10-K 1 fs10k01.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 OR / /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 033-78252 FIVE STAR PRODUCTS, INC. (Exact name of registrant as specified in its charter) Delaware 13-3729186 (State of Incorporation) (I.R.S. Employer Identification No.) 9 West 57th Street, New York, NY 10019 (Address of principle executive offices) (Zip code) Registrant's telephone number, including area code: (212) 826-8976 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------- Indicate by check mark if disclosure of delinquent filers to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. /X/ As of March 15, 2002, the aggregate market value of the outstanding shares of the Registrant's Common Stock, par value $.01 per share, held by non-affiliates was approximately $987,462 based on the closing price of the Common Stock on the OTC Bulletin Board, which is operated by the NASDAQ Stock Market on March 15, 2002. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 15, 2002 ----- ----------------------------- Common Stock, par value $.01 per share 13,001,140 shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. TABLE OF CONTENTS PART I Page Item 1. Business 1 Item 2. Properties..................................................7 Item 3. Legal Proceedings...........................................7 Item 4. Submission of Matters to a Vote of Security Holders.........7 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..............................8 Item 6. Selected Financial Data.....................................9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................................12 Item 8. Financial Statements and Supplementary Data................13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................33 PART III Item 10. Directors and Executive Officers of the Registrant........34 Item 11. Executive Compensation....................................34 Item 12. Security Ownership of Certain Beneficial Owners and Management..............................................34 Item 13. Certain Relationships and Related Transactions............34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................35 PART I Item 1. Business (a) General Development of Business On September 30, 1998, a newly formed wholly owned subsidiary of Five Star Products, Inc. (the "Company"), Five Star Group, Inc. ("Five Star") purchased from JL Distributors, Inc. ("JL"), a wholly owned subsidiary of GP Strategies Corporation ("GP Strategies"), substantially all of the operating assets of JL. The assets were purchased for $16,476,000 in cash and a $5,000,000 unsecured senior note. The unsecured senior note bears interest at the rate of 8% payable quarterly, with the principal due on September 30, 2004. Five Star is a leading distributor of home decorating, hardware and finishing products in the northeast. For the year ended December 31, 2001 Five Star had sales of approximately $95,000,000. The Company was organized in 1993, as a wholly owned subsidiary of GP Strategies to initiate marketing and sales activities for generic pharmaceutical and medical products in Russia and the Commonwealth of Independent States. NPD Trading (USA) Inc. ("NPD Trading") was formed in January 1990 as a wholly owned subsidiary of GP Strategies to provide consulting services to American and Western corporations in Russia and Eastern Europe. The Company now has two wholly owned subsidiaries, Five Star and NPD Trading. NPD Trading is currently inactive. On August 10, 1999, the Company changed its name to Five Star Products, Inc. from American Drug Company to reflect its new industry focus. (b) Financial Information about Industry Segments This item is not applicable because the Company has only a single line of business. (c) Narrative Description of Business Five Star Five Star is engaged in the wholesale distribution of home decorating, hardware and finishing products. Five Star is composed of two strategically located warehouse distribution centers and office locations in New Jersey and Connecticut with over 360,000 square feet of space. All operations are coordinated by senior management from the headquarters in New Jersey, with each strategically located facility having its own sales force. In January 2000, Five Star expanded its sales territory with the addition of an established, dedicated sales force servicing the Mid Atlantic States, as far south as Virginia. In 2001 this new sales force generated revenues in excess of $7,400,000. Five Star services this new territory from its 250,000 square foot East Hanover, New Jersey facility, from which it currently services the Northeast. Five Star's ability to service this territory from its existing New Jersey facility will enable Five Star to leverage its fixed costs over a broader revenue base. Five Star is a leading distributor of paint sundry items, interior and exterior stains, brushes, rollers, caulking compounds and hardware products. Five Star offers products from leading manufacturers such as Cabot Stain, William Zinsser & Company, DAP, General Electric Corporation, American Tool, USG, Stanley Tools, Minwax and Minnesota Mining Company. Five Star distributes its products to retail dealers, which include lumber yards, "do-it yourself" centers, hardware stores and paint stores principally in the northeast region. It carries an extensive inventory of the products it distributes and provides delivery, generally within 24 to 72 hours. Five Star has grown to be one of the largest independent distributors in the Northeast by providing a complete line of competitively priced products, timely delivery and attractive pricing and financing terms to its customers. Much of Five Star's success can be attributed to a continued commitment to provide customers with the highest quality service at reasonable prices. As one of the largest distributors of paint sundry items in the Northeast, Five Star enjoys cost advantages and favorable supply arrangements over the smaller distributors in the industry. This enables Five Star to compete as a "low cost" provider. Five Star uses a fully computerized warehouse system to track all facets of its distribution operations. Five Star has enhanced the sophistication of its warehouse and office facilities to take full advantage of economies of scale, speed the flow of orders and to compete as a low cost distributor. Nearly all phases of the selling process from inventory management to receivable collection are automated and tracked at each facility. Furthermore, all operations are overseen by senior management at the New Jersey facility. Five Star is able to capitalize on manufacturer discounts by strategically timing purchases involving large quantities. Management takes a proactive approach in coordinating all phases of the Company's operations. For example, sales managers require all sales representatives to call on customers once every week. Each representative transmits their orders through Five Star's automated sales system, to the IBM AS400 computer located at the New Jersey facility. The salesperson system combines the ability to scan product codes in the stores and download the information to a laptop computer for final transmission. Based on the floor plan of each warehouse and the location of products therein, the computer designs the most efficient pattern for the