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 193
For the quarterly period ended: FEBRUARY 24, 2001
-------------------------
-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
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3129318
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(State or other (I. R. S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
105 S. ST. MARY'S STREET, SUITE 1800, SAN ANTONIO, TEXAS 78205
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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 APRIL 9, 2001, THERE WERE OUTSTANDING 16,789,609 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--February 24, 2001 and August 26, 2000 3
Consolidated statements of operations--thirteen and twenty-six week
periods ended February 24, 2001 and February 26, 2000,
respectively 5
Consolidated statements of shareholders' equity--twenty-six week period
ended February 24, 2001 6
Consolidated statements of cash flows--twenty-six week periods ended
February 24, 2001 and February 26, 2000, respectively 7
Notes to consolidated financial statements--February 24, 2001 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Qualitative and Quantitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 24,
2001 AUGUST 26,
(UNAUDITED) 2000 *
----------------------- ---------------------
ASSETS
Current assets:
Cash $ 14,000 $ 124,000
Accounts receivable, less allowance for doubtful accounts and discounts
and allowances of $3,498,000 and $4,353,000, respectively 10,480,000 16,076,000
Accounts receivable - related parties - net 1,694,000 2,311,000
Inventories 13,737,000 13,482,000
Other current assets 235,000 340,000
----------------------- ---------------------
Total current assets 26,160,000 32,333,000
----------------------- ---------------------
Property, plant and equipment, less accumulated depreciation
of $12,449,000 and $11,774,000 8,416,000 8,271,000
----------------------- ---------------------
Other assets:
Goodwill, less accumulated amortization of $410,000 and $267,000 7,174,000 7,986,000
Other assets 223,000 287,000
----------------------- ---------------------
Total other assets 7,397,000 8,273,000
----------------------- ---------------------
Total assets $ 41,973,000 $ 48,877,000
======================= =====================
* Prepared from audited financial statements for the year ended August 26, 2000
See accompanying notes to unaudited consolidated financial statements.
3
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
FEBRUARY 24,
2001 AUGUST 26,
(UNAUDITED) 2000 *
----------------------- ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit agreement borrowings $ 11,872,000 $ 15,167,000
Accounts payable--trade 8,840,000 8,457,000
Accounts payable--related parties - net 1,462,000 1,809,000
Accrued expenses 4,061,000 4,678,000
Current portion of capital lease obligations 9,000 9,000
Current portion of long-term debt 1,916,000 1,712,000
Current portion of subordinated debt 1,060,000 945,000
----------------------- ---------------------
Total current liabilities 29,220,000 32,777,000
Long-term debt, less current portion 1,461,000 2,077,000
Subordinated debt, less current portion 1,334,000 2,735,000
Obligations under capital leases, less current portion 10,000 12,000
----------------------- ---------------------
Total liabilities 32,025,000 37,601,000
----------------------- ---------------------
Commitments and contingencies (Note 6)
Shareholders' equity:
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, 31,890 shares issued and outstanding 1,173,000 1,173,000
Series C, 100,000 shares issued and outstanding 6,133,000 6,133,000
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 16,789,609 shares and
16,783,909 shares, respectively 168,000 168,000
Additional paid-in-capital 14,754,000 14,723,000
Accumulated deficit (16,040,000) (14,681,000)
----------------------- ---------------------
Total shareholders' equity 9,948,000 11,276,000
----------------------- ---------------------
Total liabilities and shareholders' equity $ 41,973,000 $ 48,877,000
======================= =====================
* Prepared from audited financial statements for the year ended August 26, 2000
See accompanying notes to unaudited consolidated financial statements.
