FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

               /X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1998
                                       OR
             / /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                        Commission File Number 033-78252
                              AMERICAN DRUG COMPANY
             (Exact name of registrant as specified in its charter)


Delaware                                               13-3729186
(State  of Incorporation)                  (I.R.S. Employer Identification No.)

9 West 57th Street, New York, NY                       10019
(Address of principle executive offices)               (Zip code)

Registrant's telephone number, including area code:              (212) 826-8976

Securities registered pursuant to Section 12(b) of the Act:            None

Securities registered pursuant to Section 12(g) of the Act:            None


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                      Yes X                  No

Indicate  by  check  mark if  disclosure  of  delinquent  filers  to item 405 of
Regulation S-K is not contained herein,  and will not be contained,  to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10- K. /X/

As of March 15, 1999, the aggregate  market value of the  outstanding  shares of
the Registrant's  Common Stock, par value $.01 per share, held by non-affiliates
was  approximately  $2,365,473 based on the closing price of the Common Stock on
the OTC  Bulletin  Board,  which is operated by the NASDAQ Stock Market on March
15, 1999.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.


Class                                          Outstanding at March 15, 1999
-----                                          -----------------------------
Common Stock, par value $.01 per share                  13,020,155 shares

DOCUMENTS INCORPORATED BY REFERENCE:

Part III  incorporates  certain  information by reference from the  Registrant's
definitive  proxy  statement  to  be  filed  for  its  1999  Annual  Meeting  of
Shareholders.



<PAGE>


                                              



                                TABLE OF CONTENTS
PART I                                                                    Page
         Item 1. Business  1

         Item 2. Properties................................................7

         Item 3. Legal Proceedings.........................................7

         Item 4. Submission of Matters to a Vote of Security Holders.......7

PART II
         Item 5. Market for the Registrant's Common
         Equity and Related Stockholder Matters............................8

         Item 6. Selected Financial Data...................................9

         Item 7.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations....................10

         Item 7A. Quantitative and Qualitative Disclosures About
         Market Risk.                                                    .16

         Item 8. Financial Statements and Supplementary Data..............17

         Item 9.  Changes in and Disagreements with
         Accountants on Accounting and Financial Disclosure...............40

PART III
         Item 10. Directors and Executive Officers of the Registrant......40

         Item 11. Executive Compensation..................................40

         Item 12. Security Ownership of Certain Beneficial
         Owners and Management............................................40

         Item 13. Certain Relationships and Related Transactions..........41

PART IV
         Item 14. Exhibits, Financial Statement Schedules, and
         Reports on Form 8-K..............................................42


<PAGE>


                                                                  


                                     PART I

Item 1.  Business

(a)      General Development of Business

         On  September  30, 1998, a newly  formed  wholly  owned  subsidiary  of
American  Drug Company (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,  1997 and the nine  months  ended
September  30,  l998,  Five  Star had  sales of  approximately  $82,300,000  and
$64,148,000, respectively.

         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 (the
"CIS").  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.

         The  purchase by the Company of the assets of Five Star has changed the
focus of the  Company.  The  Company  plans 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.  As a  result  of the
purchase  of the  assets of Five  Star,  the  Company  has shut down its  Moscow
office.  In addition,  the Company closed its  Washington,  DC office and scaled
back the  operations  of its Prague  office with  respect to the business of NPD
Trading.

          (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



<PAGE>


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 which  enables Five Star to
service the market from Maine to Maryland.  All  operations  are  coordinated by
senior management from the headquarters in New Jersey,  with each  strategically
located facility having its own sales force.

         Five Star is a leading distributor in the United States of paint sundry
items, interior and exterior stains,  brushes,  rollers,  caulking compounds and
hardware products and 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
the largest  independent  distributor  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 the largest distributor 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.

<PAGE>

Customers

      Five Star's largest customer accounted for approximately 2.4% of its sales
in 1998 and its 10 largest  customers  accounted for  approximately  11% 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.

Five Star is utilizing both internal and external resources to identify, correct
or reprogram and test systems for year 2000 compliance. During the third quarter
of 1998,  Five Star entered into an agreement to purchase new software that will
be year 2000 compliant. This previously planned software upgrade will manage the
financial operations of Five Star, including order entry,  inventory control and
accounts receivable and payable. Five Star has an implementation team led by the
Director of  Information  Systems,  which began the project on November 1, 1998.
Five Star  anticipates  that they will  complete the  implementation  of the new
software by  September 1, 1999.  See  "Management's  Discussion  and Analysis of
Financial    Condition    and    Results   of    Operations-Recent    Accounting
Pronouncements-Year  2000" for a discussion of the Company's  preparations  with
respect to the risks presented by the year 2000 issue.

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.

<PAGE>

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 approximating
85%.

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.  Customers are able to
order  products  directly from  manufacturers  at the show and in 1999 customers
placed orders totaling well over $6 million worth of merchandise. Five Star also

<PAGE>

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 producer.

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 1998,  according to the American  Express
Retail Index,  Americans  spent more than $112 billion on home  improvement  and
expenditures  are  expected to reach $137 billion in 2003.  In addition,  36% of
households are planning home  improvement or redecorating  projects in 1999 with
an average household expenditure of $2,747.

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.

<PAGE>

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 chose from.

NPD Trading

         NPD  Trading  provides  consulting  services  to  American  and Western
corporations  doing business in Eastern Europe through an office in Prague.  NPD
Trading's  on-going  efforts on behalf of ICF Kaiser  International  ("ICF") and
their  associated  company,  Kaiser  Engineers,   secured  for  these  companies
contracts  to  perform  feasibility  studies  in the  areas of  hazardous  waste
management and steel industry  modernization in the Czech Republic.  NPD Trading
is providing ICF with  technical and  commercial  assistance on a contract for a
$250 million hot strip mini mill in the Czech Republic. To date, the Company has
received  $1  million  for  this  assistance,  including  $840,000  received  in
September  1997.  The  Company  expects  to receive  another $1 million  payment
contingent upon the completed construction on the mini mill in 1999.

         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  its expected  future  payments in the amount of
approximately  $1,000,000  from  ICF as a  success  fee in  connection  with the
completion of the Company's  consulting  project in the Czech  Republic which is
anticipated to be completed in 1999.


Employees

         The Company employs 265 people, 264 of whom are employees of Five Star.
Management-employee  relations are  considered  excellent at both of Five Star's
warehouse  facilities.  Approximately  111 of Five Star's  employees,  warehouse
personnel and drivers are represented by unions.  The 111 union employees at New
Jersey  are  represented  by the  Teamsters  union.  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 15, 2000.

