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 September 30, 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 of (I.R.S. Employer
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 ______
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
November 1, 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 -
September 30, 2004 and December 31, 2003 1
Consolidated Condensed Statements of Operations
and Comprehensive Income -
Three Months and Nine Months Ended September 30,
2004 and 2003 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 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 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risks 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
Current assets
Cash $ 5 $ 6
Accounts receivable, net 13,933 10,979
Inventory 22,982 26,427
Prepaid expenses and other current assets 74 308
--------- --------
Total current assets 36,994 37,720
------ ------
Property, plant and equipment, at cost 2,379 2,175
Less accumulated depreciation 1,521 1,302
-------- -------
Property, plant and equipment, net 858 873
Deferred income taxes 298 248
Other assets 42 42
Interest rate collar, fair value 4 -
Interest rate swap, fair value - 122
----------- ---------
$38,196 $39,005
======= =======
See accompanying notes to the consolidated condensed financial statements.
1
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
September 30, December 31,
2004 2003
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $19,426 $16,685
Accounts payable and accrued expenses
(including due to (from) affiliates of $(8) and $257) 11,624 15,075
------- -------
Total current liabilities 31,050 31,760
------- -------
Long-term debt to GP Strategies 2,800 2,800
------- --------
Stockholders' equity
Common stock 173 173
Capital in excess of par value 8,552 8,552
Accumulated deficit (3,679) (4,308)
Accumulated other comprehensive (loss) income - 71
Treasury stock, at cost (700) (43)
--------- ----------
Total stockholders' equity 4,346 4,445
-------- --------
$38,196 $39,005
======= =======
See accompanying notes to the consolidated condensed financial statements.
2
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------- ----------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Sales $ 26,678 $ 25,396 $ 80,971 $ 75,053
Cost of goods sold 21,934 20,614 66,818 61,818
-------- -------- ------- --------
Gross margin 4,744 4,782 14,153 13,235
Selling, general and administrative
expenses (4,284) (4,083) (12,246) (11,439)
Management fee to GP Strategies (30) (43) (90) (109)
----------- ----------- ----------- -----------
Operating Income 430 656 1,817 1,687
Other Income 68 10 34 30
Interest expense (287) (249) (766) (781)
---------- ---------- ---------- -----------
Income before income taxes 211 417 1,085 936
Income tax expense (85) (175) (456) (393)
----------- ---------- ---------- -----------
Net income $ 126 $ 242 $ 629 $ 543
======== ========= ======== =========
Other comprehensive income (loss) net of tax:
Change in value of cash flow hedge (231) 168 (122) 36
Tax benefit (expense) 97 (70) 51 (15)
---------- ----------- ---------- -----------
Comprehensive income (loss) $ (8) $ 340 $ 558 $ 564
============= ======== ======== ========
Net income per share
Basic and diluted $ .01 $ .02 $ .04 $ .04
========= ========= ========= ==========
See accompanying notes to the consolidated condensed financial statements.
3
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months
ended September 30,
--------------------------------------
--------------- ----------------------
2004 2003
---- ----
Cash flows from operations:
Net income $ 629 $ 543
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 218 212
Issuance of compensatory stock options - 2
Interest rate collar (4) -
Deferred tax asset 2 -
Changes in other operating items:
Accounts receivable (2,954) (3,106)
Inventory 3,445 3,442
Prepaid expenses and other current assets 234 (55)
Accounts payable and accrued expenses (3,451) (3,714)
--------- ----------
Net cash used in operating activities (1,881) (2,676)
--------- ----------
Cash flows used in investing activities:
Additions to property, plant and equipment (203) (133)
--------- ----------
Cash flows from financing activities:
Net proceeds from short-term borrowings 2,740 3,808
Repayment of long-term borrowings - (1,000)
Purchase of treasury stock (657) (8)
--------- ------------
Net cash provided by financing activities 2,083 2,800
------- --------
Net decrease in cash (1) (9)
Cash at beginning of period 6 16
---------- ----------
Cash at end of period $ 5 $ 7
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 746 $ 777
======== ========
Income taxes $ 343 $ 329
========== ========
See accompanying notes to the consolidated condensed financial statements.
4
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 September 30, 2004, 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, 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.
Reclassifications
Certain prior year amounts in the financial statements and notes
thereto have been reclassified to conform to 2004 classifications.
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, 2003. 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.
