FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: NOVEMBER 27, 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 0-13099
TRISTAR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3129318
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
12500 SAN PEDRO AVENUE, SUITE 500, SAN ANTONIO, TEXAS 78216
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(Address of principal executive offices)
(Zip Code)
(210) 402-2200
(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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
ON JANUARY 11, 2000, THERE WERE OUTSTANDING 16,771,319 SHARES OF
COMMON STOCK, $.01 PAR VALUE, OF THE REGISTRANT.
TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--November 27, 1999 and August 28, 1999......3
Consolidated statements of operations and comprehensive income--
thirteen week periods ended November 27, 1999 and
November 28, 1998, respectively..................................5
Consolidated statement of shareholders' equity -- thirteen weeks
ended November 27, 1999..........................................6
Consolidated statements of cash flows--thirteen week periods ended
November 27, 1999 and November 28, 1998, respectively............7
Notes to consolidated financial statements--November 27, 1999...........8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................14
Item 3. Qualitative and Quantitative Disclosure About Market Risk.............20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................21
Item 2. Changes in Securities.................................................21
Item 3. Defaults Upon Senior Securities.......................................21
Item 4. Submission of Matters to a Vote of Security Holders...................21
Item 5. Other Information.....................................................22
Item 6. Exhibits and Reports on Form 8-K......................................22
SIGNATURES....................................................................23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 27,
1999 AUGUST 28,
ASSETS (UNAUDITED) 1999 *
----------- -----------
Current assets:
Cash ................................................ $ 42,000 $ 90,000
Accounts receivable, less allowance for doubtful
accounts of $2,756,000 and $651,000, respectively . 17,520,000 13,519,000
Accounts receivable - related parties - net ......... 4,235,000 4,118,000
Inventories ......................................... 13,547,000 9,531,000
Other current assets ................................ 193,000 72,000
----------- -----------
Total current assets .............................. 35,537,000 27,330,000
----------- -----------
Property, plant and equipment, less accumulated
depreciation of $10,789,000 and $10,434,000 ......... 8,808,000 8,364,000
----------- -----------
Other assets:
Goodwill, less accumulated amortization of $22,000 .. 5,346,000 --
Other assets ........................................ 590,000 435,000
----------- -----------
Total other assets ................................ 5,936,000 435,000
----------- -----------
Total assets .......................................... $50,281,000 $36,129,000
=========== ===========
* Prepared from audited financial statements for the year ended August 28, 1999
See accompanying notes to unaudited consolidated financial statements.
3
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
NOVEMBER 27,
1999 AUGUST 28,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1999 *
------------ ------------
Current liabilities:
Revolving credit agreement borrowings .................................... $ 14,018,000 $ 8,926,000
Accounts payable--trade .................................................. 8,577,000 7,055,000
Accounts payable--related parties - net .................................. 3,535,000 3,516,000
Accrued interest expense-related party ................................... 1,731,000 1,731,000
Other accrued expenses ................................................... 2,863,000 1,997,000
Current portion of capital lease obligations ............................. 107,000 132,000
Current portion of long-term debt ........................................ 1,462,000 1,283,000
Current portion of subordinated debt ..................................... 1,293,000 --
------------ ------------
Total current liabilities .............................................. 33,586,000 24,640,000
Long-term debt, less current portion ....................................... 2,741,000 2,738,000
Subordinated debt, less current portion .................................... 3,255,000 --
Obligations under capital leases, less current portion ..................... 11,000 20,000
------------ ------------
Total liabilities ....................................................... 39,593,000 27,398,000
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' equity (deficit):
Preferred stock, $.05 par value; authorized 1,000,000 shares;
Series A, 537,142 shares issued and outstanding ........................ 3,760,000 3,760,000
Series B, 120,690 shares issued and outstanding ........................ 4,511,000 4,511,000
Series C, 100,000 and 78,333 respectively, shares issued and outstanding 6,133,000 4,699,000
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 16,771,319 shares and
16,768,859 shares, respectively ........................................ 168,000 168,000
Additional paid-in-capital ............................................... 13,427,000 12,841,000
Related party receivables ................................................ (2,365,000) (2,365,000)
Accumulated deficit ...................................................... (14,946,000) (14,883,000)
------------ ------------
Total shareholders' equity ............................................. 10,688,000 8,731,000
------------ ------------
Total liabilities and shareholders' equity ................................. $ 50,281,000 $ 36,129,000
============ ============
* Prepared from audited financial statements for the year ended August 28, 1999
See accompanying notes to unaudited consolidated financial statements.
4
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------
NOVEMBER 27, NOVEMBER 28,
1999 1998
------------ ------------
Net sales ..................................... $ 13,464,000 $ 15,075,000
Cost of sales ................................. 9,166,000 10,606,000
------------ ------------
Gross profit .................................. 4,298,000 4,469,000
Selling, general and administrative expenses .. 3,455,000 3,891,000
------------ ------------
Income from operations ........................ 843,000 578,000
Other income (expense):
Interest expense .......................... (421,000) (331,000)
Amortization of warrants .................. (3,000) (28,000)
Other expense ............................. (30,000) 5,000
------------ ------------
Income (loss) before provision for income taxes 389,000 224,000
Provision for income taxes .................... 3,000 --
------------ ------------
Net income .................................... $ 386,000 $ 224,000
------------ ------------
Less:
Preferred stock dividends ................. (211,000) (207,000)
Beneficial conversion feature ............. (341,000) (641,000)
------------ ------------
Net loss applicable to common stock ........... $ (166,000) $ (624,000)
============ ============
Loss per common share:
Basic ..................................... $ (.01) $ (.04)
============ ============
Diluted ................................... $ (.01) $ (.04)
============ ============
Net Income .................................... 386,000 224,000
Other comprehensive income .................... -- --
------------ ------------
Comprehensive Income .......................... $ 386,000 $ 224,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
THIRTEEN WEEKS ENDED NOVEMBER 27, 1999
PREFERRED STOCK
-------------------------------------------------------------------------
COMMON STOCK SERIES A SERIES B SERIES C
---------------------------- ------------------------- ----------------------- -----------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
------------ --------------- ----------- ------------- ---------- ------------ ---------- -----------
Balance, August 28, 1999* 16,768,859 $ 168,000 537,142 $ 3,760,000 120,690 $ 4,511,000 78,333 $ 4,699,000
============ =============== =========== ============= ========== ============ ========== ===========
Net income
Preferred Stock Dividends
Contribution to 401(k) Plan 2,460
Issuance of Series C
Preferred Stock and
related warrants 21,667 $ 1,434,000
Issuance of options relating
to FIL acquisition
------------ --------------- ----------- ------------- ---------- ------------ ---------- -----------
Balance, November 27, 1999 16,771,319 $ 168,000 537,142 $ 3,760,000 120,690 $ 4,511,000 100,000 $ 6,133,000
============ =============== =========== ============= ========== ============ ========== ===========
RELATED
ADDITIONAL PARTY ACCUMULATED
PAID-IN-CAPITAL RECEIVABLES DEFICIT
----------------- ------------- ----------------
Balance, August 28, 1999* $ 12,841,000 $ (2,365,000) $ (14,883,000)
================ ============= ================
Net income 386,000
Preferred Stock Dividends (108,000)
Contribution to 401(k) Plan
Issuance of Series C
Preferred Stock and
related warrants 185,000 (341,000)
Issuance of options relating
to FIL acquisition 401,000
---------------- ------------- ----------------
Balance, November 27, 1999 $ 13,427,000 $ (2,365,000) $ (14,946,000)
================ ============= ================
* Prepared from audited financial statements for the year ended August 28, 1999
See accompanying notes to unaudited consolidated financial statements.
