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 28, 1998
-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
(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 28, 1999, THERE WERE OUTSTANDING 16,761,493 SHARES OF
COMMON STOCK, $.01 PAR VALUE, OF THE REGISTRANT.
1
TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
-----
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--November 28, 1998 and August 29, 1998 3
Consolidated statements of operations--thirteen week periods 5
ended November 28, 1998 and November 29, 1997, respectively
Consolidated statement of shareholders' equity -- thirteen weeks 6
ended November 28, 1998
Consolidated statements of cash flows--thirteen week periods ended 7
November 28, 1998 and November 29, 1997, respectively
Notes to consolidated financial statements--November 28, 1998 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 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 28,
1998 AUGUST 29,
ASSETS (UNAUDITED) 1998*
----------- -----------
Current assets:
Cash ..................................................... $ 41,000 $ 66,000
Accounts receivable, less allowance for doubtful accounts
of $966,000 and $ 795,000, respectively ................ 16,061,000 14,206,000
Accounts receivable - related parties - net .............. 3,521,000 3,607,000
Inventories .............................................. 13,215,000 11,375,000
Prepaid expenses ......................................... 257,000 186,000
Other current assets ..................................... 117,000 141,000
----------- -----------
Total current assets ................................... 33,212,000 29,581,000
----------- -----------
Property, plant and equipment, less accumulated depreciation
of $9,239,000 and $8,805,000 ............................ 8,031,000 8,199,000
----------- -----------
Other assets:
Warrant valuation, less accumulated amortization
of $1,809,000 and $1,805,000, respectively ............. 99,000 103,000
Other assets ............................................. 760,000 825,000
----------- -----------
Total other assets ..................................... 859,000 928,000
----------- -----------
Total assets ............................................... $42,102,000 $38,708,000
=========== ===========
* Prepared from audited financial statements for the year ended August 29, 1998.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 28,
1998 August 29,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1998 *
------------ ------------
Current liabilities:
Book overdraft .............................................. $ 392,000 $ 334,000
Revolving credit agreement borrowings, current .............. 6,662,000 7,612,000
Accounts payable--trade ..................................... 8,855,000 9,289,000
Accounts payable--related parties - net ..................... 5,118,000 5,185,000
Accrued bonuses ............................................ 82,000 164,000
Accrued interest expense-subordinated debt .................. 1,731,000 1,731,000
Other accrued expenses ...................................... 1,698,000 1,467,000
Current portion of capital lease obligations ................ 140,000 144,000
Current portion of long-term obligations .................... 900,000 822,000
------------ ------------
Total current liabilities ................................. 25,578,000 26,748,000
Long-term debt, less current portion .......................... 2,878,000 2,781,000
Obligations under capital leases, less current portion ........ 102,000 130,000
Subordinated long term debt - related parties ................. 1,700,000 1,700,000
------------ ------------
Total liabilities .......................................... 30,258,000 31,359,000
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.05 par value; authorized 1,000,000 shares;
Series A, 666,529 shares issued and outstanding ........... 4,666,000 4,666,000
Series B, 120,690 shares issued and outstanding ........... 4,511,000 4,511,000
Series C, 78,333 shares issued and outstanding ............ 4,699,000
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 16,761,493 shares and
16,761,493 shares, respectively ........................... 168,000 168,000
Additional paid-in-capital .................................. 12,790,000 12,483,000
Foreign currency translation ................................ (376,000) (376,000)
Accumulated deficit ......................................... (14,614,000) (14,103,000)
------------ ------------
Total shareholders' equity ................................ 11,844,000 7,349,000
------------ ------------
Total liabilities and shareholders' equity .................... $ 42,102,000 $ 38,708,000
============ ============
* Prepared from audited financial statements for the year ended August 29, 1998.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------
NOVEMBER 28, NOVEMBER 29,
1998 1997
------------ ------------
Net sales .................................. $ 15,075,000 $ 20,865,000
Cost of sales .............................. 10,432,000 14,927,000
------------ ------------
Gross profit ............................... 4,643,000 5,938,000
Selling, general and administrative expenses 4,065,000 3,964,000
------------ ------------
Income from operations ..................... 578,000 1,974,000
Other income (expense):
Interest expense ....................... (331,000) (474,000)
Amortization of warrants ............... (28,000) (11,000)
Other income (expense) ................. 5,000 (84,000)
------------ ------------
Income before provision for income taxes ... 224,000 1,405,000
Provision for income taxes ................. -- 50,000
