Item 1. Business
(a) General Development of Business
On September 30, 1998, a newly formed wholly owned subsidiary of Five Star Products, Inc. (the "Company"), Five Star Group, Inc. ("Five Star") purchased from JL Distributors, Inc. ("JL"), a wholly owned subsidiary of GP Strategies Corporation ("GP Strategies"), substantially all of the operating assets of JL. The assets were purchased for $16,476,000 in cash and a $5,000,000 unsecured promissory note ("Note") which bears interest at the rate of 8%, payable quarterly, with the principal due on September 30, 2004.
On August 2, 2002 the Company entered into a transaction to reduce its long-term debt to GP Strategies. The principal amount of the Note was reduced by $500,000 to $4,500,000. In connection with this debt reduction, GP Strategies received 2,272,727 shares of the Company's common stock. The transaction valued the Company's common stock at $0.22 per share, which was a premium to the open market value at that time. As a result of this transaction, GP Strategies' ownership of the Company increased to approximately 47% from approximately 37% of the Company's outstanding shares of common stock.
Five Star is a leading distributor of home decorating, hardware and finishing products in the northeast. For the year ended December 31, 2002 Five Star had sales of approximately $94,000,000.
Additional information about Five Star, may be found at www.fivestargroup.com
(b) Financial Information about Industry Segments
This item is not applicable because the Company has only a single line of business.
(c) Narrative Description of Business
Five Star
Five Star is engaged in the wholesale distribution of home decorating, hardware and finishing products. Five Star leases two strategically located warehouse distribution centers in New Jersey and Connecticut with approximately 347,000 square feet of space between them. All operations are coordinated by senior management from offices in New Jersey. Five Star's sales force consists almost entirely of employees.
In the first quarter of 2000, Five Star expanded its sales territory with the addition of an established, dedicated sales force servicing the Mid-Atlantic States, as far south as Virginia. This new addition to the sales force generates revenues of approximately $7 million annually. Five Star services this new territory from its 236,000 square foot East Hanover, New
Jersey facility, from which it currently services the Northeast. Five Star's ability to service this territory from its existing New Jersey facility has enabled Five Star to leverage its fixed costs over a broader revenue base.
Five Star is a leading distributor of paint sundry items, interior and exterior stains, brushes, rollers, caulking compounds and hardware products. Five Star offers products from leading manufacturers such as Cabot Stain, William Zinsser & Company, DAP, General Electric Corporation, American Tool, USG, Stanley Tools, Minwax and 3M Company. Five Star distributes its products to retail dealers, which include lumber yards, "do-it yourself" centers, hardware stores and paint stores principally in the northeast region. It carries an extensive inventory of the products it distributes and provides delivery, generally within 24 to 72 hours. Five Star has grown to be one of the largest independent distributors in the Northeast by providing a complete line of competitively priced products, timely delivery and attractive pricing and financing terms to its customers. Much of Five Star's success can be attributed to a continued commitment to provide customers with the highest quality service at reasonable prices.
As one of the largest distributors of paint sundry items in the Northeast, Five Star enjoys cost advantages and favorable supply arrangements over the smaller distributors in the industry. This enables Five Star to compete as a "low cost" provider. Five Star uses a fully computerized warehouse system to track all facets of its distribution operations. Five Star has enhanced the sophistication of its warehouse and office facilities to take full advantage of economies of scale, speed the flow of orders and to compete as a low cost distributor. Nearly all phases of the selling process from inventory management to receivable collection are automated and tracked; all operations are overseen by senior management at the New Jersey facility. Five Star is able to capitalize on manufacturer discounts by strategically timing purchases involving large quantities.
Management takes a proactive approach in coordinating all phases of the Company's operations. For example, sales managers require all sales representatives to call on customers once every week. Each salesperson transmits his or her orders through Five Star's automated sales system, to the IBM AS/400 computer located at the New Jersey facility. The salesperson system combines the ability to scan product codes in the customers' stores and download the information to a laptop computer for final transmission. Based on the floor plan of each warehouse and the location of products therein, the computer designs a pattern for the orders to be picked. The orders are then relayed to the appropriate location and typically picked in the evening. The warehouse facilities are well-maintained and skillfully organized. A bar-coded part number attached to the racking shelves identifies the location of each of the approximately 23,000 stock keeping units (SKUs). The products are loaded onto Five Star's trucks in the evening in the order that they will be unloaded, and are delivered directly to the customers' locations the following morning.
Customers
Five Star's largest customer accounted for approximately 3.6% of its sales in 2002 and its 10 largest customers accounted for approximately 11.6% of such sales. All such customers are unaffiliated and Five Star does not have a long-term contractual relationship with any of them.
Management Information System
All of Five Star's inventory control, purchasing, accounts payable and accounts receivable are fully automated on an IBM AS/400 computer system. In addition, Five Star's software alerts buyers to purchasing needs, and monitors payables and receivables. This system allows senior management to control closely all phases of Five Star's operations. Five Star also maintains a salesperson-order-entry system, which allows the salesperson to scan product and then download the information to a laptop. The laptop contains all product and customer information and interacts with the AS/400.
Purchasing
Five Star relies heavily upon its purchasing capabilities to gain a competitive advantage relative to its competitors. Five Star's capacity to stock the necessary products in sufficient volume and its ability to deliver them promptly upon demand is one of the strongest components of service in the distribution business, and is a major factor in Five Star's success.
Since retail outlets depend upon their distributor's ability to supply products quickly upon demand, inventory is the primary working capital investment for most distribution companies, including Five Star. Through its strategic purchasing decisions, Five Star carries large quantities of inventory relative to its competitors and thus can boast fill ratios of approximately 95%.
All purchasing decisions based on current inventory levels, sales projections, manufacturer discounts and recommendations from sales representatives, are made by the merchandising group, located in New Jersey, in order to coordinate effectively Five Star's activities. In addition to senior management's active involvement, regional sales managers play an extremely critical role in this day-to-day process.
Five Star has developed strong, long-term relationships with the leading suppliers since its predecessor company, J. Leven, was founded in 1912. As a major distributor of paint sundry items, suppliers rely on Five Star to introduce new products to market. Furthermore, suppliers have grown to trust Five Star's ability to penetrate the market. As a result, Five Star is often called on first by manufacturers to introduce new products into the marketplace. For example, Minwax, Best Liebco and Cabot Stain have utilized Five Star to introduce and distribute some of their new product innovations.
Marketing
The do-it-yourself industry relies on distributors to link manufacturer's products to the various retail networks. The do-it-yourself market operates on this two-step distribution process, i.e., manufacturers deal through distributors who in turn service retailers. This occurs principally because most retailers are not equipped to carry sufficient inventory in order to be cost effective in their purchases from manufacturers. Thus, distributors add significant value by effectively coordinating and transporting products to retail outlets on a timely basis. Five Star distributes and markets products from hundreds of manufacturers to all of the various types of retailers from regional paint stores, to lumber yards, to independent paint and hardware stores.
The marketing efforts are directed by regional sales managers. These individuals are responsible for designing, implementing and coordinating marketing policies. They work closely with senior management to coordinate company-wide marketing plans as well as to service Five Star's major multi-state customers. In addition, each regional sales manager is responsible for overseeing the efforts of his sales representatives.
The sales representatives, by virtue of daily contact with Five Star's customers, are the most integral part of Five Star's marketing strategy. It is their responsibility to generate revenue, ensure customer satisfaction and expand the customer base. Each representative covers an assigned geographic area. The representatives are compensated based solely on commission. Five Star has experienced low turnover in its sales force; most representatives have a minimum of five years' experience with Five Star. Many sales representatives had retail experience in the paint or hardware industry when they were hired by Five Star.