<PAGE>

         As  a  result  of  the  Company's   decision  to   concentrate  on  its
distribution  business,  the Company closed its Washington,  D.C. office, scaled
back the Prague office and eliminated the Moscow office.

(d) Financial Information about Foreign and Domestic Operations and Export 
Sales.

         Not Applicable.

Item 2. Properties

         Five Star leases  250,000  square feet in New Jersey and 110,000 square
feet in  Connecticut.  Five Star's  operating  lease for the New Jersey facility
expires in March 2007 and the annual rent is $885,731. Five Star's lease for the
Connecticut  facility  expires in February 2001 and its annual rent is $379,780.
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  receives  $10,000 a month for  services  provided  by GP  Strategies
employees,  such as management,  legal, tax, accounting,  insurance and employee
benefit administration services.

         The facilities leased by the Company and Five Star are considered to be
suitable and  adequate for their  intended  uses and are  considered  to be well
maintained and in good condition.

Item 3. Legal Proceedings

         There are currently no material legal proceedings  pending to which the
Company is a party or to which any of its properties are subject.

<PAGE>


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.


<PAGE>


                                     Part II

Item 5. Market for the Registrant's Common Equity and Related Stockholder 
        Matters

         The  following  table  presents  the high and low prices for the Common
Stock for 1998 and 1997. 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

1998                  First                $0.14                          $0.05

                      Second               $0.42                          $0.11

                      Third                $0.45                          $0.25

                      Fourth               $0.45                          $0.30


1997                  First                $0.31                          $0.13

                      Second               $0.28                          $0.16

                      Third                $0.22                          $0.09

                      Fourth               $0.17                          $0.08


----------

         The number of  shareholders  of record of the Common  Stock as of March
15, 1999 was 4,646.  On March 15, 1999, the average of the closing bid and asked
prices on the OTC  Bulletin  Board was $0.34.  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.




<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

Item 6.  Selected Financial Data

                      SELECTED CONSOLIDATED FINANCIAL DATA

                    (in thousands, except per share amounts)


<TABLE>

                                                                  Years Ended December 31,        

<CAPTION>
                                                         1998        1997        1996        1995      1994
                                                         ----        ----        ----        ----      ----


Statement of Operations Data:

<S>                                                   <C>          <C>        <C>           <C>        <C>  
Revenue                                               $17,184      $2,047     $ 1,104       $ 529      $ 799
Cost of goods sold                                     13,686         936         496         155        456
General and administrative
 expenses                                               3,187       1,385       1,674       1,690      1,355
Net loss                                                 (664)       (857)     (1,498)    (1,604)     (1,302)

Loss per share:
Basic and diluted
 before extraordinary item                              (.03)       (.07)       (.12)       (.12)      (.10)
Basic and diluted                                       (.05)       (.07)       (.12)       (.12)      (.10)

                                                                          December 31,           

                                                         1998        1997        1996        1995      1994
                                                         ----        ----        ----        ----      ----


Balance Sheet Data:

Current assets                                      $  32,291      $  514      $1,018      $  550      $  70
Current liabilities                                    27,596         199         152         356         73
Non current liabilities                                 5,000       4,933       4,739       2,633        955
Working capital (deficiency)                            4,695         315         866         194         (3)
Total assets                                           33,179         552       1,088         602        161
Total stockholders' equity (deficiency)                   583      (4,580)     (3,803)     (2,387)      (867)

</TABLE>

<PAGE>


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.  For the year ended December 31, 1997 and
the nine months ended September 30, 1998,  Five Star had sales of  approximately
$82,300,000 and $64,148,000, respectively.

The purchase by the Company of certain assets of Five Star has changed the focus
of the Company.  The Company plans to focus its efforts in the future on growing
the distribution business, and has taken several steps to reduce its traditional
operations from both a business and cost perspective.

As a result of the  purchase  of the assets of Five Star,  the  Company has shut
down its  Moscow  office,  and in the  short-term,  the  Company  will  sell its
existing  inventory of generic products in Moscow  warehouses  through a Russian
company,  Akorta and other third parties.  No such  additional  products will be
purchased  in the  United  States.  In  addition,  the  Company  has  closed its
Washington,  DC office and scaled back the  operations of its Prague office with
respect to the business of NPD Trading.

Liquidity and Capital Resources

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.
Therefore GP Strategies did not charge the Company interest in the third quarter
of 1998.

At December 31, 1998,  the Company had cash of $119,000.  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, 1998,  the Company had
borrowed  $16,971,000  and had $1,194,000 of additional  availability  under the
loan agreement.

The Company  believes it has sufficient  borrowing  availability  under existing
credit  agreements,  and  through the  operations  of the  Company,  to fund the
working capital  requirements of Five Star as well as the limited  operations of
the Company's Prague office.

<PAGE>

Results of operations

In 1998,  loss before income taxes and  extraordinary  item was  $(420,000),  as
compared to a loss of $(857,000) before income taxes and extraordinary  item for
1997. The reduced loss for 1998 was  principally the result of the income earned
by Five Star since September  30,1998,  as well as reduced selling,  general and
administrative  expenses  incurred by the Company due to the curtailing of their
operations  in Moscow  during the year.  The income  earned by Five Star and the
reduced cost structure of the Company was partially  offset by the effect of the
consulting  revenues earned by the Company in 1997 totaling $840,000 relating to
a success fee  attributable  to a project with ICF Kaiser  International  in the
Czech Republic.

The Company's net loss decreased to $857,000 for 1997 from  $1,498,000  incurred
for  1996  due  to  increased   consulting   fees  and  decreased   general  and
administrative expenses, partially offset by increased interest expenses

Sales

The Company had sales of $17,080,000 in 1998, compared to sales of $1,123,000 in
1997 and  $842,000  in 1996.  The  increased  sales in 1998  were the  result of
$16,476,000 of sales earned by Five Star since September 30, 1998. The increased
sales in 1997 were generated by increased sales of medical equipment,  partially
offset by reduced  sales of generic  drugs in the  Commonwealth  of  Independent
States.

Consulting revenues

In 1998, the Company had consulting  revenues of $104,000,  compared to $924,000
in 1997 and $262,000 in 1996.  The decrease in consulting  revenues from 1997 to
1998 and the increase in consulting revenues from 1996 to 1997 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.