------------ ------------
Net income ................................. $ 224,000 $ 1,355,000
------------ ------------
Less:
Preferred stock dividends .............. (207,000) (113,000)
Effect of beneficial conversion feature (641,000) --
============ ============
Net income (loss) applicable to common stock $ (624,000) $ 1,242,000
============ ============
Earnings per common share:
Basic .................................. $ (.04) $ .07
============ ============
Diluted ................................ $ (.04) $ .07
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THIRTEEN WEEKS ENDED NOVEMBER 28, 1998
PREFERRED STOCK
-------------------------------------------------
COMMON STOCK SERIES A SERIES B
----------------------- ----------------------- -----------------------
NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
Balance, August 31, 1998 ........... 16,761,493 $ 168,000 666,529 $ 4,666,000 120,690 $ 4,511,000
=========== ========== ========= =========== ========== ===========
Net income .........................
Series C Preferred Stock Dividends..
Issuance of Series C Preferred Stock
and related warrants...............
=========== ========== ========== =========== ========== ===========
Balance, November 28, 1998 ......... 16,761,493 $ 168,000 666,529 $ 4,666,000 120,690 $ 4,511,000
=========== ========== ========== =========== ========== ===========
PREFERRED STOCK
-----------------------
SERIES C
----------------------- ADDITIONAL FOREIGN
NUMBER PAID-IN CURRENCY ACCUMULATED
OF SHARES AMOUNT CAPITAL TRANSLATION DEFICIT
---------- ---------- ----------- ----------- -----------
Balance, August 31, 1998 ........... $ 12,483,000 ($ 376,000) $(14,103,000)
========== ========== ============ =========== ============
Net income ......................... 224,000
Preferred Stock Dividends .......... (94,000)
Issuance of Series C Preferred Stock
and related warrants............... 78,333 $ 4,699,000 307,000 (641,000)
Foreign Currency Translation........
Beneficial Conversion ..............
Issuance of Warrants................
========== =========== ============ =========== ============
Balance, November 28, 1998 ......... 78,333 $ 4,699,000 $ 12,790,000 $ (376,000) $(14,614,000)
========== =========== ============ =========== ============
See notes to unaudited financial statements.
6
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------------
NOVEMBER 28, NOVEMBER 28,
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................... $ 224,000 $ 1,355,000
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization ..................... 434,000 445,000
Provision for losses on accounts receivable ....... 273,000 156,000
Provision for inventory allowances ................ 130,000 128,000
Issuance of stock in connection with 401K plan .... -- --
Amortization of warrant valuations ................ 28,000 11,000
Amortization of deferred loan costs ............... 64,000 --
Compensation expense for extension of stock options -- 217,000
Change in operating assets and liabilities:
Accounts receivable ............................. (2,042,000) (5,524,000)
Inventories ..................................... (1,970,000) 569,000
Prepaid expenses ................................ (71,000) (262,000)
Other current assets ............................ 1,000 --
Income taxes payable ............................ -- 39,000
Accounts payable ................................ (501,000) 1,258,000
Accrued expenses ................................ 149,000 (148,000)
------------ -----------
Net cash used in operating activities ............. (3,281,000) (1,756,000)
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures ................................ (266,000) (527,000)
Increase in other assets ............................ -- (112,000)
------------ -----------
Net cash used in investing activities ............. (266,000) (639,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdraft ...................................... 58,000 --
Repayment of revolving credit facility .............. (12,664,000) --
Borrowings under revolving credit facility .......... 11,714,000 --
Net borrowings under old revolving credit facility .. -- 2,426,000
Proceeds from long-term debt ........................ 380,000 --
Principal payments under new debt ................... (205,000) --
Principal payments on capital leases ................ (32,000) --
Principal payments under old long-term debt ......... -- (195,000)
Proceeds from exercise of stock options ............. -- 141,000
Issuance of Series C Preferred Stock
and related warrants................................ 4,699,000 --
Payment of issuance costs on Series C Preferred Stock (334,000) --
Payment of dividends on Series C Preferred Stock .... (94,000) --
------------ -----------
Net cash provided by financing activities ......... 3,522,000 2,372,000
------------ -----------
NET (DECREASE) INCREASE IN CASH ......................... (25,000) (23,000)
CASH AT BEGINNING OF PERIOD ............................. 66,000 492,000
------------ -----------
CASH AT END OF PERIOD ................................... $ 41,000 $ 469,000
============ ===========
Supplemental disclosure of noncash financing and investing activities:
FIRST QUARTER 1998
o A non-cash increase in property and equipment and obligations under
capital lease of $250,000.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
7
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 28, 1998
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with 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 statements.
