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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, 2004
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 Identification No.)
of incorporation or organization)
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______
Indicate by check mark whether registrant is an accelerated filer.
Yes No__X___
Number of shares outstanding of each of issuer's classes of common stock as of
April 30, 2004:
Common Stock, par value $0.01 per share 14,310,077 shares
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statement s (Unaudited)
Consolidated Condensed Balance Sheets -
March 31, 2004 and December 31, 2003 1
Consolidated Condensed Statements of Operations
and Comprehensive Income -
Three Months ended March 31, 2004 and 2003 3
Consolidated Condensed Statements of Cash Flows -
Three Months ended March 31, 2004 and 2003 4
Notes to Consolidated Condensed Financial
Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risks 12
Item 4. Controls and Procedures 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I. FINANCIAL INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
Current assets
Cash $ 6 $ 6
Accounts receivable, net 17,184 10,979
Inventory 26,042 26,427
Prepaid expenses and other current assets 141 308
-------- --------
Total current assets 43,373 37,720
------ ------
Property, plant and equipment, at cost 2,253 2,175
Less accumulated depreciation 1,373 1,302
------- -------
Property, plant and equipment, net 880 873
Deferred income taxes 382 248
Other assets 42 42
Interest rate swap, fair value - 122
----------- ---------
$44,677 $39,005
======= =======
See accompanying notes to the consolidated condensed financial statemen
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
March 31, December 31,
2004 2003
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $22,644 $16,685
Accounts payable and accrued expenses
(including due to affiliates of $308 and $257) 14,518 15,075
Tender offer payable 657 ______
----------
Total current liabilities 37,819 31,760
-------- -------
Long-term debt to GP Strategies 2,800 2,800
--------- --------
Interest rate swap, fair value 196 -
---------- -----------
Stockholders' equity
Common stock 173 173
Capital in excess of par value 8,552 8,552
Accumulated deficit (4,049) (4,308)
Accumulated other comprehensive (loss) income (114) 71
Treasury stock, at cost (700) (43)
--------- ----------
Total stockholders' equity 3,862 4,445
--------- --------
$44,677 $39,005
======= =======
See accompanying notes to the consolidated condensed financial statements.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)
Three months ended
----------------------------------------------
2004 2003
---- ----
Sales $26,991 $ 25,215
Cost of goods sold 22,522 20,907
-------- ----------
Gross margin 4,469 4,308
Selling, general and administrative
Expenses (3,782) (3,631)
Management fee to GP Strategies (30) (33)
Interest expense (211) (248)
--------- ----------
Income before income taxes 446 396
Income tax expense (187) (166)
--------- ----------
Net income $ 259 $ 230
Other comprehensive income (loss) net of tax:
Change in value of cash flow hedge, net
of tax $133 (185) -
--------- -------------
Comprehensive income $ 74 $ 230
========== ==========
Net income per share
Basic and 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,
------------------------------------------------
--------------------- --------------------------
2004 2003
---- ----
Cash flows from operations:
Net income $ 259 $ 230
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 70 69
Changes in other operating items:
Accounts receivable (6,205) (5,393)
Inventory 385 (964)
Prepaid expenses and other current assets 167 (216)
Accounts payable and accrued expenses (557) (244)
---------- ------------
Net cash used in operatings activities (5,881) (6,518)
--------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (78) (52)
---------- ------------
Cash flows from financing activities:
Net proceeds from short-term borrowings 5,959 6,569
Purchase of treasury stock - (8)
---------- -------------
Net cash provided by financing activities 5,959 6,561
-------- ----------
Net decrease in cash - (9)
Cash at beginning of period 6 16
---------- ------------
Cash at end of period $ 6 $ 7
========== ============
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 211 $ 237
======= ==========
Income taxes $ 82 $ 197
======== ==========
Non cash investing and financing activities:
Treasury stock acquired with payables $ 657
=======
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, 2004, and the results of its
operations and cash flows for the quarter then ended. The results of operations
for the quarter ended March 31, 2004 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, 2003 included in the Company's Form
10-K.
Recent accounting pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS No. 150 establishes standards for how a
company classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The provisions of SFAS No. 150
were effective for financial instruments entered into or modified after May 31,
2003 and to all other instruments that existed as of the beginning of the first
interim financial reporting period beginning after June 15, 203. The adoption of
this standard has no effect on the financial statements.
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
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
3. Short-term borrowings (continued)
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 of 2% (3.16%
at March 31, 2004) for borrowings not to exceed $15,000,000 and the prime rate
(4% at March 31, 2004) 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 March
31, 2004, approximately $22,644,000 was outstanding under the new Loan Agreement
and approximately $1,980,000 was available to be borrowed. Substantially all of
the Company's assets are pledged as collateral for those borrowings. Under the
Loan Agreement Five Star is subject to covenants requiring minimum net worth,
limitations on losses, if any, and minimum or maximum values for certain
financial ratios. As of March 31, 2004, the Company was in compliance with all
required minimum covenants.