Five Star's size, solid reputation for service, large inventory and attractive financing terms provide sales representatives with tremendous advantages relative to competing sales representatives from other distributors. In addition, the representatives' efforts are strengthened by company-sponsored marketing events. For example, each year in the first quarter, Five Star invites all of its customers to special trade shows for Five Star's major suppliers, so that suppliers may display their products and innovations. Five Star also participates in advertising circular programs in the spring and the fall which contain discount specials and information concerning new product innovations.
Five Star has a history of enhancing its growth through complementary acquisitions which have allowed it to preempt much of its competition as a high-quality, competitively priced distributor.
Industry Dynamics
The Do-It-Yourself Industry
The paint sundry items distribution industry is closely related to the do-it-yourself retail market, which has tended to exhibit elements of counter-cyclicality. In times of recession, consumers tend to spend more on home improvements if they cannot afford to trade up to bigger homes. In times of economic strength, consumers tend to spend heavily in home improvements because they believe they can afford to complete their home improvement projects. According to the National Retail Hardware Association, total retail sales by home improvement retailers were $199 billion in 2002, and are projected to grow at a 5.7% compound rate through 2006.
Painting is the quintessential do-it-yourself project. Painting has to be done more frequently than most remodeling jobs, and it is a relatively inexpensive way to update the appearance of a home. For these reasons, the paint and paint sundry items industry tends to be counter-cyclical and a solid growth segment of the do-it-yourself market.
Competition
Competition within the industry is intense. There are much larger national companies commonly associated with national franchises such as Ace and TruServ as well as smaller regional distributors, all of whom offer similar products and services. Other than paint sundry item distributors, Five Star faces stiff competition from Home Depot, which purchases directly from manufacturers and dealer-owned distributors such as Ace and TruServ. Moreover, in some instances manufacturers will bypass the distributor and choose to sell and ship their products directly to the retail outlet. The principal means of competition for Five Star are its strategically placed distribution centers and its extensive inventory of quality, name-brand products. Five Star will continue to focus its efforts on supplying its products to its customers at a competitive price and on a timely, consistent basis. In the future, Five Star will attempt to acquire complementary distributors and to expand the distribution of its line of private-label products sold under the "Five Star" name. Through internal growth and acquisitions, Five Star has already captured a leading share in its principal market, the Northeast. This growth-oriented acquisition strategy of acquiring complementary distributors has allowed Five Star to compete against a substantial number of its competitors. While other paint sundry items distributors sell to the same retail networks as Five Star, they are at a distinct disadvantage due to Five Star's experience, sophistication and size.
Hardware stores that are affiliated with the large, dealer-owned distributors such as Ace also utilize Five Star's services because they are uncomfortable with relying solely on their dealer network. Most cooperative-type distributors lack the level of service and favorable credit terms that independent hardware stores enjoy with Five Star. Five Star effectively competes with the dealer-owned distributors because it provides more frequent sales calls, faster deliveries, better financing terms and a full line of vendors and products to choose from.
Employees
The Company employs approximately 275 people. Management-employee relations are considered good at both of Five Star's warehouse facilities. The Teamsters union represents approximately 95 union employees at the New Jersey warehouse facility. The Connecticut warehouse facility is completely non-unionized. Five Star has never experienced a labor strike at its facilities. Five Star's contract with Local No. 11, affiliated with the International Brotherhood of Teamsters expires on December 20, 2003.
(d) Financial Information about Foreign and Domestic Operations and Export Sales.
Not Applicable.
Item 2.
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.
Item 3. Legal Proceedings
The Company is not a party to any legal proceeding, the outcome of which is believed by management to have a reasonable likelihood of having any material adverse effect upon the financial condition of the Company.
Item 4.
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.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The following table presents the high and low prices for the Common Stock for 2002 and 2001. The Company's Common Stock, $.01 par value, is quoted on the OTC Bulletin Board, which is operated by the NASDAQ Stock Market.
Quarter High Low
2002 First $0.15 $0.12 Second $0.22 $0.12 Third $0.18 $0.13 Fourth $0.13 $0.05
2001 First $0.15 $0.09 Second $0.21 $0.13 Third $0.25 $0.12 Fourth $0.15 $0.11 - ---------- The number of shareholders of record of the Common Stock as of March 27, 2003 was 3,595. On March 27, 2003, the average of the closing bid and asked prices on the OTC Bulletin Board was $0.14. The Company has not declared any cash dividends during or since its two most recent fiscal years. The current policy of the Company's Board of Directors is to retain earnings, if any, to finance the operation of the Company's business. The payment of cash dividends on the Common Stock in the future will depend on the Company's earnings, financial condition and capital needs and on other factors deemed pertinent by the Company's Board of Directors.
Equity Compensation Plan Information as of December 31, 2002
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.
Item 6. Selected Financial Data
*Statement of Operations Data include the operations of Five Star Group, Inc. from September 30, 1998, the date of its acquisition by the Company.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations Overview
On September 30, 1998 a newly formed wholly owned subsidiary of the Company, Five Star Group, Inc. ("Five Star") purchased from JL Distributors, Inc. ("JL"), substantially all of the operating assets of JL. JL is a wholly owned subsidiary of GP Strategies Corporation ("GP Strategies"). The assets were purchased for $16,476,000 in cash and a $5,000,000 unsecured promissory note. On August 2, 2002, GP Strategies converted $500,000 of the Note into 2,272,727 shares of the Company's common stock at a conversion price of $.22 per share.
Five Star is a leading distributor of home decorating, hardware and finishing products in the northeastern United States.
Liquidity and Capital Resources
At December 31, 2002, the Company had cash of $16,000 and working capital of $6,629,000. On November 1, 2001, Five Star renewed a $25,000,000 loan and security agreement with a group of banks. The credit facility allowed Five Star to borrow up to 50% or, under certain circumstances, 55% of eligible inventory and up to 80% of eligible accounts receivable. At December 31, 2002, the Company had borrowed $13,808,000 and had $3,900,000 of additional availability under the loan agreement.
The Company's operations provided $2,826,000 in cash in 2002. The operating cash flow in 2002 was primarily the result of a decrease in the accounts receivable balance and increases in accounts payable and accrued expenses principally relating to increased inventory purchases during the fourth quarter of 2002, payment for which was not due until the following quarter. The Company purchased $229,000 of machinery and equipment in 2002. The Company's financing activities used $2,641,000 in 2002 principally consisting of net repayments of short-term borrowings. The Company's Board of Directors has authorized the repurchase of up to 1,000,000 shares of the Company's common stock.
Management believes that cash generated from operations and borrowing availability under existing credit agreements will be sufficient to fund the Company's working capital requirements.
Results of operations
The Company had income before income taxes of $719,000 in 2002 as compared to $714,000 in 2001. The relatively stable income before income taxes was principally the result of an increase in gross margin and a decrease in interest expense, offset by an increase in selling, general & administrative expenses as discussed below.
Sales
The Company had sales of $94,074,000 in 2002 as compared to sales of $94,908,000 in 2001 and $93,878,000 in 2000. Sales were essentially flat from 2001 to 2002. There was no significant change in the Company's customer base in 2002.
Gross margin
The Company had gross margin of $16,613,000 in 2002, $16,054,000 in 2001, and $16,506,000 in 2000. The gross margin percentage in 2002 was 17.7%, essentially in line with the 16.9% and the 17.6% gross margin percentages in 2001 and 2000, respectively. The Company includes warehousing costs in the Cost of Goods Sold.
Selling, general and administrative expenses
The Company had Selling, general and administrative (SG&A) expense of $14,665,000 in 2002, $13,576,000 in 2001, and $13,154,000 in 2000. The increase in SG&A expense in 2002 was principally attributable to write-offs of uncollectible receivables (see Note 13 to the Company's financial statements included herein) and rising insurance costs. Insurance premiums rose significantly in 2002 for two reasons. First, rates in the insurance market increased drastically after the terrorist attacks in 2001. Second, in 2002 the Company replaced its large-deductible workers' compensation policy with a zero-deductible policy, paying a larger premium in consequence. The Company has included delivery costs in SG&A expenses; delivery costs were not materially changed from 2001 to 2002.
