1
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: MAY 31, 1995
-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 JULY 6, 1995, THERE WERE OUTSTANDING 6,648,996 SHARES OF COMMON
STOCK, $.01 PAR VALUE, OF THE REGISTRANT.
There are 24 pages in the sequentially numbered, manually signed original.
The exhibit index is located at page 19.
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TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--May 31, 1995 and August 31, 1994 3
Consolidated statements of income--three and nine month periods ended
May 31, 1995 and 1994 5
Consolidated statements of cash flows--nine month periods ended
May 31, 1995 and 1994 6
Notes to consolidated financial statements--May 31, 1995 7
Report of Independent Accountants 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MAY 31 August 31,
ASSETS 1995 1994 *
-------------- ---------------
Current assets:
Cash and cash equivalents $ 249,000 $ 269,000
Accounts receivable, less allowance for doubtful accounts
of $447,000 and $589,000 4,952,000 6,430,000
Current portion note receivable-related party (Note 11) 50,000 ---
Accounts receivable - insurance reimbursement (Note 6) 815,000 ---
Inventories (Notes 3 and 11) 8,549,000 8,127,000
Prepaid expenses 297,000 243,000
Refundable income taxes (Note 4) 52,000 1,774,000
-------------- ----------------
Total current assets 14,964,000 16,843,000
-------------- ----------------
Note receivable-related party (Note 11) 550,000 ---
Assets held for sale (Note 11) 648,000 ---
Property, plant and equipment, less accumulated depreciation
of $734,000 and $1,015,000 714,000 2,372,000
-------------- ----------------
Other assets:
Warrant valuation, less accumulated amortization
of $557,000 and $367,000 1,532,000 1,722,000
Other assets 56,000 84,000
-------------- ----------------
Total other assets 1,588,000 1,806,000
-------------- ----------------
TOTAL ASSETS $ 18,464,000 $ 21,021,000
============== ================
* Prepared from audited financial statements for the year ended August 31,
1994.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -- Continued
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
MAY 31 August 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 *
------------- -------------
Current liabilities:
Short-term borrowings (Note 5) $ 3,964,000 $ 4,511,000
Current portion of long-term obligations 35,000 38,000
Accounts payable-trade 474,000 865,000
Accounts payable-related parties-net (Note 9) 2,857,000 1,462,000
Accrued bonuses 212,000 302,000
Accrued litigation expense 177,000 175,000
Accrued interest expense 456,000 386,000
Accrued promotion expense 92,000 455,000
Other accrued expenses 655,000 694,000
------------- -------------
Total current liabilities 8,922,000 8,888,000
------------- -------------
Shareholder litigation settlement (Note 7) --- 4,500,000
Obligations under capital leases, less current portion 31,000 54,000
Subordinated long term debt - related parties (Notes 6 and 7) 8,000,000 5,000,000
------------- -------------
Total liabilities 16,953,000 18,442,000
------------- -------------
Commitments and contingencies (Note 8) --- ---
Shareholders' equity:
Preferred stock, $.05 par value; authorized 1,000,000 shares;
no shares issued --- ---
Common stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding 6,648,966 shares in May 1995
and 6,641,538 shares in August 1994 67,000 66,000
Additional paid-in capital 10,281,000 10,229,000
Receivable from shareholders-related parties (Note 7) --- (500,000)
Accumulated deficit (8,837,000) (7,216,000)
------------- -------------
Total shareholders' equity 1,511,000 2,579,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,464,000 $ 21,021,000
============= =============
* Prepared from audited financial statements for the year ended August 31,
1994.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -- Continued
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------------------ -------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- ----------------
Net sales $ 6,672,000 $ 9,557,000 $ 24,091,000 $ 35,861,000
Cost of sales (Note 10) 5,778,000 7,909,000 19,821,000 29,290,000
-------------- -------------- -------------- ----------------
Gross profit 894,000 1,648,000 4,270,000 6,571,000
Selling, general and
administrative expenses
(Note 11) 2,300,000 2,763,000 6,576,000 8,298,000
-------------- -------------- -------------- ----------------
Loss from operations (1,406,000) (1,115,000) (2,306,000) (1,727,000)
Other income (expense):