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 28, 1998, are not
necessarily indicative of the results that may be expected for the year ending
August 28, 1999.
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 NOVEMBER
28, 1998 29, 1997
-------------- -----------
Basic EPS:
Net earnings (loss) applicable to common
stock ....................................... $ (624,000) $ 1,242,000
Weighted-average number of common shares
outstanding ................................. 16,761,493 $16,738,083
============== ===========
Basic EPS ....................................... $ (.04) $ .07
============== ===========
Diluted EPS (1):
Net income applicable to common stock ...... $ (624,000) $ 1,242,000
Weighted-average number of common shares
outstanding ................................. 16,761,493 16,738,083
Add: effects of assumed exercise of
options and warrants
Exercise of stock options ................. -- 269,134
Exercise of warrants ...................... -- 1,271,395
-------------- -----------
Weighted-average number of common shares
outstanding plus shares from assumed
exercise of options and warrants .......... 16,761,493 18,278,612
-------------- -----------
Diluted EPS ..................................... $ (.04) $ .07
============== ===========
8
1. Dilutive EPS equals basic EPS for the thirteen week period ended 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 28, August 29,
1998 1998
----------- -----------
Raw materials ........................ $ 4,639,000 $ 4,728,000
Work-in-process ...................... 680,000 1,209,000
Finished goods ....................... 8,841,000 6,342,000
----------- -----------
14,160,000 12,279,000
Inventory reserves ................... (945,000 (904,000
----------- -----------
$13,215,000 $11,375,000
=========== ===========
NOTE 4: CREDIT AGREEMENT BORROWINGS
The Company maintains a $22,000,000 Credit Agreement (the "Credit Agreement").
The Credit Agreement includes a revolving credit facility (the "Revolving
Credit") which provides for $15,100,000 of maximum borrowings bearing 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 28, 1998, the Revolving Credit bore interest at a rate of 9.39%.
Borrowings under the Revolving Credit are limited by a formula based on Eligible
Accounts Receivable and Inventory. Remaining availability under the line as of
November 28, 1998 approximated $2,334,000 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 in
the event of a "material adverse change", as defined. 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 2001.
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 (7.90% at
November 28, 1998) plus 2.00%. Principal repayments of the Term Loan are $56,667
per month for 35 months beginning in January 1998 with a $1,416,655 balloon
payment due in December 2001. Additionally, 50% of annual excess cash flow, as
defined, must be applied to the Term Loan installments in the inverse order of
maturity.
9
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 plus
2.00%. Principal payments on the Cap Ex Facility commence one month after the
take down in an amount based on a three year amortization. However, a balloon
payment in an amount equal to all outstanding borrowings under the Cap Ex
Facility is also due in December 2001. As of November 28, 1998, the Company had
outstanding borrowings under the Cap Ex Facility totaling $990,000. Principal
repayments are due at the rate of $18,300 per month.
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. The Credit Agreement contains restrictive financial
covenants including Minimum Tangible Net Worth, Minimum EBITDA, Maximum Loss,
Minimum Fixed Charge Coverage, Maximum Leverage and Maximum Capital
Expenditures. Additional covenants limit borrowings, asset sales and dividends.