Gross margin

The Company had gross margin of $3,394,000 in 1998, compared to $187,000 in 1997
and $346,000 in 1996.  The  increased  gross margin in 1998 was due to the gross
margin  earned on the sales volume  generated by Five Star since  September  30,
1998.


<PAGE>


Selling, general and administrative expense

The Company had Selling, general and administrative (SG&A) expense of $3,187,000
in 1998 compared to $1,  385,000 in 1997 and  $1,674,000 in 1996.  The increased
SG&A in 1998 is due 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  both  Washington  D.C.  and  Moscow.  The  decrease  in  general  and
administrative  expenses in 1997  compared to 1996 was  primarily due to reduced
consulting,  marketing  expense and facility  costs,  partially  offset by costs
associated with consulting projects.

Interest expense

The Company  had  interest  expense of  $611,000  in 1998,  $463,000 in 1997 and
$312,000 in 1996. The increased  interest  expense in 1998 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). The increased
interest expense in 1998 was partially offset by reduced interest expense due to
GP Strategies as a result of the  contribution to Capital in excess of par value
of the amount owed to GP Strategies  by the Company  during the third quarter of
1998. The increased  interest expense in 1997 as compared to 1996 was the result
of the increased balance due to GP Strategies in 1997.

Recent accounting pronouncements

The Financial  Accounting  Standards Board (FASB) issued  Statement of Financial
Accounting Standards No. 130, (SFAS 130), "Reporting  Comprehensive  Income", in
June 1997 which requires a statement of  comprehensive  income to be included in
the financial statements for fiscal years beginning after December 15, 1997. The
Company  has  adopted  this  Statement  and has no other  comprehensive  income;
therefore comprehensive income is the same as net income (loss).

In  addition,  in June of 1997,  the FASB  issued SFAS 131,  "Disclosures  about
Segments of an Enterprise and Related Information". SFAS 131 requires disclosure
of certain information about operating segments and about products and services,
geographic  areas in which a company  operates  and their major  customers.  The
Company operates in one principal  business segment,  and accordingly,  SFAS 131
had no impact on the Company's December 31, 1998 financial statements.

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities."  This Statement  establishes  accounting and reporting
standards for derivative  instruments  and for hedging  activities.  It requires
that an entity  recognize all derivatives as either assets or liabilities in the
statement of financial  position and measure  those  instruments  at fair value.
This  Statement is effective for all fiscal  quarters of fiscal years  beginning
after June 15, 1999. The Company will adopt SFAS No. 133 by January 1, 2000. The

<PAGE>

Company is  currently  evaluating  the impact the  adoption of SFAS No. 133 will
have on the consolidated financial statements.

Year 2000

The  Company  is aware of the issues  associated  with the  programming  code in
existing  computer systems as the millennium (year 2000)  approaches.  The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the  rollover of the two digit year value to 00.
The issue is whether  computer  systems will properly  recognize  date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

The Company is  utilizing  both  internal  and  external  resources to identify,
correct or reprogram  and test systems for year 2000  compliance.  The Company's
primary  operating  subsidiary,  Five Star has during the third  quarter of 1998
entered  into an  agreement  to  purchase  new  software  that will be year 2000
compliant.  This previously  planned  software upgrade will manage the financial
operations of Five Star including  order entry,  inventory  control and accounts
receivable and payable. Five Star has an implementation team led by the Director
of Information  Systems,  which began the project on November 1, 1998. Five Star
anticipates  that they will complete the  implementation  of the new software by
September 1, 1999. The cost of the new software,  including  implementation,  is
estimated to be  approximately  $400,000.  Five Star has arranged  financing for
approximately  $250,000  of the  estimated  cost  over a four  year  period.  In
addition, Five Star's other major information system is its warehouse management
system. Five Star is currently updating this system to a current release that is
year 2000 compliant.  There will be no additional cost to this upgrade since all
upgrades related to the warehouse system are included in yearly maintenance.

Five Star has also identified various ancillary programs that need to be updated
and has contracted  with third parties for this work to be completed  within the
next six months.  It is expected  that the cost of these  modifications  will be
approximately $10,000.

In  addition  Five Star is  examining  their  exposure to the year 2000 in other
areas of technology. These areas include telephone and E-mail systems, operating
systems and applications in free standing personal  computers and other areas of
communication. A failure of these systems may impact the ability of Five Star to
service their  customers  which could have a material effect on their results of
operations.  These  issues are being  handled  by the  information  systems  and
finance team at Five Star by identifying the problems and obtaining from vendors
and service  providers  either the  necessary  modifications  to the software or
assurances  that the systems will not be disrupted.  Five Star believes that the
cost of the programming and equipment upgrades will not be in excess of $50,000.
In addition,  certain  personal  computers and other  equipment that is not year
2000 compliant will be upgraded  through Five Star's normal process of equipment
upgrades. Five Star believes that the evaluation and implementation process will
be completed no later than the second quarter of 1999.  Over the next year, Five
Star plans to  concentrate  its  efforts on the  implementation  of its new data
processing  systems,  but it will also continue to develop and  implement  other
information technology projects needed in the ordinary course of business.

<PAGE>

Five Star expects to finance these  expenditures  from a combination  of working
capital and  operating  leases for a portion of the new computer  equipment  and
software.  Therefore,  Five Star does not  expect  the year 2000 issue to have a
material adverse impact on its financial position or results of operations.

Like other  companies,  the Company  relies on its customers for revenues and on
its vendors for products and services of all kinds; these third parties all face
the year 2000 issue.  An  interruption  in the ability of any of them to provide
goods or  services,  or to pay for goods or  services  provided  to them,  or an
interruption  in the business  operations of our customers  causing a decline in
demand for  services,  could have a material  adverse  effect on the  Company in
turn.

In addition,  there is a risk, the  probability of which the Company is not in a
position to estimate, that the transition to the year 2000 will cause wholesale,
perhaps    prolonged,    failures    of    electrical    generation,    banking,
telecommunications  or  transportation  systems in the United  States or abroad,
disrupting the general  infrastructure of business and the economy at large. The
effect of such disruptions on the Company could be material.

The  Company's  various   departments  will  communicate  with  their  principal
customers and vendors about their year 2000  readiness,  and expect this process
to be completed no later than the third  quarter of 1999.  None of the responses
received to date suggests that any  significant  customer or vendor  expects the
year 2000 issue to cause an  interruption  in its operations  which would have a
material  adverse  impact on the  Company.  However,  because  so many firms are
exposed to the risk of failure not only of their own systems, but of the systems
of other firms,  the ultimate effect of the year 2000 issue is subject to a very
high degree of uncertainty.