6
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTEEN WEEKS ENDED
-----------------------------
NOVEMBER 27, NOVEMBER 28,
1999 1998
------------ ------------
Cash flows from operating activities
Net income ............................................. $ 386,000 $ 224,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization ........................ 377,000 434,000
Provision for losses on accounts receivable .......... 193,000 273,000
Provision for inventory allowances ................... 125,000 130,000
Amortization of warrant valuation .................... 3,000 28,000
Amortization of deferred loan costs .................. 66,000 64,000
Change in operating assets and liabilities:
Accounts receivable ............................... (1,959,000) (2,042,000)
Accounts receivable affiliates .................... (117,000) --
Inventories ....................................... (1,611,000) (1,970,000)
Other current assets .............................. (220,000) (70,000)
Accounts payable .................................. (477,000) (501,000)
Accrued expenses .................................. 649,000 149,000
------------ ------------
Net cash provided by (used in) operating activities .. (2,585,000) (3,281,000)
------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures ................................... (312,000) (266,000)
Investment in business acquisition; net of cash acquired (579,000) --
------------ ------------
Net cash used in investing activities ................ (891,000) (266,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdraft ......................................... -- 58,000
Repayment of revolving credit facility ................. (16,976,000) (12,664,000)
Borrowings under revolving credit facility ............. 19,086,000 11,714,000
Proceeds from long-term debt ........................... 547,000 380,000
Principal payments under long-term debt ................ (365,000) (205,000)
Principal payments on capital leases ................... (34,000) (32,000)
Issuance of Preferred Stock Series C ................... 1,300,000 4,699,000
Payment of issuance costs for Preferred Stock Series C . (22,000) (334,000)
Payment of dividends on Preferred Stock Series C ....... (108,000) (94,000)
------------ ------------
Net cash provided by (used in) financing activities .. 3,428,000 3,522,000
------------ ------------
NET INCREASE (DECREASE) IN CASH ............................ (48,000) (25,000)
CASH AT BEGINNING OF PERIOD ................................ 90,000 66,000
------------ ------------
CASH AT END OF PERIOD ...................................... $ 42,000 $ 41,000
============ ============
Supplemental disclosure of noncash financing and investing activities:
FIRST QUARTER 1999
The Company purchased all of the capital stock of FIL for $758,000. In
conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 10,923,000
Value of options issued $ (307,000)
Cash paid for the capital stock (758,000)
-----------
Liabilities assumed $ 9,858,000
FIRST QUARTER 1998
A non-cash increase in property and equipment and obligations under capital
lease of $250,000.
See accompanying notes to unaudited consolidated financial statements.
7
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 27, 1999
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Tristar
Corporation ("the Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statement presentation.
The accompanying unaudited consolidated financial statements include the
accounts of Tristar Corporation and its subsidiaries. Effective November 1,
1999, the Company, through a newly formed wholly owned subsidiary, Tristar USA,
Inc. ("Tristar USA") acquired Fragrance Impressions Limited (See Note 9 of the
Notes to Consolidated Financial Statements for further details).
Certain prior period amounts have been reclassified to conform to the current
year presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the thirteen week period ended November 27, 1999, are not
necessarily indicative of the results that may be expected for the year ending
August 26, 2000.
NOTE 2: EARNINGS (LOSS) PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share computations, as required by SFAS No. 128, is
presented below:
THIRTEEN WEEKS ENDED
-----------------------------
NOVEMBER 27, NOVEMBER 28,
1999 1998
------------ ------------
Basic EPS:
Net loss applicable to common stock ..................... $ (166,000) $ (624,000)
Weighted-average number of common shares outstanding .... 16,769,724 16,761,493
------------ ------------
Basic EPS ..................................................... $ (.01) $ (.04)
============ ============
Diluted EPS (1):
Net loss applicable to common stock ..................... $ (166,000) $ (624,000)
Weighted-average number of common shares outstanding .... 16,769,724 16,761,493
Add: effects of assumed exercise of options and warrants
Exercise of stock options ............................ _ _
Exercise of warrants ................................. _ _
------------ ------------
Weighted-average number of common shares outstanding
plus shares from assumed exercise of options and
warrants ............................................. 16,769,724 16,761,493
------------ ------------
Diluted EPS ................................................... $ (.01) $ (.04)
============ ============
8
1. Dilutive EPS equals basic EPS for the thirteen week periods ended November
27, 1999 and November 28, 1998, as the assumed conversion of convertible
preferred stock and the assumed exercise of outstanding options and
warrants would have an anti-dilutive effect.