4
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
FEBRUARY 24, FEBRUARY 26, FEBRUARY 24, FEBRUARY 26,
2001 2000 2001 2000
--------------- ---------------- ---------------- ----------------
Net sales $ 8,930,000 $ 13,624,000 $ 22,308,000 $ 27,087,000
Cost of sales 6,473,000 9,495,000 15,389,000 18,704,000
--------------- ---------------- ---------------- ----------------
Gross profit 2,457,000 4,129,000 6,919,000 8,383,000
Selling, general and administrative expenses 3,417,000 3,799,000 7,090,000 7,254,000
--------------- ---------------- ---------------- ----------------
Income (loss) from operations (960,000) 330,000 (171,000) 1,129,000
Other income (expense):
Interest expense (524,000) (523,000) (1,111,000) (944,000)
Other expense 3,000 14,000 48,000 25,000
--------------- ---------------- ---------------- ----------------
Income (loss) before provision for income taxes (1,481,000) (179,000) (1,234,000) 210,000
Provision for income taxes - - 5,000 3,000
--------------- ---------------- ---------------- ----------------
Net income (loss) (1,481,000) (179,000) (1,239,000) 207,000
--------------- ---------------- ---------------- ----------------
Less:
Preferred stock dividends (178,000) (223,000) (356,000) (434,000)
Beneficial conversion feature - (31,000) - (372,000)
--------------- ---------------- ---------------- ----------------
Net loss applicable to common stock $ (1,659,000) $ (433,000) $ (1,595,000) $ (599,000)
=============== ================ ================ ================
Loss per common share:
Basic $ (.10) $ (.03) $ (.10) $ (.04)
=============== ================ ================ ================
Diluted $ (.10) $ (.03) $ (.10) $ (.04)
=============== ================ ================ ================
See accompanying notes to unaudited consolidated financial statements.
5
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
TWENTY-SIX WEEKS ENDED FEBRUARY 24, 2001
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 26, 2000* 16,783,909 $168,000 537,142 $3,760,000 31,890 $1,173,000 100,000 $6,133,000
Net loss
Preferred
Stock C Dividends
Contribution to
401(k) Plan 5,700 -
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
Febraury 24, 2001 16,789,609 $168,000 537,142 $3,760,000 31,890 $1,173,000 100,000 $6,133,000
============ ============ ============ ============ ============ ============ ============ ============
ADDITIONAL ACCUMULATED
PAID-IN-CAPITAL DEFICIT
----------------- ----------------
Balance,
August 26, 2000* $14,723,000 $(14,681,000)
Net loss (1,239,000)
Preferred
Stock C Dividends (120,000)
Contribution to
401(k) Plan 31,000
----------------- ----------------
Balance,
Febraury 24, 2001 $14,754,000 $(16,040,000)
================= ================
* Prepared from audited financial statements for the year ended August 26, 2000.
See accompanying notes to unaudited consolidated financial statements.
6
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-SIX WEEKS ENDED
FEBRUARY 24, FEBRUARY 26,
2001 2000
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,239,000) $ 207,000
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:
Depreciation 668,000 788,000
Other amortization costs 177,000 100,000
Provision for losses on accounts receivable 164,000 354,000
Provision for inventory allowances 150,000 58,000
Reduction in LIFO valuation allowance (184,000) --
Issuance of stock in connection with 401(K) 31,000 29,000
Amortization of warrant valuation 10,000 6,000
Amortization of deferred loan costs 83,000 140,000
Change in operating assets and liabilities:
Accounts receivable 5,432,000 2,348,000
Accounts receivable affiliates 617,000 (693,000)
Inventories (446,000) (721,000)
Other assets 58,000 (226,000)
Accounts payable 383,000 (1,256,000)
Accounts payable affiliates (347,000) (205,000)
Accrued expenses (617,000) 410,000
------------------- -------------------
Net cash provided by operating activities 4,940,000 1,339,000
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CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures (813,000) (565,000)
Investment in business acquisition; net of cash acquired -- (441,000)
------------------- -------------------
Net cash used in investing activities (813,000) (1,006,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving credit facility (43,394,000) (31,248,000)
Borrowings under revolving credit facility 40,099,000 30,103,000
Proceeds from long-term debt 612,000 891,000
Principal payments under long-term debt (1,432,000) (1,025,000)
Principal payments on capital leases (2,000) (65,000)
Issuance of Preferred Stock Series C -- 1,300,000
Payment of issuance costs for Preferred Stock Series C -- (53,000)
Payment of dividends on Preferred Stock Series C (120,000) (228,000)
------------------- -------------------
Net cash used in financing activities (4,237,000) (325,000)
------------------- -------------------
NET INCREASE (DECREASE) IN CASH (110,000) 8,000
CASH AT BEGINNING OF PERIOD 124,000 90,000
------------------- -------------------
CASH AT END OF PERIOD $ 14,000 $ 98,000
=================== ===================
Supplemental disclosure of noncash operating, investing and financing
activities:
2001
- ----
- - Reduction of subordinated debt of $895,000 as a result of the FIL settlement
agreement in January 2001
(See Note 8 of the Notes to Consolidated Financial Statements for further
discussion).
