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, 2003. Five Star is a leading distributor of home decorating, hardware and finishing products in the northeast. For the year ended December 31, 2000 Five Star had sales of approximately $94,000,000.
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. This new sales force is currently generating revenues in excess of $7,000,000 on an annual basis. Five Star intends to service 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 9.0% of its sales in 2000 and its 10 largest customers accounted for approximately 12.5% 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. The Computer Associates Warehouse Boss System installed in 1994 located at the New Jersey and the Connecticut facilities allows Five Star to obtain maximum efficiency and cost savings by coordinating the processing of orders, the selection of optimal picking routines and the tracking of inventory levels. 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 recently implemented a new salesperson-order-entry system, which allows the salesman to scan product and then download the information to a laptop. The laptop will contain all product and customer information and will interact with the AS400.
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.
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.
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. In 2000, Americans purchased more than $180 billion on home improvement products. These purchases are expected to grow at a compounded rate of 4.2% till 2003.
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 2000. 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. No such additional payments have been received from ICF.
Employees
The Company employs 200 people. Management-employee relations are considered excellent at both of Five Star's warehouse facilities. Unions represent approximately 90 of Five Star's employees, warehouse personnel and drivers. The Teamsters union represent the 90 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.
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 $1,114,959. Five Star's lease for the Connecticut facility expires in February 2007 and its annual rent is $398,397. The New York sales office pays $16,740 per year in rent and the Maryland office pays $10,080. The Company's New York office space is provided by GP Strategies pursuant to the Management Services Agreement. As part of the Management Services Agreement, GP Strategies can receive 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.
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.
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 2000 and 1999. 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
2000 First $0.53 $0.18
Second $0.36 $0.25
Third $0.30 $0.20
Fourth $0.24 $0.10
1999 First $0.42 $0.32
Second $0.39 $0.30
Third $0.38 $0.30
Fourth $0.32 $0.19
- ----------
The number of shareholders of record of the Common Stock as of March 12, 2001 was 3,816. On March 12, 2001, the average of the closing bid and asked prices on the OTC Bulletin Board was $0.10. 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.
Item 6. Selected Financial Data
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, 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, 2000, the Company had cash of $51,000 and working capital of $5,800,000. On September 30, 1998, Five Star entered into 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. The Company borrowed $16,476,000 on September 30, 1998 to fund the cash portion of the purchase price in connection with the purchase of JL. At December 31, 2000, the Company had borrowed $16,303,000 and had $1,229,000 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
Because of the September 30, 1998 purchase of the assets of Five Star and the change in focus of the Company, results of operations for the years ended December 31, 1999 and December 31, 2000 are not comparable to results for the prior years.
The Company had income before income taxes of $1,047,000 for the year ended December 31, 2000 compared to $1,147,000 for the year ended December 31, 1999. The slight decrease in income before income taxes is the result of increased sales and gross margin, which was more than offset by increased selling, general and administrative expenses and interest costs. In addition, there were no consulting revenues in 2000 while 1999 results included $98,000 of such income. Income tax expense in 2000 was $272,000 and in 1999 $500,000. The lower effective rate in 2000 is due to the reversal of a $185,000 valuation reserve against deferred tax assets.
Sales
The Company had sales of $93,878,000 in 2000 compared to sales of $83,134,000 in 1999 and $17,080,000 in 1998. The increased sales 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. The increased sales in 1999 over 1998 were totally attributable to the operations of Five Star, which entered into the operations of the Company only for the fourth quarter of 1998.
Consulting revenues
The Company had consulting revenues of $98,000 in 1999, $104,000 in 1998 and $924,000 in 1997. The decrease in consulting revenues from 1997 to 1998 and 1999 was primarily due to $840,000 in the form of a success fee related to a project with ICF Kaiser International in the Czech Republic during 1997. No consulting fees were earned in 2000 as NPD Trading ceased operations.
Gross margin
The Company had gross margin of $16,506,000 in 2000, $14,488,000 in 1999 and $3,394,000 in 1998. The gross margin percentage in 2000 was 17.6%, similar to that recorded in 1999. The consistent gross margin percentage was achieved with increased operating and purchasing efficiencies in 2000 being offset by rising warehouse costs. The increased gross margin in 1999 was due to the gross margin earned on the full year sales volume generated by Five Star since September 30, 1998.