The Company was not in violation of any financial covenants as of November 28,
1998.
NOTE 5: 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
seeks 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. The Company intends to dispute these allegations vigorously and
believes that ultimate disposition of the case will not have a material adverse
effect on its business, financial condition or results of operations.
INTERNAL REVENUE SERVICE EXAMINATION
In February, 1997 the Internal Revenue Service ("the IRS") concluded their
examination of the Company's tax returns submitted for fiscal years 1993, 1994
and 1995. The IRS proposed adjustments disallowing the deductions of payments
made in the settlement of the class action litigation and certain related legal
and professional fees. In April 1998, the Company filed a protest letter with
the IRS. In a letter dated August 17, 1998, the IRS rejected the Company's
response. The Company will now raise this issue to the Appeals Court. If the
Company is unsuccessful in its discussions or ultimately in an appeal, it could
be required to pay taxes from prior years and related interest thereon exceeding
$1,800,000, and it could lose a significant amount of its existing net operating
loss carryforward benefits. No accrual for the impact of the proposed IRS
adjustments has been recorded in the accompanying financial statements as the
Company does not believe it is probable that the IRS will prevail in this
matter.
10
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 6: 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 28, 1998 and August 29, 1998.
NOVEMBER 28, AUGUST 29,
1998 1998
----------- -----------
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties ..... $ 3,922,000 $ 4,153,000
Offset amount ................................. (401,000 (546,000)
----------- -----------
Net related parties receivables ............... $ 3,521,000 $ 3,607,000
=========== ===========
ACCOUNTS PAYABLE:
Total accounts payable-related parties ........ $ 5,519,000 $ 5,731,000
Offset amount ................................. (401,000 (546,000
----------- -----------
Net related parties payables .................. $ 5,118,000 $ 5,185,000
=========== ===========
The Company purchases finished goods and fragrance product components from Sheth
Group affiliates. During the thirteen week period ended November 28, 1998, and
for the comparable period in fiscal 1998, the Company purchased approximately
$1,376,000 and $1,073,000, respectively.
11
During the thirteen week period ended November 28, 1998, and for the comparable
period in fiscal 1998, the Company sold products to Sheth Group affiliates in
the amounts of approximately $607,000 and $1,041,000, respectively.
NOTE 7: ISSUANCE OF SERIES C PREFERRED STOCK
Effective September 3, 1998, the Company 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
11.0345 shares of the Company's common stock. In connection with the Series C
Preferred Stock issuance, the Company issued 125,000 common stock warrants which
are exercisable at a price of between $4.00 and $6.28 per share. The Company
received proceeds from issuance of the Series C Preferred Stock and the common
stock warrants of approximately $4,699,000 and expects to receive an additional
$1,300,000 in fiscal 1999 upon issuance of an additional 21,667 shares of Series
C Preferred Stock to the same investor, in accordance with the stated closing
schedule.
The Series C Preferred Stockholders are entitled to receive a cumulative cash
dividend of $4.80 per share annually. The dividend is payable quarterly ($1.20
per quarter). 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 $94,000 were paid in cash
on the Series C Preferred Stock during the thirteen week period ended November
28, 1998. The Series C Preferred Stockholders 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 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 Series C Preferred Stockholders were valued at
approximately $307,000 utilizing the Black Scholes Method. Additionally, the
Company incurred costs totaling $334,000 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.
NOTE 8: SERIES A AND B PREFERRED STOCK
The Company's Series A and B Preferred Stockholders 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.
Dividends accumulated on the Series A and B Preferred Stock for the thirteen
week period ended November 28, 1998 totaling approximately $113,000 have been
reflected as a reduction in net income applicable to common stock. Cumulative
dividends in arrears on the Series A and B Preferred Stock totaled approximately
$822,000 at November 28, 1998.