See accompanying notes to unaudited consolidated financial statements.
7
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 24, 2001
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.
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 and twenty-six week periods ended February
24, 2001 are not necessarily indicative of the results that may be expected for
the year ending August 25, 2001.
NOTE 2: LOSS PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic and diluted
loss per share computations, as required by SFAS No. 128, is presented below:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
FEBRUARY 24, FEBRUARY 26, FEBRUARY 24, FEBRUARY 26,
2001 2000 2001 2000
----------------------------------------------------------
Basic/diluted EPS:
Net loss applicable to common stock $ (1,659,000) $ (433,000) $ (1,595,000) $ (599,000)
Weighted-average number of common shares
outstanding 16,787,132 16,771,931 16,785,818 16,770,828
----------------------------------------------------------
Basic/diluted EPS $ (.10) $ (.03) $ (.10) $ (.04)
==========================================================
Options to purchase 1,858,500 shares of common stock and warrants to purchase
2,635,000 shares of common stock were outstanding at February 24, 2001 but were
not included in the computation of diluted EPS because the options and warrants
would have an anti-dilutive effect. Therefore, dilutive EPS equals basic EPS for
the thirteen and twenty-six week periods ended February 24, 2001 and February
26, 2000, 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:
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February 24, August 26,
2001 2000
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Raw materials $ 6,094,000 $ 7,331,000
8
Work-in-process 971,000 1,498,000
Finished goods 7,782,000 6,575,000
---------------- -----------------
14,847,000 15,404,000
Reserves for market valuation (914,000) (1,542,000)
LIFO valuation allowance (196,000) (380,000)
---------------- -----------------
$ 13,737,000 $ 13,482,000
================ =================
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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 $16,000,000 of maximum borrowings with a $4,500,000
sub-limit allocated to support the requirements of Tristar USA (See Note 8 of
the Notes to Consolidated Fiancial 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 1.00% or the London Interbank Offered Rate (LIBOR) plus 3.50%
(although, borrowings based on LIBOR cannot exceed 60% of the total oustanding
borrowings under the Revolving Credit). At February 24, 2001, the Revolving
Credit bore interest at rates of 9.50% and 9.05%, 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 February 24, 2001 approximated $21,000 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 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 (8.5% at
February 24, 2001) 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 1998. Additionally, 50% of annual excess cash flow, as
defined, must be applied to the Term Loan installments in the inverse order of
maturity. As of February 24, 2001, the Company had outstanding borrowings under
the Term Loan totaling $1,190,000.
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 (8.5%
at February 24, 2001) plus 2.00%. Principal payments on the Cap Ex Facility
commence one month after the related borrowing 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 2002.
As of February 24, 2001, the Company had outstanding borrowings under the Cap Ex
Facility totaling $2,187,000. Principal payments are currently set at the rate
of $103,000 per month.
9
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. Restrictive financial covenants including Minimum
Tangible Net Worth, Minimum EBITDA, Maximum Loss, Minimum Fixed Charge Coverage,
Maximum Leverage and Maximum Capital Expenditures, are set annually. Additional
covenants limit borrowings, asset sales and dividends. The Company's lender has
agreed to amend the restrictive financial covenants required under its credit
agreement for the remainder of the current fiscal year effective beginning with
the second quarter ended February 24, 2001. As such, the Company was in
compliance for the thirteen-week period ended February 24, 2001.
