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 June 30, 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 (I.R.S. Employer
of incorporation or organization) 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
July 29, 2003:
Common Stock, par value $0.01 per share 14,937,867 shares
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
June 30, 2003 and December 31, 2002 1
Consolidated Condensed Statements of Operations-
Three Months and Six Months Ended June 30,
2003 and 2002 3
Consolidated Condensed Statements of Comprehensive
Income- Three Months and Six Months Ended June 30,
2003 and 2002 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Condensed Financial
Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information 14
Signatures 15
PART I. FINANCIAL INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
----------- ------------
(unaudited) *
ASSETS
Current assets
Cash 7 $ 16
Accounts receivable, net 13,653 10,162
Inventory 23,008 23,664
Prepaid expenses and other current assets
(including due from affiliates of $37 and $33) 619 372
--------- -----------
Total current assets 37,287 34,214
--------- ---------
Property, plant and equipment, at cost 2,001 1,882
Less accumulated depreciation (1,156) (1,016)
--------- ----------
Property, plant and equipment, net 845 866
Deferred income taxes 299 244
Other assets 42 42
--------- ------------
Total assets $ 38,473 $ 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 SUBISIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
June 30, December 31,
2003 2002
----------- ------------
(unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 20,113 $ 13,808
Accounts payable and accrued expenses 10,730 13,777
------- --------
Total current liabilities 30,843 27,585
------- ---------
Long-term debt to GP Strategies 4,000 4,500
-------- ---------
Interest rate swap, at market 132 -
-------- -------------
Stockholders' equity
Common stock 153 153
Capital in excess of par value 8,070 8,069
Accumulated deficit (4,605) (4,906)
Accumulated other comprehensive income (loss) (77) -
Treasury stock, at cost (43) (35)
-------- -------------
Total stockholders' equity 3,498 3,281
-------- ----------
Total liabilities and stockholders' equity $ 38,473 $ 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 SUBISIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
-------- ------- ------- ---------
Sales $ 24,442 $ 25,289 $ 49,657 $ 50,779
Cost of goods sold 20,297 21,119 41,204 42,429
-------- -------- -------- -------
Gross margin 4,145 4,170 8,453 8,350
Selling, general and administrative
expenses (3,705) (3,702) (7,336) (7,207)
Management fee to GP Strategies (33) (19) (66) (38)
Interest expense (284) (316) (532) (614)
---------- --------- --------- --------
Income before income taxes 123 133 519 491
Income tax expense (52) (57) (218) (207)
----------- ---------- --------- --------
Net income $ 71 $ 76 $ 301 $ 284
=========== ========= ========= ========
Net income per share
Basic $ .00 $ .01 $ .02 $ .02
----------- --------- ---------- ---------
Diluted $ .00 $ .01 $ .02 $ .02
----------- --------- ---------- ---------
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
-------- ------- ------- ---------
Net income $ 71 $ 76 $ 301 $ 284
Other comprehensive income (loss), net of tax:
Change in value of cash flow hedge,
net of tax benefit of $55 (77) - (77) -_
----------- ----------- ---------- ----------
Comprehensive income (loss) $ (6) $ 76 $ 224 $ 284
============ ========= ========= ========
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,
2003 2002
-------- -----------
Cash flows from operations:
Net income $ 301 $ 284
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 140 130
Issuance of compensatory stock options 1 -
Changes in other operating items:
Accounts receivable, net (3,491) (3,604)
Inventory 656 2,853
Prepaid expenses and other current assets (247) (217)
Accounts payable and accrued expenses (3,047) (530)
-------- ---------
Net cash used in operating activities (5,687) (1,084)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment, at cost (119) (137)
--------- ----------
Cash flows from financing activities:
Net proceeds from short-term borrowings 6,305 1,252
Repayment of long-term borrowings (500) -
Purchase of treasury stock (8) (35)
---------- ----------
Net cash provided by financing activities 5,797 1,217
-------- --------
Net decrease in cash (9) (4)
Cash at beginning of period 16 60
---------- ----------
Cash at end of period $ 7 $ 56
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 519 $ 611
========= =========
Income taxes $ 329 $ 2
========= ===========
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") 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 June 30, 2003, 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, 2003 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,
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.