Interest expense
The Company had interest expense of $1,131,000 in 2002, $1,692,000 in 2001, and $2,220,000 in 2000. The decreased interest expense in 2002 is the result of lower interest rates, reduced borrowing under the Company's revolving loan, and the reduction of the principal amount of the Company's long-term note payable to GP Strategies (see Note 1 to the Company's financial statements included herein).
Application of Critical Accounting Policies
The Company's consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note 2 to the Company's financial statements included herein. The Company has not adopted any significant new accounting policies during the year ended December 31, 2002.
Among the significant judgments made by management in the preparation of the Company's financial statements are the determination of the allowance for doubtful accounts and adjustments of inventory valuations. These adjustments are made each reporting period in the ordinary course of accounting.
Inflation
Inflation is not expected to have a significant impact on the Company's business.
Forward-Looking Statements. This report contains certain forward-looking statements reflecting management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, all of which are difficult to predict and many of which are beyond the control of the Company, including, but not limited to the risks and uncertainties detailed in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission.
Item 7A.
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.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 13
Financial Statements:
Consolidated Balance Sheets - December 31, 2002 and 2001 14
Consolidated Statements of Operations - Years ended December 31, 2002, 2001 and 2000 16
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2002, 2001 and 2000 17
Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001 and 2000 18
Notes to Consolidated Financial Statements 19
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Five Star Products, Inc.
We have audited the accompanying consolidated balance sheets of Five Star Products, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the financial position of Five Star Products, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
Eisner LLP
New York, New York March 19, 2003
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share and per share data)
December 31, December 31, 2002 2001 ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 13,808 $ 16,414 Accounts payable and accrued expenses (including due to affiliates of $354 in 2001) 13,777 12,348 -------- -------- Total current liabilities 27,585 28,762 -------- --------
Long-term debt to GP Strategies 4,500 5,000 --------- ---------
Commitments
Stockholders' equity
Common stock, authorized 30,000,000 shares, par value $.01 per share; 15,292,882 shares issued and 15,023,651 outstanding in 2002 and 13,020,155 shares issued and outstanding in 2001 153 130 Capital in excess of par value 8,069 7,589 Accumulated deficit (4,906) (5,297) Treasury stock, at cost (35) - ----------- ----------- Total stockholders' equity 3,281 2,422 ---------- --------- $ 35,366 $ 36,184 ========= ========
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000 (in thousands, except number of shares)
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Acquisition of the assets and business of Five Star
Five Star Products, Inc. (the "Company" or "Five Star") owns 100% of Five Star Group, Inc. which is a wholesale distributor of home decorating hardware and finishing products in the northeastern United States.
The Company's business was purchased on September 30, 1998 from GP Strategies Corporation ("GP Strategies") for approximately $16,476,000 in cash and a $5,000,000 unsecured promissory note (the "Note"). Under a separate Subordination Agreement with GP Strategies in favor of the banks providing the Company's $25,000,000 revolving loan (see Note 3), which Note is subordinate to the revolving loan, Five Star may make annual payments of principal to GP Strategies if the Company achieves certain financial performance benchmarks. On August 2, 2002 the Company entered into a transaction to reduce its long-term debt to GP Strategies. The principal amount of the Note was reduced by $500,000 to $4,500,000. In connection with this debt reduction, GP Strategies received 2,272,727 shares of the Company's common stock. The transaction valued the Company's common stock at $0.22 per share, which was a premium to the open market value at that time. At December 31, 2002, GP Strategies owned approximately 47% of the Company's common stock.
2. Summary of significant accounting policies
Principles of consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Inventory. Inventory is valued at the lower of cost, using the first-in, first-out (FIFO) method, or market. Inventory consists solely of finished products.
Machinery and equipment. Fixed assets are carried at cost less accumulated depreciation. Major additions and improvements are capitalized, while maintenance and repairs that do not extend the lives of the assets are expensed currently. Gain or loss, if any, on the disposition of fixed assets is recognized currently in operations. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.
Income taxes. Income taxes are provided for based on the asset and liability method of accounting pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Concentration of credit risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. Sales are made principally to independently owned paint and hardware stores in the northeast United States.
Stock-based compensation. The Company has elected to continue to account for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees". Under the provisions of APB No. 25, employee compensation is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock.
Had the Company determined compensation cost based on the fair value method at the grant date for its stock options under SFAS No. 123, the Company's net income would have been changed to the pro forma amounts indicated below (in thousands, except per share amounts):
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
The weighted-average fair value of options granted in 2002 and 2001 was approximately $.08 and $.11, respectively, using the Black-Scholes option-pricing model with the following assumptions:
2002 2001 -------------- -------- Volatility 73% 106% Risk-free interest rate 2.52% - 4.14% 4.24%
Expected life in years 3 5 Dividend yield 0 0
There were no options granted during the year ended December 31, 2000.
Revenue recognition. Revenue is recognized upon shipment of product to customers. Allowances for estimated returns and allowances are recognized when sales are recorded.
Earnings per share. Basic earnings per share (EPS) is based upon the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common shares outstanding during the period assuming the issuance of common shares for all dilutive potential common shares outstanding. Options outstanding at December 31, 2002, 2001 and 2000 to purchase approximately 1,700,000, 1,025,000, and 650,000 shares of common stock, respectively, were not included in the diluted per share computation because their effect would be anti-dilutive. Warrants outstanding during the year ended December 31, 2000 to purchase 6,017,775 shares of common stock were not included in the diluted per share computation because their effect would be anti-dilutive. Such warrants expired in August 2000.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
Advertising costs. The Company expenses advertising costs as incurred. Advertising expense was $57,000, $43,000 and $56,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
3. Short-term borrowings
On November 1, 2001, the Company's wholly owned subsidiary, Five Star Group, Inc., renewed its Loan and Security Agreement (the "Loan Agreement") by and among three banks, which now matures on September 30, 2004. The Loan Agreement provides for a $25,000,000 revolving credit facility, which allows Five Star to borrow based upon a formula of up to 50% and, under certain circumstances, 55% of eligible inventory and 80% of eligible accounts receivable, as defined in the Loan Agreement. The interest rates under the Loan Agreement are based upon LIBOR or the Prime rate, and can be reduced in the event Five Star achieves and maintains certain performance benchmarks. At December 31, 2002, approximately $13,808,000 was outstanding under the Loan Agreement and approximately $3,900,000 was available to be borrowed. As of December 31, 2002, the LIBOR-based rates averaged 3.56% and the Prime-based rate was 4.25%. The weighted average interest rate on the Company's short-term debt at December 31, 2002 was 3.78%. Substantially all of the Company's assets are pledged as collateral for these borrowings. Under the Loan Agreement Five Star is subject to covenants requiring minimum net worth, limitations on losses, if any, and minimum or maximum values for certain financial ratios.
4. 401(k) plan
The Company maintains a 401(k) Savings Plan for employees who have completed one year of service. The Savings Plan permits pre-tax contributions to the Savings Plan of 2% to 50% of compensation by participants pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 40% of the participants' first 6% of compensation contributed, not to exceed an amount equivalent to 2.4% of that participant's compensation.