NOTE 5: SUBORDINATED LONG-TERM DEBT
Subordinated debt as of February 24, 2001 and August 26, 2000, consists of the
following (See Note 8 of the Notes to Consolidated Financial Statements):
- --------------------------------------------------------------------------------------------------------------
February 24, 2001 August 26, 2000
----------------- ---------------
Notes to selling shareholders; senior subordinated debt; interest at
prime; interest and principal is payable in various installments
through January 2005. $ 1,551,000 $ 2,683,000
Notes to key employees for change in control; senior subordinated
debt; interest at 7 1/2% payable quarterly; principal is payable in
twelve quarterly installments of $34,166 through November 2002. 230,000 282,000
Notes to consultant; senior subordinated debt; interest at prime
payable quarterly; principal is payable in twelve quarterly
installments of $29,167 through November 2002. 210,000 239,000
Notes to creditor; senior subordinated debt; interest at prime payable
quarterly; principal is payable in 16 quarterly installments
of $37,436 through November 2003. 397,000 446,000
Notes payable - other. 6,000 30,000
----------------- ---------------
Total subordinated debt $ 2,394,000 $ 3,680,000
Less: current portion of subordinated debt (1,060,000) (945,000)
Total subordinated debt less current portion $ 1,334,000 $ 2,735,000
================= ===============
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NOTE 6: COMMITMENTS AND CONTINGENCIES
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.
10
Related party accounts payable result from the purchase of products from those
vendors. Related party accounts receivable result from the sale of products to
other affiliates of the Sheth Group.
The Company purchases finished goods and fragrance product components from
Sheth Group affiliates and other related parties. During the twenty-six week
period ended February 24, 2001, and for the comparable period in fiscal 2000,
the Company purchased approximately $1,155,000 and $1,520,000, respectively.
During the twenty-six week period ended February 24, 2001, and for the
comparable period in fiscal 2000, the Company sold products to Sheth Group
affiliates in the amounts of approximately $659,000 and $1,417,000,
respectively.
NOTE 8: PURCHASE OF FRAGRANCE IMPRESSIONS LIMITED
On November 15, 1999, the Company and its newly formed wholly owned subsidiary,
Tristar USA, Inc., 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. In January 2001, the Company and the FIL selling shareholders agreed to
reduce the amount due on promissory notes to $1,804,000 in full settlement of
all post closing adjustment provisions pursuant to the acquisition agreement.
The resulting adjustment was recorded as a reduction of goodwill. Among other
things, the FIL settlement agreement provided that approximately $227,000 would
be settled by the return of certain finished goods inventory. Simultaneous with
the execution of the FIL settlement agreement, the Company terminated and
settled an employment agreement with a senior executive resulting in a one time
charge amounting to $210,000 which was recorded in the thirteen week period
ended February 24, 2001.
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. 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 9 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 $7.5 million has been
recorded as goodwill to be amortized on a straight line basis over 20 years.
The following represents supplemental consolidated pro-forma information for
the twenty-six weeks period ended February 26, 2000, respectively, assuming the
FIL acquisition had occurred at the beginning of such period:
2000
(unaudited)
-----------
Net Sales 27,652,000
Net loss applicable to common stock (720,000)
Net Loss per share $ (.04)
11
NOTE 9: 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 the Company's
wholly owned Mexican subsidiary and settlement of outstanding receivable
balances due from related parties, both of which resulted in the redemption of a
portion of such Series A and B Preferred shares and payment of the applicable
dividends in arrears. Dividends accumulated on the Series A and B Preferred
Stock for the thirteen week periods ended February 24, 2001 and February 26,
2000 of approximately $58,000 and $103,000, and for the twenty-six week periods
ended February 24, 2001 and February 26, 2000 of $116,000 and $206,000, have
been reflected as additional net loss applicable to common stock. Cumulative
dividends in arrears on the Series A and B Preferred Stock totaled approximately
$953,000 at February 24, 2001. 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 lender in connection with the existing
Credit Agreement.
The holders of the Series C Preferred Stock are entitled to receive a cumulative
cash dividend of $4.80 per share annually. 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. The holders of the
Series C Preferred Stock are entitled to receive a liquidation preference equal
to $60 per share plus interest thereon from the date of issue until redemption
or conversion at a compound rate of 20% per year. Dividends of $120,000 and
$228,000 were paid on the Series C Preferred Stock during the twenty-six week
periods ended February 24, 2001 and February 26, 2000, respectively. Cumulative
dividends in arrears on Series C Preferred Stock totaled $120,000 at February
24, 2001 and were reflected as additional net loss applicable to common stock.