3. Short-term borrowings
On June 20, 2003, the Company's wholly-owned subsidiary, Five Star
Group, Inc., obtained a new Loan and Security Agreement (the "new Loan
Agreement") with Fleet Capital Corporation as sole lender to replace the Loan
and Security Agreement by and among three banks which was to have matured on
September 30, 2004 (the "old Loan Agreement"). The new Loan Agreement has a
five-year term, with a maturity date of June 30, 2008. The new Loan Agreement
provides for a $25,000,000 revolving credit facility, which allows Five Star
Group, Inc. to borrow based upon a formula of up to 55% of eligible inventory
and 80% of eligible accounts receivable, as defined therein. The interest rates
under the new Loan Agreement consist of LIBOR plus a credit spread for
borrowings not to exceed $15,000,000 and the prime rate plus a credit spread for
borrowings in excess of the above-mentioned LIBOR-based borrowings. The credit
spreads can be reduced in the event that Five Star Group, Inc. achieves and
maintains certain performance benchmarks. At June 30, 2003, approximately
$20,113,000 was outstanding under the new Loan Agreement and approximately
$1,712,000 was available to be borrowed.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Short-term borrowings (continued)
In connection with the new Loan Agreement, Five Star Group, Inc. also
entered into a derivative transaction with Fleet National Bank on June 20, 2003.
The derivative transaction is an interest rate swap and has been designated as a
hedge. Effective July 1, 2004 through June 30, 2008, Five Star Group, Inc. will
pay a fixed interest rate of 3.38% to Fleet National Bank on notional principal
of $12,000,000. In return, Fleet National Bank will pay to Five Star Group, Inc.
a floating rate, namely, LIBOR, on the same notional principal amount. The
credit spread under the new Loan Agreement is not included in, and will be paid
in addition to, this fixed interest rate of 3.38%.
4. Derivatives and hedging activities
Upon entering into the interest rate swap described in Note 3, the
Company adopted SFAS No. 133, as amended, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires the Company to recognize all
derivatives in the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through earnings. If the derivative is a cash
flow hedge, changes in the fair value of the derivative are recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.
The Company is a party to an interest rate swap agreement designated as
a cash flow hedge whereby changes in the cash flows of the swap will offset
changes in the interest rate payments on the Company's variable-rate revolving
loan, thereby reducing the Company's exposure to fluctuations in LIBOR. The fair
value of the interest rate swap at June 30, 2003 was recognized through a charge
to accumulated other comprehensive income.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Long-term borrowings and subsequent events
The Company's wholly-owned subsidiary, Five Star Group, Inc., has an
unsecured note payable (the "Note Payable") to JL Distributors, Inc., a
wholly-owned subsidiary of GP Strategies, Inc., bearing interest at 8%, payable
quarterly, with the principal due September 30, 2004. The Note Payable is
subordinated to the indebtedness under the new Loan Agreement (see Note 3)
according to an Agreement of Subordination & Assignment (the "Subordination
Agreement") between Five Star Group, Inc. and JL Distributors, Inc. dated June
20, 2003. The Subordination Agreement permits the annual repayment of principal
under certain circumstances. In accordance with the provisions of the
Subordination Agreement, on June 27, 2003 Five Star Group, Inc. made a partial
repayment in the amount of $500,000, reducing the outstanding principal amount
of the Note Payable from $4,500,000 to $4,000,000. In July, 2003, Five Star
Group, Inc. again made partial repayments in the aggregate amount of $500,000,
further reducing the outstanding principal amount of the Note Payable from
$4,000,000 to $3,500,000. Under the Subordination Agreement, Five Star Group,
Inc. is permitted to make further repayment in the amount of $200,000 for the
remainder of 2003.
FIVE STAR PRODUCTS, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Earnings per share
Earnings per share (EPS) for the quarter and six months ended June 30,
2003 and 2002 are as follows (in thousands, except per share amounts):
Three months Six months
ended June 30, ended June 30,
2003 2002 2003 2002
Basic EPS
Net income $ 71 $ 76 $ 301 $ 284
--------- --------- --------- --------
Weighted average shares
outstanding 14,938 12,751 14,949 12,841
-------- ------ -------- ------
Basic earnings per share $ .00 $ .01 $ .02 $ .02
========= ========= ========== =========
Diluted EPS
Net income $ 71 $ 76 $ 301 $ 284
--------- -------- -------- -------
Weighted average shares
outstanding 14,938 12,751 14,949 12,841
Dilutive effect of stock options - 453 - 258
----------- --------- ----------- ----------
Weighted average shares
outstanding, diluted 14,938 13,204 14,949 13,099
-------- ------- ------- -------
Diluted earnings per share $ .00 $ .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
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. 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 Six months
ended June 30, ended June 30,
2003 2002 2003 2002
Reported net income $ 71 $ 76 $ 301 $ 284
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 (4) (8) (11) (16)
----------- ----------- ----------- ----------
Pro-forma net income $ 67 $ 68 $ 290 $ 268
---------- ---------- ---------- ---------
Basic earnings per share:
As reported $ .00 $ .01 $ .02 $ .02
---------- ---------- ----------- ----------
Pro forma $ .00 $ .01 $ .02 $ .02
---------- ---------- ----------- ----------
Diluted earnings per share:
As reported $ .00 $ .01 $ .02 $ .02
---------- ---------- ----------- ----------
Pro forma $ .00 $ .01 $ .02 $ .02
---------- ---------- ----------- ----------
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 $123,000 and $519,000 for the
quarter and six months ended June 30, 2003, as compared to income before income
taxes of $133,000 and $491,000 for the quarter and six months ended June 30,
2002. The reduction in income before income taxes for the quarter ended June 30,
2003 was the result of reduced gross margin and increased management fees,
partially offset by reduced interest expense. The increase in income before
income taxes for the six months ended June 30, 2003 was the result of increased
gross margin and reduced interest expense, partially offset by increased
selling, general and administrative expense and management fees.
