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 September 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
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(212) 230-9500
- ------------------------------------------------------------------------------
(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
November 5, 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 -
September 30, 2002 and December 31, 2001 1
Consolidated Condensed Statements of Operations-
Three Months and Nine Months Ended September 30,
2002 and 2001 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 4
Notes to Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 10
Signatures 11
Certification of Chief Executive Officer 12
Certification of Chief Financial Officer 14
PART I. FINANCIAL INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
2002 2001
------------- --------------
(unaudited) *
ASSETS
Current assets
Cash $ 6 $ 60
Accounts receivable, net 12,188 11,215
Inventory (finished goods) 19,482 23,325
Prepaid expenses and other current assets 683 445
----------- ----------
Total current assets 32,359 35,045
--------- --------
Property, plant and equipment, at cost 1,846 1,653
Less accumulated depreciation (948) (749)
---------- ----------
898 904
----------- ----------
Deferred tax asset 193 193
Other assets 42 42
----------- -----------
$ 33,492 $ 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)
September 30, December 31,
2002 2001
----------- -----------
(unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 13,955 $ 16,414
Accounts payable and accrued expenses
(including due to affiliates of $266 and $354) 11,692 12,348
--------- ---------
Total current liabilities 25,647 28,762
--------- ---------
Long-term debt to GP Strategies 4,500 5,000
---------- ---------
Stockholders' equity
Common stock 153 130
Capital in excess of par value 8,066 7,589
Accumulated deficit (4,839) (5,297)
Treasury stock, at cost (35)
---------- ---------
Total stockholders' equity 3,345 2,422
--------- ---------
$ 33,492 $ 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 Nine Months ended
September 30, September 30,
2002 2001 2002 2001
-------- ------- ------- ---------
Sales $ 24,372 $ 24,784 $ 75,151 $ 74,663
Cost of goods sold 19,925 20,402 62,354 61,835
-------- -------- -------- ---------
Gross margin 4,447 4,382 12,797 12,828
Selling, general and administrative
expenses (3,847) (3,656) (11,054) (10,673)
Management fee to GP Strategies (27) (30) (65) (90)
Interest expense (275) (412) (889) (1,363)
--------- ---------- --------- --------
Income before income taxes 298 284 789 702
Income tax expense (124) (113) (331) (280)
--------- -------- --------- --------
Net income $ 174 $ 171 $ 458 $ 422
======== ========= ========= ========
Income per share
Basic $ .01 $ .01 $ .04 $ .03
--------- ---------- ---------- ---------
Diluted .01 .01 .04 .03
---------- ----------- ----------- ---------
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months
ended September 30,
----------------------------
2002 2001
-------- ------------
Cash flows from operations:
Net income $ 458 $ 422
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 199 233
Changes in other operating items:
Accounts receivable (973) (2,890)
Inventory 3,843 1,806
Prepaid expenses and other current assets (238) (228)
Accounts payable and accrued expenses (656) (791)
----------- --------
Net cash provided by (used in) operations 2,633 (1,448)
----------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (193) (128)
----------- ----------
Cash flows from financing activities:
Net (repayments of) proceeds from short-term borrowings (2,459) 1,612
Purchase of treasury stock (35) -
------------- ------------
Net cash (used in) provided by financing activities (2,494) 1,612
----------- --------
Net (decrease) increase in cash (54) 36
Cash at beginning of period 60 51
-------------- -----------
Cash at end of period $ 6 $ 87
============== ==========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 903 $ 1,498
============ =========
Income taxes $ 171 $ 427
============ ==========
Non-cash financing activity:
Conversion of long-term debt to
GP Strategies to common stock $ 500 $ -
=========== ==========
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
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 September 30, 2002, and the results of its
operations and cash flows for the quarter and nine months then ended. The
results of operations for the quarter and nine months ended September 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.
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. Conversion of Long-Term Debt to GP Strategies to Common Stock
On August 2, 2002, the Company entered into a transaction to reduce its
long-term debt to GP Strategies. The principal amount of said debt was reduced
by $500,000 to a new principal amount of $4,500,000. The Company executed a new
promissory note to GP Strategies but under the same terms and conditions as the
original note. In connection with this debt reduction, GP Strategies received
2,272,727 shares of the Company's common stock. The transaction valued the
Company's stock at $0.22 a share, which was at a premium to the open market
value at that time. As a result of this transaction, GP Strategies' ownership of
the Company has increased to approximately 46% from 37% of the Company's
outstanding shares of common stock.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Earnings per share
Earnings per share (EPS) for the quarter and nine months ended
September 30, 2002 and 2001 are as follows (in thousands, except per share
amounts):
Three months Nine months
ended September 30, ended September 30,
------------------------ ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic EPS
Net income $ 174 $ 171 $ 458 $ 422
--------- --------- -------- --------
Weighted average shares
outstanding 14,233 13,020 12,811 13,020
------- -------- ------- -------
Basic earnings per share $ .01 $ .01 $ .04 $ .03
---------- --------- --------- ---------
Diluted EPS
Net income $ 174 $ 171 $ 458 $ 422
--------- -------- ------- -------
Weighted average shares
outstanding 14,233 13,020 12,811 13,020
Dilutive effect of stock options
and warrants 392 368 272 182
---------- -------- --------- ---------
Weighted average shares
outstanding, diluted 14,625 13,388 13,083 13,202
-------- -------- ------- -------
Diluted earnings per share $ .01 $ .01 $ .04 $ .03
---------- --------- --------- --------
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is based
upon the weighted average number of common shares outstanding during the period,
assuming the issuance of common shares for all potential dilutive common shares
outstanding.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company had income before income taxes of $298,000 and $789,000 for the
quarter and nine months ended September 30, 2002 as compared to income before
income taxes of $284,000 and $702,000 for the quarter and nine months ended
September 30, 2001. The increased income before income taxes for the quarter
ended September 30, 2002 was the result of reduced interest expense as well as
increased gross margin, offset in part by increased selling, general and
administrative expense. The increased income before income taxes for the nine
months ended September 30, 2002 was the result of reduced interest expense,
offset in part by increased selling, general and administrative expense.