The Company plans to pay such dividends within the current fiscal year.
NOTE 10: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition, which provides
guidance on the recognition and disclosure of revenues. Adoption of SAB No. 101
is required by the fourth quarter of fiscal 2001. The Company is in the process
of evaluating the effect adoption of SAB No. 101 will have on the Company's
consolidated financial position and results of operations.
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 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
12
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 Securities and
Exchange 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 AND TWENTY-SIX WEEK PERIODS ENDED
FEBRUARY 24, 2001 AND FEBRUARY 26, 2000
For the thirteen week period ended February 24, 2001, the Company recorded a
consolidated net loss of $1,481,000, a decline of $1,302,000, compared to a
consolidated net loss of $179,000 for the thirteen week period ended February
26, 2000. The decline relates primarily to reduced gross profit associated with
lower net sales and a lower profit margin reflective of an unfavorable sales
mix, the one time cost of terminating an employment agreement with a senior
executive, offset somewhat by lower selling, general and administrative
expenses. After giving effect to preferred stock dividends and the cost of
accumulated beneficial conversion feature, the Company recorded net loss
applicable to common stock of $1,659,000 and $433,000 or $.10 and $.03 per
diluted share for the thirteen week periods ended February 24, 2001 and February
26, 2000, respectively.
For the twenty-six week period ended February 24, 2001, the Company recorded a
consolidated net loss of $1,239,000 compared to consolidated net income of
$207,000 for the comparable period in 2000. The decline in the current period
was mainly attributable to reduced gross profit relating to the lower net sales
achievement, the one time cost of terminating an employment agreement with a
senior executive, increase in interest expense associated with a higher level of
borrowings and higher interest rates, offset somewhat by lower selling, general
and administrative expenses. After giving effect to preferred stock dividends
and the cost of accumulated beneficial conversion feature, the Company recorded
a consolidated net loss applicable to common stock of $1,595,000 or $.10 per
diluted share and $599,000 or $.04 per diluted share for the related twenty-six
week periods ended February 24, 2001 and February 26, 2000, respectively.
NET SALES
Net sales were $8,930,000 for the thirteen week period ended February 24, 2001,
a 34% decrease versus net sales of $13,624,000 for the comparable period in
fiscal 2000. The decrease in the thirteen week period ended February 24, 2001
was experienced across all selling divisions and reflective of disappointing
calendar 2000 year end retail sales to consumers, which negatively impacted many
consumer goods distributors, global economic uncertainty, continued weakness in
the Latin America and U.S. wholesale markets and lower sales to related parties.
The decline in net sales for the twenty-six week period ended February 24, 2001
was primarily due to volume decreases in 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
Collection lines. This decline was partially offset by volume increases in the
U.S. wholesale markets in the
13
new Royal Selection Crown II Series and Premiere Editions fragrance lines, U.S.
chain, specialty chain and mass merchandising channel in the Euro Garden
Collection line and Apple cosmetic pencils in the U.S. wholesale market as well
as volume increases in the FIL brand acquired in fiscal year 2000 (See Note 8
of the Notes to Consolidated Financial Statements).
The Company, in conjunction with its majority shareholders (the Sheth Group),
has developed an aggressive global distribution expansion, designed to
significantly increase its market penetration outside the Western Hemisphere.
The successful implementation of this plan is expected to substantially
increase sales volume beginning with the second half of fiscal year 2001 and
onward. However, management makes no assurances that such sales increases will
occur.
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 and twenty-six
week periods ended February 24, 2001, the company experienced weak demand in
all sales divisions including related party sales compared to the prior year
periods. Disappointing holiday consumer purchases impacted the Company's
replenishment sales in the U.S. retail distribution channel while economic
uncertainty and regional turmoil in South America continued to negatively
impact sales in the Latin America and U.S. wholesale markets.
NET SALES - RELATED PARTIES
In the thirteen and twenty-six week periods ended February 24, 2001, sales to
affiliates of the Sheth Group were $206,000 and $659,000 compared with $756,000
and $1,417,000 for the same periods in fiscal 2000.
