UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarter ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 033-78252
FIVE STAR PRODUCTS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3729186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip code)
(212) 230-9500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Number of shares outstanding of each of issuer's classes of common stock as of
November 12, 1999:
Common Stock 13,020,155 shares
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
September 30, 1999 and December 31, 1998 1
Consolidated Condensed Statements of Operations-
Three Months and Nine Months Ended September 30,
1999 and 1998 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 4
Notes to Consolidated Condensed Financial
Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Qualification Relating to Financial Information 11
Part II. Other Information 12
Signatures 13
<PAGE>
PART I. FINANCIAL INFORMATION
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
1999 1998
ASSETS (unaudited) *
Current assets
Cash $ 89 $ 119
Accounts receivable, net 12,065 9,697
Inventory (finished goods) 20,907 22,446
Prepaid expenses and other current assets 55 29
----------- -----------
Total current assets 33,116 32,291
-------- --------
Property, plant and equipment, at cost 1,202 985
Less accumulated depreciation (306) (173)
---------- ---------
896 812
----------- ----------
Other assets 76 76
----------- ------------
$ 34,088 $ 33,179
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1998 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
September 30, December 31,
1999 1998
(unaudited) *
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 16,392 $ 16,971
Accounts payable and accrued expenses 11,639 10,625
------- --------
Total current liabilities 28,031 27,596
------- ---------
Long-term debt to GP Strategies 5,000 5,000
------- ---------
Stockholders' equity
Common stock 130 130
Capital in excess of par value 7,589 7,589
Accumulated deficit (6,662) (7,136)
--------- ---------
Total stockholders' equity 1,057 583
--------- ----------
$ 34,088 $ 33,179
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1998 has been
summarized from the Company's audited Consolidated Balance sheet as of that date
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
September 30, September 30,
1999 1998 1999 1998
-------- ------- ------ ------
<S> <C> <C> <C>
Sales $ 21,241 $ $ 65,527 $ 158
Cost of goods sold 17,406 54,411 142
-------- ------- -------- ------
Gross margin 3,835 11,116 16
Selling, general and administrative
expenses (3,036) (155) (8,917) (585)
Consulting fee 3 83
Management fee to GP Strategies (30) (30) (90) (90)
Interest expense (457) (1,249) (177)
--------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item 312 (182) 860 (753)
Income tax expense (141) (386)
--------- ------- -------- -------
Income (loss) before extraordinary
item 171 (182) 474 (753)
Extraordinary item
Early extinguishment of debt (204)
Net income (loss) $ 171 $ (182) $ 474 $ (957)
========= ======== ======= =======
Income (loss) per share
Basic before extraordinary item $ .01 $ (.01) $ .04 $ (.06)
Diluted before extraordinary item .01 (.01) .03 (.06)
Basic net income (loss) per share .01 (.01) .04 (.07)
Diluted net income (loss) per share .01 (.01) .03 (.07)
========== ======== ======= ========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months
ended September 30,
1999 1998
Cash flows from operations:
Net income (loss) $ 474 $ (957)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 133 5
Loss from extinguishment of debt 204
Deferred compensation 40
Changes in other operating items:
Accounts receivable (2,368) (9)
Inventory 1,539
Prepaid expenses and other current assets (26)
Accounts payable and accrued expenses 1,014
--------- -------
Net cash provided by (used in) operations 766 (717)
--------- -------
Cash flows from investing activities:
Net assets of Five Star, less cash acquired (16,291)
Additions to property, plant and equipment (217)
--------- -------
Net cash used in investing activities (217) (16,291)
--------- -------
Cash flows from financing activities:
Net (repayments of) proceeds from
short-term borrowings (579) 16,476
Loans from GP Strategies 545
--------- -------
Net cash (used in) provided by financing
activities (579) 17,021
--------- -------
Net (decrease) increase in cash (30) 13
Cash at beginning of period 119 225
--------- ---------
Cash at end of period $ 89 $ 238
========= =========
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Change of name
On August 10, 1999 the Stockholders of the Company voted to change its
name from American Drug Company to Five Star Products, Inc. The name change is
consistent with the transformation of the Company into a distributor of home
decorating, hardware and finishing products.
