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 quarterly period ended March 31, 2003
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 incorporation or organization) (I.R.S. Employer Identification No.)
777 Westchester Avenue, Fourth Floor, White Plains, NY 10604
(Address of principal executive offices) (Zip code)
(914) 249-9700
(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 April 29, 2003:
Common Stock, par value $0.01 per share
14,937,867 shares
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I.
Financial Information
Consolidated Condensed Balance Sheets -
March 31, 2003 and December 31, 2002
1
Consolidated Condensed Statements of Operations-
Three Months ended March 31, 2003 and 2002
3
Consolidated Condensed Statements of Cash Flows -
Three Months ended March 31, 2003 and 2002
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
Certification of Chief Executive Officer
12
Certification of Chief Financial Officer
13
PART I. FINANCIAL INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
March 31,
December 31,
2003
2002
(unaudited)
*
ASSETS
Current assets
Cash
$ 7
$ 16
Accounts receivable, net
15,555
10,162
Inventory
24,628
23,664
Prepaid expenses and other current assets
(including due from affiliates of $71 and $33)
588
372
Total current assets
40,778
34,214
Property, plant and equipment, at cost
1,934
1,882
Less accumulated depreciation
(1,085)
(1,016)
Property, plant and equipment, net
849
866
Deferred income taxes
244
244
Other assets
42
42
$ 41,913
$ 35,366
* The Consolidated Condensed Balance Sheet as of December 31, 2002 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)
March 31,
December 31,
2003
2002
(unaudited)
*
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings
$ 20,377
$ 13,808
Accounts payable and accrued expenses
13,533
13,777
Total current liabilities
33,910
27,585
Long-term debt to GP Strategies
4,500
4,500
Stockholders' equity
Common stock
153
153
Capital in excess of par value
8,069
8,069
Accumulated deficit
(4,676)
(4,906)
Treasury stock, at cost
(43)
(35)
Total stockholders' equity
3,503
3,281
$ 41,913
$ 35,366
* The Consolidated Condensed Balance Sheet as of December 31, 2002 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
March 31, _
2003
2002
Sales
$ 25,215
$ 25,490
Cost of goods sold
20,907
21,310
Gross margin
4,308
4,180
Selling, general and administrative
expenses
(3,631)
(3,505)
Management fee to GP Strategies
(33)
(19)
Interest expense
(248)
(298)
Income before income taxes
396
358
Income tax expense
(166)
(150)
Net income
$ 230
$ 208
Earnings per share
Basic
$ .02
$ .02
Diluted
$ .02
$ .02
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three months
ended March 31, _
2003
2002
Cash flows from operations:
Net income
$ 230
$ 208
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization
69
64
Changes in other operating items:
Accounts receivable
(5,393)
(6,271)
Inventory
(964)
1,248
Prepaid expenses and other current assets
(216)
(216)
Accounts payable and accrued expenses
(244)
1,753
Net cash used in operations
(6,518)
(3,214)
Cash flows from investing activities:
Additions to property, plant and equipment
(52)
(74)
Cash flows from financing activities:
Net proceeds from short-term borrowings
6,569
3,329
Purchase of treasury stock
(8)
(35)
Net cash provided by financing activities
6,561
3,294
Net (decrease) increase in cash
(9)
6
Cash at beginning of period
16
60
Cash at end of period
$ 7
$ 66
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest
$ 237
$ 290
Income taxes
$ 197
$ 2
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”) 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 certain information and footnotes required by accounting principles generally accepted in the United States 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 March 31, 2003, and the results of its operations and cash flows for the quarter then ended. The results of operations for the quarter ended March 31, 2003 are not necessarily indicative of the operating results for the full year. It is suggested that these finan cial statements be read in conjunction with the financial statements and related disclosures for the year ended December 31, 2002 included in the Company’s Form 10-K.
2.
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.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3.