NOTE 9: SUBSEQUENT EVENT - SALE OF WHOLLY OWNED MEXICAN SUBSIDIARY
On January 6, 1999, the Company executed a letter of intent agreeing to sell all
of the outstanding stock and certain distribution rights of its wholly owned
Mexican subsidiary, to Transvit Holding Corporation ("THC"), a wholly owned
affiliate of the Sheth Group, for $2,540,000. The Company will receive payment
in the form of a reduction in subordinated debt and other indebtedness to Nevell
Investments S.A. ("Nevell"), another affiliate of the Sheth Group. The agreement
provides for non-compete restrictions and a supply arrangement whereby the
Company agrees to continue selling product to the Mexican unit through November
30, 2001. Additionally, the Company will receive an option to
12
repurchase the stock and distribution rights from THC at a formula-based price
set forth in the agreement at any time prior to November 30, 2004. The Company
currently has no plans to repurchase the stock and distribution rights under
this option.
13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED NOVEMBER 28, 1998 AND
NOVEMBER 29, 1997
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 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. Important factors that could cause
actual results to differ materially from the Company's expectations are set
forth under the captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this document. 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.
For the thirteen week period ended November 28, 1998, the Company recorded net
income of $224,000 compared to net income of $1,355,000 for the thirteen week
period ended November 29, 1997. The November 28, 1998 results were negatively
affected primarily by lower sales which were partially offset by improved gross
profit margins. After giving effect to preferred stock dividends and the
beneficial conversion feature associated with the issuance of Series C Preferred
Stock, the Company recorded a net loss applicable to common stock of $624,000 or
$.04 per diluted share for the thirteen week period ended November 28, 1998
compared to net income applicable to common stock of $1,242,000 or $.07 per
diluted share for the related fiscal 1999 period.
14
NET SALES
Net sales were $15,075,000 for the thirteen week period ended November 28, 1998,
a decrease of 28% versus net sales of $20,865,000 for the same period in fiscal
1998. The decrease in the thirteen week period ended November 28, 1998 is
related mainly to volume decreases in both the U.S. wholesale and Latin America
markets, primarily in the Royal Selections fragrance line. This decline was
somewhat offset by a volume increase in chain accounts, where the Regal
Collections fragrance line continued significant sales expansion to offset a
decline in the Designer Classic Alternatives fragrance 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
28, 1998, the Company experienced a decline mainly in the U.S. wholesale and
Latin America markets. Royal Selections market expansion slowed somewhat in the
thirteen week period as compared to the comparable period in fiscal 1998 as
competition continued intensified aggressive pricing initiatives and the U.S.
wholesale and Latin America channels experienced significant turmoil relating to
instability in the global financial markets. Sales of the Regal Collections
fragrance line grew significantly to somewhat offset decreases in the Designer
Collection Alternative Fragrance line and the Roxy Cosmetic line in the chain,
specialty chain, and mass merchandise channels.
NET SALES - RELATED PARTIES
In the thirteen week period ended November 28, 1998, sales to affiliates of the
Sheth Group, the Company's major stockholder, were $607,000, compared with
$1,041,000 for the same period in fiscal 1998.
NET SALES - PRODUCTS PURCHASED FROM RELATED PARTIES
Approximately 3% or $428,000 of the net sales in the thirteen week period of
fiscal 1999 resulted from the sale of products purchased from related parties as
finished goods. For the same period in fiscal 1998, comparable numbers were 5%,
or $1,113,000. In addition, fragrances and other products manufactured and sold
by the Company included some components that were purchased from related
parties. The cost of those components approximated 8% and 6% of cost of sales in
the same periods of fiscal 1999 and 1998, respectively.
GROSS PROFIT
The Company's gross profit for the thirteen week periods ended November 28, 1998
and November 29, 1997 was $4,643,000 or 31% of sales and $5,938,000 or 28% of
sales, respectively. The decline in gross profit in the thirteen week period
related primarily to the overall sales decrease. As a percent of sales, however,
gross margin improved compared to the same quarter in fiscal 1998 due to
favorable product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") were $4,065,000 for the
thirteen week period ended November 28, 1998, compared to $3,964,000 for the
comparable period of fiscal 1998. The fiscal 1998 period included expenses
associated with the Company's disposal of its former Brazilian subsidiary,
coupled with higher compensation expense in 1998 relating to extending the term
of certain stock options to a former employee. Offsetting these decreases in the
fiscal 1999 period were higher marketing expenses and banking fees.