NOTE 3: INVENTORIES
Inventory is stated at the lower of cost or market. The components of inventory
are as follows:
November 27, August 28,
1999 1999
------------ ------------
Raw materials .................... $ 6,332,000 $ 4,183,000
Work-in-process .................. 905,000 630,000
Finished goods ................... 7,632,000 5,395,000
------------ ------------
14,869,000 10,208,000
Reserves for market
valuation ........................ (950,000) (305,000)
LIFO valuation
allowance ........................ (372,000) (372,000)
------------ ------------
$ 13,547,000 $ 9,531,000
============ ============
NOTE 4: CREDIT AGREEMENT BORROWINGS
In December 1997, the Company entered into a $22,000,000 credit agreement (the
"Credit Agreement") with its principal lender. In November 1999, the Credit
Agreement was amended and restated to provide for a revolving credit facility
(the "Revolving Credit") of $15,100,000 of maximum borrowings; $10,600,000 and
$4,500,000 of the Revolving Credit was allocated to support the requirements of
Tristar Corporation and Tristar USA respectively (See Note 9 of the Notes to
Consolidated Financial Statements for further details on Tristar USA
acquisition). Such borrowings bear interest, at the Company's election, at the
Alternate Base Rate (the higher of the prime rate or the Federal Funds Rate plus
.50%) plus 1.50% or the London Interbank Offered Rate (LIBOR) plus 3.50%
(although borrowings based on LIBOR, cannot exceed 60% of the total outstanding
borrowings under the Revolving Credit). At November 27, 1999, the Revolving
Credit bore interest at rates of 9.87% and 9.03%, respectively, in accordance
with the above noted interest computations. Borrowings under the Revolving
Credit are limited by a formula based on Eligible Accounts Receivable and
Inventory, as defined in the agreement. Remaining availability under the line as
of November 27, 1999 approximated $751,000 based on the borrowing formula.
Commitment fees equal to .50% per annum on the unused portion of the Revolving
Credit are payable monthly. The Credit Agreement contains certain provisions
giving the lender the right to accelerate payment of all outstanding amounts
upon the occurrence of certain events. Accordingly, all revolving Credit amounts
are classified as current in the accompanying consolidated balance sheets. All
outstanding amounts under the Revolving Credit Agreement are due in December
2002.
The Credit Agreement also provides for a $3,400,000 term loan (the "Term Loan")
and a $3,500,000 capital expenditure facility (the "Cap Ex Facility"). The Term
Loan bears interest, payable monthly, at the Alternate Base Rate ( 8.37% at
November 27, 1999) plus 2.00%. Principal payments on the Term Loan consist of
equal monthly principal payments in the amount of $56,667 for 60 months
beginning in January
9
1998. Additionally, 50% of annual excess cash flow, as defined in the Cap Ex
Facility, must be applied to the Term Loan installments in the inverse order of
maturity.
Borrowings under the Cap Ex Facility are limited to 80% of the cost of new
machinery and equipment, limited to annual utilization of $1,500,000. These
borrowings also bear interest, payable monthly, at the Alternate Base Rate
(8.37% at November 27, 1999) plus 2.00%. Principal payments on the Cap Ex
Facility commence one month after the related borrowing in an amount based on a
five year amortization for borrowings made prior to October 4, 1998 and a three
year amortization for borrowings made subsequent to October 4, 1998. However, a
balloon payment in an amount equal to all outstanding borrowings under the Cap
Ex Facility is also due in December 2002. As of November 27, 1999, the Company
had outstanding borrowings under the Cap Ex Facility totaling $2,072,000;
principal payments are currently set at the rate of $65,190 per month.
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. At November 27,1999, the Credit Agreement contained a
restrictive financial covenant relative to Minimum Tangible Net Worth. The
Company was in violation of such covenant as of November 27, 1999 and was
granted a waiver by the lender. New restrictive financial covenants including
Minimum Tangible Net Worth, Minimum EBITDA, Maximum Loss, Minimum Fixed Charge
Coverage, Maximum Leverage and Maximum Capital Expenditures, reflective of
consolidated Tristar Corporation and Tristar USA (See Note 9 of the Notes to
Consolidated Financial Statements) for periods beyond November 1999 are to be
determined and subsequently agreed upon. Additional covenants limit borrowings,
asset sales and dividends.
NOTE 5: SUBORDINATED DEBT
Subordinated debt consists of the following:
- --------------------------------------------------------------------------------
NOVEMBER 27,
1999
-----------
Notes to selling shareholders; senior subordinated debt;
interest at prime; principle and interest payable in
quarterly installments ........................................ $ 3,050,000
Notes to key employees for change in control; senior
subordinated debt; interest at 7 1/2 %; principle and
interest payable in quarterly installments .................... 410,000
Notes to consultant; senior subordinated debt; interest at
prime; principle and interest payable in quarterly
installments .................................................. 350,000
Notes to creditor; senior subordinated debt; interest at
prime; principle and interest payable in quarterly
installments .................................................. 599,000
Notes payable - other; senior subordinated debt;
interest at prime and non-interest bearing; principle
payments quarterly and annually, interest is payable
quarterly ..................................................... 139,000
-----------
Total subordinated debt ....................................... $ 4,548,000
Less: current portion of subordinated debt .................... (1,293,000)
-----------
Total subordinated debt less current portion .................. $ 3,255,000
===========
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10
NOTE 6: LITIGATION AND CONTINGENCIES
FREITAS AND KENNER
In October 1994, a suit was filed in Florida state court against the Company and
two of its directors by Ross Freitas, Carolyn Kenner, Rose Freitas and Melissa
Freitas. The complaint alleged causes of action by two plaintiffs for libel and
sought indemnification of legal costs allegedly incurred by those plaintiffs in
suits and proceedings arising from the facts which were the subject of the
investigation conducted by the Special Committee of the Board of Directors in
1992. The complaint also alleged, on behalf of all four plaintiffs, that the
Company's disclosures relating to the Sheth Group's holding of Company stock and
other matters were fraudulent or negligently misrepresented. In April 1995, the
court dismissed the complaint without prejudice, in part due to the plaintiffs'
failure to state a claim for relief. In May 1995, the plaintiffs refiled the
complaint, asserting many of the same claims, and in June 1996, amended their
complaint yet again, naming only the Company and one of its directors as
defendants. In October 1998, the Court dismissed the claim against the one
director. On November 3, 1999, the Court dismissed the remaining claims for
failure to prosecute.
OTHER
The Company is subject to ordinary and routine litigation arising out of the
conduct of its business. Management believes that the ultimate disposition of
these proceedings will not have a material adverse effect on the Company's
financial condition.
