully would materially
adversely affect our business and financial condition.
Changing economic conditions in the United States could harm our business.
Our revenues and profitability are related to general levels of
economic activity and employment in the United States. As a result, any
significant economic downturn or recession could harm our business or financial
condition.
Control by GP Strategies Corporation
The Company is controlled by the Company's principal stockholder, GP
Strategies, whose interest may not be aligned with those of the Company's other
stockholders. As of March 15, 2004 GP Strategies owned approximately 54% of the
Company's outstanding common stock.
Accordingly, GP Strategies will be able to influence our management and affairs
and all matters requiring stockholder approval, including the election of
directors and approval of signification corporate transactions. This
concentration of ownership may have the effect of delaying, discouraging or
preventing a change in control and might affect the market price of the
Company's common stock. See Notes 8 and 17 to Notes to Consolidated Financial
Statements for a description of transactions between the Company and GP
Strategies.
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 from time to time subject to litigation or other legal
proceedings arising in the ordinary course of business. 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 and operating results 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 2003 and 2002. 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
2003 First $0.18 $0.09
Second $0.19 $0.10
Third $0.21 $0.09
Fourth $0.20 $0.07
2002 First $0.15 $0.12
Second $0.22 $0.12
Third $0.18 $0.13
Fourth $0.13 $0.05
The number of shareholders of record of the Common Stock as of March 15, 2004
was 3,559. On March 15, 2004, the average of the closing bid and asked prices on
the OTC Bulletin Board was $0.19 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, 2003.
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
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 options, future issuance under
outstanding options, warrants and rights equity compensation
warrants and rights plans (excluding securities
(b) reflected in
column(a)
(a) (c)
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
Equity compensation (outstanding options) (weighted average number of options left
plans not approved price)
by security holders 1,530,000 $0.19 1,070,000
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
- ------------------------------- ---------------------------- ------------------------- ---------------------------------
Total 1,530,000 $0.19 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,
-----------------------------------------------------------
--------- ----------- ------------- ----------- -----------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of Operations Data:
Revenue $95,085 $94,074 $94,908 $93,878 $83,134
Cost of goods sold 77,366 77,461 78,854 77,372 68,646
Selling, general and administrative
expenses 15,598 14,665 13,576 13,154 11,627
Net income (loss) 598 391 417 775 647
Income (loss) per share:
Basic and diluted
before extraordinary item .04 .03 .03 .06 .05
Basic and diluted .04 .03 .03 .06 .05
Years Ended December 31,
-----------------------------------------------------------
-------- ------------ ----------- ----------- -------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Current assets $37,720 $34,214 $35,045 $34,983 $32,810
Current liabilities 31,760 27,585 28,762 29,183 27,598
Non-current liabilities 2,800 4,500 5,000 5,000 5,000
Working capital 5,960 6,629 6,283 5,800 5,212
Total assets 39,005 35,366 36,184 36,188 33,828
Total stockholders' equity 4,445 3,281 2,422 2,005 1,230
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.
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, 2003, the Company had cash of $6,000 and working capital of
$5,960,000. On June 20, 2003, the Company's wholly-owned subsidiary, Five Star
Group, Inc., obtained a new Loan and Security Agreement (the "new Loan
Agreement") with Fleet Capital Corporation as sole lender to replace the Loan
and Security Agreement by and among three banks which was to have matured on
September 30, 2004 (the "old Loan Agreement"). The new Loan Agreement has a
five-year term, with a maturity date of June 30, 2008. The new Loan Agreement
provides for a $25,000,000 revolving credit facility, which allows Five Star
Group, Inc. to borrow based upon a formula of up to 55% of eligible inventory
and 80% of eligible accounts receivable, as defined therein. The interest rates
under the new Loan Agreement consist of LIBOR plus a credit spread of 2% (3.22%
at December 31, 2003) for borrowings not to exceed $15,000,000 and the prime
rate (4.0% at December 31, 2003) for borrowings in excess of the above-mentioned
LIBOR-based borrowings. The credit spreads can be reduced in the event that Five
Star Group, Inc. achieves and maintains certain performance benchmarks. At
December 31, 2003, approximately $16,685,000 was outstanding under the new Loan
Agreement and approximately $480,000 was available to be borrowed.
In connection with the new Loan Agreement, Five Star Group, Inc. also entered
into a derivative transaction with Fleet National Bank on June 20, 2003. The
derivative transaction is an interest rate swap and has been designated as a
hedge. Effective July 1, 2004 through June 30, 2008, Five Star Group, Inc. will
pay a fixed interest rate of 3.38% to Fleet National Bank on notional principal
of $12,000,000. In return, Fleet National Bank will pay to Five Star Group, Inc.
a floating rate, namely, LIBOR, on the same notional principal amount. The
credit spread under the new Loan Agreement is not included in, and will be paid
in addition to this fixed interest rate of 3.38%.