Sales
The Company had sales of $24,372,000 and $75,151,000 for the quarter and nine
months ended September 30, 2002, as compared to sales of $24,784,000 and
$74,663,000 for the quarter and nine months ended September 30, 2001. The
reduced sales for the quarter ended September 30, 2002 were attributable to
reduced sales volume among the Company's existing customer base. Sales volume
was adversely affected by unfavorable general economic conditions. The increased
sales for the nine months ended September 30, 2002 reflect increased sales in
the first quarter of 2002, offset in part by reduced sales in the second and
third quarters of 2002. The variability of sales in 2002 was attributable to
variability in sales volume among the Company's existing customer base.
Gross margin
Gross margin increased to $4,447,000 or 18.2% of net sales and declined to
$12,797,000 or 17.0% of net sales for the quarter and nine months ended
September 30, 2002, as compared to $4,382,000 or 17.7% of net sales and
$12,828,000 or 17.2% of net sales for the quarter and nine months ended
September 30, 2001. The increased gross margin dollars for the quarter ended
September 30, 2002 was the result of increased gross margin percentage, offset
in part by reduced sales. The increased gross margin percentage was largely due
to reduced warehousing costs. For the nine months ended September 30, 2002,
gross margin was largely unchanged in amount. The slight reduction in gross
margin percentage was the result of increased competitive pressures throughout
the Company's sales territory and increased purchasing costs, offset in part by
reduced warehousing costs.
Selling, general and administrative expense
The Company had Selling, general and administrative (SG&A) expense of $3,847,000
and $11,054,000 for the quarter and nine months ended September 30, 2002, as
compared to $3,656,000 and $10,673,000 for the quarter and nine months ended
September 30, 2001. The increased SG&A expense for the quarter ended September
30, 2002 was attributable to increased general as well as selling expense,
offset in part by reduced delivery expense. The increase in general expense was
largely due to write-offs of receivables deemed no longer collectible by the
Company. The increased SG&A expense for the nine months ended September 30, 2002
was largely attributable to write-offs of receivables and increased insurance
costs.
Interest expense
The Company had interest expense of $275,000 and $889,000 for the quarter and
nine months ended September 30, 2002, as compared to interest expense of
$412,000 and $1,363,000 for the quarter and nine months ended September 30,
2001. The reduced interest expense in 2002 is the result of reduced interest
rates as well as lower average short-term borrowings.
Liquidity and Capital Resources
At September 30, 2002 the Company had cash of approximately $6,000. The Company
has a $25,000,000 loan and security agreement with a group of banks. This credit
facility allows the Company to borrow up to 50% of eligible inventory and up to
80% of eligible accounts receivable. At September 30, 2002, the Company had
borrowed $13,955,000 and had $4,230,000 of additional availability under the
loan agreement.
On August 2, 2002, the Company entered into a transaction to reduce its
long-term debt to GP Strategies. The principal amount of said debt was reduced
by $500,000 to a new principal amount of $4,500,000. The Company executed a new
promissory note to GP Strategies but under the same terms and conditions as the
original note. In connection with this debt reduction, GP Strategies received
2,272,727 shares of the Company's common stock. The transaction valued the
Company's stock at $0.22 a share, which was at a premium to the open market
value at that time. As a result of this transaction, GP Strategies' ownership of
the Company has increased to approximately 46% from 37% of the Company's
outstanding shares of common stock
Management believes that cash generated from operations and borrowing
availability under existing credit agreements will be sufficient to fund the
Company's working capital requirements.
Application of Critical Accounting Policies
The Company's consolidated condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting policies have a significant impact on amounts
reported in the financial statements. A summary of those significant accounting
policies can be found in Note 2 to the Company's financial statements included
in the Company's 2001 Annual Report on Form 10-K. The Company has not adopted
any significant new accounting policies during the nine months ended September
30, 2002.
Among the significant judgments made by management in the preparation of the
Company's financial statements are the determination of the allowance for
doubtful accounts and adjustments of inventory valuations. These adjustments are
made each quarter in the ordinary course of accounting.
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 3. Quantitative and Qualitative Disclosures about Market Risk
We have no material changes to the disclosure on this matter
made in our report on Form 10-K for the fiscal year ended
December 31, 2001
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. The
Company's Chief Executive Officer and Chief Financial Officer
have reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act
Rules 240.13a-14(c) and 15d-14(c)) as of a date within ninety
days before the filing date of this quarterly report. Based on
that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's current
disclosure controls and procedures are effective, timely
providing them with material information relating to the
Company required to be disclosed in the reports the Company
files or submits under the Exchange Act.
b. Changes in internal controls. There have not been any
significant changes in the Company's internal controls or in
other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses and therefore
no corrective actions were taken.
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-Oxley 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-Oxley Act of 2002
b. Reports on Form 8-K
None
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
September 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: November 19, 2002 BY: Charles Dawson
President
DATE: November 19, 2002 BY: Roger P. Antaki
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Charles Dawson, President of Five Star Products, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Five Star
Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
Charles Dawson
President
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Roger P. Antaki, Chief Financial Officer of Five Star Products,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Five Star
Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
Roger P. Antaki
Chief Financial Officer