NOTE 7: RELATED PARTY TRANSACTIONS
Certain suppliers of fragrance product components and the primary suppliers of
cosmetic products are affiliates of the Sheth Group who beneficially own 73% of
the Company's outstanding common stock. Related party accounts payable result
from the purchase of products from those vendors. Related party accounts
receivable result from the sale of products to those and other affiliates of the
Sheth Group. The payables and receivables balances for individual parties are
offset for presentation purposes and the net balance of accounts receivable or
accounts payable is presented on the balance sheet. Related party payables also
include payables due members of the Company's Board of Directors which result,
in the normal course of business, from expenses associated with Board and
related committee meetings. The following summarizes the presentations at
November 27, 1999 and August 28, 1999.
11
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NOVEMBER 27, AUGUST 28,
1999 1999
----------- -----------
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties .... $ 4,705,000 $ 4,568,000
Offset amount ................................ (470,000) (450,000)
----------- -----------
Net related parties receivables .............. $ 4,235,000 $ 4,118,000
=========== ===========
ACCOUNTS PAYABLE:
Total accounts payable-related parties ....... $ 4,005,000 $ 3,966,000
Offset amount ................................ (470,000) (450,000)
----------- -----------
Net related parties payables ................. $ 3,535,000 $ 3,516,000
=========== ===========
- --------------------------------------------------------------------------------
Certain related party accounts receivable balances will not be collected in the
normal course of business. Accordingly, outstanding balances totaling $2,365,000
have been reclassified to shareholder's equity at November 27, 1999. These
receivables will be settled in fiscal 2000 through a redemption of preferred
stock controlled by the related parties.
The Company purchases finished goods and fragrance product components from Sheth
Group affiliates. During the thirteen week period ended November 27, 1999, and
for the comparable period in fiscal 1998, the Company purchased approximately
$816,000 and $1,376,000, respectively.
During the thirteen week period ended November 27,1999, and for the comparable
period in fiscal 1998, the Company sold products to Sheth Group affiliates in
the amounts of approximately $661,000 and $607,000, respectively.
NOTE 8: SALE OF WHOLLY OWNED MEXICAN SUBSIDIARY
On March 15, 1999, pursuant to a stock purchase agreement entered into by and
among the Company, Transvit Holding Corporation ("THC"), a wholly owned
affiliate of the Sheth Group, the majority stockholder of the Company, and
Nevell Investments, S.A. ("Nevell"), another affiliate of the Sheth Group, the
Company sold to THC for $2,686,000 all of the issued and outstanding capital
stock ("Trimex Stock") and certain distribution rights of its wholly owned
subsidiary, Tristar de Mexico, S.A. de C.V. ("Trimex"), a distributor of
fragrance and cosmetic products into the formal retail market in the United
Mexican States. The transaction was effective as of November 29, 1998.
The transaction provides for a non-compete restriction and a supply agreement
whereby the Company agreed to continue selling certain products to Trimex. The
Company also received an option to repurchase the Trimex Stock and distribution
rights from THC at a fair value at anytime prior to March 15, 2004. The Company
currently has no plans to exercise such option but may do so in the future.
12
The Company received payment in the form of a reduction of debt due Nevell, and
redemption of 129,387 shares of the Company's Series A Convertible Preferred
Stock, $.05 par value ("Series A Preferred"), issued to Nevell, at a redemption
price of $7.62 per share. Of the total purchase price of $2,686,000, an amount
equal to $1,700,000 was applied to a reduction of debt due Nevell with the
remaining $986,000 attributed to redeemed shares of the Series A Preferred at a
total redemption of approximately $906,000 plus $80,000 of dividends in arrears.
Warrant valuation costs of $99,000 associated with the subordinated debt
reduction were written-off in connection with the sale. The excess of the
carrying value of the Company's investment in Trimex over the proceeds received
was recorded as an increase in accumulated deficit.
NOTE 9: PURCHASE OF FRAGRANCE IMPRESSIONS LIMITED ("FIL")
On November 15, 1999, Tristar Corporation (the "Company"), and its newly formed
wholly owned subsidiary, Tristar USA, Inc. ("Tristar USA"), entered into an
acquisition agreement dated effective November 1, 1999 to acquire Fragrance
Impressions Limited, a Connecticut corporation ("FIL"). FIL, headquartered in
Bridgeport, Connecticut, markets and distributes designer alternative
fragrances, cosmetics and bath and body products. Under the terms of the
acquisition agreement, FIL was merged into Tristar USA which purchased all of
the issued and outstanding common stock of FIL for $350,000 in cash, $3,050,000
in promissory notes ("Notes"), and options to purchase up to 100,000 shares of
the Company's common stock at $5.82 per share which were valued at approximately
$307,000 utilizing the Black Scholes Method. The Notes are subject to post
closing adjustment to the outstanding principle balance, based upon sales
achievement during the next two calendar years. In connection with the FIL
acquisition, the Company assumed and entered into other notes payable with key
employees and consultants for change in control and other liabilities amounting
to $1,498,000 (See Note 5 of Notes to Consolidated Financial Statements). Cash
used to finance this transaction was derived from the sale of 21,667 shares of
Series C Preferred Stock in October 1999 (See Note 10 of the Notes to
Consolidated Financial Statements). The consideration paid by Tristar USA was
arrived at through negotiations between the Company, Tristar USA, and FIL and
was based on a variety of issues, including without limitation, earnings and
revenue, the value of goodwill and the nature of alternative designer fragrance,
cosmetic and bath and body industry.
The acquisition of FIL has been treated as a purchase acquisition for accounting
purposes. Accordingly, net assets acquired have been adjusted to fair value as
appropriate. The excess of the purchase price over the related fair value of net
assets acquired of approximately $5.4 million has been recorded as goodwill to
be amortized over 20 years.
NOTE 10: ISSUANCE OF SERIES C PREFERRED STOCK
Effective September 3, 1998, the Company completed a private placement whereby
it sold 78,333 shares of Series C Senior Convertible Preferred Stock ("Series C
Preferred Stock") to a private investor for $60 per share. Each share of Series
C Preferred Stock is convertible into common shares at a conversion price of
$5.44 per share.
In addition, the Company issued warrants to purchase 125,000 shares of Common
Stock at a price of between $4.00 and $6.28 per share. The Company received
proceeds of approximately $4,700,000 in such private placement.