15
NON OPERATING INCOME OR EXPENSE
Interest expense decreased when comparing the thirteen week period of fiscal
1999 to the same period of fiscal 1998 as a result of lower revolving credit
borrowings in the current fiscal year. Other expense declined in the thirteen
week period ended November 28,1998 as compared with the same period in fiscal
1998 due mainly to a decrease in foreign exchange losses.
POTENTIAL ADVERSE AFFECTS ON RESULTS OF OPERATIONS FOR FUTURE PERIODS
The Company's business, financial condition and results of operations could be
materially adversely affected by each or all of the following factors:
1. MEXICAN MARKET. The market for the Company's products continues to be
negatively impacted as a result of the devaluation of the Mexican Nuevo Peso
in December 1994 and the subsequent economic and political instability. These
factors sharply reduced the purchasing power of the Mexican consumer and
therefore the demand for the Company's products was adversely affected. Any
future significant deterioration of the Peso's value would be expected to
further adversely affect the Company's sales in Mexico and also the
collectability of accounts receivable. The Company believes that some of its
customers based in the United States sell the Company's products (as well as
the products of other companies) to purchasers who, in turn, may attempt to
import goods into Mexico without full payment of applicable Mexican taxes and
customs duties. Enhanced enforcement efforts by Mexican authorities may have
an adverse effect on the Company's sales to such customers.
2. LATIN AMERICA ECONOMIES. Growth in sales, or even the maintenance of existing
sales levels, in certain Latin American countries depends to a large extent
on the economic health and political stability of those countries. Any
deterioration in the economic or political stability in such countries could
adversely affect sales.
3. SUPPLY OF PRODUCTS. The Company's ability to manufacture and to satisfy
consumer demand for fragrances is dependent on the supply of certain
components from single sources including an affiliate of the Sheth Group. Any
inability of these vendors to meet the Company's requirements could have an
adverse effect on the Company's results until an alternative source could be
found and/or developed. In addition, the Company is dependent on the supply
of cosmetic products, other than cosmetic pencils, from Sheth Group
affiliates. If such affiliates were to cease or be unable to supply these
cosmetic products, the lack of these products would have an adverse effect on
the Company until a secondary supplier could be located.
4. NEW AND DEVELOPING MARKETS. The Company continues to develop and expand sales
in Latin America. In the process, the Company incurs significant expenses in
order to establish a marketing presence and an economically viable amount of
sales. There is no assurance that the Company will be successful in those
endeavors or that it will recover its initial expenses and start up costs. In
addition, certain countries from time to time impose strict import
restrictions, high levels of taxes on imports, and restrictions on currency
transactions, all of which could affect the success of sales and marketing
activities and also affect the profitability of such activities.
5. INTERNAL REVENUE SERVICE. In February 1997, the Internal Revenue Service
("the IRS") concluded its examination of the Company's tax returns submitted
for fiscal years 1993, 1994 and 1995. The IRS proposed adjustments
disallowing the deductions of payments made in the settlement of the class
action litigation and certain related legal and professional fees. The
Company is in discussions with the IRS on these issues and will appeal the
proposed adjustments if necessary. If the Company is unsuccessful in its
discussions or ultimately in an appeal, it may be required to pay taxes from
prior years and related interest thereon exceeding $1,800,000, and it may
lose a significant amount of its existing net operating loss carryforward
benefits. No accrual for the impact of the proposed IRS
16
adjustments has been recorded in the accompanying financial statements as the
Company does not believe it is probable that the IRS will prevail in this
matter.
At this time, it is not known whether, or to what degree, the above factors will
have a material adverse impact on future results.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently is obtaining its working capital from three primary
sources: a revolving line of credit, cash generated from operations and by
delaying payments to vendors (primarily related parties) beyond customary terms.
OPERATING ACTIVITIES
Operations in the thirteen week period ended November 28, 1998, utilized
$3,281,000 in cash primarily due to increases in accounts receivable and
inventory, and a decrease in accounts payable. Offsetting the usages was cash
provided by net income as adjusted for non cash items.