The Company believes that its  preparations  currently under way are adequate to
assess and manage the risks presented by the year 2000 issue,  and does not have
a formal contingency plan at this time.

The  statements  in this section  regarding  the effect of the year 2000 and the
Company's  responses  to it are  forward-looking  statements.  They are based on
assumptions  that the Company  believes to be reasonable in light of its current
knowledge and experience.  A number of contingencies  could cause actual results
to differ materially from those described in forward-looking  statements made by
or on behalf of the Company.

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, as well as the Company's ability
to further  scale down its  operations  in Prague,  the risk that the  Company's
preparations with respect to the risks presented by the year 2000 issue will not
be  adequate,  and  those  risks and  uncertainties  detailed  in the  Company's
periodic  reports and  registration  statements  filed with the  Securities  and
Exchange Commission.


<PAGE>



Inflation

Inflation  is  not  expected  to  have a  significant  impact  on the  Company's
business.



<PAGE>


Item 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

                  The  information  required by Item 7A is not applicable to the
Company's business.




<PAGE>


                                                                 

Item 8.           Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         Page

Independent Auditors' Reports                                            18

Financial Statements:

         Consolidated Balance Sheets - December 31, 1998 and
           1997                                                          20

         Consolidated Statements of Operations - Years ended
           December 31, 1998, 1997 and 1996                              22

         Consolidated Statements of Changes in Stockholders'
           Equity (Deficiency) - Years ended December 31,
           1998, 1997 and 1996                                           23

         Consolidated Statements of Cash Flows - Years ended
           December 31, 1998, 1997 and 1996                              24

         Notes to Consolidated Financial Statements                      25


<PAGE>



         INDEPENDENT AUDITORS' REPORT


         The Board Directors and Stockholders
         American Drug Company


         We have audited the accompanying consolidated balance sheet of American
         Drug Company and  subsidiaries as of December 31, 1998, and the related
         consolidated  statements of operations,  stockholders'  equity and cash
         flows for the year  then  ended.  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 audit.

         We conducted our audit in accordance with generally  accepted  auditing
         standards.  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 audit provides 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 American Drug Company and subsidiaries at December 31, 1998, and the
         consolidated  results of its operations and its cash flows for the year
         then  ended,   in  conformity   with  generally   accepted   accounting
         principles.



                                            Richard A. Eisner & Company, LLP

         New York, New York
         March 5, 1999




<PAGE>


                                            INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
American Drug Company:


We have  audited the  consolidated  balance  sheet of AMERICAN  DRUG COMPANY AND
SUBSIDIARIES as of December 31, 1997, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for each
of the years in the two-year period ended December 31, 1997. These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of AMERICAN  DRUG
COMPANY  AND  SUBSIDIARIES  at  December  31,  1997,  and the  results  of their
operations  and their  cash flows for each of the years in the  two-year  period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.

The consolidated  financial statements referred to above have been prepared 
assuming that the Company will continue as a going concern. As discussed in
Note 3 accompanying the 1997 consolidated financial statements, the Company has 
suffered recurring losses from  operations  and has an accumulated  deficit t
hat raise  substantial doubt about its ability to continue as a going concern.  
Management's  plans in regard  to  these  matters  are  also  described in the
Notes  to  those consolidated financial statements.  The consolidated financial 
statements do not include any adjustments that might result from the outcome of 
this uncertainty.


                                                              KPMG LLP


New York, New York
March 27, 1998


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

             (in thousands, except shares and per share information)


                                                   December 31,    December 31,
                                                     1998             1997     
                 ASSETS

Current assets

Cash                                             $     119       $   225
Accounts receivable, trade, less allowance
 for doubtful accounts of $1,630 and $90
 in 1998 and 1997                                    9,697           139
Inventory                                           22,446           149
Prepaid expenses and other current assets               29             1
                                                 ---------       -------

Total current assets                                32,291           514
                                                  --------        ------

Machinery and equipment, at cost                       985           113
Less accumulated depreciation                         (173)         (113)
                                                 ---------       -------
                                                       812               


Other assets                                            76            38
                                                 ---------       -------
                                                 $  33,179       $   552
                                                 =========       =======






        See accompanying notes to the consolidated financial statements.


<PAGE>


                                                                  


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (Continued)

             (in thousands, except shares and per share information)


                                                December 31,        December 31,
                                                  1998                   1997  


LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities

Short-term borrowings                              $  16,971      $
Accounts payable and accrued expenses                 10,625              199
                                                  ----------         --------

Total current liabilities                             27,596              199
                                                  ----------         --------

7% convertible notes                                                    1,000
                                                ------------          -------

Long-term debt to GP Strategies                        5,000            3,933
                                                   ---------          -------

Stockholders' equity (deficiency)

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            1,762
Accumulated deficit                                   (7,136)          (6,472)
                                                   ---------          -------

Total stockholders' equity (deficiency)                  583           (4,580)
                                                  ----------         --------
                                                    $ 33,179        $     552
                                                   ========        =========






        See accompanying notes to the consolidated financial statements.



<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  (in thousands, except per share information)

                             Year Ended December 31,

<TABLE>
                                                              1998             1997            1996  
<CAPTION>
                                                            --------        ---------       ---------
<S>                                                        <C>              <C>               <C>    
Sales                                                      $   17,080       $    1,123        $   842
Cost of goods sold                                             13,686              936            496
                                                            ---------       ----------       --------
Gross margin                                                    3,394              187            346

Selling, general and
 administrative expenses                                       (3,187)          (1,385)        (1,674)

Management fee to GP Strategies                                  (120)            (120)          (120)

Consulting revenues                                               104              924            262

Interest expense                                                 (611)            (463)          (312)
                                                             --------          -------        -------
Loss before income taxes
 and extraordinary item                                          (420)            (857)        (1,498)

Income tax expense                                                (40)                                   

Loss before extraordinary item                                   (460)            (857)        (1,498)

Extraordinary item
Early extinguishment of debt                                     (204)                                 

Net loss                                                     $   (664)          $ (857)       $(1,498)
                                                             ========           =======     ==========
Loss per share
 Basic and diluted before extraordinary item                   $(.03)           $(.07)         $(.12)
                                                               -----            -----          -----
 Basic and diluted net loss per share                           (.05)            (.07)          (.12)
                                                              ------           ------         ------
Weighted average number of
 shares outstanding                                            13,020           13,020         13,020
                                                             ========         ========      =========

        See accompanying notes to the consolidated financial statements.