orders to be picked. The orders are then relayed to the appropriate location and picked in the evening. The warehouse facilities are well-maintained and skillfully organized. A bar-coded part number attached to the racking shelves identifies the location of each of the approximately 22,000 stock keeping units (SKUs). This numbering system allows the computer to arrange picking in the most efficient order. The products are loaded onto Five Star's trucks in the evening in the order that they will be unloaded, and are then delivered directly to the customers' locations. Customers Five Star's largest customer accounted for approximately 3.5% of its sales in 2001 and its 10 largest customers accounted for approximately 10% of such sales. All such customers are unaffiliated and Five Star does not have a long-term contractual relationship with any of them. Management Information System All of Five Star's inventory control, purchasing, accounts payable and accounts receivable are now being fully automated on an IBM AS400 computer system. In addition, Five Star's software alerts buyers to purchasing needs, and monitors payables and receivables. This system allows senior management to closely control all phases of Five Star's operations. Five Star also maintains a salesperson-order-entry system, which allows the salesman to scan product and then download the information to a laptop. The laptop contains all product and customer information and interacts with the AS400. Purchasing Five Star relies heavily upon its purchasing capabilities to gain a competitive advantage relative to its competitors. Five Star's capacity to stock the necessary products in sufficient volume and its ability to deliver them promptly upon demand is one of the strongest components of service in the distribution business, and is a major factor in Five Star's success. Since retail outlets depend upon their distributor's ability to supply products quickly upon demand, inventory is the primary working capital investment for most distribution companies, including Five Star. Through its strategic purchasing decisions, Five Star carries large quantities of inventory relative to its competitors and thus can boast fill ratios of approximately 95%, as compared to industry averages as reported in trade publications of approximately 87%. All purchasing decisions based on current inventory levels, sales projections, manufacturer discounts and recommendations from sales representatives, are made by the merchandising group, located in New Jersey, in order to effectively coordinate Five Star's activities. Notwithstanding senior management's active involvement, the sales managers play an extremely critical role in this day-to-day process. Five Star has developed strong, long-term relationships with the leading suppliers since its predecessor company, J. Leven was founded in 1912. As a major distributor of paint sundry items, suppliers rely on Five Star to introduce new products to market. Furthermore, suppliers have grown to trust Five Star's ability to penetrate the market. As a result, Five Star is often called on first by manufacturers to introduce new products into the marketplace. For example, Minwax, Best Liebco and Cabot Stain have utilized Five Star to introduce and distribute some of their new product innovations. Marketing The do-it-yourself industry relies on distributors to effectively link manufacturer's products to the various retail networks. The do-it-yourself market operates on this two-step distribution process, i.e., manufacturers deal through distributors who in turn service retailers. This occurs principally because most retailers are not equipped to carry sufficient inventory in order to be cost effective in their purchases from manufacturers. Thus, distributors add significant value by effectively coordinating and transporting products to retail outlets on a timely basis. Five Star distributes and markets products from hundreds of manufacturers to all of the various types of retailers from regional paint stores, to lumber yards to independent paint and hardware stores. The marketing efforts are directed by the Vice President of Sales at each facility. These individuals are responsible for designing, implementing and coordinating marketing policies. The Vice President of Sales at each facility works closely with senior management to coordinate company-wide marketing plans as well as to service Five Star's major multi-state customers. In addition, each Vice President of Sales is responsible for overseeing the effort of his sales representatives. The sales representatives, by virtue of daily contact with Five Star's customers, are the most integral part of Five Star's marketing strategy. It is their responsibility to generate revenue, ensure customer satisfaction and expand the customer base. Each representative covers an assigned geographic area. The representatives are compensated based on a draw plus commission. Five Star has experienced a very low turnover in its sales force as evidenced by the fact that most representatives have over five years of experience with Five Star. Many sales reps often have retail experience in the paint or hardware industry when they are hired by Five Star. Five Star's size, solid reputation for service, large inventory and attractive financing terms provide sales representatives with tremendous advantages relative to competing sales representatives from other distributors. In addition, the representatives' efforts are strengthened by company-sponsored marketing events. For example, each year in January, Five Star invites all of its customers to a special trade show for Five Star's major suppliers, so that suppliers may display their products and innovations. Five Star also participates in a profitable advertising circular program in the spring and the fall which contains discount specials and information concerning new product innovations. Five Star has continually enhanced its growth through complementary acquisitions which have allowed it to preempt much of its competition as a high-quality, competitively priced distributor. Industry Dynamics The Do-It-Yourself Industry The paint sundry items distribution industry is closely related to the do-it-yourself market, which has tended to exhibit elements of counter-cyclicality. In times of recession, consumers tend to spend more on home-improvements because they cannot afford contractor services or the cost to trade up to bigger homes and in times of economic strength consumers spend heavily in home improvements because they believe they can afford to complete their home improvement projects. According to the Home Improvement Research Institute, in 2001, Americans purchased more than $187 billion on home improvement products. These purchases are expected to grow at a compounded rate of 4.8% till 2006 according to the Home Improvement Research Institute. Painting is the quintessential do-it-yourself project. Painting has to be done more frequently than most remodeling jobs, and it is a relatively inexpensive way to update the appearance of a home. For these reasons, the paint and paint sundry items industry tends to be counter-cyclical and a solid growth segment of the do-it-yourself market. Competition Competition within the industry is intense. There are much larger national companies commonly associated with national franchises such