Accounts receivable grew primarily due to varying extended financing terms given
to customers. Accounts payable decreased as the Company made payments to certain
vendors whose balances had been extended beyond credit terms. Inventory
increased in anticipation of future sales.
INVESTING ACTIVITIES
Capital expenditures during the thirteen week period were $266,000, consisting
primarily of investments in production related machinery and equipment,
facilities related items, and computer equipment. Capital expenditures in fiscal
1999 are expected to exceed the fiscal 1998 level with the major portion being
devoted to manufacturing equipment which will enable the Company to enhance its
level of customer service.
FINANCING ACTIVITIES
During the thirteen week period ended November 28, 1998, revolving credit
decreased by $950,000. This was offset by proceeds from the sale of Series C
Preferred Stock and related warrants, primarily resulting in net cash provided
by financing activities of $3,522,000 for the period.
The Company maintains a $22,000,000 credit agreement (the "Credit Agreement").
The Credit Agreement includes a revolving credit facility (the "Revolving
Credit") which provides for $15,100,000 of maximum borrowings bearing 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 28, 1998, the Revolving Credit bore interest at a rate of 9.40%.
Borrowings under the Revolving Credit are limited by a formula based on Eligible
Accounts Receivable and Inventory. Remaining availability under the line as of
November 28, 1998 approximated $2,334,000 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 in
the event of a "material adverse change", as defined. 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 2001.
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 (7.90% at
November 28, 1998) plus 2.00%. Principal payments on the Term
17
Loan will equal monthly principal payments in the amount of $56,667 for 35
months beginning in January 1998 with a $1,416,655 balloon payment due in
December 2001. Additionally, 50% of annual excess cash flow, as defined, 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 plus
2.00%. Principal payments on the Cap Ex Facility commence one month after the
take down in an amount based on a three year amortization. However, a balloon
payment in an amount equal to all outstanding borrowings under the Cap Ex
Facility is also due in December 2001. As of November 28, 1998, the Company had
outstanding borrowings under the Cap Ex Facility totaling $990,000 in capital
expenditures. Principal payments are due at the rate of $18,300 per month.
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. The Credit Agreement contains restrictive financial
covenants including Minimum Tangible Net Worth, Minimum EBITDA, Maximum Loss,
Minimum Fixed Charge Coverage, Maximum Leverage and Maximum Capital
Expenditures. Additional covenants limit borrowings, asset sales and dividends.
The Company was not in violation of any financial covenants as of November 28,
1998.
The Company also purchases certain equipment, primarily office furniture,
computer equipment and software, under long-term purchase agreements. These 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 commercial lender in connection with the
existing Credit Agreement. On November 27, 1998, the Company paid $94,000 in
dividends to the Series C Preferred stockholders.
The Company believes the lines of credit, together with cash generated by
operations and the continued ability to delay payments to related party vendors
as required will provide sufficient cash to meet the requirements of the Company
for fiscal 1999.
Effective September 3, 1998, the Company 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
11.0345 shares of the Company's common stock. In connection with the Series C
Preferred Stock issuance, the Company issued 125,000 common stock warrants which
are exercisable at a price of between $4.00 and $6.28 per share. The Company
received proceeds from issuance of the Series C Preferred Stock and the common
stock warrants of approximately $4,699,000 and expects to receive an additional
$1,300,000 in fiscal 1999 upon issuance of an additional 21,667 shares of Series
C Preferred Stock to the same investor, in accordance with the stated closing
schedule.
The Series C Preferred Stockholders are entitled to receive a cumulative cash
dividend of $4.80 per share annually. The dividend is payable quarterly ($1.20
per quarter). 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 $94,000 were paid in cash
on the Series C Preferred Stock during the thirteen week period ended November
28, 1998. The Series C Preferred Stockholders 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 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 Series C Preferred Stockholders were valued at
approximately $307,000 utilizing the Black Scholes Method. Additionally, the
Company incurred costs totaling $334,000 in connection with the Series C
Preferred Stock sale. The value of the common stock
18
warrants and 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 Company's Series A and B Preferred Stockholders 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.