The Savings Plan is administered by a trustee appointed by the Board of Directors of the Company and all contributions are held by the trustee and invested at the participants' directions in various mutual funds. The Company's expense associated with the Savings Plan was approximately $110,000, $137,000 and $120,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
5. Machinery and equipment
Machinery and equipment consist of the following (in thousands):
December 31, Estimated 2002 2001 useful lives ---- ---- ------------
Machinery and equipment $ 308 $ 304 5-7 years Furniture and fixtures 735 521 5 years Leasehold improvements 839 828 3-9 years ------- ------ 1,882 1,653
Less accumulated depreciation and amortization (1,016) (749) ------- ------ $ 866 $ 904 ======= =======
Depreciation and amortization expense for the years ended December 31, 2002, 2001, and 2000 was $267,000, $263,000 and $234,000, respectively.
6. Long-term debt, related party
The Company has an unsecured note payable to GP Strategies in the amount of $4,500,000. The note bears interest at 8%, payable quarterly, with the principal due September 30, 2004. The note is subordinated to the indebtedness under the Loan Agreement (see note 3). Interest expense for the years ended December 31, 2002, 2001, and 2000 was $384,000, $400,000 and $400,000, respectively. A subordination agreement between the Company and GP Strategies permits the annual repayment of principal under certain circumstances (see Note 1).
In August 2002, the principal amount of this indebtedness was reduced from $5,000,000 to $4,500,000 through issuance by the Company of 2,272,727 shares of its common stock to GP Strategies (see Note 1).
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued
7. Related party transactions
(a) Transactions with affiliates
Transactions with GP Strategies and its subsidiaries, other than loans, as disclosed elsewhere in the financial statements, during the years ended December 31, 2002, 2001, and 2000 are summarized below (in thousands):
December 31, 2002 2001 2000 ---- ---- ---- Transactions with GP Strategies Management fees incurred $ 98 $ 72 $ 85 Interest expense incurred 384 400 400
As of January 1, 1994, the Company and GP Strategies entered into a three-year Management Services Agreement pursuant to which certain direct and indirect services will be provided to the Company by GP Strategies. The services to be provided by GP Strategies include legal, tax, business development, insurance and employee benefit administration services. The Company pays GP Strategies a fee of up to $10,000 per month during the term of the agreement. The Agreement is automatically renewable for successive one-year terms unless one of the parties notifies the other in writing at least six months prior to the end of the initial term of any renewal thereof. The Agreement was renewed for 2002 and 2003. Fees incurred to GP Strategies under this agreement totaled $98,000, $72,000, and $85,000 for each of the years ended December 31, 2002, 2001 and 2000. At December 31, 2002, the amount receivable from GP Strategies, which is included in prepaid expenses and other current assets, was $33,000. At December 31, 2001, the amount due to GP Strategies for expenses and interest, which is included in accounts payable and accrued expenses, was $354,000.
(b) Other related party transactions
On February 8, 2002, the Company entered into a Consulting and Severance Agreement (the "Agreement") with Richard Grad, the former President and Chief Executive Officer of the Company. Pursuant to the Agreement, Mr. Grad will receive $145,000 per year for consulting services to be rendered to the Company and a severance fee at the rate of $5,000 per year, for a five-year period ending December 31, 2006. In addition, in August, 2002, Mr. Grad was granted options to purchase 150,000 shares of the Company's Common Stock at the quoted market price on the date of grant, which options will vest annually over the term of the Agreement in equal installments. Such options were valued at an aggregate amount of $13,000. The Agreement also provided for the repurchase by the Company of 192,308 shares of the Company's Common
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued
7. Related party transactions (Continued)
Stock held by Mr. Grad for an aggregate purchase price of $25,000. During this five-year period, Mr. Grad is also receiving certain benefits, including medical benefits, life insurance and use of an automobile.
On February 8, 2002, the Company entered into a Consulting and Severance Agreement (the "Agreement") with Cynthia Krugman, the former Controller of the Company. Pursuant to the Agreement, Ms. Krugman will receive $105,000 per year for consulting services to be rendered to the Company and a severance fee of $5,000 per year, for an eighteen-month period ending June 30, 2003. The Agreement also provided for the repurchase by the Company of 76,923 shares of the Company's Common Stock held by Ms. Krugman for an aggregate purchase price of $10,000. During this period, Ms. Krugman is receiving certain benefits, including medical benefits. Ms. Krugman is the daughter of Richard Grad.
Severance fees payable to Mr. Grad and Ms. Krugman under the aforementioned agreements are included in accrued expenses at December 31, 2002.
8. Income taxes
The components of income tax expense (benefit) are as follows (in thousands):
Years ended December 31, 2002 2001 2000 ----------------------------------------------------------------- Current Federal $ 286 $ 251 $ 305 State and local 93 76 130 ------ -------- ------ Total current expense 379 327 435 ------ ------- --- Deferred Federal (38) (23) (124) State and local (13) (7) (39) ------- ---------- ------- Total deferred (benefit) (51) (30) (163) ------- --------- ----- Total income tax expense $ 328 $ 297 $ 272 ------- ------- -------
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Income taxes (Continued)
As of December 31, 2002 and 2001, the Company had approximately $244,000 and $193,000, respectively, of deferred tax assets net of valuation allowances. The tax effects that gave rise to these deferred tax assets and the valuation allowance consist of the following (in thousands):
December 31, 2002 2001 ------ -------- Deferred tax assets
Allowance for doubtful accounts $ 35 $ 31 Machinery and equipment 158 115 Deferred compensation 39 38 Accrued compensation 10 - Inventory 41 47 ------- ------- Deferred tax assets 283 231 ------ ------
Valuation allowance (39) (38) -------- ------ Net deferred tax assets after valuation allowance $ 244 $ 193 ======= =======
A reconciliation between the Company's tax provision and the U.S. statutory rate follows:
Under SFAS No. 109, a valuation allowance is provided when it is more likely than not that some portion of deferred tax assets will not be realized. The Company has provided a full valuation allowance at December 31, 2002 and December 31, 2001 for the deferred tax asset relating to the deferred compensation as the realization of such asset is uncertain.
The valuation allowance increased $1,000 for the year ended December 31, 2002. The valuation allowance for the year ended December 31, 2001 decreased by $122,000 as a result of the expiration during 2001 of the underlying warrants which gave rise to the deferred tax asset relating to certain deferred compensation. The valuation allowance decreased by $185,000 for the year ended December 31, 2000.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. Major customers
For the years ended December 31, 2002, 2001 and 2000 no customer accounted for more than 10% of the Company's revenue.
10. Stock options and warrants
(a) Stock option plan
On January 1, 1994, the Company's Board of Directors adopted the Five Star Products, Inc. 1994 Stock Option Plan (the "Stock Option Plan"), which became effective August 5, 1994. On January 1, 2002, the Board of Directors amended the Stock Option Plan increasing the total number of shares of Common Stock to 4,000,000 shares reserved for issuance, subject to adjustment in the event of stock splits, stock dividends, recapitalizations, reclassifications or other capital
(a) Stock option plan (Continued)
adjustments. Unless designated as "incentive stock options" intended to qualify under Section 422 of the Internal Revenue Code, options granted under the Stock Option Plan are intended to be nonqualified options. Options may be granted to any director, officer or other key employee of the Company and its subsidiaries, and to consultants and other individuals providing services to the Company.
The term of any option granted under the Stock Option Plan will not exceed ten years from the date of the grant of the option and, in the case of incentive stock options granted to a 10% or greater holder in the total voting stock of the Company, three years from the date of grant. The exercise price of any option will not be less than the fair market value of the Common Stock on the date of grant or, in the case of incentive stock options granted to a 10% or greater holder in the total voting stock, 110% of such fair market value.