PRODUCTS PURCHASED FROM RELATED PARTIES
The Company purchases finished goods and fragrance components from Sheth Group
affiliates and other related parties. During the twenty-six week period ended
February 24, 2001, and for the comparable period in fiscal 2000, the Company
purchased $1,155,000 and $1,520,000, respectively.
GROSS PROFIT
The Company's gross profit for the thirteen week periods ended February 24,
2001 and February 26, 2000 was $2,457,000 or 27.5% of sales and $4,129,000 or
30.3% of sales, respectively. The decline in the Company's gross profit related
mainly to a lower net sales achievement and a lower profit margin reflective of
an unfavorable sales mix primarily in the higher margin retail distribution
segment.
For the twenty-six weeks ended February 24, 2001 and February 26, 2000, the
Company's gross profit was $6,919,000, or 31% of sales and $8,383,000, or 30.9%
of sales, respectively. Although the gross margin percentage improved slightly,
the Company's gross profit for the twenty-six week periods declined primarily
due to the reduction in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the thirteen week
period ended February 24, 2001 were $3,417,000, a decrease of 10% versus
$3,799,000 for the comparable period ended February 26, 2000. For the
twenty-six week periods ended February 24, 2001 and February 26, 2000, SG&A was
$7,090,000 and $7,254,000, respectively or a decrease of 2.3%. The decrease in
SG&A in the thirteen week period related to the lower level of variable selling
expenses and to restructuring of business processes and expense levels together
with staff realignment. As a percentage of sales, SG&A was 31.8% and 26.8% for
the twenty-six week periods ended February 24, 2001 and February 26, 2000,
respectively, reflective of the lower net sales achievement.
14
NON-OPERATING INCOME OR EXPENSE
Interest expense was flat in the current fiscal period but increased by
$167,000 for the twenty-six week period ended February 24, 2001 when compared
to the comparable prior year period. This increase related to higher revolving
credit balances on average, higher revolving credit interest rates and interest
on subordinated notes payable to the FIL selling shareholders.
LIQUIDITY AND CAPITAL RESOURCES
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 2001.
OPERATING ACTIVITIES
- --------------------
Operations in the twenty-six week period ended February 24, 2001, provided
$4,940,000 in cash primarily due to decreases in accounts receivable offset by
decreases in accrued expenses and increases in inventory.
Accounts receivable decreased mainly due to collection of outstanding balances
relating to the high level of sales in the fourth quarter of fiscal 2000
coupled with disappointing sales achievement to-date in fiscal 2001. Inventory
increased mainly as a result of the underachievement of sales versus planned
production during the current period. The decrease in accrued expenses is
largely attributable to lower payroll related costs in this twenty-six week
period relative to the high level of production and sales activity in the
fourth quarter of fiscal 2000. In addition, accrued expenses decreased due to
lower commissions and cooperative advertising expenses relating to the sales
experienced in fiscal 2001.
INVESTING ACTIVITIES
- --------------------
Capital expenditures during the twenty-six week period were $813,000,
consisting primarily of investments in production related machinery and
equipment, facilities related items, computer equipment and costs associated
with the current construction of a new distribution facility. Capital
expenditures in fiscal 2001 are expected to be significantly higher than fiscal
2000 with the increase primarily being attributable to the construction of the
new distribution facility. Construction is substantially complete and will be
funded by the Company in the third quarter. The Company anticipates a cost
approximating $2 million for this new facility. The Company's lender has agreed
to finance $1.5 million for the building construction. Additionally, the
Company has expended approximately $270,000 in land preparation costs in
connection with this project and expects to finance the remaining equipment
costs through the Company's Cap Ex Facility and third party capital leases.
FINANCING ACTIVITIES
- --------------------
During the twenty-six week period ended February 24, 2001, net cash used by
financing activities amounted to $4,237,000, consisting mainly of payments
exceeding borrowings under the revolving credit and long-term debt agreements of
$4,115,000 coupled with dividends paid in the amount of $120,000 on the Series C
Preferred Stock.