Interest expense (308,000) (299,000) (961,000) (859,000)
Other (expense) income (297,000) 1,000 (419,000) 12,000
Insurance reimbursement
(Note 6) 815,000 ---- 2,065,000 ----
-------------- -------------- -------------- ----------------
Loss before provision for
income taxes (1,196,000) (1,413,000) (1,621,000) (2,574,000)
Provision for income taxes ---- ---- ---- ----
-------------- -------------- -------------- ----------------
Net loss $ (1,196,000) $ (1,413,000) $ (1,621,000) $ (2,574,000)
============== ============== ============== ================
Net loss per common share
(Note 2):
Primary $ ( .18) $ ( .21) $ ( .24) $ ( .39)
============== ============== ============== ================
Fully diluted $ ( .18) $ ( .21) $ ( .24) $ ( .39)
============== ============== ============== ================
Weighted average common shares outstanding
(Note 2):
Primary 6,650,230 6,633,642 6,646,067 6,629,837
============== ============== ============== ================
Fully diluted 6,650,230 6,633,642 6,646,067 6,629,837
============== ============== ============== ================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -- Continued
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
-----------------------------
MAY 31, May 31,
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,621,000) $ (2,574,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 386,000 332,000
Provision for losses on accounts receivable 210,000 213,000
Provision for inventory 407,000 369,000
Impairment of assets reserve 150,000
Loss on asset disposals 23,000 71,000
Issuance of stock in connection with 401K plan 53,000 41,000
Amortization of warrant valuation 190,000 ---
Change in operating assets and liabilities:
Accounts receivable 1,268,000 (349,000)
Accounts receivable-insurance reimbursement (815,000)
Inventories (830,000) 376,000
Prepaid expenses (54,000) (86,000)
Refundable income taxes 1,722,000 559,000
Accounts payable 1,004,000 (1,093,000)
Accrued expenses (420,000) 468,000
Shareholder litigation settlement liability (4,500,000) (3,500,000)
------------ ------------
Net cash used in operating activities (2,827,000) (5,173,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (129,000) (195,000)
Increase in other assets (33,000) (107,000)
Proceeds from sale of assets 42,000 19,000
------------ ------------
Net cash from (used in) investing
activities (120,000) (283,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term borrowings 30,749,000 40,167,000
Payments under short term borrowings (31,296,000) (38,167,000)
Proceeds from issuance of subordinated long-term debt 4,000,000 3,500,000
Principal payments on subordinated long-term debt (1,000,000) ---
Other principal payments (26,000) (21,000)
Collection on receivable from shareholders 500,000 ---
------------ ------------
Net cash provided by financing
activities 2,927,000 5,479,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (20,000) 23,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 269,000 235,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 249,000 $ 258,000
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -- Continued
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 1995
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 three and nine month periods ended May 31, 1995, are
not necessarily indicative of the results that may be expected for the year
ending August 31, 1995.
NOTE 2: NET LOSS PER SHARE
Net loss per share amounts were computed based upon the weighted average number
of common shares outstanding.
NOTE 3: INVENTORIES
Inventory is stated at the lower of cost (determined by the weighted average
cost method) or market.
5/31/95 8/31/94
------------------ -----------------
Raw materials $ --- $ 227,000
Work-in-process 246,000 494,000
Finished goods 8,303,000 7,406,000
------------------ -----------------
$ 8,549,000 $ 8,127,000
================== =================
The inventory balances at May 31, 1995, and August 31, 1994, are shown net of
reserves for market valuation and shrinkage of $807,000 and $400,000,
respectively. Raw materials inventories as of August 31, 1994, relate to the
cosmetic pencil manufacturing operations. These operations and the related
inventories were sold to Eurostar, effective May 1995. Work-in-process
inventories as of August 31, 1994, related partially to the cosmetic pencil
manufacturing and partially to the distribution activity. The remaining
work-in-process inventories relate only to the distribution activity. See Note
11 for further discussion of the pencil manufacturing operations sale.