2. Basis of reporting
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such statements include all adjustments (consisting only of normal
recurring items) which are considered necessary for a fair presentation of the
Company's financial position at September 30, 1999, and the results of its
operations and cash flows for the nine months then ended. The results of
operations for the quarter and nine months ended September 30, 1999 are not
necessarily indicative of the operating results for the full year. Results of
operations and cash flows for the three and nine month periods ended September
30, 1999 are not comparable to the corresponding periods of the prior year due
to the acquisition of the Five Star Group on September 30, 1998. It is suggested
that these financial statements be read in conjunction with the financial
statements and related disclosures included in the American Drug Company Form
10-K for the year ended December 31, 1998.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Earnings (loss) per share
Earnings (loss) per share (EPS) for the quarter and nine months ended
September 30, 1999 and 1998 are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1999 1998 1999 1998
Basic EPS
<S> <C> <C> <C> <C>
Net income (loss) $ 171 $ (182) $ 474 $ (957)
Weighted average shares
Outstanding 13,020 13,020 13,020 13,020
Basic earnings (loss) per share $ .01 $ (.01) $ .04 $ (.07)
---------- -------- --------- --------
Diluted EPS
Net income (loss) $ 171 $ (182) $ 474 $ (957)
Weighted average shares
outstanding 13,020 13,020 13,020 13,020
Dilutive effect of stock options
and warrants 825 860
---------- ------------ --------- -------------
Weighted average shares
outstanding, diluted 13,845 13,020 13,888 13,020
-------- ------------ ------- -------------
Diluted earnings (loss) per share $ .01 $ (.01) $ .03 $ (.07)
---------- ------------ --------- ------------
</TABLE>
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.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
On September 30, 1998, a newly formed wholly-owned subsidiary of the Company,
the Five Star Group, Inc. (Five Star) purchased from JL Distributors, Inc. (JL),
(formerly Five Star Group, Inc.) substantially all the operating assets of JL.
JL is a wholly-owned subsidiary of GP Strategies Corporation (GP Strategies).
The assets were purchased for approximately $16,476,000 in cash and a $5,000,000
unsecured five year senior note. Five Star is a leading distributor of home
decorating, hardware and finishing products in the northeast.
The purchase by the Company of the assets of Five Star has changed the focus of
the Company. The Company plans to focus its efforts in the future on growing the
distribution business, and has taken several steps to reduce its traditional
operations from both a business and cost perspective.
As a result of the purchase of the assets of Five Star, the Company has shut
down its Moscow and Washington offices and scaled back the operations of its
Prague office with respect to the business of NPD Trading. For the nine months
ended September 30, 1999, the Company incurred losses of $105,000 before income
taxes related to the business of NPD Trading. Of this total, approximately
$74,000 pertained to severance and shut down costs related to the Washington and
Prague offices.
Liquidity and Capital Resources
At September 30, 1999 the Company had cash of $89,000. Five Star has a
$25,000,000 loan and security agreement with a group of banks. The credit
facility allows Five Star to borrow up to 50% of eligible inventory and up to
80% of eligible accounts receivable. At June 30, 1999, the Company had borrowed
$16,392,000 and had $2,200,000 of additional availability under the loan
agreement.
The Company believes that cash generated from operations and borrowing
availability under existing credit agreements will be sufficient to fund the
working capital requirements of Five Star as well as the limited operations of
the Company's Prague office.
Results of Operations
Because of the September 30, 1998 purchase of the assets of Five Star and the
change in focus of the Company, results of operations for the quarter and nine
months ended September 30, 1999 are not comparable to results for the
corresponding periods of the prior year.
<PAGE>
Sales
The Company had sales of $21,241,000 and $65,527,000 for the quarter and nine
months ended September 30, 1999, all of which were generated by Five Star,
compared to sales of zero and $158,000 for the quarter and nine months ended
September 30, 1998, which related to consulting revenue earned by the Company.
Gross margin
The Company had gross margin of $3,835,000 and $11,116,000 for the quarter and
nine months ended September 30, 1999, compared to $16,000 for the nine months
ended September 30, 1998. The increased gross margin was the result of the sales
volume generated by Five Star during 1999. The Company experienced an increased
gross margin percentage in the third quarter ended September 30, 1999, compared
to the first six months of the year due to increased sales volume and the
related operating efficiencies historically experienced during the second and
third quarters of the year.