Options granted during 2002, 2001 and 1999 vest 20% on date of grant with the balance vesting in equal annual installments over four years. There were no options granted in 2000, and all options granted prior to 1999 were fully vested as of December 31, 2002.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
10. Stock options and warrants (Continued)
Activity relating to stock options granted by the Company:
The following table summarizes information about the Plan's options at December 31, 2002:
(b) Warrants to purchase common stock
Warrants to purchase a total of 6,017,775 shares of the Company's common stock, which the Company had issued during 1994 in connection with its acquisition of NPD Trading from GP Strategies, were extended in 1996 at an exercise price of $.50 per share and in 1998 at an exercise price of $.75 per share. These warrants expired in August, 2000.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. Earnings per share
Earnings per share (EPS) for the years ended December 31, 2002, 2001 and 2000 are as follows (in thousands, except per share amounts):
(a) Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period, assuming the issuance of common shares for all dilutive potential common shares outstanding.
12. Commitments and contingencies
The Company has several noncancellable leases which cover real property, machinery and equipment. Such leases expire at various dates and some of them have options to extend their terms.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
12. Commitments and contingencies (Continued)
Minimum rental obligations under long-term operating leases are indicated in the table below (in thousands). Figures for real property include estimated amounts of supplemental lease obligations, such as pro-rated assessments for property taxes or common-area expenses.
Real Machinery and property equipment Total 2003 $ 1,616 $1,098 $ 2,714 2004 1,589 796 2,385 2005 1,589 376 1,965 2006 1,589 29 1,618 2007 314 7 321 --------------------------------------------------------------------- Total $ 6,697 $ 2,306 $ 9,003 ---------------------------------------------------------------------
During 2002, 2001, and 2000, the Company incurred $2,882,000, $2,721,000, and $3,412,000, respectively, of rental expenses. GP Strategies has guaranteed the leases for the Company's New Jersey and Connecticut warehouses, totaling approximately $1,589,000 per year through the first quarter of 2007.
13. Valuation and Qualifying Accounts
The following is a summary of the allowance for doubtful accounts related to accounts receivable for the years ended December 31 (in thousands):
2002 2001 2000 ---- ---- ---- Balance at beginning of year $ 631 $ 681 $ 616 Charged (credited) to expense 438 (47) 80 Uncollectable accounts written off, net of recoveries (429) (3) (15) ----- ------- --------- Balance at end of year $ 640 $ 631 $ 681 ====== ======= =======
14. Subsequent events
The Company's Board of Directors has authorized the repurchase of up to 1,000,000 shares of the Company's common stock. In January, 2003, the Company purchased 76,000 shares of its common stock on the open market at prices per share ranging from $0.08 to $0.10. In February, 2003, the Company purchased 10,000 shares of its common stock on the open market at a price per share of $0.10.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning the directors and officers of the Company:
Name Age Position - ------------------------------------------------------ Jerome I. Feldman 74 Chairman of the Board Charles Dawson 46 President and Director Bruce Sherman 50 Executive Vice President, Sales and Director Steven Schilit 56 Executive Vice President, and Chief Operating Officer and Director Joseph Leven 50 Vice President John Moran 52 Director Carll Tucker 50 Director
Jerome I. Feldman has been Chairman of the Board of the Company since 1994. In 1959 he founded GP Strategies Corporation ("GPS"), which today is a workforce development company, and is Chief Executive Officer and a Director of GPS. He also has been Chairman of the Board of GPS since 1999 and was President of GPS until June 2001. He has been a director of GSE Systems, Inc., ("GSE"), a software design and development company since 1994 and Chairman of the Board of GSE since 1997. Mr. Feldman is also Chairman of the New England Colleges Fund and a Trustee of Northern Westchester Hospital Center.
Charles Dawson has been President of the Company and of Five Star Group, Inc. ("Five Star") since January 2002 and Vice President and a director of the Company since 1999. Since 1993 Mr. Dawson has held several managerial positions with Five Star.
Bruce Sherman has been Executive Vice President, Sales of the Company and of Five Star since January 2002, Vice President and a director of the Company since 1999 and Vice President of Sales of Five Star since 1993. He is a member of the New York and New Jersey Paint and Decorating Association.
Steven Schilit has been Executive Vice President, Chief Operating Officer of the Company and of Five Star since January 2002, Vice President and a director of the Company since 1999 and since 1981 has held several executive positions with Five Star.
Joseph Leven has been Vice President of the Company since 1999, Vice President of Operations of Five Star since 1995 and since 1976 has held various managerial positions with Five Star.
John Moran has been a director of the Company since January 2002. He has been Vice President of GPS since August 2001, President and Chief Executive Officer of GP e-Learning Technologies, Inc. from 2000 to August 2001 and from 1994 to 2000 he was Group President, Training and Technologies Group of General Physics Corporation.
Carll Tucker has been a director of the Company since January 2002. In 1986 he founded Trader Publications and was its President until 1999, which published The Patent Trader newspaper and various local magazines, newsletters and programs for cultural institutions in Westchester, Putnam and Fairfield counties. Trader Publications was sold to Gannett Corporation in 1999. Mr. Tucker is the author of a weekly newspaper column in the Westchester Patent Trader, "Looseleaves", since 1983. Mr. Tucker is also a Trustee of Northern Westchester Hospital Center and was its Chairman of the Board from 1999-2001.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's securities, to file reports of ownership and changes in ownership with the SEC and NASDAQ. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of copies of such forms received by it and written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that during the period January 1, 2002 to March 18, 2003, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with, except that Carll Tucker and GP Strategies filed one late report.
Item 11.
Item 11. Executive Compensation
Executive Compensation
The following table and notes present the aggregate compensation paid by the Company's subsidiary, Five Star, to its President and to its most highly compensated executive officers for services rendered to Five Star in 2002.
(1) Consists of options to purchase shares of Common Stock granted pursuant to the Company's 1994 Non-Qualified Stock Option Plan.
(2) Consists of $602 for executive life insurance premiums and a $20,000 bonus.
(3) Consists of premiums for executive life insurance.
(4) Consists of $4,400, $4,080 and $4,196 as matching contributions made by the Company to the 401(k) Savings Plan for 2002, 2001 and 2000, respectively, and $991, $596 and $469 for executive life insurance premiums for 2002, 2001 and 2000, respectively.
(5) Consists of $4,400 as matching contributions made by the Company to the 401(k) Savings Plan, $718 for executive life insurance premiums and a $20,000 bonus.
(6) Consists of $4,080 and $3,953 as matching contributions made by the Company to the 401(k) Savings Plan for 2001 and 2000, respectively, and $762 and $748 for executive life insurance premiums for 2001 and 2000, respectively.
(7) Consists of $2,833, $2,449 and $1,768 as matching contributions made by the Company to the 401(k) Savings Plan for 2002, 2001 and 2000, respectively, and $353, $315 and $282 for executive life insurance premiums for 2002, 2001 and 2000, respectively.
Option Grants in 2002
No options were granted to the named executive officers in 2002.
Aggregate Option Exercises in 2002 And Fiscal Year-End Option Values
The following table and notes contain information concerning the exercise of stock options under the Plan during 2002 and unexercised options under the Plan held at the end of 2002 by the named executive officers. Unless otherwise indicated, options are to purchase shares of Common Stock.
(1) Calculated based on $0.08, which was the closing price of the Common Stock as quoted on the OTC Bulletin Board, which is operated by the NASDAQ Stock Market, on December 31, 2002, (which was below the exercise price of the stock options.)
Board Report on Executive Compensation
During the year ended December 31, 2002, the Company did not have a Compensation Committee. Accordingly, the full Board of Directors is responsible for determining and implementing the compensation policies of the Company.
The Board's executive compensation policies are designed to offer competitive compensation opportunities for all executives which are based on personal performance, individual initiative and achievement, as well as assisting the Company in attracting and retaining qualified executives. The Board also endorses the position that stock ownership by management and stock-based compensation arrangements are beneficial in aligning management's and shareholders' interests in the enhancement of shareholder value.
