UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarter ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
Commission File Number: 033-78252
FIVE STAR PRODUCTS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3729186
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip code)
(212) 230-9500
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(Registrant's telephone number, including area code)
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______
--------
Number of shares outstanding of each of issuer's classes of common stock as of
August 14, 2002:
Common Stock 15,023,867 shares
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
June 30, 2002 and December 31, 2001 1
Consolidated Condensed Statements of Operations-
Three Months and Six Months Ended June 30,
2002 and 2001 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 4
Notes to Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information 10
Signatures 11
PART I. FINANCIAL INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
-------- ---------
ASSETS (unaudited) *
Current assets
Cash $ 56 $ 60
Accounts receivable, net 14,819 11,215
Inventory (finished goods) 20,472 23,325
Prepaid expenses and other current assets 662 445
----------- -----------
Total current assets 36,009 35,045
--------- ---------
Property, plant and equipment, at cost 1,790 1,653
Less accumulated depreciation (879) (749)
---------- ---------
911 904
---------- ----------
Deferred tax asset 193 193
Other assets 42 42
----------- -----------
$ 37,155 $ 36,184
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2001 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
June 30, December 31,
2002 2001
----------- ------------
(unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 17,666 $ 16,414
Accounts payable and accrued expenses (including
due to affiliates of $462 and $354) 11,818 12,348
------- --------
Total current liabilities 29,484 28,762
------- ---------
Long-term debt to GP Strategies 5,000 5,000
------- ---------
Stockholders' equity
Common stock 130 130
Capital in excess of par value 7,589 7,589
Accumulated deficit (5,013) (5,297)
Treasury stock, at cost (35)
-------- -------------
Total stockholders' equity 2,671 2,422
-------- --------
$ 37,155 $ 36,184
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2001 has been
summarized from the Company's audited Consolidated Balance sheet as of that
date.
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
-------- ------- ------- ---------
Sales $ 25,289 $ 25,413 $ 50,779 $ 49,879
Cost of goods sold 21,119 21,099 42,429 41,433
-------- -------- -------- -------
Gross margin 4,170 4,314 8,350 8,446
Selling, general and administrative
expenses (3,702) (3,722) (7,207) (7,043)
Management fee to GP Strategies (19) (15) (38) (34)
Interest expense (316) (456) (614) (951)
---------- --------- --------- --------
Income before income taxes 133 121 491 418
Income tax expense (57) ( 47) (207) (167)
----------- ---------- --------- --------
Net income $ 76 $ 74 $ 284 $ 251
=========== ========= ========= ========
Net income per share
Basic $ .01 $ .01 $ .02 $ .02
----------- --------- ---------- ---------
Diluted .01 .01 .02 .02
------------ ---------- ----------- ----------
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months
ended June 30,
-----------------------
2002 2001
-------- ---------
Cash flows from operations:
Net income $ 284 $ 251
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 130 155
Changes in other operating items:
Accounts receivable (3,604) (4,560)
Inventory 2,853 937
Prepaid expenses and other current assets (217) (39)
Accounts payable and accrued expenses (530) 120
--------- ---------
Net cash used in operations (1,084) (3,136)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (137) (91)
--------- ---------
Cash flows from financing activities:
Net proceeds from short-term borrowings 1,252 3,280
Purchase of treasury stock (35)
--------- ---------
Net cash provided by financing activities 1,217 3,280
-------- --------
Net (decrease) increase in cash (4) 53
Cash at beginning of period 60 51
--------- ---------
Cash at end of period $ 56 $ 104
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 611 $ 1,172
========= =========
Income taxes $ 2 $ 291
========= =========
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of reporting
The accompanying unaudited financial statements of Five Star Products,
Inc. and subsidiaries (the "Company" or "Five Star") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such statements include all adjustments (consisting only of normal
recurring items), which are considered necessary for a fair presentation of the
Company's financial position at June 30, 2002, and the results of its operations
and cash flows for the quarter and six months then ended. The results of
operations for the quarter and six months ended June 30, 2002 are not
necessarily indicative of the operating results for the full year. It is
suggested that these financial statements be read in conjunction with the
financial statements and related disclosures for the year ended December 31,
2001 included in the Company's Form 10-K.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Summary of significant accounting policies
Inventory is valued at the lower of cost, using the first-in, first-out
(FIFO) method, or market. Inventory consists solely of finished products.