Selling, general and administrative expense
The Company had Selling, general and administrative (SG&A) expense of $13,154,000 in 2000, $11,627,000 in 1999 and $3,187,000 in 1998. The increased SG&A in 2000 is attributable to increased selling and delivery expenses resulting from the increased sales volume and the increase of fuel prices, as well as initial costs incurred to integrate the new customer base and sales forces in the Mid Atlantic States. The increased SG&A in 1999 is due to the acquisition of substantially all the operating assets of Five Star on September 30, 1998, partially mitigated by reduced SG&A incurred by the rest of the Company due to reduced consulting, personnel costs and facility costs in Washington D.C., Moscow and Prague.
Interest expense
The Company had interest expense of $2,220,000 in 2000, $1,692,000 in 1999 and $611,000 in 1998. The increased interest expense in 2000 is the result of both the short -term borrowings incurred by Five Star (see Note 3 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), and increased interest rates.
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, but not limited to the risk that the acquisition of Five Star will achieve the projected levels of profitability and revenues, and those 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.
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 15
Financial Statements:
Consolidated Balance Sheets - December 31, 2000 and 1999 17
Consolidated Statements of Operations - Years ended December 31, 2000, 1999 and 1998 19
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) - Years ended December 31, 2000, 1999 and 1998 20
Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 21
Notes to Consolidated Financial Statements 22
INDEPENDENT AUDITORS' REPORT
The 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, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity (deficiency) and cash flows for each of the years in the three year period ended December 31, 2000. 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 financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Five Star Products, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
Richard A. Eisner & Company, LLP
New York, New York March 15, 2001
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31, 2000 1999 ------------ -------- ASSETS
Current assets
Cash $ 51 $ 97 Accounts receivable, trade, less allowance for doubtful accounts of $681 and $616 in 2000 and 1999 11,115 10,108 Inventory 23,610 22,554 Prepaid expenses and other current assets 207 51 --------- ---------
Total current assets 34,983 32,810
Machinery and equipment, net 998 942 Deferred tax asset 163 Other assets 44 76 ----------- ---------- $ 36,188 $ 33,828 ========= =========
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares)
December 31, December 31, 2000 1999 ---------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 16,303 $ 16,324 Accounts payable and accrued expenses (including due to affiliates of $536 and $602) 12,880 11,274 -------- ---------- Total current liabilities 29,183 27,598 -------- ----------
Long-term debt to GP Strategies 5,000 5,000 --------- --------- Commitments and contingencies (Note 14)
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 (5,714) (6,489) -------- --------
Total stockholders' equity 2,005 1,230 -------- -------- $ 36,188 $ 33,828 ======== ========
See accompanying notes to the consoliddated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
See accompanying notes to the consolidated financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) Years Ended December 31, 2000, 1999 and 1998 (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") (formerly American Drug Company) has two subsidiaries, NPD Trading (USA), Inc. (NPD Trading) and Five Star Group, Inc. (Five Star).
On August 10, 1999, the Company changed its name to Five Star Products, Inc. from American Drug Company to reflect its new industry focus.
Five Star is a wholesale distributor of home decorating hardware and finishing products in the northeastern United States. NPD Trading is an inactive subsidiary.
On September 30, 1998, a newly formed wholly owned subsidiary of the Company, Five Star, purchased from JL Distributors, Inc. (JL), (formerly the Five Star Group, Inc.) substantially all of the operating assets of JL, for approximately $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, 2003. As part of this transaction, GP Strategies Corporation (GP Strategies) sold a 16.5% interest in the Company to the employees and management of Five Star. GP Strategies currently owns approximately 37% of the Company. JL is a wholly owned subsidiary of GP Strategies. The acquisition was accounted for as a purchase. The excess of the fair value of the net assets acquired over the purchase price was applied to reduce the recorded value of fixed assets. Since the acquisition of Five Star occurred on September 30, 1998, the results of operations for Five Star prior to that date have not been included in the operations of the Company.
The following shows on a proforma basis the results of operations of the Company had the above transaction occurred on January 1, 1998 (in thousands, except per share data):
Year ended December 31, 1998 (unaudited) ------------
Sales $81,091 Income before extraordinary item 371 Net income 167 Basic income per share .01 Diluted income per share .01
Such information is not indicative of what actual results might have been.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies
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.