The holders of the Series C Preferred Stock are entitled to receive a cumulative
cash dividend of $4.80 per share annually. The dividend is payable quarterly
($1.20 per share). The dividends may be paid by issuance of additional shares of
Series C Preferred Stock except such shares bear a cumulative cash dividend of
$7.80 per share annually. Dividends of approximately $ 108,000 were paid in cash
on the Series C Preferred Stock during the thirteen period ended November 27,
1999. The holders of the Series C Preferred Stock are entitled to receive a
liquidation preference equal to $60.00 per share plus interest
13
thereon from the date of issue until redemption or conversion at a compound rate
of 20% per year. The Series C Preferred Stock has full voting rights based on
the number of common shares into which it is convertible and is voted together
with the Common Stock as one class.
On September 3, 1998, the date of the issuance of the Series C Preferred Stock,
the closing bid price of the Company's common stock as reported by the NASDAQ
was $5.44. The Series C Preferred Stock conversion ratio was based on this
closing bid price at date of issuance. The common stock warrants issued to the
holders of the Series C Preferred Stock were valued at approximately $307,000
utilizing the Black Scholes Method. Additionally, the Company incurred costs
totaling $374,000 in connection with the Series C Preferred Stock sale. The
value of the common stock warrants and the issuance costs have been accounted
for as a beneficial conversion feature to the preferred shareholders and thus
have been charged directly to accumulated deficit and have been reflected as a
reduction in net income applicable to common stock.
Effective October 14, 1999, the Company completed a second private placement
whereby it sold an additional 21,667 shares of Series C Preferred Stock to a
private investor for $60 per share. Each share of Series C Preferred Stock is
convertible into 11.0345 common shares at a conversion price of $5.44 per share.
On October 14, 1999, the date of the issuance of 21,667 shares of the Series C
Preferred Stock, the closing bid price of the Company's common stock as reported
by NASDAQ was $6.00. The Series C Preferred Stock conversion ratio was based on
a $5.44 conversion price resulting in a beneficial conversion feature of
$133,887.
In connection with this private placement, the Company issued warrants to
purchase an aggregate of 60,000 shares of common stock at $4.75 per share.
The common stock warrants issued to the holders of the Series C Preferred Stock
were valued at $184,425 utilizing the Black Scholes Method. Additionally, the
Company incurred issuance costs of $22,000 in connection with the Series C
Preferred Stock sale. The beneficial conversion, the value of common stock
warrants and the issuance costs have been accounted for as a beneficial
conversion feature to the preferred shareholders and thus have been charged
directly to accumulated deficit and have been reflected as a reduction in net
income applicable to common stock.
NOTE 11: SERIES A AND B PREFERRED STOCK
The holders of the Company's Series A and B Preferred Stock are entitled to
receive cumulative dividends of $.315 per share and $2.03 per share,
respectively. To date, no dividends have been paid on the Series A and B
Preferred Stock except those paid in connection with the sale of Trimex Stock
(See Note 8 of the Notes to Consolidated Financial Statements). Dividends
accumulated on the Series A and B Preferred Stock for the thirteen week period
ended November 27, 1999, totaling approximately $ 103,000 have been reflected as
a reduction in net loss applicable to common stock. Cumulative dividends in
arrears on the Series A and B Preferred Stock totaled approximately $1,147,000
at November 27, 1999.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This document contains certain statements that are "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this document, including without limitation
statements that use terminology such as "anticipate", "believe," "continue,"
"estimate," "expect," "intend," "may,", "plan," "predict," "should," "will," and
similar expressions, are forward-looking statements. These
14
forward-looking statements include, among other things, the Company's business
strategy and expectations concerning the Company's market position, future
operations, margins, profitability, liquidity and capital resources,
expenditures for capital projects and attempts to reduce costs. Although the
Company believes that the assumptions upon which the forward-looking statements
contained in this document are based are reasonable, any of the assumptions
could prove to be inaccurate and, as a result, the forward-looking statements
based on those assumptions also could be incorrect. All phases of the operations
of the Company involve risks and uncertainties, many of which are outside the
control of the Company and any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether the
forward-looking statements ultimately prove to be correct. Actual results and
trends in the future may differ materially depending on a variety of factors
including, but not limited to, the timing and extent of changes in fragrance
components, fragrance and cosmetic prices and underlying demand and availability
of fragrance components; changes in the cost or availability of means of
transporting products; execution of planned capital projects; adverse changes in
the credit ratings assigned to the Company's trade credit; the extent of the
Company's success in developing and marketing new product lines; state and
federal environmental, economic, safety and other policies and regulations, and
changes therein, and any legal or regulatory delays or other factors beyond the
Company's control; adverse rulings, judgments, or settlements in litigation or
other legal matters; actions of customers and competitors; economic conditions
affecting the areas in which the Company's products are marketed; political
developments in foreign countries; and the conditions of the capital markets and
equity markets during the periods covered by the forward-looking statements.
Many of the factors are described in greater detail in other of the Company's
filings with the Commission. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the foregoing. The Company undertakes
no obligation to publicly release the results of any revisions to any such
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED NOVEMBER 27, 1999 AND
NOVEMBER 28, 1998
Results of operations for the thirteen week period ended November 27, 1999
include the acquisition of Fragrance Impressions Limited ("FIL") effective
November 1, 1999 (See Note 9 of the Notes to Consolidated Financial Statements).
For the thirteen week period ended November 27, 1999, the Company recorded
consolidated net income of $386,000 compared to consolidated net income of
$224,000 for the thirteen week period ended November 28, 1998. The November 27,
1999 fiscal year results improved significantly over the comparable prior year
period despite lower sales. Reduced cost of sales resulting from increased
efficiencies in operations as well as lower selling, general and administrative
expenses ("SG&A"), mainly contributed to the improvement. After giving effect to
preferred stock dividends and the cost of accumulated beneficial conversion
feature, the Company recorded a net loss applicable to common stock of $166,000
or $.01 per diluted share and $624,000 or $.04 per diluted share for the related
thirteen week periods ended November 28, 1999 and November 29, 1998,
respectively.
NET SALES
Net sales were $13,464,000 for the thirteen week period ended November 27, 1999,
a decrease of 10.7% versus net sales of $15,075,000 for the comparable period in
fiscal 1998. The decline in the thirteen week period ended November 27, 1999 was
primarily due to volume decreases in the Latin America and U.S. wholesale
markets in the Royal Selections fragrance line, and the combined U.S. chain,
specialty chain and mass merchandising channel in the Regal and Euro Collections
lines. As well, approximately 5% of the sales decline is attributed to the
disposal of the Company's wholly owned subsidiary in Mexico (See Note 8 of the
Notes to Consolidated Financial Statements). This decline was partially offset
by volume increases associated with the recent FIL acquisition (See Note 9 of
the Notes to
15
Consolidated Financial Statements), volume increases in the U.S. wholesale
markets particularly in the new Royal Selections Crown II Series fragrance line
and U.S. chain, specialty chain and mass merchandising channel in the Euro
Garden Collections line.