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NOTE 4: INCOME TAXES
During the first quarter of fiscal 1995, TRISTAR CORPORATION (the "Company")
received tax refunds of approximately $1,722,000 reducing the refundable taxes
recorded at August 31, 1994.
NOTE 5: SHORT-TERM BORROWING
The Company had available at May 31, 1995, a revolving line of credit that
permits borrowings of up to $10 million at prime rate plus five percentage
points per annum, with additional fees approximating a percentage point per
annum. Borrowings under this credit agreement are limited to 70% of eligible
accounts receivable and 30% of eligible inventories as defined in the
agreement. Collateral for the credit agreement consists of all assets of the
Company. The agreement contains a material adverse change provision as well as
certain restrictions and conditions, among which are limitations on cash
dividends and capital expenditures. As of May 31, 1995, based on the borrowing
formula in the agreement, the maximum borrowings available to the Company were
$4,839,000 of which $875,000 was not utilized.
As of July 7, 1995, the Company and its lender amended the existing credit
agreement and extended the maturity date to July 7, 1997 from the original
maturity date of October 7, 1995. Under the terms of the amendment, borrowing
availability was increased to 75% of eligible accounts receivable and 50% of
eligible inventories as defined in the original agreement. In addition, the
interest expense was reduced to prime rate plus three percentage points per
annum with additional fees approximating a percentage point per annum.
NOTE 6: PROCEEDS OF AN EXECUTIVE LIABILITY AND INDEMNIFICATION POLICY
On December 6, 1994, the Company received a court approved distribution of
$1,250,000 from the proceeds of an executive liability and indemnification
policy owned by the Company. In accordance with the financing agreement with
the Core Sheth Families, a related party, $1,000,000 of the proceeds were
utilized to repay a portion of the existing long term subordinated debt. The
$1,000,000 repayment was made in December 1994.
On June 23, 1995, the Company received a court approved distribution of the
balance ($750,000) of the proceeds of the executive liability and
indemnification policy owned by the Company. In addition, the Company received
a distribution of approximately $65,000 of interest earned during the period
the court held the proceeds. This court approved distribution is subject to
appeal by other claimants under the policy.
NOTE 7: LONG TERM LIABILITIES
On December 16, 1994, the Company made its final payment of $4.5 million under
the stockholder litigation settlement. The funds were provided by the
borrowing of $4 million under the financing agreement entered into on August
31, 1993, with the Core Sheth Families, a related party. Such borrowings were
recorded as subordinated long-term debt in accordance with the financing
agreement. The remaining $500,000 was from the proceeds of the purchase by the
Core Sheth Families of 10-year warrants to purchase 2 million shares of the
Company's common stock at a per share price of $5.34.
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NOTE 8: LITIGATION 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 9: ACCOUNTS PAYABLE - RELATED PARTIES
The Company's primary suppliers of fragrance products and cosmetic products are
related parties, Eurostar Perfumes, Inc. ("Eurostar") and Emicos
International, Ltd., ("Emicos"), respectively. Related party accounts payable
result from the purchase of products from those vendors. Related party
accounts receivable result from (1) transferring inventory to Eurostar for sale
to Eurostar customers or repackaging for the Company, and (2) the sale of
cosmetic pencils to Emicos and Eurostar. The payables and receivables balances
are offset and the net balance of accounts receivable or accounts payable is
presented on the balance sheet. Payables due members of the Company's Board of
Directors result, in the normal course of business, from expenses associated
with Board and related committee meetings. However, during the third fiscal
quarter ended May 31, 1995, additional expenses were incurred which related to
the Company's proposed merger with a related party, Eurostar. See Note 12 for
further discussion of the proposed merger transaction. The following
summarizes the presentations at May 31, 1995 and August 31, 1994.
5/31/95 8/31/94
------------------ -------------
Total Accounts Payable-Related Parties $ 3,579,000 1,888,000
Total Accounts Receivable-Related Parties 775,000 438,000
------------------ -------------
Offset Amount 771,000 438,000
------------------ -------------
2,808,000 1,450,000
------------------ -------------
Payables due members of the Company's
Board of Directors 49,000 12,000
------------------ -------------
Net Related Parties Payables $ 2,857,000 1,462,000
================== ==============
NOTE 10: RELATED PARTY COST OF SALES:
The majority of the Company's sales, approximately 88% and 90% for the three
and nine months ended May 31, 1995, respectively, and 92% for the same periods
in fiscal 1994, are from product purchased from related parties.