Principles of consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, NPD Trading and Five Star. All significant intercompany balances and transactions have been eliminated in consolidation.
Income taxes. Income taxes are provided for based on the asset and liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 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 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 generally accepted accounting principles 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.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
Stock based compensation. The Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. 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" and to disclose the pro forma effect on net income and earnings per share had the fair 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.
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. For the year ended December 31, 1998 the Company did not include any potential common stock in its calculation of diluted EPS because all options and warrants were anti-dilutive.
Advertising costs. The Company expenses advertising costs as required. Advertising expense was $56,000, $74,000 and $20,000 for the years ended December 31, 2000, 1999, and 1998, respectively.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 is applying this interpretation on the financial statements for the fiscal year ended December 31, 2000.
4. Short-term borrowings
As of September 30, 1998, the Company's wholly owned subsidiary Five Star entered into a new three year Loan and Security Agreement (the "Loan Agreement") by and among three banks. 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 the LIBOR rate for $12,500,000 of the loan and an adjusted prime rate for the balance of the loan. At December 31, 2000, $16,303,000 was outstanding under the Loan Agreement and approximately $1,229,000 was available to be borrowed. As of December 31, 2000, the LIBOR rate was 9.0% and the adjusted prime rate was 10.0%. The weighted average interest rate on the Company's short-term debt at December 31, 2000 is 9.23%. Substantially all of the Company's assets are pledged as collateral for these borrowings.
5. 401(k) plan
The Company's employees are included in the GP Strategies 401(k) pension plan. The Company pays its allocable share of costs as incurred. Such allocable costs, including administrative expenses and the employer's contributions, amounted to approximately $120,000, $132,000 and $36,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
6. Machinery and equipment
Major classes of machinery and equipment consist of the following (in thousands):
December 31, Estimated 2000 1999 useful lives ---- ---- ------------
Machinery and equipment $ 296 $ 250 3 years Furniture and fixtures 429 285 5 years Leasehold improvements 763 663 3-9 years ----- ----- 1,488 1,198
Less accumulated depreciation and amortization (490) (256) ------- ----- $ 998 $ 942 ======= =======
Depreciation and amortization expense for the years ended December 31, 2000, 1999 and 1998 was $234,000, $196,000 and $191,000, respectively.
7. Long-term debt
a. Related party
The Company has an unsecured note to GP Strategies in the amount of $5,000,000. The note bears interest at 8%, payable quarterly, with the principal due September 30, 2003. The note is subordinated to the Loan Agreement (See note 4). Interest expense for the year ended December 31, 2000, 1999 and 1998 was $400,000, $400,000 and $177, 000, respectively.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
b. Other
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 all 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.
The company recorded during 1998 the $330,000 fair value of the warrants issued by GP Strategies to the noteholders as a credit to capital in excess of par value. The unamortized balance of the related debt issuance expense at the date of conversion of the Notes in the amount of $204,000 was recorded as an extraordinary charge upon early extinguishment of debt in 1998.
On April 30, l998, the Company and GP Strategies agreed that instead of issuing additional shares of the Company's common stock, the Company would assign to GP Strategies any future payments from ICF Kaiser International as a success fee in connection with the completion of the Company's consulting project in the Czech Republic.
Since this fee is contingent upon the successful completion of the project, it has not been recorded by the Company. Only the amount of the fee, if any, collected by the Company is required to be remitted to GP Strategies. Accordingly, no liability to GP Strategies has been recorded for any amount which may ultimately be collected in connection with this project
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. Transactions with affiliates
Transactions with GP Strategies and its subsidiaries, other than loans and capital contributions received, as disclosed elsewhere in the financial statements, during the years ended December 31, 2000, 1999, and 1998 are summarized below (in thousands):
December 31, ---------------------------- 2000 1999 1998
Consulting fees earned from affiliate $ - $ 98 $ 101 ===== ==== =====
Transactions with GP Strategies
Management fees incurred $ 85 $ 120 $ 120 Interest expense incurred 400 400 177
From inception through September 30, 1998, the Company was financed by GP Strategies, by means of capital contributions, short-term non-interest bearing advances and long-term interest bearing obligations. The Company received $2,500,000 under its $2,500,000 loan agreement with GP Strategies, plus additional funding totaling $5,407,000 including accrued interest through September 30, 1998.