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 $16,000,000 of maximum borrowings; with a
$4,500,000 sub-limit allocated to support the requirements of Tristar USA (See
Note 8 of the Notes to Consolidated Fiancial Statements for further details on
Tristar USA acquisition). 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 February 24, 2001
approximated $21,000 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
15
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
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"). As of
February 24, 2001, the Company had outstanding borrowings under the Term Loan
totaling $1,190,000 and under the Cap Ex Facility totaling $2,187,000.
Borrowings under the Credit Agreement are collateralized by all of the
Company's present and future assets.
The Company's lender has agreed to amend the restrictive financial covenants
required under its credit agreement. As such, the Company was in compliance for
the thirteen week period ended February 24, 2001.
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. Dividends accumulated on the Series A and B Preferred Stock for
the thirteen week periods ended February 24, 2001 and February 26, 2000 of
approximately $58,000 and $103,000, and for the twenty-six week periods ended
February 24, 2001 and February 26, 2000 of $116,000 and 206,000, have been
reflected as additional net loss applicable to common stock. Cumulative
dividends in arrears on the Series A and B Preferred Stock totaled
approximately $953,000 at February 24, 2001. 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 lender in connection with the
existing Credit Agreement.
The holders of the Series C Preferred Stock are entitled to receive a
cumulative cash dividend of $4.80 per share annually. As well, liquidation
preference equal to $60 per share plus interest thereon from the date of issue
until redemption or conversion at a compound rate of 20% per year is provided
for. Dividends of $120,000 and $228,000 were paid on the Series C Preferred
Stock during the twenty-six week periods ended February 24, 2001 and February
26, 2000, respectively. Cumulative dividends in arrears on Series C Preferred
Stock totaled $120,000 at February 24, 2001 and was reflected as additional net
loss applicable to common stock. The Company plans to pay such dividends within
the current fiscal year.
In January 2001, the Company and the FIL selling shareholders agreed to reduce
the amount due on promissory notes to $1,804,000 in full settlement of all post
closing adjustment provisions pursuant to the acquisition agreement. The
resulting adjustment was recorded as a reduction of goodwill. Among other
things, the FIL settlement agreement provided that approximately $227,000 would
be settled by the return of certain finished goods inventory.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition, which provides
guidance on the recognition and disclosure of revenues. Adoption of SAB No. 101
is required by the fourth quarter of fiscal 2001. The Company is in the process
of evaluating the effect adoption of SAB No. 101 will have on the Company's
consolidated financial position and results of operations.
16
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 February 24, 2001 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 February 24, 2001 would result in an
approximate $180,000 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 February 24, 2001.
The Company's direct exports comprise approximately 31% of net sales for the
twenty-six week period ended February 24, 2001. 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.
In the twenty-six week period ended February 24, 2001, two customers accounted
for approximately 15% and 10% of the Company's net sales. The loss of a single
or a few customers may have a material adverse effect on the Company's business.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 of the Notes to the Consolidated Financial Statements.
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
a.) The Annual Meeting of Stockholders was held on January 18, 2001.
b.) The following directors were elected to serve until the next
Annual Meeting of Stockholders or until their successors have
been elected and qualified:
Richard P. Rifenburgh Viren S. Sheth
Richard R. Howard B.J. Harid
Robert A. Lerman
c.) (1) The directors listed in item 4 b) above were elected by the
following votes:
NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
------- ------------------- ------------------------
Richard P. Rifenburgh 17,887,598 2,400
Richard R. Howard 17,880,738 9,260
Robert A. Lerman 17,887,598 2,400
Viren S. Sheth 17,884,298 5,700
B.J. Harid 17,887,598 2,400
(2) Of the 17,889,998 shares voting at the meeting, 17,889,998 voted
for the ratification of the apointment of the firm
PricewaterhouseCoopers LLP as the Company's independent public
accountants for fiscal 2001. The number of shares that voted
against such ratification was zero and the holders of 206 shares
abstained from voting on this matter.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
18
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: April 9, 2001 By: /s/ Richard R. Howard
-------------- --------------------------------------
RICHARD R. HOWARD
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 9, 2001 By: /s/ Robert M. Viola
-------------- --------------------------------------
ROBERT M. VIOLA
Senior Executive Vice-President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
19