The Company's operations used $1,385,000 in cash in 2003. Net cash used in
operating activities in 2003 was primarily the result of an increase in the
accounts receivable balance and increased inventory purchases during the fourth
quarter of 2003, payment for a portion of which was not due until the following
quarter. The Company purchased $294,000 of machinery and equipment in 2003. Net
cash provided by financing activities of $1,669,000 in 2003 principally
consisted of net proceeds from short-term borrowings offset in part by
repayments of long term note payable to GP Strategies.
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 for at least the next twelve months.
Results of operations
The Company had income before income taxes of $1,031,000 in 2003 as compared to
$719,000 in 2002 and $714,000 in 2001. The increase in 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 and
administrative expenses as discussed below.
Sales
The Company had sales of $95,085,000 in 2003 as compared to sales of $94,074,000
in 2002 and $94,908,000 in 2001. Sales were essentially flat from 2001 to 2003.
There was no significant change in the Company's customer base in 2003.
Gross margin
The Company had gross margin of $17,719,000 in 2003, $16,613,000 in 2002, and
$16,054,000 in 2001. The gross margin percentage in 2003 was 18.6%, slightly
higher than the 17.6% and the 16.9% gross margin percentages in 2002 and 2001,
respectively. The increase in gross margin percentages from 2001 to 2003 were
primarily a result of improved purchasing efficiencies partially offset by
increased warehousing costs. The Company includes warehousing costs in Cost of
Goods Sold.
Selling, general and administrative expenses
The Company had selling, general and administrative (SG&A) expense of
$15,598,000 in 2003, $14,665,000 in 2002, and $13,576,000 in 2001. The increase
in SG&A expense in 2003 was principally attributable to increases in executive
and office personnel salary merit increases and bonuses; an increase in sales
personnel to include the mid-Atlantic states as far south as North Carolina and
to additional expenses incurred in support of the Company's business
development, sales territory expansion and higher computer expenses incurred to
upgrade the Company's systems during the year. The increase in SG&A expense in
2002 was principally attributable to write-offs of uncollectible receivables and
rising insurance costs.
Interest expense
The Company had interest expense of $990,000 in 2003, $1,131,000 in 2002, and
$1,692,000 in 2001. The decreased interest expense in 2003 is the result of a
significant 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), and lower interest rates on short-term borrowings offset by an
increase in borrowing under the Company's revolving loan. 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.
Application of Critical Accounting Policies
The Company's consolidated 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.
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 Company is a party to an interest rate swap agreement designated as a cash
flow hedge whereby changes in the cash flows of the swap will offset changes in
the interest rate payments on the Company's variable-rate revolving loan,
thereby reducing the Company's exposure to fluctuations in LIBOR. Changes in the
fair value of the interest rate swap are recognized in accumulated other
comprehensive income, net of income taxes.
Effective July 1, 2004 through June 30, 2008, Five Star Group, Inc. will pay a
fixed interest rate of 3.38% to Fleet National Bank on notional principal of
$12,000,000. In return, Fleet National Bank will pay to Five Star Group, Inc. a
floating rate, namely, LIBOR, on the same notional principal amount. The credit
spread under the new Loan Agreement is not included in, and will be paid in
addition to this fixed interest rate of 3.38%.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 15
Financial Statements:
Consolidated Balance Sheets - December 31, 2003 and
2002 16
Consolidated Statements of Operations and Comprehensive Income -
Years ended December 31, 2003, 2002 and 2001 18
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2003, 2002 and 2001 19
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2002 and 2001 20
Notes to Consolidated Financial Statements 21
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,
2003 and 2002, and the related consolidated statements of operations
and comprehensive income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31,
2003. 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 referred to above
present fairly, in all material respects, the financial position of
Five Star Products, Inc. and subsidiaries as of December 31, 2003 and
2002, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United
States of America.