Compensation paid to the Company's executive officers generally consists of the following elements: base salary, annual bonus and long-term compensation in the form of stock options and the 401(k) Savings Plan. The compensation for the other executive officers of the Company is determined by a
consideration of each officer's initiative and contribution to overall corporate performance and the officer's managerial abilities and performance in any special projects that the officer may have undertaken. Competitive base salaries that reflect the individual's level of responsibility are important elements of the Company's executive compensation philosophy. Subjective considerations of individual performance are considered in establishing annual bonuses and other incentive compensation.
The Company has certain broad-based employee benefit plans in which all employees, including the named executives, are permitted to participate on the same terms and conditions relating to eligibility and subject to the same limitations on amounts that may be contributed. In 2002, the Company also made matching contributions to the 401(k) Savings Plan for those participants.
Mr. Dawson's Compensation
Mr. Dawson's compensation in 2002 was determined principally by the terms of his employment agreement with Five Star. Effective November 28, 2001, Five Star and Mr. Dawson entered into an employment agreement which is described below. In considering the terms of Mr. Dawson's employment agreement the Board of Directors considered Mr. Dawson's significant contribution to the improved financial performance of the Company.
Mr. Dawson, has decades of experience in the industry and has strong relationships with manufacturing companies that are the Company's suppliers. In addition, Mr. Dawson helped lead management's efforts in expanding the Company's sales territory to encompass the Mid-Atlantic states.
Employment Agreements
Charles Dawson. As of November 28, 2001, Charles Dawson and Five Star Group, Inc. entered into an employment agreement pursuant to which Mr. Dawson is employed as President of the Company for a period commencing January 1, 2002 until December 31, 2005, (the "Employment Term"), unless sooner terminated.
Commencing January 1, 2002, Mr. Dawson's base salary is $225,000, with annual increases of at least 3% effective on the second year of the Employment Term. Mr. Dawson will receive a target bonus of $100,000, calculated based upon the following two components: (1) earnings growth of the Company, and (2) an achievement of certain Company goals, weighted 75% and 25% respectively. The goals component of the bonus for 2002 will be determined by the Steering Team at the conclusion of the year. The Steering Team consists of Jerome I. Feldman, John Moran, Steve Schilit, Bruce Sherman and Charles Dawson. The Board of Directors shall determine whether earnings growth resulting from acquisitions will be included in Mr. Dawson's bonus determination. In any determination by the Steering Team of Mr. Dawson's bonus, Mr. Dawson shall recuse himself from any such proceedings. Mr. Dawson's target bonus for the years 2003, 2004 and 2005, will be $110,000, $120,000, and $130,000, respectively, which will be determined by components and weighting factors based upon the goals and objectives of the Company, mutually agreed upon. Pursuant to the employment agreement, the Company granted Mr. Dawson under the Company's option plan, options to purchase 150,000 shares of the Company's Common Stock at an exercise price of $0.14 per share. Such options vest 20% immediately and 20% on each November 28, commencing November 28, 2001 and terminating on November 28, 2005. The Company is also required to provide Mr. Dawson with an automobile.
The Company may terminate the employment agreement for cause which is defined as (i) breach by Mr. Dawson of any of the terms of the employment agreement, provided that the Company has given fifteen days notice prior to termination for any breach of any of the terms of the employment agreement which are capable of cure, (ii) gross neglect by Mr. Dawson of his duties continuing for 30 days after written warning issued to Mr. Dawson setting forth the conduct constituting such gross neglect, (iii) conviction of Mr. Dawson for any felony or any crime involving moral turpitude; (iv) the conviction of Mr. Dawson of any offense involving the property of the Company or any of its affiliates; (v) the commission by Mr. Dawson of any act of fraud or dishonesty; (vi) the engagement by Mr. Dawson in misconduct resulting in serious injury to the Company, or (vii) the physical or mental disability of Mr. Dawson, whether totally or partially, if he is unable to perform substantially his duties for a period of (i) two consecutive months or (ii) shorter periods aggregating three months during any twelve month period, such termination to be effective thirty days after written notice of such decision delivered to Mr. Dawson. If Mr. Dawson is terminated for cause, he shall not be entitled to any compensation, including without limitation, the bonus, if any, after the date of termination for the year in which the termination takes place. If Mr. Dawson's employment is terminated by his death or disability, the Company is required to pay Mr. Dawson his base salary then in effect for the month during which termination occurred, and four months thereafter. In the event that termination occurs more than six months after the start of the then-current contract year, Mr. Dawson shall receive a bonus for that year prorated through the date of termination.
If the Company terminates the employment agreement for any reason, other than those set forth in the employment agreement, the Company is obligated to continue to pay Mr. Dawson's base salary as then in effect for the period commencing from the date of termination and ending on the termination date of the employment agreement and shall only be obligated to pay the Bonus, if any, through the date of termination on a pro rata basis.
Bruce Sherman As of November 28, 2001, Bruce Sherman and Five Star Group, Inc. entered into an employment agreement pursuant to which Mr. Sherman is employed as Executive Vice President, Sales of the Company for a period commencing January 1, 2002 until December 31, 2005, (the "Employment Term"), unless sooner terminated.
Commencing January 1, 2002, Mr. Sherman's base salary is $220,000, with annual increases of at least 3% effective on the second year of the Employment Term. Mr. Sherman will receive a target bonus of $100,000, calculated based upon the following two components: (1) earnings growth of the Company, and (2) an achievement of certain Company goals, weighted 75% and 25% respectively. The goals component of the bonus for 2002 will be determined by the Steering Team at the conclusion of the year. The Steering Team consists of Jerome I. Feldman, John Moran, Steve Schilit, Charles Dawson and Bruce Sherman. The Board of Directors shall determine whether earnings growth resulting from acquisitions will be included in Mr. Sherman's bonus determination. In any determination by the Steering Team of Mr. Sherman's bonus, Mr. Sherman shall recuse himself from any such proceedings. Mr. Sherman's target bonus for the years 2003, 2004 and 2005, will be $110,000, $120,000, and $130,000, respectively, which will be determined by components and weighting factors based upon the goals and objectives of the Company, mutually agreed upon. Pursuant to the employment
agreement, the Company granted Mr. Sherman under the Company's option plan, options to purchase 150,000 shares of the Company's Common Stock at an exercise price of $0.14 per share. Such options vest 20% immediately and 20% on each November 28, commencing November 28, 2001 and terminating on November 28, 2005. The Company is also required to provide Mr. Sherman with an automobile.
The Company may terminate the employment agreement for cause which is defined as (i) breach by Mr. Sherman of any of the terms of the employment agreement, provided that the Company has given fifteen days notice prior to termination for any breach of any of the terms of the employment agreement which are capable of cure, (ii) gross neglect by Mr. Sherman of his duties continuing for 30 days after written warning issued to Mr. Sherman setting forth the conduct constituting such gross neglect, (iii) conviction of Mr. Sherman for any felony or any crime involving moral turpitude; (iv) the conviction of Mr. Sherman of any offense involving the property of the Company or any of its affiliates; (v) the commission by Mr. Sherman of any act of fraud or dishonesty; (vi) the engagement by Mr. Sherman in misconduct resulting in serious injury to the Company, or (vii) the physical or mental disability of Mr. Sherman, whether totally or partially, if he is unable to perform substantially his duties for a period of (i) two consecutive months or (ii) shorter periods aggregating three months during any twelve month period, such termination to be effective thirty days after written notice of such decision delivered to Mr. Sherman. If Mr. Sherman is terminated for cause, he shall not be entitled to any compensation, including without limitation, the bonus, if any, after the date of termination for the year in which the termination takes place. If Mr. Sherman's employment is terminated by his death or disability, the Company is required to pay Mr. Sherman his base salary then in effect for the month during which termination occurred, and four months thereafter. In the event that termination occurs more than six months after the start of the then-current contract year, Mr. Sherman shall receive a bonus for that year prorated through the date of termination.