5
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 of 2% (3.65%
at September 30, 2004) for borrowings not to exceed $15,000,000 and the prime
rate (4.75% at September 30, 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 September 30, 2004, approximately $19,426,000 was outstanding
under the new Loan Agreement and approximately $2,359,000 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 September 30, 2004, the
Company was in compliance with all required financial 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%. On June 17, 2004, Five Star
Group, Inc. also entered into a derivative interest rate collar transaction
during the period from July 1, 2004 through June 30, 2008 on notional principal
of $12,000,000. The transaction consists of an interest rate floor of 2.25%,
whereas if LIBOR is below 2.25%, Fleet National Bank will pay to Five Star
Group, Inc. the difference between LIBOR and 2.25%, on the same notional
principal amount. The transaction also consists of an interest rate cap of
5.75%, whereas if LIBOR is above 5.75%, Five Star Group, Inc. will pay to Fleet
National Bank the difference between LIBOR and 5.75%, on the same notional
principal amount.
6
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Derivatives and hedging activities
The interest rate swap and interest rate collar entered into by the
Company in connection with its loan agreement (see Note 3) are being accounted
for under SFAS No. 133, as amended, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires all derivatives to be recognized 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. Changes in the fair value of the interest rate swap,
which has been designated as a cash flow hedge, were recognized in other
comprehensive income. Changes in the fair value of the interest rate collar are
recognized in earnings. During the third quarter and nine month period ended
September 30, 2004 the Company recognized a gain of $61,000 and $4,000,
respectively, as part of other income, for the changes in the fair value of the
interest rate collar.
5. Earnings per share
Earnings per share (EPS) for the quarter and nine months ended
September 30, 2004 and 2003 are as follows (in thousands, except per share
amounts):
Three months Nine months
ended September 30, ended September 30,
-------------------------------- -------------------------------
----------------- -------------- ---------------- --------------
Basic EPS 2004 2003 2004 2003
---- ---- ---- ----
Net income $ 126 $ 242 $ 629 $ 543
------- --------- ------- -------
Weighted average shares outstanding 14,310 14,938 15,185 14,945
------ ------ ------ ------
Basic earnings per share $ .01 $ .02 $ .04 $ .04
-------- ------- ------- -------
Diluted EPS
Net income $ 126 $ 242 $ 629 $ 543
------- --------- -------- -------
Weighted average shares outstanding 14,310 14,938 15,185 14,945
Dilutive effect of stock options 338 - 352 -
-------- ----------- -------- -----------
Diluted weighted average shares outstanding 14,648 14,938 15,537 14,949
------ ------ ------ ------
Diluted earnings per share $ .01 $ .02 $ .04 $ .04
-------- ------- ------- -------
7
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Earnings per share (continued)
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. For the three months and nine months ended September 30, 2003,
2,930,000 option shares were excluded, as their effect is anti-dilutive.
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 Nine months
Ended September 30, Ended September 30,
------------------------------- -----------------------------
---------------- -------------- -------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Reported net income $ 126 $ 242 $ 629 $ 543
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) (3) (9) (14)
--------- ------ --------- -------
Pro-forma net income $ 123 $ 239 $ 620 $ 529
----- ------ ----- ------
8
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Stock-based compensation (continued)
Basic earnings per share:
As reported $. 01 $ .02 $.04 $ .04
----- ------ ---- ------
Pro forma $. 01 $ .02 $.04 $ .04
----- ------ ---- ------
Diluted earnings per share: $. 01 $ .02 $.04 $ .04
----- ------ ---- ------
As reported $. 01 $ .02 $.04 $ .04
----- ------ ---- ------
Pro forma
7. Stockholders' equity
On February 6, 2004 the Company announced that it would repurchase up
to 5,000,000 shares, or approximately 30% of its common stock then 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 to the Company
as of March 31, 2004. The value of the shares re-acquired is included in
treasury stock, at cost as of September 30, 2004. The Company made full payment
to the depository on April 6, 2004.
9
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 $211,000 and $1,085,000 for the
quarter and nine months ended September 30, 2004, as compared to income before
income taxes of $417,000 and $936,000 for the quarter and nine months ended
September 30, 2003. The decrease in income before income taxes for the quarter
ended September 30, 2004 was the result of increased selling expense due to
higher sales commissions and increased delivery expense due to higher fuel and
common carrier costs. The increase in income before income taxes for the nine
months ended September 30, 2004 was the result of increased gross margin and
reduced interest expense, partially offset by increased selling and delivery
expense.
Sales
The Company had sales of $26,678,000 and $80,971,000 for the quarter and nine
months ended September 30, 2004, as compared to sales of $25,396,000 and
$75,053,000 for the quarter and nine months ended September 30, 2003. The
increases in sales were attributable to increased sales volume among the
Company's existing customer base. Sales volume was favorably affected by clement
weather, as well as a general recovery in the economy.