In 1999 and 1998, 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, $98,000 and $101,000, respectively, for the years ended December 31, 2000, 1999, and 1998.
In 1994 the Company commenced paying $150,000 annually as compensation to an officer of GP Strategies, in view of the additional time allocated by this officer to the Company. This agreement was terminated effective December 31, 1998.
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. Fees incurred to GP Strategies under this agreement totaled $85,000, $120,000 and $120,000 for each of the years ended December 31, 2000, 1999 and 1998. At December 31, 2000 and 1999, 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 $536,000 and $602,000, respectively
9. Income taxes
As of December 31, 2000 and 1999, the Company had approximately $323,000 and $345,000, 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, 2000 1999 -------- ------- Deferred tax assets
Allowance for doubtful accounts $ 46 $ 56 Machinery, property, plant and equipment 65 75 Deferred compensation 160 160 Inventory 52 54 -------- -------- Deferred tax assets 323 345 ------- -------
Valuation allowance (160) (345) ------- ------- Net deferred tax assets after valuation allowance $ 163 $ ======== =========
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. Income taxes (Continued)
A reconciliation between the Company's tax provision and the provision of 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 for the year ended December 31, 2000 reserved for the deferred tax asset relating to the deferred compensation as the realization of such asset is uncertain. As of December 31, 1999 the Company had a 100% valuation reserve.
The change in the valuation allowance for the year ended December 31,2000 amounted to a decrease of $185,000.
10. Major customers
For the years ended December 31, 2000, 1999 and 1998 no customer accounted for more than 10% of the Company's revenue.
Export revenues represented approximately $1,123,000 of the Company's revenues in 1998.
There were no export revenues for the years ended December 31, 2000 and 1999.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)
11. Stock options and warrants
(a) Stock option plan
On January 1, 1994, the Company's Board of Directors and sole stockholder adopted the Five Star Products, Inc. 1994 Stock Option Plan (the "Stock Option Plan"), which became effective August 5, 1994. Under the Stock Option Plan, a total of 2,000,000 shares of Common Stock have been 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 Compensation Committee of the Board of Directors will administer the Stock Option Plan and will determine, among other things, the persons to be granted options, the number of shares to be subject to each option, the exercise price and vesting schedule of each option, whether to accelerate the exercise date of the option for any reason, and whether to cause the Company to make loans which enable an optionee to pay the purchase price of any option. No options are transferable by the optionee other than by will.
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.
In June 1998, the Company cancelled 1,440,000 options and issued 1,500,000 common stock options at a price of $.13 per share to both employees of the Company and employees of GP Strategies who provide services to the Company under the management services agreement. The Company recorded compensation expense of $90,000 related to the issuance of the options to the employees of GP Strategies.
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 at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) would have been changed to the pro forma amounts indicated below (in thousands, except per share amounts):
2000 1999 1998 ---- ---- ---- Net income (loss) As reported $ 775 $647 $(664) Pro forma 740 606 (670) Basic and diluted income (loss) per share As reported .06 .05 (.05) Pro forma .05 .04 (.05)
Stock option activity during the periods indicated is as follows:
No options were granted during 2000.
The per share weighted-average fair value of stock options granted during 1999 and 1998 were $.30 and $.06, respectively, on the dates of grant using the Black Scholes option-pricing model with the following assumptions: 1999 - expected dividend yield 0%, risk-free interest rate of 5.05%, expected volatility of 146% and expected life of 3 years; 1998 - expected dividend yield 0%, risk-free interest rate of 5.6%, expected volatility of 66.7% and an expected life of 3 years.
Number of Weighted-Average
Shares Exercise Price
Balance at December 31, 1997 1,540,000 .50 Granted 1,500,000 .13 Cancelled (1,440,000) .50 ----------- --- 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 =========== ===
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. Stock options and warrants (Continued)
At December 31, 2000 and 1999, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $.33 and $.13 and 2 years and 3 years, respectively.
At December 31, 2000, 1999 and 1998, the number of options exercisable was 1,485,000, 1,380,000 and 1,350,000, respectively, and the weighted-average exercise price of exercisable options was $.17, $.15 and $.17, respectively.