as Ace and TruServ as well as smaller regional distributors, all of whom offer similar products and services. Other than paint sundry item distributors, Five Star faces stiff competition from Home Depot, which purchases directly from manufacturers and dealer-owned distributors such as Ace and TruServ. Additionally, in some instances manufacturers will bypass the distributor and choose to sell and ship their products directly to the retail outlet. The principal means of competition for Five Star are its strategically placed distribution centers and its extensive inventory of quality name brand products. Five Star will continue to focus its efforts on supplying its products to its customers at a competitive price and on a timely, and consistent basis. In the future, Five Star will attempt to acquire complementary distributors and to expand the distribution of its line of private-label products sold under the "Five Star" name. Through internal growth and acquisitions, Five Star has captured a leading share in its principal market, the Northeast. This growth-oriented acquisition strategy of acquiring complementary distributors has allowed Five Star to effectively compete against a substantial number of its competitors. While other paint sundry items distributors sell to the same retail networks as Five Star, they are at a distinct disadvantage versus Five Star's experience, sophistication and size. Concomitantly, hardware stores that are affiliated with the large, dealer-owned distributors such as Ace also utilize Five Star's services because they are uncomfortable with relying solely on their dealer network. Most cooperative-type distributors lack the level of service and favorable credit terms that independent hardware stores enjoy with Five Star. Five Star effectively competes with the dealer-owned distributors because it provides more frequent sales calls, faster deliveries, better financing terms and a full line of vendors and products to choose from. NPD Trading NPD Trading ceased its operations in the year 1999. NPD Trading provided ICF Kaiser International ("ICF") with technical and commercial assistance on a contract for a $250 million hot strip mini mill in the Czech Republic. The Company had received $1 million for this assistance and had expected to receive another $1 million payment contingent upon the completed construction of the mini mill. On March 17, 1998 and April 2, 1998, the Company was informed by holders of an aggregate of $1,000,000 of the Company's convertible notes (the "Notes") that they had elected to convert $1,000,000 of the Notes into an aggregate of 82,306 shares of GP Strategies common stock. In accordance with the terms of the original agreement, the Company and GP Strategies had agreed that if the Notes were used to exercise the warrants issued by GP Strategies in connection with the Note offering, GP Strategies had the right to receive from the Company in exchange for the Notes shares of the Company's common stock at a price equal to 60% of its then current market value. However, on April 30, 1998, the Company and GP Strategies agreed that instead of issuing additional shares of the Company's common stock which GP Strategies was entitled to, the Company would assign to GP Strategies any future payments it would receive from ICF as a success fee in connection with the completion of the Company's consulting project in the Czech Republic. Employees The Company employs 260 people. Management-employee relations are considered good at both of Five Star's warehouse facilities. Unions represent approximately 95 of Five Star's employees. The Teamsters union represent the 95 union employees at New Jersey. Connecticut is completely non-unionized. Five Star has never experienced a labor strike at its facilities. Five Star's contract with Local No. 11, affiliated with the International Brotherhood of Teamsters expires on December 20, 2003. (d) Financial Information about Foreign and Domestic Operations and Export Sales. Not Applicable. Item 2. Properties Five Star leases 250,000 square feet in New Jersey, 110,000 square feet in Connecticut, 1,200 square feet of sales offices in New York and 800 square feet in Maryland. Five Star's operating lease for the New Jersey facility expires in March 2007 and the annual rent is $1,129,327. Five Star's lease for the Connecticut facility expires in February 2007 and its annual rent is $401,120. The New York sales office pays $17,493 per year in rent and the Maryland office pays $10,155. The Company's New York City office space is provided by GP Strategies pursuant to the Management Services Agreement. As part of the Management Services Agreement, GP Strategies receives up to $10,000 a month for services provided by GP Strategies employees, such as management, legal, tax, accounting, insurance and employee benefit administration services. The facilities leased by the Company and Five Star are considered to be suitable and adequate for their intended uses and are considered to be well maintained and in good condition. Item 3. Legal Proceedings The Company is not a party to any legal proceedings the outcome of which are believed by management to have a reasonable likelihood of having any material adverse effect upon the financial condition of the Company Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The following table presents the high and low prices for the Common Stock for 2001 and 2000. The Company's Common Stock, $.01 par value, is quoted on the OTC Bulletin Board, which is operated by the NASDAQ Stock Market. Quarter High Low 2001 First $0.15 $0.09 Second $0.21 $0.13 Third $0.25 $0.12 Fourth $0.15 $0.11 2000 First $0.53 $0.18 Second $0.36 $0.25 Third $0.30 $0.20 Fourth $0.24 $0.10 ---------- The number of shareholders of record of the Common Stock as of March 15, 2002 was 3,736. On March 15, 2002, the average of the closing bid and asked prices on the OTC Bulletin Board was $0.14. The Company has not declared any cash dividends during or since its two most recent fiscal years. The current policy of the Company's Board of Directors is to retain earnings, if any, to finance the operation of the Company's business. The payment of cash dividends on the Common Stock in the future will depend on the Company's earnings, financial condition and capital needs and on other factors deemed pertinent by the Company's Board of Directors. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share amounts) Item 6. Selected Financial Data Years Ended December 31,