</TABLE>

<PAGE>


                                                                  


                             AMERICAN DRUG COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
                                       EQUITY (DEFICIENCY)
                          Years Ended December 31, 1998, 1997 and 1996
                             (in thousands, except number of shares)
<TABLE>

<CAPTION>
                                              Shares of               Capital in                                           Total
                                           Common Stock     Common     Excess of                    Deferred           Stockholders'
                                            Outstanding     Stock      Par Value      Deficit       Compensation        Deficiency

<S>                                          <C>              <C>         <C>         <C>                   <C>            <C>     
Balance at December 31, 1995                 13,020,155       $130        $1,682      $(4,117)              $(82)          $(2,387)
------------------------------------------------------------------------------------------------------------------------------------
Net loss                                                                               (1,498)                              (1,498)
Amortization of deferred compensation                                                                         82                82
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                 13,020,155        130         1,682       (5,615)                              (3,803)
------------------------------------------------------------------------------------------------------------------------------------
Net loss                                                                                 (857)                                (857)
Officers' compensation                                                        80                                                80
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                 13,020,155        130         1,762       (6,472)                              (4,580)
------------------------------------------------------------------------------------------------------------------------------------
Net loss                                                                                 (664)                                (664)
Contribution to capital by GP Strategies                                   5,407                                             5,407
Deferred finance cost-contribution to
 capital by GP Strategies                                                    330                                               330
Issuance of compensatory stock options                                        90                                                90
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998                 13,020,155       $130        $7,589      $(7,136)             $              $    583
-----------------------------------------------------------------------------------------------------------------------------------


</TABLE>



        See accompanying notes to the consolidated financial statements.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
                                                                              Years Ended December 31,
<CAPTION>
                                                                      1998              1997          1996 

Cash flows used in operations:
<S>                                                                  <C>               <C>          <C>     
Net loss                                                             $  (664)          $(857)       $(1,498)
Adjustments to reconcile net loss
  to net cash used in operating activities:
Depreciation and amortization                                            191              33             37
Non cash compensation                                                     90              80             82
Loss from extinguishment of debt                                         204

Changes in other operating items:
Accounts receivable                                                    2,310             (55)            20
Inventory                                                             (1,906)            177              3
Prepaid expenses and other assets                                        235              20             29
Accounts payable, accrued expenses
  and accrued interest                                                (1,608)            338             73
                                                                   ---------        --------      ---------

Net cash used in operations                                           (1,148)           (264)        (1,254)
                                                                  ----------           -----        -------

Cash flows from financing activities:
Net proceeds from short-term borrowings                               16,971
Net proceeds from issuance of 7% convertible notes                                                      950
Loans from GP Strategies                                                 474                            829
Repayment of loans from GP Strategies                                                    (97)              
                                                               -------------        --------      ---------
Net cash (used for) provided by financing activities                  17,445             (97)         1,779
                                                                    --------        --------         ------

Cash flows from investing activities:
Net assets of Five Star, less cash acquired                          (16,291)
Additions to machinery and equipment                                    (112)                            (5)
                                                                 ------------    -----------      ----------
Net cash used in investing activities                                (16,403)                            (5)
                                                                   ---------     -----------      ---------

Net (decrease) increase in cash                                         (106)           (361)           520
Cash at beginning of period                                              225             586             66
                                                                  ----------        --------      ---------
Cash at end of period                                             $      119        $    225       $    586
                                                                  ==========        ========       ========

Non cash financing and investing activities:
 Senior note issued in Five Star acquisition                       $   5,000
                                                                   ---------
7% convertible notes retired by
  issuance of GP Strategies common stock                               1,000
Contributions to capital by GP Strategies                              5,737

        See accompanying notes to the consolidated financial statements.

</TABLE>



<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

             1. Acquisition of the assets and business of Five Star

         American Drug Company (the "Company") has two subsidiaries, NPD Trading
         (USA),  Inc. (NPD Trading) and Five Star Group,  Inc. (Five Star).  NPD
         Trading  provides  consulting  services  in Eastern  Europe  through an
         office in Prague.

         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  the  Five  Star  Group,  Inc.)
         substantially  all  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. Five Star is a
         distributor of home decorating,  hardware and finishing products in the
         northeast.  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 for the periods presented.

         The  following  shows on a proforma  basis the results of operations of
         the Company had the above  transaction  occurred on January 1, 1997 and
         1998 (in thousands, except per share data):

                                                            December 31,
                                                            (unaudited)        
                                                        1998             1997
           Sales                                     $81,091          $83,423
           Income before extraordinary item              371               49
           Net income                                    167               24
           Basic income per share                        .01                -
           Diluted income per share                      .01                -

         Such  information  is not  indicative of what actual results might have
been nor of what future results would be.



<PAGE>


                     AMERICAN DRUG COMPANY 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.

         Fixed  assets.  Fixed assets are carried at cost.  Major  additions and
         betterments are capitalized,  while maintenance and repairs that do not
         extend the lives of the assets are expensed currently.  Gain or loss 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.

         Statement of cash flows.  For purposes of the  statement of cash flows,
         the Company considers all liquid  investments with original  maturities
         of three months or less to be cash equivalents.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

         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, and therefore, there are
         no significant concentrations of credit risk.

         Financial  instruments.  The carrying amounts of financial  instruments
         including cash,  trade accounts  receivable and trade accounts  payable
         approximated fair value as of December 31, 1998 and 1997 because of the
         relatively short maturity of these instruments.  The carrying amount of
         short-term   borrowings   and  of  long-term   debt  to  GP  Strategies
         approximated fair value because interest is charged at market rates.