(b) Warrants to purchase common stock
In August 1994, GP Strategies entered into a Transfer and Distribution Agreement with the Company whereby GP Strategies transferred to the Company (the "Distribution") immediately prior to the closing of the Distribution, all of its interest in NPD Trading in exchange for (i) the issuance by the Company of 6,990,900 shares of Common Stock to GP Strategies (ii) the issuance of 6,017,775 shares of Common Stock to be distributed to GP Strategies stockholders, and (iii) the issuance of 6,017,775 warrants to be distributed to GP Strategies stockholders. Each warrant was initially exercisable for a period of two years from August 5, 1994 at an exercise price per share of $1.00. In August 1996, the Board of Directors approved an extension of the Company's warrants until August 5, 1999 and a reduction of the exercise price to $.50 per share, subject to adjustment in certain circumstances and in August 1998 the Board of Directors approved a two-year extension of the Company's warrants until August 5, 2000 and an increase in the exercise price to $.75 per share, subject to adjustment in certain circumstances. In August 2000, the warrants expired and were not further extended by the Board of Directors.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
12. Earnings (loss) per share
Earnings (loss) per share (EPS) for the years ended December 31, 2000, 1999 and 1998 are as follows (in thousands, except per share amounts):
Basic earnings per share are based upon the weighted average number of common shares outstanding during the period. 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. Loans and advances from GP Strategies
In August 1994, GP Strategies entered into a $2.5 million loan agreement with NPD Trading, under which GP Strategies would fund the loan with either securities or cash, at its option. At September 30, 1998, the Company had borrowed the full $2,500,000 under its loan agreement with GP Strategies and therefore had no remaining borrowing availability under this agreement. GP Strategies advanced additional funds to the Company, until the third quarter of 1998, when the total amount due to GP Strategies, including accrued interest totaled approximately $5,407,000. During the third quarter of 1998, GP Strategies deemed that the Company would not have the ability to repay its loan to GP Strategies, and therefore made the decision to contribute the amount due to capital in excess of par value.
14. 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 - ---------------------------------------------------------------------------- 2001 $ 1,315 $ 858 $ 2,173 2002 1,360 936 2,296 2003 1,374 736 2,110 2004 1,347 373 1,720 2005 1,347 18 1,365 After 2005 1,651 - 1,651 - ----------------------------------------------------------------------------- Total $ 8,394 $ 2,921 $11,315 - ------------------------------------------------------------------------------
During 2000, 1999 and 1998, the Company incurred $3,412,000, $3,359,000 and $804,000, 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.
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 72 Chairman of the Board Richard T. Grad 63 President, Chief Executive Officer and Director Charles Dawson 44 Vice President and Director Bruce Sherman 48 Vice President and Director Steven Schilit 54 Vice President and Director Joseph Leven 48 Vice President Cindy Krugman 39 Vice President and Controller Scott N. Greenberg 44 Director Michael Feldman 33 Director
Jerome I. Feldman has been Chairman of the Board of the Company since 1994. He is founder of, and since 1959, has been President and Chief Executive Officer and a director of GP Strategies Corporation ("GPS") and Chairman of the Board since 1999, a global provider of performance improvement services and products. He has been a director of GSE Systems, Inc., ("GSE") 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.
Richard T. Grad has been President and Chief Executive Officer and a director of the Company since September 1999 and President of Five Star Group, Inc., a wholly owned subsidiary of the Company ("Five Star") since 1985.
Charles Dawson has been Vice President and a director of the Company since September 1999, Vice President of Merchandising of Five Star since 1993 and Merchandising Manager from 1992.
Bruce Sherman has been Vice President and a director of the Company since September 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 Vice President and a director of the Company since September 1999 and since 1981 has held several executive positions with Five Star.
Joseph Leven has been Vice President of the Company since September 1999; Vice President of Operations of Five Star since 1995 and since 1976 has held various managerial positions with Five Star. Mr. Leven is the cousin of Mr. Grad.
Cindy Krugman has been Vice President and Controller of the Company since September 1999, and Controller of Five Star since 1985. Ms. Krugman is the daughter of Mr. Grad.
Scott N. Greenberg has been a director of the Company since September 1999, a director of GPS since 1987 and Executive Vice President and Chief Financial Officer since June 1999 and since 1985 has held several executive positions. Mr. Greenberg is a director of GSE.