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Revenue $94,908 $93,878 $83,134 $17,080 $ 2,047 Cost of goods sold 78,854 77,372 68,646 13,686 936 General and administrative expenses 13,576 13,154 11,627 3,187 1,385 Net income (loss) 417 775 647 (664) (857) Income (loss) per share: Basic and diluted before extraordinary item .03 .06 .05 (.03) (.07) Basic and diluted .03 .06 .05 (.05) (.07) December 31, ------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Balance Sheet Data: Current assets $35,045 $35,112 $32,810 $32,291 $ 514 Current liabilities 28,762 29,312 27,598 27,596 199 Non current liabilities 5,000 5,000 5,000 5,000 4,933 Working capital 6,283 5,800 5,212 4,695 315 Total assets 36,184 36,317 33,828 33,179 552 Total stockholders' equity (deficiency) 2,422 2,005 1,230 583 (4,580)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Overview On September 30, 1998 a newly formed wholly owned subsidiary of the Company, the Five Star Group, Inc. (Five Star) purchased from JL Distributors, Inc. (JL), (formerly Five Star Group, Inc.) certain operating assets of JL. JL is a wholly owned subsidiary of GP Strategies Corporation (GP Strategies). The assets were purchased for $16,476,000 in cash and a $5,000,000 unsecured five year senior note. Five Star is a leading distributor of home decorating, hardware and finishing products in the northeast. The purchase by the Company of certain assets of Five Star has changed the focus of the Company. Since September 30, 1998, the Company had to focus its efforts on growing the distribution business, and has taken several steps to reduce its traditional operations from both a business and cost perspective including closing its Washington, DC, Prague and Moscow offices. For the years ended December 31, 2000 and December 31, 1999, the Company incurred losses of $0 and $105,000 before income taxes related to the business of NPD Trading. Of this total, approximately $74,000 pertained to severance and shut down costs related to Washington and Prague offices. Liquidity and Capital Resources At December 31, 2001 the Company had cash of $60,000 and working capital of $6,283,000. On November 1, 2001, Five Star renewed a $25,000,000 loan and security agreement with a group of banks. The credit facility allowed Five Star to borrow up to 50% of eligible inventory and up to 80% of eligible accounts receivable. At December 31, 2001, the Company had borrowed $16,414,000 and had $1,761,000 of additional availability under the loan agreement. The Company believes it has sufficient borrowing availability under existing credit agreements, and cash anticipated to be generated through the operations of the Company, to fund the working capital requirements of Five Star. Results of operations The Company had income before income taxes of $714,000 for the year ended December 31, 2001 compared to $1,047,000 for the year ended December 31, 2000. The decrease in income before income taxes is the result of increased sales, which was more than offset by a decrease in gross margin coupled with increased selling, general and administrative expenses. Income tax expense in 2001 was $297,000 and $272,000 in 2000. The effective rate of 26% in 2000 is due to the reversal of a $185,000 valuation reserve against deferred tax assets. Sales The Company had sales of $94,908,000 in 2001 compared to sales of $93,878,000 in 2000 and $83,134,000 in 1999. The increased sales were attributable to internal growth within the Company's established customer base. The increased sales in 2000 over 1999 were attributable to the expansion of Five Star's sales territory through the addition of an established, dedicated sales force servicing the Mid Atlantic States, as far south as Virginia, as well as internal growth within the Company's established customer base. Gross margin The Company had gross margin of $16,054,000 in 2001, $16,506,000 in 2000 and $14,488,000 in 1999. The gross margin percentage in 2001 was 16.9%, slightly lower than the 17.6% recorded in 2000. The slightly lower gross margin percentage was caused primarily by rising warehouse costs. The gross margin in 2000 was essentially the same as for 1999. Selling, general and administrative expense The Company had Selling, general and administrative (SG&A) expense of $13,576,000 in 2001, $13,154,000 in 2000 and $11,627,000 in 1999. The slightly increased SG&A in 2001 is attributable to increased delivery expenses resulting from the increased sales volume and the increase of fuel prices. The increased SG&A in 2000 is due to the same factors. Interest expense The Company had interest expense of $1,692,000 in 2001, $ 2,220,000 in 2000 and $1,692,000 in 1999. The decreased interest expense in 2001 is the result of lower interest rates in short-term borrowings incurred by Five Star. The increased interest expense in 2000 is the result of both the increased borrowings incurred by Five Star under its credit facility due to its growth (see Note 4 to the consolidated financial statements), as well as interest incurred on the $5,000,000 unsecured senior note (see Note 1 to the consolidated financial statements). Forward-Looking Statements. This report contains certain forward-looking statements reflecting management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, all of which are difficult to predict and many of which are beyond the control of the Company, including, but not limited to the risks and uncertainties detailed in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission. Inflation Inflation is not expected to have a significant impact on the Company's business. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by Item 7A is not applicable to the Company's business. Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 14 Financial Statements: Consolidated Balance Sheets - December 31, 2001 and 2000 15 Consolidated Statements of Operations - Years ended December 31, 2001, 2000 and 1999 17 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2001, 2000 and 1999 18 Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999 19 Notes to Consolidated Financial Statements 20 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Five Star Products, Inc. We have audited the accompanying consolidated balance sheets of Five Star Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Five Star Products, Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Richard A. Eisner & Company, LLP New York, New York March 20, 2002 FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, December 31, 2001 2000 ---------- ------------- ASSETS Current assets Cash $ 60 $ 51 Accounts receivable, trade, less allowance for doubtful accounts of $631 and $681 in 2001 and 2000 11,215 11,115 Inventory 23,325 23,610 Prepaid expenses and other current assets 445 336 --------- --------- Total current assets 35,045 35,112 Machinery and equipment, net 904 998 Deferred tax asset 193 163 Other assets 42 44 ---------- ---------- $ 36,184 $ 36,317 ========= ========= See accompanying notes to the consolidated financial statements. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (in thousands, except share and per share data)
December 31, December 31, 2001 2000 ------------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings $ 16,414 $ 16,303 Accounts payable and accrued expenses (including due to affiliates of $354 and $536) 12,348 13,009 -------- ---------- Total current liabilities 28,762 29,312 -------- ---------- Long-term debt to GP Strategies 5,000 5,000 --------- --------- Commitments and contingencies (Note 13) Stockholders' equity Common stock, authorized 30,000,000 shares, par value $.01 per share; 13,020,155 shares issued and outstanding 130 130 Capital in excess of par value 7,589 7,589 Accumulated deficit (5,297) (5,714) -------- --------- Total stockholders' equity 2,422 2,005 -------- ---------- $ 36,184 $ 36,317 ======== ========