NET SALES - CHANNELS OF DISTRIBUTION
The Company markets and distributes products to wholesalers, distributors, chain
stores, mass merchandisers and independent retail channels in various markets
throughout North and South America. For the thirteen week period ended November
27, 1999, the Company experienced a decline mainly in the Latin America, U.S.
wholesale markets and combined U.S. chain, specialty chain and mass
merchandising channel. As well, sales were lower as a result of the disposal of
the Company's wholly owned subsidiary in Mexico (See Note 8 of the Notes to the
Consolidated Financial Statements). The U.S. wholesale and Latin America
channels continue to experience significant turmoil relating to instability in
overall financial conditions existing in the world's emerging markets.
NET SALES - RELATED PARTIES
In the thirteen week period ended November 27, 1999, sales to affiliates of the
Sheth Group was $661,000, compared with $607,000 for the same period in fiscal
1998.
PRODUCTS PURCHASED FROM RELATED PARTIES
The Company purchases finished goods and fragrance components from Sheth Group
affiliates. During the thirteen week period ended November 27, 1999, and for the
comparable period in fiscal 1998, the Company purchased approximately $816,000
and $1,376,000, respectively.
GROSS PROFIT
The Company's gross profit for the thirteen week periods ended November 27, 1999
and November 28, 1998 was $4,298,000 or 31.9% of sales and $4,469,000 or 29.6%
of sales, respectively. The Company's gross profit was favorably impacted by
increased efficiencies in operations and a favorable product mix involving
increased sales of higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the thirteen week
period ended November 27, 1999 was $3,455,000, a decrease of 11.2% versus
$3,891,000 for the comparable period ended November 28, 1998. The favorable
decrease in SG&A related primarily to restructuring of business processes and
expense levels together with staff realignment. In addition, a portion of the
SG&A decrease resulted from the sale of the Company's wholly owned subsidiary in
Mexico (See Note 8 of the Notes to Consolidated Financial Statements). As a
percentage of sales, SG&A was 25.7% and 25.8% for the thirteen week periods
ended November 27, 1999 and November 28, 1998, respectively.
NON-OPERATING INCOME OR EXPENSE
Interest expense increased when comparing the thirteen week period of fiscal
1999 to the same period of fiscal 1998 as a result of higher revolving credit
borrowings in the current fiscal period. Other expense increased in the thirteen
week periods ended November 27,1999 as compared with the same period in fiscal
1998 due mainly to a increase in foreign exchange losses.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company currently is obtaining its working capital from a revolving line of
credit (See Note 4 of the Notes to Consolidated Financial Statements).
OPERATING ACTIVITIES
Operations in the thirteen week period ended November 27, 1999, used $2,585,000
in cash primarily due to increases in accounts receivable and inventory, a
decrease in accounts payable offset by net income and an increase in accrued
expenses.
Accounts receivable increased mainly due to slower collections primarily due to
Latin America customers and extended terms given to related parties. Inventory
increased primarily due to reduced sales levels. Accounts payable decreased as
the Company made payments to related parties and certain vendors, bringing those
accounts closer to normal terms.
INVESTING ACTIVITIES
Capital expenditures during the thirteen week period was $312,000, consisting
primarily of investments in production related machinery and equipment,
facilities related items, and computer equipment. Capital expenditures in fiscal
2000 are expected to approximate the fiscal 1999 level with the major portion
being devoted to manufacturing equipment to enable the Company to enhance its
capacity, efficiency and level of customer service. In addition, the Company
utilized $579,000 in cash in connection with the recent FIL acquisition.
FINANCING ACTIVITIES
During the thirteen week period ended November 27, 1999, net cash provided by
financing activities amounted to $3,428,000. Of this amount, borrowings under
revolving credit increased by $2,110,000 and the Company received proceeds from
the sale of Series C Preferred stock of $1,300,000.
In December 1997, the Company entered into a $22,000,000 credit agreement (the
"Credit Agreement") with its principal lender. In November 1999, the Credit
Agreement was amended and restated to provide for a revolving credit facility
(the "Revolving Credit") of $15,100,000 of maximum borrowings; $10,600,000 and
$4,500,000 of the Revolving Credit was allocated to support the requirements of
Tristar Corporation and Tristar USA respectively (See Note 9 of the Notes to
Consolidated Financial Statements for further details on Tristar USA
acquisition). Such borrowings bear interest, at the company's election, at the
Alternate Base Rate (the higher of the prime rate or the Federal Funds Rate plus
.50%) plus 1.50% or the London Interbank Offered Rate (LIBOR) plus 3.50%
(although borrowings based on LIBOR, cannot exceed 60% of the total outstanding
borrowings under the Revolving Credit). At November 27, 1999, the Revolving
Credit bore interest at rates of 9.87% and 9.03%, respectively, in accordance
with the above noted interest computations. Borrowings under the Revolving
Credit are limited by a formula based on Eligible Accounts Receivable and
Inventory as defined in the agreement. Remaining availability under the line as
of November 27, 1999 approximated $751,000 based on the borrowing formula.
Commitment fees equal to .50% per annum on the unused portion of the Revolving
Credit are payable monthly. The Credit Agreement contains certain provisions
giving the lender the right to accelerate payment of all outstanding amounts
upon the occurrence of certain events. Accordingly, all revolving Credit amounts
are classified as current in the accompanying consolidated balance sheets. All
outstanding amounts under the Revolving Credit Agreement are due in December
2002.
The Credit Agreement also provides for a $3,400,000 term loan (the "Term Loan")
and a $3,500,000 capital expenditure facility (the "Cap Ex Facility"). The Term
Loan bears interest, payable monthly, at the Alternate Base Rate (8.37% at
November 27, 1999) plus 2.00%. Principal payments on the Term Loan will equal
monthly principal payments in the amount of $56,667 for 60 months beginning in
January 1998. Additionally, 50% of annual excess cash flow, as defined in the
Cap Ex Facility, must be applied to the Term Loan installments in the inverse
order of maturity.