Michael D. Feldman has been a director of the Company since August 1999. He has served as Executive Vice President and a director of Avenue Entertainment Group, Inc., an independent entertainment company, since 1997.
At each annual meeting of stockholders, directors are elected to serve for a term of office to expire at the next annual meeting of stockholders after their election. Under the Company's bylaws, the number of directors constituting the entire Board of Directors shall be fixed, from time to time, by the directors then in office, who may decrease or increase the number of directors by majority action without soliciting stockholder approval. The Company does not currently pay compensation to directors for service in that capacity.
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 Group, Inc., to its President and Chief Executive Officer and most highly compensated executive officers for services rendered to Five Star Group in 2000.
SUMMARY COMPENSATION TABLE
(1) Includes $4,000, $4,000 and $911 as a matching contribution made by the Company to the 401(k) Savings Plan (the "401(k) Savings Plan") for 2000, 1999 and for the period September 30, 1998 through December 31, 1998, and $2,450 and $1,881 for executive life insurance premiums in 2000 and 1999 and $1,032 for Group Term Life Insurance paid by the Company in for the period September 30, 1998 through December 31, 1998.
(2) Mr. Grad became the Chief Executive Officer of the Company effective September 30, 1998 and the above compensation relates to the period September 30, 1998 through December 31, 1998.
(3) Includes $4,196 and $3,840 matching for 2000 and 1999, respectively, contribution to the 401(k) and $469 and $371, respectively, for executive life insurance premiums.
(4) Includes $3,953 for 2000 and 1999, respectively, contribution to the 401(k) and $748 and $587, respectively for executive life insurance premiums.
(5) Executive life insurance premiums
(6) Includes $1,768 and $3,790 matching for 2000 and 1999, respectively, contribution to the 401(k) and $282 and $224, respectively, for executive life insurance premiums.
Option Grants in 2000
No options were granted to the named executive officers in 2000.
Board Report on Executive Compensation
During the year ended December 31, 2000, 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 2000, the Company also made matching contributions to the 401(k) Savings Plan for those participants.
Mr. Grad's Compensation
In reviewing Mr. Grad's performance in 2000 and determining appropriate compensation, the Board took the following major accomplishments into consideration:
oThe transformation of the Company into a leading distributor in the United States of home decorating, hardware and finishing products.
oThe major sales territory expansion.
Mr. Grad was the driving force behind the Company's transformation into a leading distributor in the United States of home decorating, hardware and finishing products. In addition, Mr. Grad, together with his senior management team was instrumental in Five Star's expansion of its sales territory with the addition of an established dedicated sales force servicing the Mid Atlantic States, as far south as Virginia. Five Star's diverse product line enabled these established salespeople immediately to penetrate this market with an expanded product line. Five Star's ability to service this territory from its existing New Jersey facility enabled Five Star to leverage its fixed costs on a broader revenue base. This new sales force is currently generating revenues in excess of $7,000,000 on an annual basis. The Board considered Mr. Grad's integral role in the above-described transactions as well as his significant contribution to the Company's financial progress.
As of January 1, 1997 Five Star Group, Inc. entered into a five-year (the "Employment Term") employment agreement (the "Employment Agreement") with Bruce Sherman ("Mr. Sherman"), Five Star's Vice President, Sales, New York and New Jersey. The Employment Agreement provides for Mr. Sherman to receive an annual base salary of $160,000, subject to 3% annual increases. In addition, Mr. Sherman shall be entitled to receive a $15,000 annual bonus. Mr. Sherman received a $10,000 bonus in January 2000 and received a $15,000 bonus in January 1, 2001. The Employment Agreement provides for the termination of employment upon Mr. Sherman's death, physical or mental disability or retirement. In addition, Five Star may terminate Mr. Sherman's employment for "cause" (including failing to perform required duties or engaging in gross negligence).