Gross margin
Gross margin decreased to $4,744,000, or 17.8% of net sales, for the quarter
ended September 30, 2004, as compared to $4,782,000, or 18.8% of net sales, for
the quarter ended September 30, 2003. The decrease in gross margin dollars and
gross margin percentage for the quarter ended September 30, 2004 is primarily a
result of an unfavorable shift in the product mix sold. Gross margin increased
to $14,153,000, or 17.5% of net sales, for the nine months ended September 30,
2004, as compared to $13,235,000, or 17.6% of net sales, for the nine months
ended September 30, 2003. The increase in gross margin dollars was primarily the
result of increased sales. The slight decrease in gross margin percentage was
primarily attributable to an unfavorable shift in the product mix sold.
Selling, general and administrative expense
The Company had selling, general and administrative (SG&A) expense of $4,284,000
and $12,246,000 for the quarter and nine months ended September 30, 2004, as
compared to $4,083,000 and $11,439,000 for the quarter and nine months ended
10
September 30, 2003. The increase in SG&A expenses was primarily attributable to
increases in salesmen commissions, in common carrier freight-out, in medical
expenses, in computer expenses and in legal and professional fees.
Other income
The Company had other income of $68,000 and $34,000 for the quarter and nine
months ended September 30, 2004, as compared to other income of $10,000 and
$30,000 for the quarter and nine months ended September 30, 2003. The increase
in other income for the quarter ended September 30, 2004 is mainly a result of
the Company recognizing a gain of $61,000 for the change in the fair value of
the interest rate collar.
Interest expense
The Company had interest expense of $287,000 and $766,000 for the quarter and
nine months ended September 30, 2004, as compared to interest expense of
$249,000 and $781,000 for the quarter and nine months ended September 30, 2003.
The increase in interest expense for the quarter ended September 30, 2004 is a
result of an increase in average short-term borrowings. The reduced interest
expense for the nine months ended September 30, 2004 is the result of reduced
interest rates, offset in part by an increase in average short-term borrowings.
Income taxes
The effective income tax rate remained at approximately 42% for the quarter and
nine months ended September 30, 2004 and 2003, which is the anticipated
annualized effective rate.
Liquidity and Capital Resources
At September 30, 2004, the Company had cash of $5,000 and working capital of
$5,944,000. On September 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% (3.65%
at September 30, 2004) for borrowings not to exceed $15,000,000 and the prime
rate (4.75% at September 30, 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 September 30, 2004, approximately $19,426,000 was outstanding
under the new Loan Agreement and approximately $2,359,000 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
11
maximum values for certain financial ratios. As of September 30, 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%. On June 17, 2004, Five Star
Group, Inc. has also entered into a derivative interest rate collar transaction
during the period from July 1, 2004 through June 30, 2008 on notional principal
of $12,000,000. The transaction consists of an interest rate floor of 2.25%,
whereas if LIBOR is below 2.25%, Fleet National Bank will pay to Five Star
Group, Inc. the difference between LIBOR and 2.25%, on the same notional
principal amount. The transaction also consists of an interest rate cap of
5.75%, whereas if LIBOR is above 5.75%, Five Star Group, Inc. will pay to Fleet
National Bank the difference between LIBOR and 5.75%, on the same notional
principal amount.
The interest rate swap and interest rate collar entered into by the Company in
connection with the Loan Agreement are being accounted for under SFAS No. 133,
as amended, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires all derivatives to be recognized 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. Changes in the fair value
of the interest rate swap, which has been designated as a cash flow hedge, were
recognized in other comprehensive income. Changes in the fair value of the
interest rate collar are recognized in earnings. During the third quarter and
nine month period ended September 30, 2004 the Company recognized a gain of
$61,000 and $4,000, respectively, as part of other income, for the changes in
the fair value of the interest rate collar.
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 nine months ended September
30, 2004.
12
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.
13
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-15(e) or 15d-15(e) as of the end of period
covered by the 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 as of the evaluation date,
providing them with material timely 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.
14
PART II OTHER INFORMATION
Item 6. Exhibits
31.1 Certification of Chief Executive Officer of the Company,
dated November 15, 2004 pursuant to Securities Exchange Act
Rule 13a-14(a)/15d-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 November 15, 2004 pursuant to Securities Exchange Act
Rule 13a-14(a)/15d-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 November 15, 2004
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
15
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 12, 2004 Charles Dawson
President
DATE: November 12, 2004 Greg Golkov
Chief Financial Officer
16