Dividends accumulated on the Series A and B Preferred Stock for the thirteen
week period ended November 28, 1998 totaling approximately $113,000 have been
reflected as a reduction in net income applicable to common stock. Cumulative
dividends in arrears on the Series A and B Preferred Stock totaled approximately
$822,000 at November 28, 1998.
On January 6, 1999, the Company executed a letter of intent agreeing to sell all
of the outstanding stock and certain distribution rights of its wholly owned
Mexican subsidiary, to Transvit Holding Corporation ("THC"), a wholly owned
affiliate of the Sheth Group, for $2,540,000. The Company will receive payment
in the form of a reduction in subordinated debt and other indebtedness to Nevell
Investments S.A. ("Nevell"), another affiliate of the Sheth Group. The agreement
provides for non-compete restrictions and a supply arrangement whereby the
Company agrees to continue selling product to the Mexican unit through November
30, 2001. Additionally, the Company will receive an option to repurchase the
stock and distribution rights from THC at a formula-based price set forth in the
agreement at any time prior to November 30, 2004. The Company currently has no
plans to repurchase the stock and distribution rights under this option.
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent on its computer
software programs and operating systems (collectively, "Programs and Systems").
These Programs and Systems are used in several key areas of the Company's
business, including information management services and financial reporting, as
well as in various administrative functions. The Company has been evaluating its
Programs and Systems to identify potential year 2000 compliance problems, as
well as manual processes, external interfaces with customers, and services
supplied by vendors to coordinate year 2000 compliance and conversion. The year
2000 problem refers to the limitations of the programming code in certain
existing software programs to recognize date sensitive information for the year
2000 and beyond. Unless modified prior to the year 2000, such systems may not
properly recognize such information and could generate erroneous data or cause a
system to fail to operate properly.
Based on current information, the Company expects to attain year 2000 compliance
and is in the process of instituting appropriate testing of its modifications
and replacements in a timely fashion and in advance of the year 2000 date
change. It is anticipated that modification or replacement of the Company's
Programs and Systems will be performed by Company or contract personnel. The
Company believes that, with modifications to existing software and conversions
to new software, the year 2000 problem will not pose a significant operational
problem for the Company. However, because most computer systems are, by their
very nature, interdependent, it is possible that non-compliant third party
computers may not interface properly with the Company's computer systems. The
Company could be adversely affected by the year 2000 problem if it or unrelated
parties fail to successfully address this issue. Although the ultimate costs of
attaining Year 2000 compliance is not fully known at this time, management
anticipates that its external costs will not exceed $200,000.
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. The Act also potentially provides added protection from
liability for certain types of Year 2000 disclosures made after January 1, 1996
and before October 19, 1998. As such, to the extent permitted by applicable law.
Previously disclosed statements of or by the Company and its management
concerning the Company's Year 2000 readiness are intended to constitute "Year
2000 Readiness Disclosures" as defined by the Act.
19
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 cashflow of the Company.
The Company's short term and long term debt at November 28, 1998 bears interest
at variable rates (See Note 4 of the Notes to the consolidated Financial
Statements). A one percentage point increase in the effective interest rate on
the debt would result in an approximate $114,000 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 28, 1998.
The Company's direct exports compromise approximately 44% of net sales for the
fiscal quarter ended November 28, 1998. 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 5 of the Notes to the Consolidated Financial Statement.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
*10.1 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND RICHARD HOWARD
DATED SEPTEMBER 1, 1998.
*10.2 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND ROBERT M. VIOLA
DATED SEPTEMBER 1, 1998.
*27.1 FINANCIAL DATA SCHEDULE.
---------------------------
* FILED HEREWITH.
21
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 28, 1999 /s/ Viren S. Sheth
---------------------- ---------------------------
VIREN S. SHETH
Chief Executive Officer
(Principal Executive Officer)
Date: January 28, 1999 /s/ Richard R. Howard
---------------------- ---------------------------
RICHARD R. HOWARD
President and Chief Operations Officer
Date: January 28, 1999 /s/ Robert M. Viola
---------------------- ---------------------------
ROBERT M. VIOLA
Executive Vice-President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
22