Upon termination of the Employment Agreement "for cause", all obligations of Five Star under the Employment Agreement terminate. Upon termination by Five Star other than "for cause", disability or retirement, Mr. Sherman is entitled to receive as severance pay an amount equal to his annual base salary and annual bonus for any termination prior to the fourth anniversary of the Employment Term and 50% of his annual base salary for termination at any time after the fourth anniversary of the Employment Term and ending on the fifth anniversary of the Employment Term. The Employment Agreement also contains non-competition and confidentiality provisions.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 12, 2001, 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 4,830,104(1) 37% 9 West 57th Street New York, NY 10019
Jerome I. Feldman 5,424,740(2) 41
Goldman, Sachs & Co. 653,917(3) 5 The Goldman Sachs Group, Inc. 85 Broad Street New York, NY 10014
Richard T. Grad 284,883(4) 2.2
Charles Dawson 284,308(4) 1.8
Bruce Sherman 284,308(4) 1.8
Steven Schilit 284,308(4) 1.8
Scott N. Greenberg 179,150(4) 1.4
Michael D. Feldman 51,441(4) *
All directors and officers as a group (9 persons) 2,166,265(4) 15.7 - -------------- * 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 - GP Strategies' Capital Stock Interest."
(2) Includes (i) 4,830,104 shares of Common Stock beneficially owned by GP Strategies, (ii) 594,636 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) 500,000 shares of Common Stock issuable upon exercise of currently exercisable stock options held by Mr. Feldman. Mr. Feldman disclaims beneficial ownership of the shares owned by GP Strategies and his family.
(3) Based on Schedule 13G filed with the Securities and Exchange Commission on February 12, 2001.
(4) Includes (i) 194,883, 4,150, 1,441 shares of Common Stock held by Messrs. Grad, Greenberg and Michael Feldman, respectively, 237,308 shares of Common Stock held by each of Messrs. Dawson, Sherman, and Schilit and 1,140,092 shares for all executives and officers as a group, (ii) 90,000, 175,000 and 50,000 shares of Common Stock issuable upon exercise of currently exercisable stock options held by Messrs. Grad, Greenberg and Michael Feldman, respectively, 45,000 shares of Common Stock issuable upon exercise of currently exercisable stock options held by each of Messrs. Dawson, Sherman , Schilit and (iii) 1,025,000 shares for all executives and officers as a group.
Item 13.
Item 13. Certain Relationships and Related Transactions
Transactions with GP Strategies
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 senior note. The unsecured senior note payable to GP Strategies bears interest at the rate of 8% payable quarterly, with the principal due on September 30, 2003.
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, 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 2000 and 2001.
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 $1,114,959. Five Star's lease for the Connecticut facility expires in February 2007 and its annual rent is $398,397. The rent expense for the New York sales office was $16,740 in 2000 and $10,080 for the Maryland sales office. The Company's New York office space is provided by GP Strategies pursuant to the Management Services Agreement. GP Strategies has guaranteed the leases for two of Five Star's warehouses in New Jersey and Connecticut totaling approximately $1,119,000 and $398,000 per year through 2007 and 2001, respectively.
GP Strategies holds approximately 4,830,104 shares of Common Stock, representing approximately 37% of the Common Stock issued and outstanding on March 12, 2001 (without taking into account outstanding options and warrants). The Company's by-laws do not provide for cumulative voting. GP Strategies has entered into a Voting Agreement pursuant to which it has agreed that, for a period of three years from August 31, 1998 it will 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 intend to renew the Voting Agreement for an additional year.
PART IV
Item 14.
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, 2000 and 1999..........................................16
Consolidated Statements of Operations - Years ended
December 31, 2000, 1999 and 1998....................................18
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)- Years
ended December 31, 2000, 1999 and 1998..............................19
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998........................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, 2000.
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.
Richard T. Grad, President and Chief Executive Officer Dated: March 31, 2001
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
Richard T. Grad President, Chief Executive Officer and Director (Principal Executive and Operating Officer)
Jerome I. Feldman Chairman of the Board
Cindy Krugman Vice President and Controller (Principal Financial and Accounting Officer)
Scott N. Greenberg Director
Charles Dawson Director
March 31, 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. Incorporated herein by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form S-1 filed on July 22, 1994, Registration Statement No. 33-78252.
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.*
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 among Fleet Bank, National Association in its capacity as Agent for the ratable benefit of Lenders named Within and The Lenders named Herein and Five Star Group, Inc. formerly Five Star Acquisition Group Incorporated herein by reference to the Registrant's Form 10-Q for the third quarter ended September 30, 1998.
21. Subsidiaries.*
22. N/A
*Filed herewith