         Stock  based  compensation.  The  Company  has  adopted  SFAS No.  123,
         Accounting  for  Stock-Based  Compensation,  which permits  entities to
         recognize  as  expense  over the  vesting  period the fair value of all
         stock-based  awards on the date of grant.  Alternatively,  SFAS No. 123
         also allows entities to continue to apply the provisions of APB Opinion
         No. 25 and  provide  pro forma net  income and pro forma  earnings  per
         share  disclosures  for employee  stock option  grants made in 1995 and
         subsequent years as if the fair-value-based  method defined in SFAS No.
         123 had been applied.  The Company has elected to continue to apply the
         provisions  of APB Opinion No. 25 and provide the pro forma  disclosure
         provisions of SFAS No. 123.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

2.       Summary of significant accounting policies (Continued)

         Earnings  per share.  The Company has adopted  Statement  of  Financial
         Accounting  Standards  (SFAS) No.  128,  "Earnings  per  Share",  which
         established  standards for computing and presenting  earnings per share
         (EPS).  The statement  simplifies  the  standards  for  computing  EPS,
         replaces the  presentation  of primary EPS with a presentation of basic
         EPS and  requires a dual  presentation  of basic and diluted EPS on the
         face of the income  statement.  Basic EPS are based  upon the  weighted
         average number of common shares outstanding during the period.  Diluted
         EPS 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.  For the years
         ended December 31, 1998,  1997 and 1996 the Company did not include any
         potential  common stock in its calculation of diluted EPS,  because all
         options and warrants are anti-dilutive.

3.       Short-term borrowings

         On September 30, 1998, the Company's wholly-owned  subsidiary Five Star
         entered into a new three year Loan and Security  Agreement  dated as of
         September 30, 1998 (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 accounts inventory and 80% of eligible accounts receivable, as
         defined in the Loan Agreement.  The interest rate on any loan under the
         Loan  Agreement  is based on an adjusted  prime rate or LIBOR rate,  as
         described in the Loan Agreement.  At December 31, 1998, $16,971,000 was
         outstanding under the Loan Agreement and  approximately  $1,194,000 was
         available to be borrowed. Substantially all of the Company's assets are
         pledged as collateral for these borrowings.

4.       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  costs,  including   administrative  expenses  and  the
         employer's  contributions,  amounted to approximately $36,000,  $13,000
         and $13,000  for the years  ended  December  31,  1998,  1997 and 1996,
         respectively.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

5.       Machinery and equipment

         Major classes of machinery  and equipment  consist of the following (in
         thousands):
                                                    
                                              December 31,           Estimated
                                              1998       1997      useful lives
                                              ----       ----      ------------

         Machinery and equipment            $   50    $    16          3 years
         Furniture and fixtures                318         97          5 years
         Leasehold improvements                617                   3-9 years
                                            -----------------
                                               985        113

         Less accumulated depreciation       (173)       (113)
                                           $   812    $        
                                            =======   =========

         Depreciation  expense for the years ended  December 31, 1998,  1997 and
         1996 was $60,000, $10,000 and $17,000, respectively.

6.       Long-term debt

         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 has  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 has been  recorded as an  extraordinary  charge upon
         early extinguishment of debt.

         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  its  expected  future  payments in the
         amount of approximately  $1,000,000 from ICF Kaiser  International as a
         success  fee  in  connection  with  the  completion  of  the  Company's
         consulting  project in the Czech  Republic,  which is anticipated to be
         completed in l999.

         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

7.       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, 1998, 1997,
         and 1996 are summarized below (in thousands):

                                                                 December 31,  
                                                   ----------------------------
                                                    1998          1997     1996
                                                    ----          ----     ----

         Consulting fees earned from affiliate   $    101      $    65  $    25
                                                 ========      =======   =======

         Transactions with GP Strategies
                  Management fees incurred        $   120       $  120   $  120
                  Interest expense incurred           177          291      277

         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 (see
         Note 12).

         The  management  fee  charged to the  Company by GP  Strategies  covers
         services  provided by GP Strategies  such as  management,  legal,  tax,
         accounting, insurance and employee benefit administration services.

         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 $101,000, $65,000 and $25,000,  respectively,  for the
         years ended December 31, 1998, 1997, and 1996.

         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.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

7.       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 legal,
         tax,   accounting,   insurance  and  employee  benefit   administration
         services.  The Company  paid GP  Strategies  a fee of $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
         1998 and 1999.

8.       Income taxes

         The  Company and its  subsidiaries  have had net losses for years ended
         December 31, 1998, 1997 and 1996, respectively. No Federal or State tax
         expense has been  provided  for the years ended  December  31, 1997 and
         1996.  For the year ended December 31, 1998, the Company has recorded a
         current  state and local tax  provision  of $40,000 that relates to the
         Company's new subsidiary Five Star.

         A reconciliation  between the Company's effective tax rate and the U.S.
         statutory rate follows:

         Years ended December 31,            1998      1997        1996         
         -----------------------------------------------------------------------
         Tax at U.S. statutory rate        $(212)     $(283)      $(557)
         State and local taxes net of
          Federal benefit                      40
         Net operating loss utilization     1,608
         Valuation allowance
          adjustment                       (1,396)      283         557         
         -----------------------------------------------------------------------
         Taxes                              $40                                 
         -----------------------------------------------------------------------

         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 determined,  based upon the Company's history
         of operating  losses,  that 100% valuation  reserves are required as of
         December 31, 1998 and 1997.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

8.       Income taxes (Continued)

         As of  December  31,  1998 and  1997,  the  Company  had  approximately
         $304,000 and  $1,700,000,  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,
                                                     1998            1997   
         Deferred tax assets

         Organization costs                      $       3         $       7
         Allowance for doubtful accounts                40                34
         Net operating loss carryforwards               42             1,525
         Machinery and equipment                        21                 9
         Deferred compensation                         160               125
         Inventory                                      38                 
                                                  --------         ---------
         Deferred tax assets                           304             1,700
                                                   -------            ------

         Valuation allowance                          (304)           (1,700)
                                                   -------         ---------
         Net deferred tax assets after
          valuation allowance                     $                  $        
                                                  ==========         =========

         The change in the valuation  allowance for the year ended  December 31,
         1997 amounted to an increase of $283,000,  primarily attributable to an
         increase  of the  Company's  net  operating  loss.  The  change  in the
         valuation  allowance for the year ended December  31,1998 amounted to a
         decrease of $1,396,000,  primarily  attributable  to utilization of the
         net operating loss.