Sales
The Company had sales of $24,442,000 and $49,657,000 for the quarter and six
months ended June 30, 2003, as compared to sales of $25,289,000 and $50,779,000
for the quarter and six months ended June 30, 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 decreased slightly to $4,145,000 for the quarter ended June 30,
2003, as compared to $4,170,000 for the quarter ended June 30, 2002. As a
percentage of sales, however, gross margin increased to 17.0% from 16.5%. The
decrease in gross margin dollars was the result of reduced sales and increased
warehousing costs offset in part by an increased gross margin percentage. The
increased gross margin percentage was attributable to a favorable shift in the
product mix sold resulting from the change in the weather relative to last year
as well as to improved purchasing efficiencies.
Gross margin increased to $8,453,000 for the six months ended June 30, 2003, as
compared to $8,350,000 for the six months ended June 30, 2002. As a percentage
of sales, gross margin increased to 17.0% from 16.4%. The increase in gross
margin dollars was the result of increased gross margin percentage offset in
part by reduced sales and increased warehousing costs. The increased gross
margin percentage was attributable to a favorable shift in the product mix sold
resulting from the change in the weather relative to last year as well as to
improved purchasing efficiencies.
Selling, general and administrative expense
The Company had selling, general and administrative (SG&A) expense of $3,705,000
and $7,336,000 for the quarter and six months ended June 30, 2003, as compared
to $3,702,000 and $7,207,000 for the quarter and six months ended June 30, 2002.
SG&A expense for the quarter ended June 30, 2003 was largely unchanged in amount
from the previous year. For the six months ended June 30, 2003, the increase in
SG&A expense was largely attributable to increased payroll costs reflecting
employee merit increases.
Interest expense
The Company had interest expense of $284,000 and $532,000 for the quarter and
six months ended June 30, 2003, as compared to interest expense of $316,000 and
$614,000 for the quarter and six months ended June 30, 2002. The reduced
interest expense is the result of reduced interest rates offset in part by an
increase in average short-term borrowings.
Liquidity and Capital Resources
At June 30, 2003 the Company had cash of $7,000. The Company has a $25,000,000
revolving loan with a major national bank under which the Company may borrow up
to 55% of eligible inventory and up to 80% of eligible accounts receivable, as
defined in the loan documents. At June 30, 2003 the Company had borrowed
$20,113,000 and had $1,712,000 of additional borrowing availability under the
revolving loan.
During the first quarter of 2003, the Company repurchased an aggregate of 86,000
shares of its common stock on the open market at an approximate cost of $8,000.
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 and six months ended
June 30, 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 SUBISIDIARIES
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Please see Notes 3 and 4 to Consolidated Condensed Financial
Statements for information regarding an interest rate swap
agreement which the Company entered into in June 2003.
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
10.1 Loan and Security Agreement dated as of June 20, 2003, by
and between Five Star Group, Inc. as Borrower and Fleet
Capital Corporation as Lender.
10.2 Agreement of Subordination & Assignment dated as of June
20, 2003, by JL Distributors, Inc. as Creditor in favor of
Fleet Capital Corporation as Lender to Five Star Group, Inc.
as Debtor.
31. (a) Certification of President pursuant to Rule 13a-14 of
the Securities Act of 1934. (b) Certification of Chief
Financial Officer pursuant to Rule 13a-14 of the Securities
Act of 1934.
32. (a) Certification of President pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) 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
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, 2003 BY: Charles Dawson
Chief Executive Officer and President
DATE: August 14, 2003 BY: Roger P. Antaki
Chief Financial Officer