If the Company terminates the employment agreement for any reason, other than those set forth in the employment agreement, the Company is obligated to continue to pay Mr. Sherman's base salary as then in effect for the period commencing from the date of termination and ending on the termination date of the employment agreement and shall only be obligated to pay the Bonus, if any, through the date of termination on a pro rata basis.
Steven Schilit As of November 28, 2001, Steven Schilit and Five Star Group, Inc. entered into an employment agreement pursuant to which Mr. Schilit is employed as Executive Vice President and Chief Operating Officer of the Company for a period commencing January 1, 2002 until December 31, 2005, (the "Employment Term"), unless sooner terminated.
Commencing January 1, 2002, Mr. Schilit's base salary is $200,000, with annual increases of at least 3% effective on the second year of the Employment Term. Mr. Schilit will receive a target bonus of $100,000, calculated based upon the following two components: (1) earnings growth of the Company, and (2) an achievement of certain Company goals, weighted 75% and 25% respectively. The goals component of the bonus for 2002 will be determined by the Steering Team at the conclusion of the year. The Steering Team consists of Jerome I. Feldman, John Moran, Charles Dawson, Bruce Sherman and Steven Schilit. The Board of Directors shall determine whether earnings growth resulting from acquisitions will be included in Mr. Schilit's bonus determination. In any determination by the Steering Team of Mr. Schilit's bonus, Mr. Schilit shall recuse himself from any such proceedings. Mr. Schilit's target bonus for the years 2003, 2004 and 2005, will be $110,000, $120,000, and $130,000, respectively, which will be
determined by components and weighting factors based upon the goals and objectives of the Company, mutually agreed upon. Pursuant to the employment agreement, the Company granted Mr. Schilit under the Company's option plan, options to purchase 150,000 shares of the Company's Common Stock at an exercise price of $0.14 per share. Such options vest 20% immediately and 20% on each November 28, commencing November 28, 2001 and terminating on November 28, 2005. The Company is required also to provide Mr. Schilit with an automobile.
The Company may terminate the employment agreement for cause which is defined as (i) breach by Mr. Schilit of any of the terms of the employment agreement, provided that the Company has given fifteen days notice prior to termination for any breach of any of the terms of the employment agreement which are capable of cure, (ii) gross neglect by Mr. Schilit of his duties continuing for 30 days after written warning issued to Mr. Schilit setting forth the conduct constituting such gross neglect, (iii) conviction of Mr. Schilit for any felony or any crime involving moral turpitude; (iv) the conviction of Mr. Schilit of any offense involving the property of the Company or any of its affiliates; (v) the commission by Mr. Schilit of any act of fraud or dishonesty; (vi) the engagement by Mr. Schilit in misconduct resulting in serious injury to the Company, or (vii) the physical or mental disability of Mr. Schilit, whether totally or partially, if he is unable to perform substantially his duties for a period of (i) two consecutive months or (ii) shorter periods aggregating three months during any twelve month period, such termination to be effective thirty days after written notice of such decision delivered to Mr. Schilit. If Mr. Schilit is terminated for cause, he shall not be entitled to any compensation, including without limitation, the bonus, if any, after the date of termination for the year in which the termination takes place. If Mr. Schilit's employment is terminated by his death or disability, the Company is required to pay Mr. Schilit his base salary then in effect for the month during which termination occurred, and four months thereafter. In the event that termination occurs more than six months after the start of the then-current contract year, Mr. Schilit shall receive a bonus for that year prorated through the date of termination.
If the Company terminates the employment agreement for any reason, other than those set forth in the employment agreement, the Company is obligated to continue to pay Mr. Schilit's base salary as then in effect for the period commencing from the date of termination and ending on the termination date of the employment agreement and shall only be obligated to pay the Bonus, if any, through the date of termination on a pro rata basis.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 14, 2003, with respect to shares of Common Stock which are beneficially owned by (a) each person who owns more than 5% of the Company's Common Stock, (b) each director of the Company, (c) each of the persons named in the Summary Compensation Table and (d) all officers and directors of the Company as a group.
Beneficial Ownership
Number of Percentage Name and Address Common Shares of Class
GP Strategies Corporation 7,102,831(1) 47.5% 777 Westchester Avenue White Plains, NY 10604
Jerome I. Feldman 7,757,467(2) 51
Charles Dawson 312,308(3) 2.1
Bruce Sherman 312,308(3) 2.1
Steven Schilit 312,308(3) 2.1
Joseph Leven 267,308(3) 1.8
John Moran 85,000(3) *
Carll Tucker 50,000(3) *
All directors and officers as a group (8 persons) 2,074,493(3) 13.0 - -------------- * The number of shares owned is less than one percent of the outstanding shares of Common Stock.
(1) GP Strategies has entered into a Voting Agreement which limits its ability, to a certain degree, to control the affairs of the Company. See "Certain Relationships and Related Transactions."
(2) Includes (i) 7,102,831 shares of Common Stock beneficially owned by GP Strategies, (ii) 93,463 shares of Common Stock held by Mr. Feldman (iii) 1,173 shares of Common Stock which are held by certain members of Mr. Feldman's family and (iv) 560,000 shares of Common Stock issuable upon exercise of currently exercisable stock options (of which 250,000 options were granted pursuant to GP Strategies Five Star Stock Option Plan) held by Mr. Feldman. Mr. Feldman disclaims beneficial ownership of the shares owned by GP Strategies and his family.
(3) Includes (i) 192,308 shares of Common Stock held by each of Messrs. Dawson, Sherman, Schilit and Leven, and 863,320 shares for all executives and officers as a group, and (ii) 120,000 shares of Common Stock issuable upon exercise of currently exercisable stock options held by each of Messrs. Dawson, Sherman, Schilit, 235,000, 75,000, 85,000 and 50,000 shares of Common Stock issuable upon exercise of currently exercisable stock options held by Messrs. Leven, Moran and Tucker, respectively and 1,210,000 shares for all executives and officers as a group.
Item 13.
Item 13. Certain Relationships and Related Transactions
On September 30, 1998, a newly formed wholly owned subsidiary of the Company, Five Star, purchased from JL Distributors, Inc. ("JL"), a wholly owned subsidiary of GP Strategies, substantially all of the operating assets of JL. The assets were purchased for approximately $16,476,000 in cash and a $5,000,000 unsecured promissory note (the "Note"). The Note, which bears interest at the rate of 8% payable quarterly to GP Strategies, was amended in November, 2001, to provide for the extension of the due date of the Note until September 30, 2004. Under a separate Subordination Agreement between GP Strategies and the banks providing the Company's $25,000,000 revolving loan, Five Star may make annual payments of principal to GP Strategies, if the Company achieves certain financial performance benchmarks.
On August 2, 2002, the Company entered into a transaction to reduce its long-term debt to GP Strategies. The principal amount of said debt was reduced by $500,000 to a new principal amount of $4,500,000. The Company executed a new promissory note to GP Strategies but under the same terms and conditions as the original note. In connection with this debt reduction, GP Strategies received 2,272,727 shares of the Company's common stock. The transaction valued the Company's stock at $0.22 a share, which was at a premium to the open market value at that time. As a result of this transaction, GP Strategies' ownership of the Company has increased to approximately 47% from approximately 37% of the Company's outstanding shares of common stock.
As of January 1, 1994, the Company and GP Strategies entered into a three-year Management Services Agreement pursuant to which certain direct and indirect services will be provided to the Company by GP Strategies. The services to be provided by GP Strategies include legal, tax, business development, accounting, insurance and employee benefit administration services. The Company pays GP Strategies a fee of up to $10,000 per month during the term of the agreement. The Agreement is automatically renewable for successive one-year terms. The Agreement was renewed for 2002 and 2003.