         As of December 31, 1998, the Company has approximately  $110,000 of net
         operating loss  carryovers,  that expire in the year 2013. The decrease
         to the net  operating  loss of  approximately  $4,407,000  results from
         cancellation of indebtedness  income, in connection with forgiveness of
         certain obligations to GP Strategies.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

9.       Employment and consulting agreement

         (a)      Employment agreement

         As of January 1, 1994, the Company entered into an employment agreement
         with  its  President  and  Chief  Executive  Officer.  Pursuant  to the
         Employment Agreement, the officer devoted approximately one-half of his
         time to serve as the Company's Chief  Executive  Officer and President.
         The  agreement  had a  three-year  term  with an  option  to renew  for
         successive  one-year  periods.  It  provided  that  the  officer  would
         receive,  in connection with services  rendered to the Company,  a base
         salary  in  the  amount  of  $150,000,  subject  to  adjustment  by the
         Compensation  Committee of the Board of  Directors.  In  addition,  the
         officer  received options to purchase an aggregate of 500,000 shares of
         Common Stock at an exercise price per share of $.50 under the Company's
         Stock Option Plan.

         The Company  determined not to renew the  Employment  Agreement and the
         Employment Agreement terminated on December 31, 1998.

         (b)      Consulting agreement

         As of January 1, 1994, the Company entered into a consulting  agreement
         with its Chairman of the Board. Pursuant to the agreement, the Chairman
         served as a consultant  to the Company for a period of three years.  In
         lieu of  consulting  fees or other  payments,  the Company  granted the
         Chairman  options to purchase an aggregate of 250,000  shares of Common
         Stock at an exercise  price per share of $.50,  which options vested in
         equal installments over a three year period commencing August 5, 1994.

         The  Chairman,  who is the  President  of GP  Strategies,  was  granted
         options to purchase an additional  250,000  shares of Common Stock from
         GP  Strategies,  pursuant to the GP  Strategies  American  Drug Company
         Stock Option Plan, on the same terms and subject to the same conditions
         as those granted to him by the Company.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

9.       Employment and consulting agreement (Continued)

         (b)      Consulting agreement (Continued)

         The Company  estimated  the fair value of the  services of the Chairman
         for the  initial  three  year  period  beginning  January 1, 1994 to be
         approximately  $250,000.  The Company  estimated  the fair value of the
         options  granted to the Chairman by the Company and by GP Strategies to
         be approximately $250,000 in the aggregate. Such amount was recorded as
         deferred  compensation  and as  capital  in  excess of par  value.  The
         deferred  compensation was amortized over the three year vesting period
         of the  options.  Amortization  for the year ended  December  31,  1996
         amounted  to $82,000  and is  included  in general  and  administrative
         expenses.   The  unamortized  balance  of  deferred   compensation  was
         reflected as a deduction from stockholders' equity.

         The  Company  valued the  Chairman's  services  at $80,000 for the year
         ended December 31, 1997, and has recorded this amount as a contribution
         to capital and compensation  expense.  This agreement was terminated in
         1998.

10.      Major customers and customers' deposits

         Several  customers  each  accounted  for more than 10% of the Company's
         revenues as follows:

         For the year ended  December 31, 1998,  no customer  accounted for more
         than 10% of the Company's revenue.

         1997     Two customers accounted for 41% and 27 % of revenues,
                   respectively.

         1996     One customer accounted for 18% of revenue.

         Export  revenues  represented  approximately  $84,000,  $1,123,000  and
         $842,000 of the Company's revenues in 1998, 1997 and 1996.


<PAGE>


                     AMERICAN DRUG COMPANY 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  American  Drug Company 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  subsidiary,  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 a deferred  compensation expense of $90,000 related to
         the issuance of the options to the employees of GP Strategies.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

11.      Stock options and warrants (Continued)

         (a)      Stock option plan (Continued)

         At December  31,  1998 and 1997,  the per share  weighted-average  fair
         value of stock options  granted during 1998 and 1996 was $.06 and $.40,
         on the date of grant using the modified  Black  Scholes  option-pricing
         model with the following  assumptions:  1998 - expected  dividend yield
         0%, risk-free interest rate of 5.6%,  expected  volatility of 66.7% and
         an  expected  life of 3  years;  1996 -  expected  dividend  yield  0%,
         risk-free interest rate of 6.6%,  expected volatility of 105.6%, and an
         expected life of 5 years.  There were no stock options  granted  during
         the year ended December 31, 1997.

         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
         loss  would  have been  increased  to the pro forma  amounts  indicated
         below:

                                                              1998       1997
                                                              ----       ----
         Net loss                   As reported              $(664)      $(857)
                                    Pro forma                 (670)       (869)
         Basic and diluted
          loss per share            As reported               (.05)       (.07)
                                    Pro forma                 (.05)       (.07)

         Pro forma net income  reflects  only  options  granted in 1995  through
         1998. Therefore,  the full impact of calculating  compensation cost for
         stock  options under SFAS No. 123 is not reflected in the pro forma net
         income amounts  presented above because  compensation cost is reflected
         over the options' vesting period of 5 years and  compensation  cost for
         options granted prior to January 1, 1995 is not considered.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

11.      Stock options and warrants (Continued)

         Stock option activity during the periods indicated is as follows:

                                     Number of            Weighted-Average
                                      Shares               Exercise Price 

Balance at December 31, 1995        1,510,000                $    .50

         Granted                       90,000                     .50
                                    ----------               --------
Balance at December 31, 1996        1,600,000                     .50
                                    -----------             ---------


         Expired                      (60,000)                    .50
                                     ------------            --------
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
                                    ===========              ========

         At  December  31,  1998 and 1997,  the  range of  exercise  prices  and
         weighted-average  remaining contractual life of outstanding options was
         $.13 to $.50 and $.50 and 3 years and 3 years, respectively.

         At December 31, 1998, 1997 and 1996, the number of options  exercisable
         was  1,350,000,   1,509,996  and  1,539,999,   respectively,   and  the
         weighted-average  exercise price of exercisable  options was $.17, $.50
         and $.50, respectively.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

11.      Stock options and warrants (Continued)

         (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, 1998 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.

         The Company has the right to cancel the  warrants if the closing  price
         of the  Company's  common  stock as  quoted by the OTC  Bulletin  Board
         during any ten consecutive trading days shall equal or exceed $1.00 per
         share.

12.      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.


<PAGE>


                     AMERICAN DRUG COMPANY AND SUBSIDIARIES

             Notes to Consolidated Financial Statements (Continued)

13.      Commitments and contingencies

The  Company  has  several  noncancellable  leases  which  cover real  property,
machinery  and  equipment.  Such leases  expire at various  dates with,  in some
cases, options to extend their terms.