Borrowings under the Cap Ex Facility are limited to 80% of the cost of new
machinery and equipment, limited to annual utilization of $1,500,000. These
borrowings also bear interest, payable monthly, at the Alternate Base Rate
(8.37% at November 27, 1999) plus 2.00%. Principal payments on the Cap Ex
Facility commence one month after the related borrowing in an amount based on a
five year amortization for borrowings made prior to October 4, 1998 and a three
year amortization for borrowings made subsequent to October 4, 1998. However, a
balloon payment in an amount equal to all outstanding borrowings under the Cap
Ex Facility is also due in December 2002. As of November 27, 1999, the Company
had outstanding borrowings under the Cap Ex Facility totaling $2,072,000;
principal payments are currently set at the rate of $65,190 per month.
17
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. At November 27, 1999, the Credit Agreement contained
a restrictive financial covenant relative to Minimum Tangible Net Worth. The
Company was in violation of such covenant as of November 27, 1999 and was
granted a waiver by the lender. New restrictive financial covenants including
Minimum Tangible Net Worth, Minimum EBITDA, Maximum Loss, Minimum Fixed Charge
Coverage, Maximum Leverage and Maximum Capital Expenditures, reflective of
consolidated Tristar Corporation and Tristar USA (See Note 9 of the Notes to
Consolidated Financial Statements) for periods beyond November 1999 are to be
determined and subsequently agreed upon. Additional covenants limit borrowings,
asset sales and dividends.
The Company also purchases certain equipment, primarily office furniture,
computer equipment and software, under long-term purchase agreements. These
amounts are not material to the Company's cash flow. The Company does not have
any plans to pay any cash dividends on the Common or the Series A and B
Preferred Stock in the foreseeable future. Further, payments of such dividends
are subject to restrictions imposed by the Company's principal lender in
connection with the existing Credit Agreement. During the thirteen week period
ended November 27, 1999, the Company paid $108,000 in dividends to the holders
of the Series C Preferred Stock.
The Company believes the lines of credit, together with cash generated by
operations should provide sufficient cash to meet the requirements of the
Company for fiscal 2000.
Effective September 3, 1998, the Company completed a private placement whereby
it sold 78,333 shares of Series C Senior Convertible Preferred Stock ("Series C
Preferred Stock") to a private investor for $60 per share. Each share of Series
C Preferred Stock is convertible into common shares at a conversion price of
$5.44 per share. In addition, the company issued a warrant to purchase 125,000
shares of common stock at an exercise price of between $4.00 to $6.28 per share.
The Company received proceeds of approximately $4,700,000 for such private
placement.
The holder of the Series C Preferred Stock is entitled to receive a cumulative
cash dividend of $4.80 per annum. The dividend is payable quarterly ($1.20 per
share). The dividends may be paid by issuance of additional shares of Series C
Preferred Stock except such shares bear a cumulative cash dividend of $7.80 per
share annually. Dividends of approximately $108,000 were paid in cash on the
Series C Preferred Stock during the thirteen week period ended November 27,
1999. The holders of the Series C Preferred Stock are entitled to receive a
liquidation preference equal to $60.00 per share plus interest thereon from the
date of issue until redemption or conversion at a compound rate of 20% per year.
The Series C Preferred Stock has full voting rights based on the number of
common shares into which it is convertible and is voted together with the Common
Stock as one class.
On September 3, 1998, the date of the issuance of the Series C Preferred Stock,
the closing bid price of the Company's common stock as reported by the NASDAQ
was $5.44. The Series C Preferred Stock conversion ratio was based on this
closing bid price at date of issuance. The common stock warrants issued to the
holders of the Series C Preferred Stock were valued at approximately $307,000
utilizing the Black Scholes Method. Additionally, the Company incurred costs
totaling $374,000 in connection with the Series C Preferred Stock sale. The
value of the common stock warrants and issuance costs have been accounted for as
a beneficial conversion feature to the preferred stockholders and thus have been
charged directly to accumulated deficit and have been reflected as a reduction
in net income applicable to common stock.
Effective October 14, 1999, the Company completed a second private placement
whereby it sold an additional 21,667 shares of the Series C Preferred Stock to a
private investor for $60 per share. Each share of Series C Preferred Stock is
convertible into 11.0345 common shares at a conversion price of $5.44 per share.
On October 14, 1999, the date of the issuance of 21,667 shares of the Series C
Preferred Stock, the closing bid price of the Company's common stock as reported
by NASDAQ was $6.00. The Series C Preferred Stock conversion ratio was based on
a $5.44 conversion price resulting in a beneficial conversion feature of
$133,887.
In connection with this private placement, the Company issued warrants to
purchase an aggregate of 60,000 shares of common stock at $4.75 per share.
The common stock warrants issued to the holders of the Series C Preferred Stock
were valued at $184,425 utilizing the Black Scholes Method. Additionally, the
Company incurred issuance costs of $22,000 in connection with the Series C
Preferred Stock sale. The beneficial conversion, the value of common stock
18
warrants and the issuance costs have been accounted for as a beneficial
conversion feature to the preferred shareholders and thus have been charged
directly to accumulated deficit and have been reflected as a reduction in net
income applicable to common stock.
The holders of the Company's Series A and B Preferred Stock are entitled to
receive cumulative dividends of $.315 per share and $2.03 per share,
respectively. To date, no dividends have been paid on the Series A and B
Preferred Stock except those paid in connection with the sale of the Company's
wholly owned Mexican subsidiary (See Note 8 of the Notes to Consolidated
Financial Statements). Dividends accumulated on the Series A and B Preferred
Stock for the thirteen week periods ended November 27, 1999 of approximately
$103,000, have been reflected as a reduction in net loss applicable to common
stock. Cumulative dividends in arrears on the Series A and B Preferred Stock
totaled approximately $1,147,000 at November 27, 1999.
YEAR 2000 COMPLIANCE
As a result of certain computer programs being written using two digits rather
than four digits to define the applicable year, any of the Company's computer
programs that have a date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions and engage in normal
business activities.
As part of the Company's Year 2000 readiness program ("Y2K Plan"), management
has evaluated its Programs and Systems. The Company's Y2K Plan's focus is on
assessing and assuring compliance in the following areas: hardware, operating
systems, legacy applications and data, external linkages and non-information
systems areas.