3. Subsequent events
On August 2, 2002, the Company entered into a transaction to reduce its
long-term debt to GP Strategies. The principal amount of said debt was reduced
by $500,000 to a new principal amount of $4,500,000. The Company executed a new
promissory note to GP Strategies but under the same terms and conditions as the
original note. In connection with this debt reduction, GP Strategies received
2,272,727 shares of the Company's common stock. Of these shares, 2,003,496
shares were newly issued and 269,231 shares had been held in treasury. The
transaction valued the Company's stock at $0.22 a share, which was at a premium
to the open market value at that time. As a result of this transaction, GP
Strategies' ownership of the Company has increased to approximately 47% from 37%
of the Company's outstanding shares of common stock.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Earnings per share
Earnings per share (EPS) for the quarter and six months ended June 30,
2002 and 2001 are as follows (in thousands, except per share amounts):
Three months Six months
ended June 30, ended June 30,
------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic EPS
Net income $ 76 $ 74 $ 284 $ 251
Weighted average shares
outstanding 12,751 13,020 12,841 13,020
-------- ------ -------- ------
Basic earnings per share $ .01 $ .01 $ .02 $ .02
========= ========= ========== =========
Diluted EPS
Net income $ 76 $ 74 $ 284 $ 251
Weighted average shares
outstanding 12,751 13,020 12,841 13,020
Dilutive effect of stock options
and warrants 453 277 258 105
---------- --------- --------- --------
Weighted average shares
outstanding, diluted 13,204 13,297 13,099 13,125
-------- ------- ------- -------
Diluted earnings per share $ .01 $ .01 $ .02 $ .02
========== ========= ========== =========
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
based upon the weighted average number of common shares outstanding during the
period, assuming the issuance of common shares for all dilutive potential common
shares outstanding.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company had income before income taxes of $133,000 and $491,000 for the
quarter and six months ended June 30, 2002 as compared to income before income
taxes of $121,000 and $418,000 for the quarter and six months ended June 30,
2001. The increased income before income taxes for the second quarter of 2002 is
the result of reduced interest expense, partially offset by reduced gross
margin.
Sales
The Company had sales of $25,289,000 and $50,779,000 for the quarter and six
months ended June 30, 2002, compared to sales of $25,413,000 and $49,879,000 for
the quarter and six months ended June 30, 2001. The reduced sales for the second
quarter of 2002 were attributable to reduced sales volume among the Company's
existing customer base; sales volume was adversely affected by uncharacteristic
weather patterns as well as a slowdown in the general economic recovery.
Gross margin
Gross margin decreased to $4,170,000 or 16.5% and $8,350,000 or 16.4% of net
sales for the quarter and six months ended June 30, 2002, as compared to
$4,314,000 or 17% of net sales and $8,446,000 or 16.9% of net sales for the
quarter and six months ended June 30, 2001. The decreased gross margin for the
second quarter of 2002 was the result of reduced sales combined with a decreased
gross margin percentage. The decreased gross margin percentage was due to
increased competitive pressures throughout the Company's sales territory,
partially offset by reduced warehousing costs.
Selling, general and administrative expense
The Company had selling, general and administrative (SG&A) expense of $3,702,000
and $7,207,000 for the quarter and six months ended June 30, 2002, compared to
$3,722,000 and $7,043,000 for the quarter and six months ended June 30, 2001.
SG&A expense for the second quarter was largely unchanged in amount.
Interest expense
The Company had interest expense of $316,000 and $614,000 for the quarter and
six months ended June 30, 2002, compared to interest expense of $456,000 and
$951,000 for the quarter and six months ended June 30, 2001. The reduced
interest expense for the second quarter of 2002 is the result of reduced
interest rates as well as lower average short-term borrowings.
Liquidity and Capital Resources
At June 30, 2002 the Company had cash of $56,000. Five Star has a $25,000,000
loan and security agreement with a group of banks. The credit facility allows
Five Star to borrow up to 50% of eligible inventory and up to 80% of eligible
accounts receivable. At June 30, 2002 the Company had borrowed $17,666,000 and
had $3,657,000 of additional availability under the loan agreement.
Management believes that cash generated from operations and borrowing
availability under existing credit agreements will be sufficient to fund the
Company's working capital requirements.
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 Company will not achieve the projected levels of profitability and revenues,
and those risks and uncertainties detailed in the Company's periodic reports and
registration statements filed with the Securities and Exchange Commission.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
99.1 Certification of President pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Okley Act
of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Okley Act of 2002
b. Reports on Form 8-K
None
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
June 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
FIVE STAR PRODUCTS, INC.
DATE: August 14, 2002 BY: Charles Dawson
President
DATE: August 14, 2002 BY: Roger P. Antaki
Chief Financial Officer