Eisner LLP
New York, New York
March 17, 2004, except for the first paragraph of Note 7, as to which
the date is March 31, 2004.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, December 31,
2003 2002
---- ----
ASSETS
Current assets
Cash $ 6 $ 16
Accounts receivable, less allowance
for doubtful accounts of $702 and $640 10,979 10,162
Inventory 26,427 23,664
Prepaid expenses and other current assets 308 372
--------- --------
Total current assets 37,720 34,214
Machinery and equipment, net 873 866
Deferred income taxes 248 244
Other assets 42 42
Interest rate swap, fair value 122 ______
---------
$39,005 $35,366
======= =======
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,
2003 2002
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $16,685 $13,808
Accounts payable and accrued expenses
(including due to affiliates of $257 and $354) 15,075 13,777
-------- -------
Total current liabilities 31,760 27,585
-------- -------
Long-term debt to GP Strategies 2,800 4,500
--------- --------
Commitments
Stockholders' equity
Common stock, authorized 30,000,000 shares, par value $.01 per share; 17,292,882
shares issued and 16,937,651 outstanding in 2003 and 15,292,882 shares issued
and 15,023,651 outstanding
in 2002 173 153
Capital in excess of par value 8,552 8,069
Accumulated deficit (4,308) (4,906)
Accumulated other comprehensive income 71
Treasury stock, at cost (43) (35)
-------- -------
Total stockholders' equity 4,445 3,281
------- -------
$39,005 $35,366
======= =======
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Year Ended December 31,
2003 2002 2001
---- ---- ----
Sales $95,085 $ 94,074 $ 94,908
Cost of goods sold 77,366 77,461 78,854
------- --------- ---------
Gross margin 17,719 16,613 16,054
Selling, general and
administrative expenses (15,598) (14,665) (13,576)
Management fee to GP Strategies (100) (98) (72)
Interest expense (including amounts
to affiliates of $312, $384 and $400) (990) (1,131) (1,692)
-------- -------- -----
Income before income taxes 1,031 719 714
Income tax expense (433) (328) (297)
-------- -------- --------
Net income 598 391 417
Other comprehensive income net of tax:
Change in value of cash flow hedge, net
of tax of $51 71 - -
-------- --------- --------
Comprehensive income $ 669 $ 391 $ 417
======= ====== =======
Net income per share
Basic and diluted $ .04 $ .03 $ .03
======= ======== ========
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, 2003, 2002 and 2001
(in thousands, except number of shares)
Common Stock Treasury Stock
Accumulated
Capital in Other Total
Number of Par Excess of Accumulated Number of Comprehensive Stockholders'
Shares Value Par Value Deficit of Shares Cost Income Equity
- ---------------------------------------------- ---------- ----------------------------------- ------ ------------- --------
- ---------------------------------------------- ---------- ----------------------------------- ------ ------------- --------
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
Net Income 598 598
Purchase of treasury stock 86,000 (8) (8)
Issuance of compensatory stock
options 3 3
Issuance of common stock in
payment of indebtedness to
GP Strategies 2,000,000 20 480 500
Increase in market value of
interest rate swap, net of tax 71 71
- ---------------------------------------------- ---------- ----------------------------------- ---------------------- -------
Balance at December 31, 2003 17,292,882 $173 $8,552 $(4,308) 355,231 $(43) $71 $4,445
- ---------------------------------------------- ---------- ----------------------------------- --------------------- ---------
- ---------------------------------------------------- ---------- ------------- ----------- --------------- ---------- ----------
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,
-------------------------------------------
--------------- -------------- ------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 598 $ 391 $ 417
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 287 267 263
Deferred income taxes (55) (51) (30)
Issuance of compensatory stock options 3 3 -
Changes in other operating items:
Accounts receivable (817) 1,053 (100)
Inventory (2,763) (339) 285
Prepaid expenses and other current assets 64 73 (107)
Accounts payable and accrued expenses 1,298 1,429 (661)
------- ----- ------
Net cash (used in) provided by operating activities (1,385) 2,826 67
-------- ----- -------
Cash flows from investing activities:
Additions to machinery and equipment (294) (229) (169)
-------- ------- ------
Cash flows from financing activities:
Net proceeds from (repayments of)
short-term borrowings 2,877 (2,606) 111
Repayments of long term note payable
to GP Strategies (1,200) - -
Purchase of treasury stock (8) (35) -
---------- -------- --------
Net cash provided by (used in)
financing activities 1,669 (2,641) 111
------ ------- -------
Net (decrease) increase in cash (10) (44) 9
Cash at beginning of period 16 60 51
-------- --------- ---------
Cash at end of period $ 6 $ 16 $ 60
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 990 $ 1,148 $ 1,863
====== ======= =======
Income tax $ 530 $ 171 $ 562
====== ======== ========
Non-cash financing activity:
Exchange of long-term debt to
GP Strategies for common stock $ 500 $ 500 $ -
====== ========= =========
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Business and relationship with GP Strategies Corporation
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), Five Star may make annual
payments of principal to GP Strategies on the Note, which is subordinate to the
revolving loan, if the Company achieves certain financial performance
benchmarks. On August 2, 2002 the Company entered into a transaction to reduce
its long-term debt to GP Strategies. The principal amount of the Note was
reduced by $500,000 to $4,500,000. In connection with this debt reduction, GP
Strategies received 2,272,727 shares of the Company's common stock. The
transaction valued the Company's common stock at $0.22 per share, which was a
premium to the open market value at that time. At December 31, 2002, GP
Strategies owned approximately 48% of the Company's common stock.