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
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. Changes
in the fair value of the interest rate swap are recognized in accumulated other
comprehensive income, net of income taxes.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Earnings per share
Earnings per share (EPS) for the quarter ended March 31, 2004 and 2003
are as follows (in thousands, except per share amounts):
Three months
ended March 31,
-------------------------------------------
----------------------- -------------------
2004 2003
Basic EPS
Net income $ 259 $ 230
-------- --------
Weighted average shares
Outstanding 16,938 14,961
------- -------
Basic earnings per share $ .02 $ .02
-------- ----------
Diluted EPS
Net income $ 259 $ 230
------- --------
Weighted average shares
Outstanding 16,938 14,961
Dilutive effect of stock options
and warrants 260 -
-------- -----------
Weighted average shares
Outstanding, diluted 17,198 14,961
------ -------
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. As of March 31, 2003 and 2004, 2,930,000 and 405,000 option shares,
respectively, have been excluded, as their effect is anti-dilutive.
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. 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,
-------------------------------
---------------- --------------
2004 2003
---- ----
Reported net income $ 259 $ 230
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 (3) (7)
-------- -------------
Pro-forma net income $ 256 $ 223
------ ----------
Basic earnings per share:
As reported $ .02 $ .02
-------- ----------
Pro forma $ .02 $ .01
------- ----------
Diluted earnings per share:
As reported $ .02 $ .02
------- ----------
Pro forma $ .01 $ .01
------- ----------
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Stockholders' equity
On February 6, 2004 the Company announced that it will repurchase up to
5,000,000 shares, or approximately 30% of its common stock currently
outstanding, through a tender offer for the shares at $0.21 per share,
originally set to expire on March 16, 2004. On March 17, 2004 the Company
announced that it had increased the price it was offering to pay for the shares
in the tender offer to $0.25 per share and extended the offer to March 31, 2004.
Based upon the final tabulation by the depository for the tender offer,
2,627,790 shares of common stock valued at $656,947 were tendered by the Company
as of March 31, 2004. The value of the shares re-acquired is included in
treasury stock, at cost and tender offer payable as of March 31, 2004. The
Company made full payment to the depository on April 6, 2004.
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 $446,000 for the quarter ended
March 31, 2004 as compared to $396,000 for the quarter ended March 31, 2003. 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 $26,991,000 for the quarter ended March 31, 2003, as
compared to $25,215,000 for the quarter ended March 31, 2003. The increase in
sales were attributable to increased sales volume among the Company's existing
customer base. Sales volume was favorably affected by clement weather.
Gross margin
Gross margin increased to $4,469,000 or 16.6% of net sales for the quarter ended
March 31, 2004 as compared to $4,308,000 or 17.1% of net sales for the quarter
ended March 31, 2003. The increased gross margin dollars were the result of
increased sales to customers, offset by higher costs on purchases for the
period. The decrease in gross margin as a percentage of sales was due primarily
to higher purchasing costs and by a small increase in warehousing costs.
Selling, general and administrative expense
The Company had selling, general and administrative (SG&A) expenses of
$3,782,000 for the quarter ended March 31, 2004 as compared to $3,631,000 for
the quarter ended March 31, 2003. The increase in SG&A expenses was primarily
attributable to increases in payroll and salesmen commissions, an increase in
computer expenses and an increase in legal and professional fees.
Interest expense
The Company had interest expense of $211,000 for the quarter ended March 31,
2004 as compared to interest expense of $248,000 for the quarter ended March 31,
2003. The reduced interest expense in 2004 is the result of reduced interest
rates.
Income taxes
The effective income tax rate remained at approximately 42% for the three months
ended March 31, 2003 and 2004, which is the anticipated annualized effective
rate.
Liquidity and Capital Resources
At March 31, 2004, the Company had cash of $6,000 and working capital of
$5,554,000. 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 of 2% (3.16%
at March 31, 2004) for borrowings not to exceed $15,000,000 and the prime rate
(4.0% at March 31, 2004) 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 March
31, 2004, approximately $22,644,000 was outstanding under the new Loan Agreement
and approximately $1,980,000 was available to be borrowed. Substantially all of
the Company's assets are pledged as collateral for those borrowings. Under the
Loan Agreement, Five Star is subject to covenants requiring minimum net worth,
limitations on losses, if any, and minimum or maximum values for certain
financial ratios. As of March 31, 2004, the Company was in compliance with all
required minimum covenants.
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%.
For the quarter ended March 31, 2004, net cash used in operating activities was
$5,881,000. Net cash used in operating activities was primarily the result of an
increase in the accounts receivable balance and a decrease in accounts payable
and accrued expenses offset by decreases in inventory and prepaid expenses and
depreciation and amortization. The Company purchased $78,000 of machinery and
equipment during the quarter. Net cash provided by financing activities of
$5,959,000 consisted of net proceeds from short-term borrowings.
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 for 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 2003 Annual Report on Form 10-K. The Company has not adopted
any significant new accounting policies during the quarter ended March 31, 2004.
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.
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, 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.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification of Chief Executive Officer of the Company,
dated May 17, 2004 pursuant to Securities Exchange Act Rule
13d-14(a), as adopted pursuant to Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of the Company,
dated May 17, 2004 pursuant to Securities Exchange Act Rule
13d-14(a), as adopted pursuant to Sections 302 and 404 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer of the Company dated May 17, 2004 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: May 17, 2004 Charles Dawson
President
DATE: May 17, 2004 Ralph J. Giordano
Chief Financial Officer