Tristar's operating systems are centered around Hewlett Packard Unix, Microsoft
NT and Windows 95. The Company operates these systems under licenses and
maintenance agreements which provide for software upgrades to remedy the Year
2000 compliance issues. The principal legacy applications consist of
Manufacturing Total Management System ("MTMS") which is licensed from Bridge
Logix who has provided Y2K compliant software. This software has undergone six
weeks of rigorous tests in a stand alone environment and began operational use
on November 12, 1999.
Hardware compliance testing has been completed. Certain computer and equipment
with non-compliant code and real-time clocks were identified and have either
been replaced or upgraded. Two key phone switches, voice mail systems, time
clocks, and networking equipment have been certified Y2K compliant.
Manufacturing facilities have been closely examined and no Y2K remediation has
been necessary.
The Company conducts electronic data interchange (EDI) with its trading partners
using version 4010, a Y2K compliant standard. Y2K readiness certifications have
been received from these trading partners in addition to certifications from key
vendors, customers, service suppliers, phone, electric, and water utilities.
The Company has allocated human resources as appropriate within its Information
Systems group to coordinate activities to obtain compliance. To date $101,000
has been spent on Y2K remediation, primarily for software upgrades, professional
services and hardware replacements.
The Company at the present time has not experienced any significant year 2000
issues. While the Company believes it has taken appropriate action to minimize
disruptions related to Y2K issues, there are no absolute assurances that the
Company will not be impacted in some way. The Company has relied in part on
representations of third party vendors including computer hardware and software
providers, raw material vendors, and service providers. Contingency plans have
been developed to address potential external supply chain disruptions as well as
internal Y2K related failures. These contingencies include, but are not limited
to, stockpiling raw materials, identifying alternative sources of goods and
services, alternate
19
manufacturing processes, production of manual inventory and work order reports,
and work stoppages. In the event contingency plans must be deployed, there could
be a material adverse effect on the Company's business, financial condition,
results of operations and liquidity of a magnitude which the Company presently
is unable to predict.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness Disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act (the "Act"),
which was signed into law on October 19, 1998. The Act provides added protection
from liability for certain public and private statements concerning a Company's
Year 2000 readiness.
ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the risk of loss that may occur due to adverse changes in
financial market prices, including interest rate risk and foreign currency
exchange risk, and the effect they may have on the financial position, results
of operation or cash flow of the Company.
The Company's short term and long term debt at November 27, 1999 bears interest
at variable rates (See Note 4 of the Notes to Consolidated Financial
Statements). A one percentage point increase in the effective interest rate on
the debt based on amounts outstanding at November 27, 1999 would result in an
approximate $225,000 reduction in annual pretax earnings. This estimate assumes
no change in the volume or composition of the short term and long term debt as
of November 27, 1999.
The Company's direct exports comprise approximately 31% of net sales for the
thirteen week period ended November 27, 1999. In addition, certain U.S. based
customers ultimately distribute the Company's products into foreign countries.
As a result, the Company has exposure to risk associated with the decrease in
value of foreign currencies. Although the risk cannot be quantified, any
significant decrease in value of the currency of foreign countries where the
Company's products are distributed could have a material adverse effect on the
Company's sales and results of operations.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 of the Notes to the Consolidated Financial Statement.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) On November 15, 1999, the Company and its newly formed wholly owned
subsidiary, Tristar USA, Inc. completed the acquisition of Fragrance Impressions
Limited, a Connecticut Corporation ("FIL"). Under the terms of the acquisition
agreement, FIL was merged into Tristar USA, Inc. which purchased all of the
issued and outstanding common stock of FIL. Part of the consideration paid by
the Company in this acquisition consisted of options to purchase up to an
aggregate of 100,000 shares of the Company's common stock at a per share
purchase price of $5.82 (the "Options"). The Options were not registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The
Company relied on certain representations and warranties of the former
shareholders of FIL (the "Former Shareholders"), including, among other things,
each of such Former Shareholders' ability to evaluate the merits and risks of an
investment in the Options, each of such Former Shareholders' status as an
"accredited investor" (as that term is defined in Rule 501(a) of Regulation D)
and that the Options were acquired solely for each of such Former Shareholders'
own account for investment and not with a view to distribution.
On October 14, 1999, the Company completed a private placement (the
"Private Placement") whereby it sold 21,667 shares of Series C Preferred Stock
to a private investor at a per share purchase price of $60.00 for a total
offering price of $1,300,000.00. Each share of Series C Preferred Stock is
convertible into common shares at a conversion price of $5.44 per share. In
connection with the Private Placement, the Company issued to such private
investor and its affiliate immediately exercisable warrants to purchase an
aggregate of 60,000 shares of common stock at a per share purchase price of
$4.75. The shares of Series C Preferred Stock and the warrants (the
"Securities") issued pursuant to the Private Placement were not registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to the
exemptions of such registration provided under Regulation D ("Regulation D") of
the rules and regulations promulgated under the Securities Act by the Securities
and Exchange Commission and Section 4(2) of the Securities Act. The Company
relied on certain representations and warranties of the Private Placement
investors, including, among other things, each of such investors' ability to
evaluate the merits and risks of an investment in the Securities, each of such
investors' status as an "accredited investor" (as that term is defined in Rule
501(a) of Regulation D) and that the Securities were acquired solely for each of
such investors' own account for investment and not with a view to distribution.
(d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
21
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Plan of Merger and Acquisition Agreement dated effective
November 1, 1999 by and among Tristar Corporation, Tristar
USA, Inc. and Fragrance Impressions Limited (incorporated
herein by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed November 30, 1999).
10.1 Form of Option Agreement Between Tristar Corporation and each
of the former stockholders of Fragrance Impressions Limited
(incorporated herein by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K filed November 30, 1999).
10.2 Employment Agreement dated November 10, 1999 between Tristar
USA, Inc. and Thomas E. McCann (incorporated herein by
reference to Exhibit 10.2 of the Company's Current Report on
Form 8-K filed November 30, 1999).
*27.1 Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K filed November 30, 1999 reporting the acquisition of Fragrance
Impressions Limited.
---------------------------
* FILED HEREWITH.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRISTAR CORPORATION
(Registrant)
Date: January 11, 2000 By: /s/ Richard R. Howard
---------------- -----------------------------------------------
RICHARD R. HOWARD
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 11, 2000 By: /s/ Robert M. Viola
---------------- -----------------------------------------------
ROBERT M. VIOLA
Senior Executive Vice-President and Chief Financial
Officer (Principal Financial and Accounting Officer)
23