On October 8, 2003, $500,000 principal amount of the Note was exchanged for
additional common stock of the Company which increased GP Strategies' ownership
of the Company to approximately 54%, resulting in the Company becoming a
subsidiary of GP Strategies.
Please see notes 7, 8 and 17 for additional information regarding the Company's
indebtedness to and relationship with GP Strategies.
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, and includes allocated warehousing costs.
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
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
recognized currently in operations. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets.
Income taxes. Income taxes are provided for based on the asset and liability
method of accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Use of estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
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 and per share amounts would have been changed to the pro forma amounts
indicated below (in thousands, except per share amounts):
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
2003 2002 2001
---- ---- ----
Reported net income $598 $391 $417
Stock-based employee
compensation
determined under the fair-value (18) (33) (5)
----- ------- -------
based method, net of tax
Pro forma net income $580 $358 $412
==== ==== ====
Basic and diluted income
per share As reported $.04 $ .03 $.03
Pro forma $.04 $ .03 $.03
The weighted-average fair value of options granted in 2002 and 2001 was
approximately $.08 and $.11, respectively, using the Black-Scholes
option-pricing model with the following assumptions
2002 2001
---- ----
Volatility 73% 106%
Risk-free interest rate 2.52%-4.14% 4.24%
Expected life in years 3 5
Dividend yield 0 0
There were no options granted during the year ended December 31, 2003.
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, 2003, 2002 and 2001 to
purchase approximately 1,530,000, 1,700,000, and 1,025,000 shares of common
stock, respectively, were not included in the diluted per share computation
because their effect would be anti-dilutive.
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, $57,000, and $43,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Derivative accounting. SFAS No. 133, as amended, "Accounting for Derivative
Instruments and Hedging Activities" requires the Company to recognize all
derivatives in the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through earnings. If the derivative is a cash
flow hedge, changes in the fair value of the derivative are recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. In 2003, the Company entered into an interest rate swap
which has been designated as a cash flow hedge (see Note 3).
3. Short-term borrowings
On June 20, 2003, the Company's wholly-owned subsidiary, Five Star Group, Inc.,
obtained a new Loan and Security Agreement (the "new Loan Agreement") with Fleet
Capital Corporation as sole lender to replace the Loan and Security Agreement by
and among three banks which was to have matured on September 30, 2004 (the "old
Loan Agreement"). The new Loan Agreement has a five-year term, with a maturity
date of June 30, 2008. The new Loan Agreement provides for a $25,000,000
revolving credit facility, which allows Five Star Group, Inc. to borrow based
upon a formula of up to 55% of eligible inventory and 80% of eligible accounts
receivable, as defined therein. The interest rates under the new Loan Agreement
consist of LIBOR plus a credit spread of 2% (3.22% at December 31, 2003) for
borrowings not to exceed $15,000,000 and the prime rate (4.0% at December 31,
2003) for borrowings in excess of the above-mentioned LIBOR-based borrowings.
The credit spreads can be reduced in the event that Five Star Group, Inc.
achieves and maintains certain performance benchmarks. At December 31, 2003,
approximately $16,685,000 was outstanding under the new Loan Agreement and
approximately $480,000 was available to be borrowed. Substantially all of the
Company's assets are pledged as collateral for those borrowings. Under the Loan
Agreement Five Star is subject to covenants requiring minimum net worth,
limitations on losses, if any, and minimum or maximum values for certain
financial ratios.
In connection with the new Loan Agreement, Five Star Group, Inc. also entered
into a derivative transaction with Fleet National Bank on June 20, 2003. The
derivative transaction is an interest rate swap and has been designated as a
hedge. Effective July 1, 2004 through June 30, 2008, Five Star Group, Inc. will
pay a fixed interest rate of 3.38% to Fleet National Bank on notional principal
of $12,000,000. In return, Fleet National Bank will pay to Five Star Group, Inc.
a floating rate, namely, LIBOR, on the same notional principal amount. The
credit spread under the new Loan Agreement is not included in, and will be paid
in addition to, this fixed interest rate of 3.38%.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
4. Derivatives and hedging activities
The Company is a party to an interest rate swap agreement designated as a cash
flow hedge whereby changes in the cash flows of the swap will offset changes in
the interest rate payments on the Company's variable-rate revolving loan,
thereby reducing the Company's exposure to fluctuations in LIBOR. Changes in the
fair value of the interest rate swap are recognized in accumulated other
comprehensive income, net of income taxes.