See accompanying notes to the consolidated financial statements. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year Ended December 31, 2001 2000 1999 -------- --------- ---------- Sales $ 94,908 $ 93,878 $ 83,134 Cost of goods sold 78,854 77,372 68,646 --------- --------- --------- Gross margin 16,054 16,506 14,488 Selling, general and administrative expenses (13,576) (13,154) (11,627) Management fee to GP Strategies (72) (85) (120) Consulting revenues 98 Interest expense (including amounts to affiliates of $400, $400 and $400) (1,692) (2,220) (1,692) -------- -------- ---------- Income before income taxes 714 1,047 1,147 Income tax expense (297) (272) (500) --------- --------- ----------- Net income $ 417 $ 775 $ 647 ======== ======== ======== Income per share Basic and diluted .03 .06 .05 --------- ---------- ----------
See accompanying notes to the consolidated financial statements. 18 FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2001, 2000 and 1999 (in thousands, except number of shares)
Shares of Capital in Total Common Stock Common Excess of Accumulated Stockholders' Outstanding Stock Par Value Deficit Equity ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 13,020,155 $130 $7,589 $(7,136) $ 583 ------------------------------------------------------------------------------------------------------------------------------- Net income 647 647 ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 13,020,155 130 7,589 (6,489) 1,230 ------------------------------------------------------------------------------------------------------------------------------- Net income 775 775 ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 13,020,155 130 7,589 (5,714) 2,005 ------------------------------------------------------------------------------------------------------------------------------- Net income 417 417 ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 13,020,155 $130 $7,589 $(5,297) $2,422 -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands
Years Ended December 31, -------------------------------------- 2001 2000 1999 ------- --------- ------- Cash flows from operating activities: Net income $ 417 $ 775 $ 647 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 263 234 196 Deferred income taxes (30) (163) Changes in other operating items: Accounts receivable (100) (1,007) (411) Inventory 285 (1,056) (108) Prepaid expenses and other current assets (107) (124) (22) Accounts payable and accrued expenses (661) 1,606 649 ------- -------- -------- Net cash provided by operating activities 67 265 951 -------- --------- -------- Cash flows from investing activities: Additions to machinery and equipment (169) (290) (326) -------- ----------- --------- Cash flows from financing activities: Net proceeds from (repayments of) short-term borrowings 111 (21) (647) ------ ------ ----- Net increase (decrease) in cash 9 (46) (22) Cash at beginning of period 51 97 119 -------- ---------- -------- Cash at end of period $ 60 $ 51 $ 97 ======== ========== =======
See accompanying notes to the consolidated financial statements. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Acquisition of the assets and business of Five Star Five Star Products, Inc. (the "Company" or "Five Star") owns 100% of Five Star Group, Inc. which is a wholesale distributor of home decorating hardware and finishing products in the northeastern United States. The Company's business was purchased on September 30, 1998 from GP Strategies Corporation (GP Strategies) for approximately $16,476,000 in cash and a $5,000,000 unsecured promissory note. At December 31, 2001, GP Strategies owned approximately 37% of the Company's common stock. The Company's consulting business, which had been acquired from GP Strategies in 1994 and conducted through a wholly-owned subsidiary, NPD Trading, has been inactive since 1999. 2. Summary of significant accounting policies Principles of consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Inventory. Inventory is valued at the lower of cost, using the first-in, first-out (FIFO) method, or market. Inventory consists solely of finished products. Machinery and equipment. Fixed assets are carried at cost. Major additions and improvements are capitalized, while maintenance and repairs that do not extend the lives of the assets are expensed currently. Gain or loss, if any, on the disposition of fixed assets is recognized currently in operations. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Income taxes. Income taxes are provided for based on the asset and liability method of accounting pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (Continued) Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Concentration of credit risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. Sales are made principally to independently owned paint and hardware stores in the northeast United States. Stock based compensation. The Company has elected to continue to account for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees". Under the provisions of APB No. 25, employee compensation is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. Reclassifications. Certain reclassifications have been made to conform to current year presentation. Revenue recognition. Revenue is recognized upon shipment of product to customers. Allowances for estimated discounts and returns are recognized when sales are recorded. Earnings per share. Basic earnings per share (EPS) is based upon the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period assuming the issuance of common shares for all dilutive potential common shares outstanding. Options outstanding at December 31, 2001, 2000 and 1999 to purchase approximately 1,025,000, 650,000 and 650,000 shares of common stock, respectively, were not included in the diluted per share computation because their effect would be anti-dilutive. Warrants outstanding during the years ended December 31, 2000 and 1999 to purchase 6,017,775 shares of common stock, respectively, were not included in the diluted per share computation because their effect would be anti-dilutive. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (Continued) Advertising costs. The Company expenses advertising costs as incurred. Advertising expense was $43,000, $56,000 and $74,000 for the years ended December 31, 2001, 2000, and 1999, respectively. 3. Recent accounting pronouncements In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance related to revenue recognition and was effective the first fiscal quarter of fiscal years beginning after December 15, 1999, and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation, in accordance with APB Opinion 20, "Accounting Changes". Subsequently, SAF Nos. 101A and 101B were issued to delay the implementation of SAB No. 101. Management believes that the adoption had no effect on the Company's revenue recognition policies. The Company adopted this pronouncement during the fiscal year ended December 31, 2000. In 2000, the Financial Accounting Standards Board ("FASB") issued interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB Opinion No. 25, "Stock Issued to Employees". Interpretation No. 44 clarifies the application of APB No. 25 for the definition of an employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of previously granted stock options or awards and the accounting for an exchange of stock compensation awards in a business combination. The Company adopted this interpretation during the fiscal year ended December 31, 2000. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangibles with indeterminate lives will no longer be amortized, but instead tested for impairment. SFAS No. 