Minimum rentals under long-term operating leases are as follows(in thousands):
                        Real               Machinery and
                     property                  equipment                Total 

1999                  $ 1,266                    $ 1,291               $ 2,557
2000                    1,266                      1,019                 2,285
2001                      949                        602                 1,551
2002                      886                        404                 1,290
2003                      886                         97                   983
After 2003              3,031                         20                 3,051
------------------------------------------------------------------------------
Total                 $ 8,284                     $3,433               $11,717
------------------------------------------------------------------------------

During  1998,  1997 and  1996,  the  Company  incurred  $804,000,  $158,000  and
$164,000, respectively, of rental expenses.


<PAGE>



                                                                  



Item 9. Changes in and Disagreements with Accountants and Financial Disclosure.

         KPMG LLP was  previously the Company's and its  subsidiaries  principal
accountants.  On  November  10,  1998,  that  firm's  appointment  as  principal
accountants  was terminated and Richard A. Eisner & Company,  LLP was engaged as
principal  accountants to audit the accounts of the Company and subsidiaries for
the year ending  December  31,  1998.  The  decision to change  accountants  was
recommended by the Board of Directors of the Company.

         In  connection  with the audits of the fiscal years ended  December 31,
1996 and December 31, 1997, and the subsequent  interim periods through June 30,
1998, there were no disagreements through November 10, 1998 with KPMG LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing  scope or  procedures,  which  disagreements,  if not resolved to their
satisfaction,  would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.

         The audit reports of KPMG LLP on the consolidated  financial statements
of the Company as of and for the years ended  December 31, 1997 and December 31,
1996 did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty,  audit scope or accounting  principles,
except as follows:  KPMG LLP's auditors'  report on the  consolidated  financial
statements  of the  Company  and its  subsidiary  as of and for the years  ended
December  31, 1997 and 1996  contained a separate  paragraph  stating  that "the
Company has suffered  recurring  losses from  operations  and has an accumulated
deficit  that raise  substantial  doubt about its ability to continue as a going
concern.  The consolidated  financial  statements do not include any adjustments
that might result from the outcome of this uncertainty."


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

         Information   with   respect  to  the   directors  of  the  Company  is
incorporated  herein by reference to the Company's  definitive  proxy  statement
pursuant to Regulation  14A,  which proxy  statement will be filed no later than
120 days after the end of the fiscal year covered by this Report.

Item 11. Executive Compensation

         Information  with respect to  Executive  Compensation  is  incorporated
herein by reference to the  Company's  definitive  proxy  statement  pursuant to
Regulation 14A, which proxy statement will be filed no later than 120 days after
the end of the fiscal year covered by this Report.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

         Information  with respect to Security  Ownership of Certain  Beneficial
Owners is  incorporated  herein by reference to the Company's  definitive  proxy
statement  pursuant to Regulation  14A,  which proxy  statement will be filed no
later than 120 days after the end of the fiscal year covered by this Report.

Item 13. Certain Relationships and Related Transactions

         Information   with  respect  to  Certain   Relationships   and  Related
Transactions  is  incorporated  herein by reference to the Company's  definitive
proxy statement  pursuant to Regulation 14A, which proxy statement will be filed
no later than 120 days after the end of the fiscal year covered by this Report.


<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) The following financial statements are included in Part II, Item 8:

                                                                           Page

        Independent Auditors' Reports.......................................18

        Financial Statements:

        Consolidated Balance Sheets -
        December 31, 1998 and 1997..........................................20

        Consolidated Statements of
        Operations - Years ended
        December 31, 1998, 1997 and 1996....................................22

        Consolidated Statements of Changes in
        Stockholders' Equity (Deficiency)- Years
        ended December 31, 1998, 1997 and 1996..............................23

        Consolidated Statements of Cash Flows
        Years ended December 31, 1998, 1997 and 1996........................24

        Notes to Consolidated Financial Statements..........................25

(a)(2)   Schedules have been omitted because they are not required
         or are not applicable, or the required information has been
          included in the financial statements or the notes thereto.

(a)(3)   See accompanying Index to Exhibits

(b)      On  November  10,  1998,  the  Registrant  filed a  Report  on Form 8-K
         reporting  a  change  in the  Registrant's  Certifying  Accountants  in
         response to Item 4.


<PAGE>


                                                              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.

                                          AMERICAN DRUG COMPANY

                                          Richard T. Grad, President
                                          and Chief Executive Officer
Dated:   March 31, 1999

         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




<PAGE>



                                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           Employment Agreement, dated as of January 1, 1994, between Martin
               M. Pollak and the Registrant. Incorporated herein by reference to
               Exhibit 10.4 of the Registrant's  Registration  Statement on Form
               S-1 filed on July 22, 1994, Registration Statement No. 33-78252.

10.3           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.

10.4           Form of  Warrant  Agreement,  dated as of  August  5,
               1994,  between  the  Registrant,   The  Harris  Trust
               Company of New York, as Warrant Agent, and the holder
               of Warrants from time to time. Incorporated herein by
               reference  to  Exhibit   10.8  of  the   Registrant's
               Registration  Statement on Form S-1 filed on July 22,
               1994, Registration Statement No.
               33-78252.

10.5           Voting Agreement, dated as of August 31, 1998, from GP Strategies
               Corporation.*

10.6           Lease  dated as of February 1, 1986  between  Vernel  Company and
               Five Star Group, Inc., as amended on July 25, 1994.*

10.7           Lease dated as of May 4, 1983  between  Vornado,  Inc.,  and Five
               Star Group, Inc.*

10.8           Lease  Modification  and Extension  Agreement  dated July 6, 1996
               between  Hanover  Public  Warehousing,  Inc. and Five Star Group,
               Inc.*

10.9           Agreement  between  Five Star  Group and Local No. 11  affiliated
               with International Brotherhood of Teamsters.*

10.10          Form  of 7% Convertible Note due 2001 of the Registrant.
               Incorporated   herein  by   Reference   to  Exhibit  4.1  of  the
               Registrant's  Form 10-Q for the  second  quarter  ended  June 30,
               1996.

10.11          Asset  Purchase  Agreement  dated as of August 31,  1998  between
               American  Drug  Company  and Five Star Group,  Inc.  Incorporated
               herein by  Reference to Exhibit 10 of the  Registrant's  Form 8-K
               dated September 15, 1998.

10.12          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.

16             Letter from KPMG Peat Marwick re change in certifying accountant.
               Incorporated  by  reference  to  Exhibit  16 to the  Registrant's
               Report on Form 8-K filed in November 18, 1998

21             Subsidiaries.*

22             N/A

23             Consent of Independent Auditors*

*Filed herewith