5. 401(k) plan
The Company maintains a 401(k) Savings Plan for employees who have completed one
year of service. The Savings Plan permits pre-tax contributions to the Savings
Plan 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 $125,000, $110,000
and $137,000 for the years ended December 31, 2003, 2002, and 2001,
respectively.
6. Machinery and equipment
Machinery and equipment consist of the following (in thousands):
December 31, Estimated
------------
2003 2002 useful lives
---- ---- ------------
Machinery and equipment $308 $308 5-7 years
Furniture and fixtures 1,029 735 5 years
Leasehold improvements 839 839 3-9 years
------ -----
2,176 1,882
Less accumulated
depreciation and amortization (1,303) (1,016)
------- -------
$ 873 $ 866
====== ======
Depreciation and amortization expense for the years ended December 31, 2003,
2002, and 2001 was $287,000, $267,000, and $263,000, respectively.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
7. Long-term debt, related party
The Company's wholly-owned subsidiary, Five Star Group, Inc., has an unsecured
note payable (the "Note Payable") to JL Distributors, Inc., a wholly-owned
subsidiary of GP Strategies Corporation ("GP Strategies"), bearing interest at
8%, payable quarterly. In 2001, the maturity date of the Note Payable was
extended until September 30, 2004 and on March 31, 2004, the maturity date of
the Note Payable was further extended until June 30, 2005. The Note Payable is
subordinated to the indebtedness under the new Loan Agreement (see Note 3)
according to an Agreement of Subordination & Assignment (the "Subordination
Agreement") between Five Star Group, Inc. and JL Distributors, Inc. dated June
20, 2003. The Subordination Agreement permits the annual repayment of principal
under certain circumstances. In accordance with the provisions of the
Subordination Agreement, on June 27, 2003, July 2, 2003 and July 7, 2003 Five
Star Group, Inc. made principal payments in the amounts of $500,000, $300,000,
and $200,000 reducing the outstanding principal amount of the Note Payable from
$4,500,000 to $3,500,000.
On October 8, 2003, the Company entered into a transaction to reduce the
principal amount of the Note Payable by $500,000 to a new principal amount of
$3,000,000. In exchange, GP Strategies received 2,000,000 shares of the
Company's common stock. In consideration for GP Strategies' agreeing to exchange
the debt for common stock at a conversion price of $0.25 per share, which was
more than twice the $0.11 closing market price of the Company's common stock on
the day prior to approval of the transaction, the Company agreed to terminate
the voting agreement between GP Strategies and itself.
The voting agreement, which by its terms would in any case have terminated on
June 30, 2004, provided that GP Strategies (i) would vote its shares of the
Company's common stock so that not more than 50% of the members of the Company's
board of directors would be officers or directors of GP Strategies and (ii)
would vote on matters other than the election of directors in the same
proportion as the Company's other shareholders. The transaction was approved by
a Special Committee of the Company's board of directors; the Special Committee
consisted of an independent non-management director who is unaffiliated with GP
Strategies. As a result of this transaction, as of December 31, 2003, GP
Strategies' ownership of the Company increased to approximately 54% from
approximately 48% of the Company's outstanding shares of common stock, and the
Company has become a subsidiary of GP Strategies.
In December 2003, in accordance with the terms of the new Loan Agreement, Five
Star Group, Inc. made another principal payment in the amount $200,000 reducing
the outstanding principal amount of the Note Payable from $3,000,000 to
$2,800,000 as of December 31, 2003.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Related party transactions
(a) Management agreement
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 will pay 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 or any renewal thereof. The Agreement was renewed for 2003 and
2004. Fees incurred to GP Strategies under this agreement totaled $100,000,
$98,000, and $72,000, for each of the years ended December 31, 2003, 2002 and
2001. At December 31, 2003 and 2002, the amount due to GP Strategies for
expenses which is included in accounts payable and accrued expenses was $257,000
and $354,000, respectively.
(b) Other related party transactions
On February 8, 2002, the Company entered into a Consulting and Severance
Agreement (the "Agreement") with Richard Grad, the former President and Chief
Executive Officer of the Company. Pursuant to the Agreement, Mr. Grad will
receive $145,000 per year for consulting services to be rendered to the Company
and a severance fee at the rate of $5,000 per year, for a five-year period
ending December 31, 2006. In addition, in August, 2002, Mr. Grad was granted
options to purchase 150,000 shares of the Company's Common Stock at the quoted
market price on the date of grant, which options will vest annually over the
term of the Agreement in equal installments. Such options were valued at an
aggregate amount of $13,000. The Agreement also provided for the repurchase by
the Company of 192,308 shares of the Company's Common Stock held by Mr. Grad for
an aggregate purchase price of $25,000. During this five-year period, Mr. Grad
is also receiving certain benefits, including medical benefits, life insurance
and use of an automobile.