Selling, general and administrative expense
The Company had Selling, general and administrative (SG&A) expense of $3,036,000
and $8,917,000 for the quarter and nine months ended September 30, 1999,
compared to $155,000 and $585,000 for the quarter and nine months ended
September 30,1998. The increased SG&A expense in 1999 is attributable to the
operations of Five Star during 1999, partially offset by reduced SG&A costs
incurred by the Company due to the shut down of the Moscow and Washington D.C.
offices, and the scaling back of operations in Prague.
Interest expense
The Company had interest expense of $457,000 and $1,249,000 for the quarter and
nine months ended September 30, 1999, compared to interest expense of $177,000
for the nine months ended September 30,1998. The increased interest expense in
1999 is the result of both the short-term borrowings incurred by Five Star, as
well as the interest incurred on the $5,000,000 unsecured senior note, which
agreements were both entered into on September 30, 1998. The increased interest
expense in 1999 was partially offset by the contribution to Capital in excess of
par value of the amount owed by the Company to GP Strategies during the third
quarter of 1998.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
<PAGE>
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram and test systems for year 2000 compliance. The Company's
primary operating subsidiary, Five Star during the second quarter of 1999 made
the decision to modify their "home grown" systems to be year 2000 compliant.
Five Star has an implementation team led by the Director of Information Systems.
Five Star has completed the modifications and has successfully tested that the
software is year 2000 compliant. In addition, Five Star's other major
information system is its warehouse management system. Five Star has installed
and completed testing a current release that is year 2000 compliant. There will
be no additional cost to this upgrade since all upgrades related to the
warehouse system are included in yearly maintenance.
In addition, Five Star has examined their exposure to the year 2000 issue in
other areas of technology. These areas include telephone and E-mail systems,
operating systems and applications in free standing personal computers and other
areas of communication. A failure of these systems may impact the ability of
Five Star to service their customers which could have a material effect on their
results of operations. These issues have been handled by the information systems
and finance team at Five Star by identifying the problems and obtaining from
vendors and service providers either the necessary modifications to the software
or assurances that the systems will not be disrupted. In addition, certain
personal computers and other equipment that is not year 2000 compliant has been
upgraded through Five Star's normal process of equipment upgrades. Five Star
believes that the evaluation and implementation process has been completed. Over
the next year, Five Star plans to continue to develop and implement other
information technology projects needed in the ordinary course of business.
Five Star expects to finance these expenditures from a combination of working
capital and operating leases for a portion of the new computer equipment and
software. Five Star does not expect the year 2000 issue to have a material
adverse impact on its financial position or results of operations.
Like other companies, the Company relies on its customers for revenues and on
its vendors for products and services of all kinds; these third parties all face
the year 2000 issue. An interruption in the ability of any of them to provide
goods or services, or to pay for goods or services provided to them, or an
interruption in the business operations of our customers causing a decline in
demand for services, could have a material adverse effect on the Company in
turn.
In addition, there is a risk, the probability of which the Company is not in a
position to estimate, that the transition to the year 2000 will cause wholesale,
perhaps prolonged, failures of electrical generation, banking,
telecommunications or transportation systems in the United States or abroad,
disrupting the general infrastructure of business and the economy at large. The
effect of such disruptions on the Company could be material.
<PAGE>
The Company's various departments are continuing to communicate with their
principal customers and vendors about their year 2000 readiness. None of the
responses received to date suggests that any significant customer or vendor
expects the year 2000 issue to cause an interruption in its operations which
would have a material adverse impact on the Company. However, because so many
firms are exposed to the risk of failure not only of their own systems, but of
the systems of other firms, the ultimate effect of the year 2000 issue is
subject to a very high degree of uncertainty.
The Company believes that its preparations currently under way are adequate to
assess and manage the risks presented by the year 2000 issue, and does not have
a formal contingency plan at this time.
The statements in this section regarding the effect of the year 2000 issue and
the Company's responses to it are forward-looking statements. They are based on
assumptions that the Company believes to be reasonable in light of its current
knowledge and experience. A number of contingencies could cause actual results
to differ materially from those described in forward-looking statements made by
or on behalf of the Company.