Five Star leases 236,000 square feet in New Jersey and 111,000 square feet in Connecticut. Five Star's operating lease for the New Jersey facility expires in March, 2007 and the annual rent is $1,187,000. Five Star's lease for the Connecticut facility expires in February, 2007 and its annual rent is $402,000. The Company's White Plains, New York office space is provided by GP Strategies pursuant to the Management Services Agreement. GP Strategies has guaranteed the leases for Five Star's New Jersey and Connecticut warehouses totaling approximately $1,589,000 per year through the first quarter of 2007.
GP Strategies holds 7,102,831 shares of Common Stock, representing approximately 48% of the Common Stock issued and outstanding on March 14, 2003 (without taking into account outstanding options and warrants). The Company's by-laws do not provide for cumulative voting. GP Strategies had entered into a Voting Agreement pursuant to which it had agreed that, for a period of three years from August 31, 1998 it would vote its shares of Common Stock (i) such that not more than 50% of the Company's directors will be officers or directors of GP Strategies; and (ii) on all matters presented to a vote of stockholders, other than the election of directors, in the same manner and in the same proportion as the remaining stockholders of the Company vote. See "Principal Stockholders." GP Strategies and the Company renewed the Voting Agreement until June 30, 2004.
On February 8, 2002, the Company entered into a Consulting and Severance Agreement (the "Agreement") with Richard Grad, the former President and Chief Executive Officer of the Company. Pursuant to the Agreement, Mr. Grad will receive $145,000 per year for consulting services rendered to the Company and a severance fee at the rate of $5,000 per year, for a five-year period ending December 31, 2006. In addition, in August, 2002, Mr. Grad was granted options to purchase 150,000 shares of the Company's Common Stock at the quoted market price on the date of grant, which options will vest annually over the term of the Agreement in equal installments. The Agreement also provided for the repurchase by the Company of 192,308 shares of the Company's Common Stock held by Mr. Grad for an aggregate purchase price of $25,000. During this five-year period, Mr. Grad is also receiving certain benefits, including medical benefits, life insurance and use of an automobile.
On February 8, 2002, the Company entered into a Consulting and Severance Agreement (the "Agreement") with Cynthia Krugman, the former Controller of the Company. Pursuant to the Agreement, Ms. Krugman will receive $105,000 per year for consulting services to be rendered to the Company and a severance fee of $5,000 per year, for an eighteen-month period ending June 30, 2003. The Agreement also provided for the repurchase by the Company of 76,923 shares of the Company's Common Stock held by Ms. Krugman for an aggregate purchase price of $10,000. During this period, Ms. Krugman is receiving certain benefits, including medical benefits. Ms. Krugman is the daughter of Richard Grad.
Item 14.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, the Company's management, including the President and the Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-14(c). Based on that evaluation, the President and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the date of that evaluation. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
Page
Independent Auditors' Report........................................13
Financial Statements:
Consolidated Balance Sheets - December 31, 2002 and 2001..........................................14
Consolidated Statements of Operations - Years ended December 31, 2002, 2001 and 2000....................................16
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2002, 2001 and 2000..............................17
Consolidated Statements of Cash Flows Years ended December 31, 2002, 2001 and 2000........................18
Notes to Consolidated Financial Statements..........................19
(a)(2) Schedules have been omitted because they are not required or are not applicable, or the required information has been included in the financial statements or the notes thereto.
(a)(3) See accompanying Index to Exhibits
There were no reports filed by the Registrant on Form 8-K for the period ended December 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIVE STAR PRODUCTS, INC.
Charles Dawson, President
Dated: April 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title
Charles Dawson President, and Director (Principal Executive and Operating Officer)
Jerome I. Feldman Chairman of the Board
Bruce Sherman Executive Vice President, Sale and Director
Steven Schilit Executive Vice President, Chief Operating Officer and Director
Roger Antaki Chief Financial Office (Principal Financial and Accounting Officer)
John Moran Director
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
I, Charles Dawson, President of Five Star Products, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Five Star Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003 Charles Dawson
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
I, Roger P. Antaki, Chief Financial Officer of Five Star Products, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Five Star Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003 Roger P. Antaki
INDEX TO EXHIBITS
Exhibit No. Document Page
3. Amended Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
3.1 By-laws of the Registrant. Incorporated herein by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 filed on July 22, 1994, Registration Statement No. 33-78252.
10. 1994 Stock Option Plan of the Registrant as amended on January 1, 2002. Incorporated herein by reference to Exhibit 10 of the Registrant's Form 10-K for the year ended December 31, 2001.
10.1 Management Services Agreement, dated as of August 5, 1994, between GP Strategies Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-1 filed on July 22,1994, Registration Statement No. 33-78252.
10.2 Consulting Agreement, dated as of January 1, 1994, between Jerome I. Feldman and the Registrant. Incorporated herein by reference to Exhibit 10.5 of the Registrant's Registration Statement on Form S-1 filed on July 22, 1994, Registration Statement No. 33-78252.
10.3 Amended Voting Agreement, dated as of June 30, 2002 between Registrant and GP Strategies Corporation.*
10.4 Lease dated as of February 1, 1986 between Vernel Company and Five Star Group, Inc., as amended on July 25, 1994. Incorporated herein by reference to Exhibit 10.6 of the Registrant's Form 10-K for the year ended December 31, 1998.
10.5 Lease dated as of May 4, 1983 between Vornado, Inc., and Five Star Group, Inc. Incorporated herein by reference to Exhibit 10.7 of the Registrant's Form 10-K for the year ended December 31, 1998.
10.6 Lease Modification and Extension Agreement dated July 6, 1996 between Hanover Public Warehousing, Inc. and Five Star Group, Inc. Incorporated herein by reference to Exhibit 10.8 of the Registrant's Form 10-K for the year ended December 31, 1998.
10.7 Agreement between Five Star Group and Local No. 11 affiliated with International Brotherhood of Teamsters dated December 12, 2000. Incorporated herein by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.
10.8 Asset Purchase Agreement dated as of August 31, 1998 between Five Star Products, Inc. and Five Star Group, Inc. Incorporated herein by Reference to Exhibit 10 of the Registrant's Form 8-K dated September 15, 1998.
10.9 Loan and Security Agreement by and between the Registrant, as Borrower and Summit Business Capital Corp. doing business as Fleet Capital-Business Finance Division as Agent. Incorporated herein by reference to Exhibit 10 of the Registrant's Form 10-Q for the quarter ended September30, 2001.
10.10 Amended Note in the amount of $4,500,000 dated August 2, 2002, between the Registrant and GP Strategies Corporation.*
10.11 Consulting and Severance Agreement dated as of February 8, 2002 between the Registrant and Richard Grad. Incorporated herein by reference to Exhibit 10.11 of the Registrant's Form 10-K for the year ended December 31, 2001.
10.12 Employment Agreement dated as of November 28, 2001 between the Registrant and Charles Dawson. Incorporated herein by reference to Exhibit 10.12 of the Registrant's Form 10-K for the year ended December 31, 2001.
10.13 Employment Agreement dated as of November 28, 2001 between the Registrant and Bruce Sherman. Incorporated herein by reference to Exhibit 10.13 of the Registrant's Form 10-K for the year ended December 31, 2001.
10.14 Employment Agreement dated as of November 28, 2001 between the Registrant and Steven Schilit. Incorporated herein by reference to Exhibit 10.14 of the Registrant's Form 10-K for the year ended December 31, 2001.
10.15 Consulting and Severance Agreement dated as of February 8, 2002 between the Registrant and Cynthia Krugman.*
21. Subsidiaries*
22. N/A
23. Consent of Eisner LLP, (formerly,Richard A. Eisner & Company, LLP) Independent Auditors*
99.1 Certification Pursuant to 18 U.S.C. Section 1350 of President*
99.2 Certification Pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer*
*Filed herewith