On February 8, 2002, the Company entered into a Consulting and Severance
Agreement (the "Agreement") with Cynthia Krugman, the former Controller of the
Company. Pursuant to the Agreement, Ms. Krugman received $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 ended 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 has received certain benefits, including medical
benefits. Ms. Krugman is the daughter of Richard Grad.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Related party transactions (Continued)
Severance fees payable to Mr. Grad and Ms. Krugman under the aforementioned
agreements are included in accrued expenses at December 31, 2003 and 2002.
9. Income taxes
The components of income tax expense (benefit) are as follows (in thousands):
- ---------------------------------------------- -------------- ------------------
Years ended December 31, 2003 2002 2001
- ---------------------------------------------- -------------- ------------------
- ---------------------------------------------- -------------- ------------------
Current
Federal $372 $ 286 $ 251
State and local 116 93 76
----- ------- -------
Total current expense 488 379 327
----- ------ ------
Deferred
Federal (43) (38) (23)
State and local (12) (13) (7)
------ ------- --------
Total deferred (benefit) (55) (51) (30)
------ ------- -------
Total income tax expense $433 $ 328 $ 297
---- ------- ------
As of December 31, 2003 and 2002, the Company had approximately $248,000 and
$244,000, 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,
--------------------------
----------- --------------
Deferred tax assets 2003 2002
---- ----
Allowance for doubtful accounts $ 64 $ 35
Machinery and equipment 191 158
Deferred compensation 39 39
Accrued compensation 6 10
Inventory 38 41
----- -----
338 283
Valuation allowance (39) (39)
----- -----
Deferred tax assets 299 244
Deferred tax liability
Interest rate swap (51) -
---- ------
Net deferred tax assets after valuation allowance $248 $244
==== ====
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. Income taxes (Continued)
A reconciliation between the Company's tax provision and the U.S. statutory rate
follows (in thousands):
- ---------------------------------------------------- ------------- ------------
Years ended December 31, 2003 2002 2001
- ---------------------------------------------------- ------------- ------------
- ---------------------------------------------------- ------------- ------------
Tax at U.S. statutory rate $350 $ 245 $ 243
State and local taxes net of
Federal benefit 69 51 49
Items not deductible 23 19 27
Valuation allowance adjustment - 1 -
Other (9) 12 (22)
------ ------ ------
Income taxes $433 $ 328 $ 297
==== ===== ======
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
valuation at December 31, 2003 decreased by $1,000 and $122,000 for the years
ended December 31, 2002 and 2001, respectively.
10. Major customers
For the years ended December 31, 2003, 2002 and 2001 no customer accounted for
more than 10% of the Company's revenue.
11. Stock options
(a) Stock option plan
On January 1, 1994, the Company's Board of Directors adopted the Five Star
Products, Inc. 1994 Stock Option Plan (the "Stock Option Plan"), which became
effective August 5, 1994. On January 1, 2002, the Board of Directors amended the
Stock Option Plan increasing the total number of shares of Common Stock to
4,000,000 shares reserved for issuance, subject to adjustment in the event of
stock splits, stock dividends, recapitalizations, reclassifications or other
capital adjustments. Unless designated as "incentive stock options" intended to
qualify under Section 422 of the Internal Revenue Code, options granted under
the Stock Option Plan are intended to be nonqualified options. Options may be
granted to any director, officer or other key employee of the Company and its
subsidiaries, and to consultants and other individuals providing services to the
Company.
The term of any option granted under the Stock Option Plan will not exceed ten
years from the date of the grant of the option and, in the case of incentive
stock options granted to a 10% or
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. Stock options (Continued)
greater holder in the total voting stock of the Company, three years from the
date of grant. The exercise price of any option will not be less than the fair
market value of the Common Stock on the date of grant or, in the case of
incentive stock options granted to a 10% or greater holder in the total voting
stock, 110% of such fair market value.
Options granted during 2002 and 2001 vest 20% on date of grant with the balance
vesting in equal annual installments over four years. There were no options
granted in 2003, and all options granted prior to 1999 were fully vested as of
December 31, 2003.