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. The Company FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 3. Recent accounting pronouncements (Continued) will adopt SFAS No. 142 in 2002 and does not expect any impairment of goodwill upon adoption. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands on the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company is required to implement SFAS No. 144 on January 1, 2002. Management does not expect this statement to have a material impact on the Company's financial position or results of operations. 4. Short-term borrowings On November 1, 2001, the Company's wholly owned subsidiary, Five Star Group, Inc., renewed its Loan and Security Agreement (the "Loan Agreement") by and among three banks, which matures on September 30, 2004. The Loan Agreement provides for a $25,000,000 revolving credit facility, which allows Five Star to borrow based upon a formula of up to 50% of eligible inventory and 80% of eligible accounts receivable, as defined in the Loan Agreement. The interest rate under the Loan Agreement is based on LIBOR and an adjusted prime rate, which rates can be reduced in the event Five Star achieves and maintains certain performance benchmarks. At December 31, 2001, approximately $16,414,000 was outstanding under the Loan Agreement and approximately $1,761,000 was available to be borrowed. As of December 31, 2001, the LIBOR rate was 4.28% and the adjusted prime rate was 5.15%. The weighted average interest rate on the Company's short-term debt at December 31, 2001 is 4.35%. Substantially all of the Company's assets are pledged as collateral for these borrowings. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 5. 401(k) plan The Company maintains a 401(k) Savings Plan for employees who have completed one year of service. The Savings Plan permits pre-tax contributions to the Savings Plan by participants pursuant to Section 401(k) of the Internal Revenue Code of 2% to 12% of base compensation. The Company matches 40% of the participants' eligible contributions based on a formula set forth in the Savings Plan. Participants are fully vested in their contributions and may withdraw such contributions at time of employment termination, or at age 59 1/2 or earlier in the event of financial hardship. Amounts otherwise are paid at retirement or in the event of death or disability. Employer contributions vest at the rate of 20% per year. The Savings Plan is administered by a trustee appointed by the Board of Directors of the Company and all contributions are held by the trustee and invested at the participants' directions in various mutual funds. The Company's expense associated with the Savings Plan was approximately $137,000, $120,000 and $132,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 6. Machinery and equipment Major classes of machinery and equipment consist of the following (in thousands):
December 31, Estimated ------------------- --------- 2001 2000 useful lives ---- ---- ------------ Machinery and equipment $ 304 $ 296 3 years Furniture and fixtures 525 429 5 years Leasehold improvements 828 763 3-9 years ------- ------- 1,657 1,488 Less accumulated depreciation and amortization (753) (490) ------- ----- $ 904 $ 998 ======= =======
Depreciation and amortization expense for the years ended December 31, 2001, 2000 and 1999 was $263,000, $234,000 and $196,000, respectively. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 7. Long-term debt, related party The Company has an unsecured note payable o GP Strategies in the amount of $5,000,000. The note bears interest at 8%, payable quarterly, with the principal due September 30, 2004. The note is subordinated to the Loan Agreement (See note 4). Interest expense for the year ended December 31, 2001, 2000 and 1999 was $400,000, $400,000 and $400,000, respectively. 8. Transactions with affiliates Transactions with GP Strategies and its subsidiaries, other than loans, as disclosed elsewhere in the financial statements, during the years ended December 31, 2001, 2000, and 1999 are summarized below (in thousands): December 31,
--------------------------------------- 2001 2000 1999 ---- ---- ---- Revenue: Consulting fees earned from affiliate $ $ $ 98 Expenses: Transactions with GP Strategies Management fees incurred $ 72 $ 85 $ 120 Interest expense incurred 400 400 400
In 1999 the Company provided services to GSE Systems, Inc. (GSES), an affiliate of GP Strategies, in assisting that affiliate to obtain a contract to provide the Temelin Nuclear Power Plant and the St. Petersburg Nuclear Power Plant with full scope simulators. GSES is a successor to General Physics International Engineering and Simulation, Inc. Revenues from GSES amounted to $0, $0 and $98,000, respectively, for the years ended December 31, 2001, 2000, and 1999. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 8. Transactions with affiliates (Continued) As of January 1, 1994, the Company and GP Strategies entered into a three-year Management Services Agreement pursuant to which certain direct and indirect services will be provided to the Company by GP Strategies. The services to be provided by GP Strategies include management, legal, tax, accounting, insurance and employee benefit administration services. The Company paid GP Strategies a fee of up to $10,000 per month during the term of the agreement. The Agreement is automatically renewable for successive one-year terms unless one of the parties notifies the other in writing at least six months prior to the end of the initial term of any renewal thereof. The Agreement was renewed for 2001 and 2002. Fees incurred to GP Strategies under this agreement totaled $72,000, $85,000 and $120,000 for each of the years ended December 31, 2001, 2000 and 1999. At December 31, 2001 and 2000, the amount due to GP Strategies for expenses and interest, which is included in accounts payable and accrued expenses on the consolidated balance sheets, was $354,000 and $536,000, respectively 9. Income taxes The components of income tax expense (benefit) are as follows (in thousands): Years ended December 31, 2001 2000 1999 --------------------------------------------------------------------- Current Federal $ 251 $ 305 $ 390 State and local 76 130 110 -------- ------ ------ Total Current Expense 327 435 500 ------- --- --- Deferred Federal (23) (124) 0 State and Local (7) (39) 0 ---------- ------- ------ Total Deferred (Benefit) (30) (163) 0 --------- ----- ------ Total Income Tax Expense $ 297 $ 272 $ 500 ------ ------ ------ FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 9. Income taxes (Continued) As of December 31, 2001 and 2000, the Company had approximately $231,000 and $323,000, respectively, of deferred tax assets and no deferred tax liabilities. The tax effects that gave rise to these deferred tax assets and the valuation allowance consist of the following (in thousands): December 31, December 31, 2001 2000 -------- ---------- Deferred tax assets Allowance for doubtful accounts $ 31 $ 46 Machinery and equipment 115 65 Deferred compensation 38 160 Inventory 47 52 -------- -------- Deferred tax assets 231 323 ------- ------- Valuation allowance (38) (160) ------ ------- Net deferred tax assets after valuation allowance $ 193 $ 163 ======== ======== A reconciliation between the Company's tax provision and the U.S. statutory rate follows: Years ended December 31, 2001 2000 1999 -------------------------------------------------------------------- Tax at U.S. statutory rate $ 243 $ 356 $ 390 State and local taxes net of Federal benefit 49 84 111 Items not deductible 27 24 Net operating loss utilization - (42) Valuation allowance adjustment - (185) 41 Other (22) (7) -------------------------------------------------------------------- Income Taxes $ 297 $ 272 $ 500 -------------------------------------------------------------------- Under SFAS No. 109, a valuation allowance is provided when it is more likely than not that some portion of deferred tax assets will not be realized. The Company has provided a full valuation allowance at December 31, 2001 and December 31, 2000 for the deferred tax asset relating to the deferred compensation as the realization of such asset is uncertain. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 9. Income taxes (Continued) The valuation allowance for the year ended December 31, 2001 decreased by $122,000 as a result of the underlying warrants giving rise to the deferred compensation tax asset expired during the year. The valuation allowance decreased by $185,000 for the year ended December 31, 2000 and increased by $41,000 for the year ended December 31, 1999. 10. Major customers For the years ended December 31, 2001, 2000 and 1999 no customer accounted for more than 10% of the Company's revenue. 11. Stock options and warrants (a) Stock option plan On January 1, 1994, the Company's Board of Directors adopted the Five Star Products, Inc. 1994 Stock Option Plan (the "Stock Option Plan"), which became effective August 5, 1994. On January 1, 2002, the Board of Directors amended the Stock Option Plan increasing the total number of shares of Common Stock to 4,000,000 shares reserved for issuance, subject to adjustment in the event of stock splits, stock dividends, recapitalizations, reclassifications or other capital adjustments. Unless designated as "incentive stock options" intended to qualify under Section 422 of the Internal Revenue Code, options granted under the Stock Option Plan are intended to be nonqualified options. Options may be granted to any director, officer or other key employee of the Company and its subsidiaries, and to consultants and other individuals providing services to the Company. The term of any option granted under the Stock Option Plan will not exceed ten years from the date of the grant of the option and, in the case of incentive stock options granted to a 10% or greater holder in the total voting stock of the Company, three years from the date of grant. The exercise price of any option will not be less than the fair market value of the Common Stock on the date of grant or, in the case of incentive stock options granted to a 10% or greater holder in the total voting stock, 110% of such fair market value. Options granted during 2001 and 1999 vest over five years in equal annual installments. All other outstanding options were fully vested as of December 31, 2001. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 11. Stock options and warrants (Continued) (a) Stock option plan (Continued) The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized in the financial statements for stock options issued to employees of the Company. Had the Company determined compensation cost based on the fair value method at the grant date for its stock options under SFAS No. 123, the Company's net income would have been changed to the pro forma amounts indicated below (in thousands, except per share amounts): 2001 2000 1999 ---- ---- ---- Net income As reported $ 417 $775 $647 Pro forma 412 740 606 Basic and diluted income per share As reported .03 .06 .05 Pro forma .03 .05 .04 Stock option activity during the periods indicated is as follows: An aggregate of 450,000 options were granted in 2001 to three individuals pursuant to Employment Agreements. The per share weighted-average fair value of stock options granted during 2001 and 1999 were $.11, and $.30, respectively, on the dates of grant using the Black Scholes option-pricing model with the following assumptions: 2001 - expected dividend yield 0%, risk-free interest rate of 4.24%, expected volatility of 106% and expected life of 5 years, 1999 - expected dividend yield .0%, risk-free interest rate of 5.05%, expected volatility of 146% and expected life of 3 years. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 11. Stock options and warrants (Continued) Activity relating to stock options granted by the Company: Number of Weighted-Average Shares Exercise Price Balance at December 31, 1998 1,600,000 .15 Granted 650,000 .33 Cancelled (100,000) .50 --------- Balance at December 31, 1999 2,150,000 .19 Cancelled (25,000) .13 ------------- Balance at December 31, 2000 2,125,000 .19 Granted 450,000 .14 Cancelled (75,000) .33 ------------- Balance at December 31, 2001 2,500,000 .18 =========== Exercisable at December 31, 2001 1,910,000 .17 =========== The following table summarizes information about the Plan's options at December 31, 2001:
Weighted Weighted Weighted Average Average Number Average Years Number Exercise Outstanding Exercise Prices Remaining Exercisable Price ----------------------------------------------------------------------------------------- 1,475,000 .13 1.42 1,475,000 .13 450,000 .14 4.92 90,000 .14 575,000 .33 2.25 345,000 .33 -------------------------------------------------------------------------------------- 2,500,000 .18 2.24 1,910,000 .17 --------------------------------------------------------------------------------------
(b) Warrants to purchase common stock Warrants to purchase a total of 6,017,775 shares of the Company's common stock, which the Company had issued during 1994 in connection with its acquisition of NPD Trading from GP Strategies, were extended in 1996 at an exercise price of $.50 per share and in 1998 at an exercise price of $.75 per share. These warrants expired in August 2000. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 12. Earnings per share Earnings per share (EPS) for the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands, except per share amounts):
Year ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Basic EPS Net income $ 417 $ 775 $ 647 Weighted average shares Outstanding 13,020 13,020 13,020 -------- -------- -------- Basic earnings per share $ .03 $ .06 $ .05 ---------- ---------- ---------- Diluted EPS Net income $ 417 $ 775 $ 647 --------- --------- -------- Weighted average shares outstanding 13,020 13,020 13,020 Dilutive effect of stock options and warrants (a) 153 719 806 ---------- ---------- --------- Weighted average shares outstanding, diluted 13,173 13,739 13,826 -------- -------- ------- Diluted earnings per share $ .03 $ .06 $ .05 ---------- ---------- ---------