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
Five Star will not achieve the projected levels of profitability and revenues,
the risk that the Company's preparations with respect to the risks presented by
the year 2000 issue will not be adequate, and those risks and uncertainties
detailed in the Company's periodic reports and registration statements filed
with the Securities and Exchange Commission.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
QUALIFICATION RELATING TO FINANCIAL INFORMATION
September 30, 1999
The financial information included herein is unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles because certain note information
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods. The results for the 1999
interim periods are not necessarily indicative of results to be expected for the
entire year.
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(b) At the Annual Meeting of Stockholders held on August 10, 1999,
the following individuals were elected to serve as directors of the Company for
a one-year term, with each individual nominee receiving the following votes:
Director Votes For Votes Withheld
Jerome I. Feldman 10,137,805 93,982,000
Richard T. Grad 10,181,701 50,086,000
Charles Dawson 10,185,001 46,786,000
Bruce Sherman 10,172,163 59,624,000
Steven Schilit 10,185,001 46,786,000
Scott N. Greenberg 10,185,001 46,786,000
Michael D. Feldman 10,146,113 85,674,000
(c) The proposal to amend the Company's Certificate of
Incorporation, as amended, changing the name of the Company from American Drug
Company to Five Star Products, Inc. received 10,163,998 votes for, 48,081 votes
against, and 19,708 votes withheld.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3(i). Certificate of Amendment of Certificate of Incorporation
of American Drug Company changing its name to Five Star Products, Inc. filed
with the State of Delaware on August 10, 1999.
19. Copy of Notice of Meeting and Proxy Statement for Annual
Meeting of Shareholders held on August 10, 1999, filed with the Securities and
Exchange Commission pursuant to Section 14 of the Securities and Exchange Act of
1934.
b. Reports on Form 8-K
None
<PAGE>
FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
September 30, 1999
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 15, 1999 BY: Richard T. Grad
President
DATE: November 15, 1999 BY: Cynthia Krugman
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000922408
<NAME> FIVE STAR PRODUCTS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 89
<SECURITIES> 0
<RECEIVABLES> 12,065
<ALLOWANCES> 645
<INVENTORY> 20,907
<CURRENT-ASSETS> 33,116
<PP&E> 1,202
<DEPRECIATION> 306
<TOTAL-ASSETS> 34,088
<CURRENT-LIABILITIES> 28,031
<BONDS> 5,00
0
0
<COMMON> 130
<OTHER-SE> 927
<TOTAL-LIABILITY-AND-EQUITY> 34,088
<SALES> 65,527
<TOTAL-REVENUES> 65,527
<CGS> 54,411
<TOTAL-COSTS> 63,418
<OTHER-EXPENSES> 8,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,249
<INCOME-PRETAX> 860
<INCOME-TAX> 387
<INCOME-CONTINUING> 474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 474
<EPS-BASIC> .04
<EPS-DILUTED> .03
</TABLE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
American Drug Company, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY to the Secretary of State of the Sate of Delaware that:
FIRST: That the Board of Directors of American Drug Company, by the
unanimous written consent of its members, filed with the minutes of the board,
duly adopted resolutions setting forth a proposed amendment to the Certificate
of Incorporation of said corporation, declaring said amendment to be advisable
and calling a meeting of stockholders of said corporation for consideration
thereof. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that the Board of Directors hereby declares it advisable and
in the best interests of the Corporation and its stockholders that Article First
of the Certificate of Incorporation of the Corporation be amended (the
"Amendment") in its entirety to read as follows:
FIRST. The name of the Corporation is
Five Star Products, Inc.
SECOND: That thereafter, pursuant to a resolution of its Board of
Directors, an Annual Meeting of the Stockholders of said Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware.
THIRD: The foregoing amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, American Drug Company has caused this Certificate
of Amendment to be signed in its name and on its behalf by its Corporate
Secretary this 28th day of July, 1999. The undersigned officer of American Drug
Company acknowledges, under the penalties for perjury, that this Certificate of
Amendment of the Certificate of Incorporation is the corporate act of said
Corporation and that, to the best of her knowledge, information and belief, the
matters set forth herein are true in all material respects.
AMERICAN DRUG COMPANY
BY: ______________________________
Lydia M. DeSantis
Corporate Secretary