Activity relating to stock options granted by the Company:
Number of Weighted-Average
Shares Exercise Price
Balance at December 31, 2000 2,125,000 .19
Granted 450,000 .14
Cancelled (75,000) .33
------------
Balance at December 31, 2001 2,500,000 .18
Granted 675,000 .15
Cancelled (245,000) .27
-----------
Balance at December 31, 2002 2,930,000 .16
=========
Granted 0 .13
Cancelled (1,400,000) .13
-----------
Balance at December 31, 2003 1,530,000 .19
=========
Exercisable at December 31, 2003 975,000 .22
==========
The following table summarizes information about the Plan's options at December
31, 2003:
Number Exercise Weighted-Average Number Exercise
Outstanding Price Years Remaining Exercisable Price
------------------ --------------- ------------------------- --------------- -----------------
------------------ --------------- ------------------------- --------------- -----------------
925,000 .14 2.95 460,000 .14
50,000 .15 3.24 50,000 .15
150,000 .16 3.64 60,000 .16
405,000 .33 .29 405,000 .33
------------------ --------------- ------------------------- --------------- -----------------
------------------ --------------- ------------------------- --------------- -----------------
1,530,000 $.19 1.90 975,000 $.22
------------------ --------------- ------------------------- --------------- -----------------
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
12. Earnings per share
Earnings per share (EPS) for the years ended December 31, 2003, 2002
and 2001 are computed as follows (in thousands, except per share amounts):
Year ended December 31,
---------------------------------------------
--------------- -------------- --------------
2003 2002 2001
---- ---- ----
Basic EPS
Net income $ 598 $ 391 $ 417
Weighted average shares
Outstanding 15,442 13,742 13,020
------ ------ ------
Basic earnings per share $ .04 $ .03 $ .03
------- --------- ---------
Diluted EPS
Net income $ 598 $ 391 $ 417
------ -------- -------
Weighted average shares
Outstanding 15,442 13,742 13,020
Dilutive effect of stock options (a) _____ 74 153
----- --------- --------
Weighted average shares
outstanding, diluted 15,442 13,816 13,173
------ ------- ------
Diluted earnings
per share $ .04 $ .03 $ .03
------- --------- --------
(a) Diluted earnings per share are based upon the weighted average number of
common shares outstanding during the period, assuming the issuance of common
shares for all dilutive potential common shares outstanding.
13. 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)
13. 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
- -----------------------------------------------------------------------------
2004 $1,627 $883 $2,510
2005 1,608 491 2,099
2006 1,605 284 1,889
2007 314 253 567
2008 - 64 64
--------------------------------------------------------------------
Total $5,154 $1,975 $7,129
--------------------------------------------------------------------
During 2003, 2002, and 2001, the Company incurred $2,914,000,
$2,882,000, and $2,721,000, respectively, of rental expenses. GP
Strategies has guaranteed the leases for the Company's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year
through the first quarter of 2007.
14. Valuation and Qualifying Accounts
The following is a summary of the allowance for doubtful accounts
related to accounts receivable for the years ended December 31 (in thousands):
2003 2002 2001
---- ---- ----
Balance at beginning of year $640 $631 $681
Charged (credited) to expense 107 438 (47)
Uncollectible accounts written off,
net of recoveries (45) (429) (3)
----- ---- ------
Balance at end of year $702 $640 $631
==== ==== ====
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
15. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following at
December 31, 2003 and 2002 (in thousands):
December 31,
2003 2002
---- ----
Accounts payable $13,586 $11,767
Accrued expenses 1,029 809
Due to GP Strategies 257 354
Other 203 847
------- ----------
$15,075 $13,777
16. Quarterly results of operations (unaudited)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2003 and 2002 (in thousands):
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2003:
Sales $25,215 $24,442 $25,396 $20,032
Cost of goods sold 20,907 20,297 20,614 15,548
Gross margin 4,308 4,145 4,782 4,484
Net income 230 71 242 55
Earnings per share:
Basic .02 .00 .02 .00
Diluted .02 .00 .02 .00
2002:
Sales 25,490 25,289 24,372 18,923
Cost of goods sold 21,310 21,119 19,925 15,107
Gross margin 4,180 4,170 4,447 3,816
Net income (loss) 208 76 174 (67)
Earnings (loss) per share:
Basic .02 .01 .01 .00
Diluted .02 .01 .01 .00
17. Subsequent events
On February 6, 2004 the Company announced that it will repurchase up to
5,000,000 shares, or approximately 30% of its common stock currently
outstanding, through a tender offer for the shares at $0.21 per share,
originally set to expire on March 16, 2004. On March 17, 2004 the
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
17. Subsequent events (Continued)
Company announced that it had increased the price it was offering to pay for the
shares in the tender offer to $0.25 per share and extended the offer to March
31, 2004.