Earnings per share
Earnings per share (EPS) for the quarter ended March 31, 2003 and 2002 are as follows (in thousands, except per share amounts):
Three months
ended March 31,
2003
2002
Basic EPS
Net income
$ 230
$ 208
Weighted average shares
outstanding
14,961
12,932
Basic earnings per share
$ .02
$ .02
Diluted EPS
Net income
$ 230
$ 208
Weighted average shares
outstanding
14,961
12,932
Dilutive effect of stock options
and warrants
-
28
Weighted average shares
outstanding, diluted
14,961
12,960
Diluted earnings per share
$ .02
$ .02
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
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4.
Stock-based compensation
Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” encourages the use of the fair value based method of accounting for stock-based employee compensation. Alternatively, SFAS No. 123 allows entities to continue to apply the intrinsic value method prescribed by the Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations and provide pro forma disclosures of net income (loss) and earnings (loss) per share, as if the fair value based method of accounting had been applied to employee awards. The Company has elected to continue to apply the provisions of APB Opinion 25 and provide the disclosures required by SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which was released in December, 2002, as an amendment of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards.
Three months
ended March 31,
2003
2002
Reported net income
$ 230
$ 208
Stock-based employee compensation
determined under the intrinsic value
method, net of tax
-
-
Stock-based employee compensation
determined under the fair value based
method, net of tax
(7)
(8)
Pro-forma net income
$ 223
$ 200
Basic earnings per share:
As reported
$ .02
$ .02
Pro forma
$ .01
$ .02
Diluted earnings per share:
As reported
$ .02
$ .02
Pro forma
$ .01
$ .02
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 $396,000 for the quarter ended March 31, 2003 as compared to $358,000 for the quarter ended March 31, 2002. The increase in income before income taxes was the result of increased gross margin as well as reduced interest expense, offset in part by increased selling, general and administrative expenses.
Sales
The Company had sales of $25,215,000 for the quarter ended March 31, 2003, as compared to $25,490,000 for the quarter ended March 31, 2002. The reduced sales were attributable to reduced sales volume among the Company’s existing customer base. Sales volume was adversely affected by inclement weather as well as the general softness in the economy.
Gross margin
Gross margin increased to $4,308,000 or 17.1% of net sales for the quarter ended March 31, 2003 as compared to $4,180,000 or 16.4% of net sales for the quarter ended March 31, 2002. The increased gross margin dollars were the result of increased gross margin percentage, offset in part by reduced sales. The increased gross margin percentage was due to improved purchasing efficiencies offset by a small increase in warehousing costs. In addition, the increase in gross margin percentage was affected by a slight shift in the mix of products sold caused by the change in the weather relative to last year.
Selling, general and administrative expense
The Company had Selling, general and administrative (SG&A) expenses of $3,631,000 for the quarter ended March 31, 2003 as compared to $3,505,000 for the quarter ended March 31, 2002. The increase in SG&A expenses was partly attributable to increased payroll costs reflecting employee merit increases.
Interest expense
The Company had interest expense of $248,000 for the quarter ended March 31, 2003 as compared to interest expense of $298,000 for the quarter ended March 31, 2002. The reduced interest expense in 2003 is the result of reduced interest rates.
Liquidity and Capital Resources
At March 31, 2003 the Company had cash of approximately $7,000. 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 March 31, 2003, the Company had borrowed $20,377,000 and had $3,932,000 of additional availability under the loan agreement.
During the first quarter of 2003, the Company repurchased an aggregate of 86,000 shares of its common stock on the open market at a cost of $8,300.
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 through at least the next twelve months.
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 2002 Annual Report on Form 10-K. The Company has not adopted any significant new accounting policies during the quarter ended March 31, 2003.
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.
PART II. OTHER INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
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, 2002.
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
March 31, 2003
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: May 12, 2003
BY:
Charles Dawson
President
DATE: May 12, 2003
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, Chief Executive 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: May 12, 2003
Charles Dawson
Chief Executive Officer and 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: May 12, 2003
Roger P. Antaki
Chief Financial Officer
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