(a) Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period, assuming the issuance of common shares for all dilutive potential common shares outstanding. FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 13. Commitments and contingencies The Company has several noncancellable leases which cover real property, machinery and equipment. Such leases expire at various dates with, in some cases, options to extend their terms. Minimum rentals under long-term operating leases are as follows(in thousands): Real Machinery and -------------------------------------------------------------------------- property equipment Total -------------------------------------------------------------------------- 2002 1,315 936 2,251 2003 1,313 736 2,049 2004 1,288 373 1,661 2005 1,288 18 1,306 2006 1,288 - 1,288 After 2006 252 - 252 -------------------------------------------------------------------------- Total $ 6,744 $ 2,063 $ 8,807 -------------------------------------------------------------------------- During 2001, 2000 and 1999, the Company incurred $2,721,000, $3,412,000 and $3,359,000, respectively, of rental expenses. GP Strategies has guaranteed the leases for the Company's New Jersey and Connecticut warehouses, totaling approximately $1,513,000 per year through 2007. 14. Valuation and Qualifying Accounts The following is a summary of the allowance for doubtful accounts related to accounts receivable for the years ended December 31 (in thousands):
2001 2000 1999 ---- ---- ---- Balance at beginning of year $ 681 $ 616 $ 1,630 Charged to expense (47) 80 45 Uncollectable accounts written off, net of recoveries (3) (15) (1,059) ------- -------- ------- Balance at end of year $ 631 $ 681 $ 616 ======= ======== =========
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 15. Subsequent Event On February 8, 2002, the Company entered into two consulting agreements with its former President and Chief Executive Officer and its Controller. One agreement provides for payments of $150,000 per annum, for a five-year period and the granting of options at the quoted market price on the date of grant, which will vest annually over the term in equal installments. . The other agreement provides for annual payments of $110,000 for an eighteen-month term. The two former employees will provide consulting and advisory services to the Company. The agreements also provide for the repurchase by the Company of 269,231 shares of the Company's common stock held by the consultants for an aggregate purchase price of $35,000. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to the Directors and Executive Officers of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. Item 11. Executive Compensation Information with respect to Executive Compensation of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to the Security Ownership of Certain Beneficial Owners and Management of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. Item 13. Certain Relationships and Related Transactions Information with respect to the Certain Relationships and Related Transactions of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) The following financial statements are included in Part II, Item 8: Page Independent Auditors' Reports.......................................15 Financial Statements: Consolidated Balance Sheets - December 31, 2001 and 2000..........................................16 Consolidated Statements of Operations - Years ended December 31, 2001, 2000 and 1999....................................18 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2001, 2000 and 1999..............................19 Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999........................20 Notes to Consolidated Financial Statements..........................21 (a)(2) Schedules have been omitted because they are not required or are not applicable, or the required information has been included in the financial statements or the notes thereto. (a)(3) See accompanying Index to Exhibits There were no reports filed by the Registrant on Form 8-K for the period ended December 31, 2001. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIVE STAR PRODUCTS, INC. Charles Dawson, President Dated: April 1, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Jerome I. Feldman Chairman of the Board Charles Dawson President and Director (Principal Executive and Operating Officer) Roger Antaki Director of Finance (Principal Financial and Accounting Officer) Scott N. Greenberg Director John Moran Director Steven Schilit Executive Vice President, Chief Operating Officer and Director Bruce Sherman Executive Vice President, Sales and Director April 1, 2001 INDEX TO EXHIBITS Exhibit No. Document Page ----------- -------- ---- 3. Amended Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 3.1 By-laws of the Registrant. Incorporated herein by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 filed on July 22, 1994, Registration Statement No. 33-78252. 10 1994 Stock Option Plan of the Registrant as amended on January 1, 2002.* 10.1 Management Services Agreement, dated as of August 5, 1994, between GP Strategies Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-1 filed on July 22,1994, Registration Statement No. 33-78252. 10.2 Consulting Agreement, dated as of January 1, 1994, between Jerome I. Feldman and the Registrant. Incorporated herein by reference to Exhibit 10.5 of the Registrant's Registration Statement on Form S-1 filed on July 22, 1994, Registration Statement No. 33-78252. 10.3 Voting Agreement, dated as of August 31, 1998, from GP Strategies Corporation. Incorporated herein by reference to Exhibit 10.5 of the Registrant's Form 10-K for the year ended December 31, 1998. 10.4 Lease dated as of February 1, 1986 between Vernel Company and Five Star Group, Inc., as amended on July 25, 1994. Incorporated herein by reference to Exhibit 10.6 of the Registrant's Form 10-K for the year ended December 31, 1998. 10.5 Lease dated as of May 4, 1983 between Vornado, Inc., and Five Star Group, Inc. Incorporated herein by reference to Exhibit 10.7 of the Registrant's Form 10-K for the year ended December 31, 1998. 10.6 Lease Modification and Extension Agreement dated July 6, 1996 between Hanover Public Warehousing, Inc. and Five Star Group, Inc. Incorporated herein by reference to Exhibit 10.8 of the Registrant's Form 10-K for the year ended December 31, 1998. 10.7 Agreement between Five Star Group and Local No. 11 affiliated with International Brotherhood of Teamsters dated December 12, 2000. Incorporated herein by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. 10.8 Asset Purchase Agreement dated as of August 31, 1998 between Five Star Products, Inc. and Five Star Group, Inc. Incorporated herein by Reference to Exhibit 10 of the Registrant's Form 8-K dated September 15, 1998. 10.9 Loan and Security Agreement by and between the Registrant, as Borrower and Summit Business Capital Corp. doing business as Fleet Capital-Business Finance Division as Agent. Incorporated herein by reference to Exhibit 10 of the Registrant's Form 10-Q for the quarter ended September30, 2001. 10.10 Amended and Restated Note in the Amount of $5,000,000 dated November 1, 2002, between the Registrant and GP Strategies Corporation.*. 10.11 Consulting and Severance Agreement dated as of February 8, 2002 between the Registrant and Richard Grad.* 10.12 Employment Agreement dated as of November 28, 2001 between the Registrant and Charles Dawson.* 10.13 Employment Agreement dated as of November 28, 2001 between the Registrant and Bruce Sherman.* 10.14 Employment Agreement dated as of November 28, 2001 between the Registrant and Steven Schilit.* 21. Subsidiaries.* 22. N/A 23. Consent of Richard A. Eisner & Company, LLP Independent Auditors* *Filed herewith INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement on Form S-3 of our report dated March 20, 2002 on the financial statements of Five Star Products, Inc. and subsidiaries, included in the 2001 Annual Report on Form 10-K. /s/ Richard A. Eisner & Company, LLP New York, New York March 29, 2002