If the Company acquires at least 3,7500,000 shares pursuant to the tender offer,
GP Strategies' percentage ownership of the Company common stock would increase
to approximately 77 %. The Company entered into an agreement with GP Strategies
pursuant to which, provided that if at least 3,750,000 shares of common stock
are acquired pursuant to this offer, GP Strategies will exchange for common
stock, as soon as legally permissible following termination of the offer, a
sufficient principal amount of the Company's 8% Senior Unsecured Note due
September 30, 2004 at the same price the Company is paying to its stockholders
in this offer to allow GP Strategies to increase its ownership in the Company to
at least 80%. If GP Strategies increases its ownership to at least 80% of the
Company's common stock, the Company would become, for federal tax purposes, part
of the affiliated group of which GP Strategies is the common parent.
As a member of such affiliated group, the Company would be included in GP
Strategies' consolidated federal income tax returns, the Company's income or
loss would be included as part of the income or loss of the affiliated group and
any of the Company's income so included might be offset by the consolidated net
operating losses, if any, of the affiliated group. As part of this agreement,
the Company has agreed to enter into a tax sharing agreement with GP Strategies
pursuant to which the Company will make tax sharing payments to GP Strategies
once the Company becomes a member of the consolidated group equal to 80% of the
amount of taxes the Company would pay if the Company were to file its own
consolidated tax returns but did not pay as a result of being included in GP
Strategies affiliated group.
In July 2002, GP strategies announced that it was actively considering a
spin-off of certain of its assets, including its common stock interest in the
Company and the Note Payable ("Spin-off"), into a separate corporation named
National Patent Development Corporation ("NPDC"). If GP Strategies completes the
Spin-off, the tax sharing agreement would be assigned by GP Strategies to NPDC.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
ITEM 9A. Controls and Procedures
"Disclosure controls and procedures" are the controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. These controls and
procedures are designed to ensure that information required to be disclosed by
an issuer in its Exchange Act reports is accumulated and communicated to the
issuer's management, including its principal executive and financial officers,
as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, the Company carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b).
Based upon the evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective as of the end of the period covered by this report.
During the quarter ended December 31, 2003, there were no changes in
the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting.
PART III
The information required in response to Items 10, 11, 12, 13, and 14 is
hereby incorporated by reference to the information under the captions
"Directors and Executive Officer of the Registrant", "Executive Compensation",
"Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters", Certain Relationships and Related Transactions" and
Principal Accounting Fees and Services" in the Proxy Statement for the Company's
2004 Annual Meeting of Shareholders.
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................................15
Financial Statements:
Consolidated Balance Sheets -
December 31, 2003 and 2002..................................16
Consolidated Statements of Operations
and Comprehensive Income - Years
ended December 31, 2003, 2002 and 2001......................18
Consolidated Statements of Changes in
Stockholders' Equity - Years
ended December 31, 2003, 2002 and 2001......................19
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001................20
Notes to Consolidated Financial Statements..................21
(a)(2) Schedules have been omitted because they are not required or are not
applicable, or the required information has been
included in the financial statements or the notes thereto.
(a)(3) See accompanying Index to Exhibits
(b) Reports on Form 8-K
Form 8-K filed on October 13, 2004 reporting an event under Item 1.
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 2, 2004
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, Sales and Director
Steven Schilit Executive Vice President, Chief Operating Officer
and Director
Ralph J. Giordano Chief Financial Officer
(Principal Financial and Accounting Officer)
John Moran Director
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 Amended Voting Agreement, dated as of June 30, 2002 between
Registrant and GP Strategies Corporation. Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Form 10-K for the
year ended December 31, 2002.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 Memorandum of Agreement by and between Five Star Group and
Teamsters Local 11, affiliated with International Brotherhood of
Teamsters dated December 12, 2003.*
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 dated as of June 20, 2003 by and
between the Registrant, as Borrower and Fleet Capital as Lender.
Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.10 Agreement of Subordination & Assignment dated as of June 20, 2003
by JL Distributions, Inc., as Creditor in favor of Fleet Capital
Corporation as Lender to Five Star Group, Inc. as Debtor.
Incorporated herein by reference to Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.11 Amended Note in the amount of $2,800,000 dated December 19, 2003,
between the Registrant and GP Strategies Corporation.*
10.12 Amended Note in the amount of $2,800,000 dated March 31, 2004,
between the Registrant and GP Strategies Corporation.*
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 Consulting and Severance Agreement dated as of February 8, 2002
between the Registrant and Cynthia Krugman. Incorporated herein by
reference to Exhibit 10.5 of the Registrant's Form 10-K for the
year ended December 31, 2002.
10.18 Agreement dated as of January 22, 2004, between the Company and GP
Strategies Corporation. Incorporated herein by reference to
Exhibit 99(d) of the Registrant Schedule TO filed on February 6,
2004.
10.19 Tax Sharing Agreement dated as of February 1, 2004 between
Registrant and GP Strategies Corporation.*
21. Subsidiaries*
22. N/A
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350
*Filed herewith