Correspondingly, the majority of the Company's cost of sales is a result of
related party transactions.
NOTE 11: COSMETIC PENCIL MANUFACTURING OPERATION
In May 1995, the Company sold its cosmetic pencil manufacturing business, with
the exception of the facility and surrounding land, to Eurostar in
consideration for the cost of inventories, payable upon utilization of such
inventories, and a seven-year note for approximately $600,000. In connection
with the sale, Eurostar agreed to supply all of the Company's requirements for
cosmetic pencils at contractual prices such that, under fiscal 1994 volume
levels and selling prices, the Company would achieve in future periods the same
contribution from cosmetic pencil
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sales as was achieved in fiscal 1994. Expenses of $149,000 related to the
closing were recorded in May 1995.
The Company intends to sell or lease its manufacturing plant facilities in
South Carolina. An impairment of assets reserve of $150,000 was recorded
against the land and facility held for sale in order to value the assets at
estimated net realizable value.
NOTE 12: PROPOSED MERGER
Subject to stockholders' approval, the Company has entered into an Agreement
and Plan of Merger (the "Merger Agreement") dated as of July 1, 1995 under
which Eurostar Perfumes, Inc., a Texas Corporation ("Eurostar"), will be merged
with and into the Company, with the Company being the surviving corporation.
Eurostar, the Company's major supplier and a related party, (see Note 9), is
owned 100% by the Core Sheth Families, who indirectly own 60.5% of the
Company's outstanding common stock. If the merger is consummated, the Company
will be the surviving corporation and will issue approximately 10 million
shares of its common stock in exchange for all of the issued and outstanding
common stock of Eurostar. The merger will be accounted for in a manner similar
to a pooling of interests.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Tristar Corporation
We have reviewed the accompanying consolidated balance sheet of Tristar
Corporation and Subsidiaries as of May 31, 1995, the consolidated statements of
income for the three and nine month periods ended May 31, 1995 and 1994, and
the consolidated statements of cash flows for the nine month periods ended May
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements of Tristar
Corporation and Subsidiaries for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Tristar Corporation and
Subsidiaries as of August 31, 1994, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated November 11, 1994, except for Note
16, as to which the date is November 22, 1994, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
August 31, 1994, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it is derived.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
July 7, 1995
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PART I - FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THREE AND NINE MONTH PERIODS ENDED MAY 31, 1995 AND
MAY 31, 1994
For the three months ended May 31, 1995, the Company recorded a net loss of
$1,196,000 or $0.18 per share, bringing the results for the nine months ended
May 31, 1995 to a loss of $1,621,000 or $0.24 per share.
NET SALES
Net sales for the third quarter of fiscal 1995 were $6,672,000, a decrease of
30.2% compared to net sales of $9,557,000 in the same quarter of fiscal 1994.
Net sales of $24,091,000 for the nine month period ended May 31, 1995,
decreased 32.8% compared to net sales of $35,861,000 for the same period in
fiscal 1994 . The decrease in sales in the fiscal 1995 periods compared to the
same periods in fiscal 1994 was primarily attributable to weak economic
conditions in Mexico in the first quarter and the subsequent devaluation of the
Mexican Peso in the latter half of December 1994. Also contributing to
decreased sales were lower sales to certain U.S. based customers who sell
outside the Company's exclusive marketing territories and a general decrease in
demand in the wholesale channel of distribution.
NET SALES - CHANNELS OF DISTRIBUTION
The Company markets and distributes products to the wholesale, independent
retail and chain/mass merchandiser channels. For the quarter and nine months
ended May 31, 1995, the Company experienced a decrease in sales to the
wholesale channel when compared to the same periods ended May 31, 1994. The
decrease in sales to the wholesale channel is primarily attributable to the
factors described in the preceding paragraph. Although slower and less than
originally anticipated, the Company has experienced growth in the independent
retail and chain/mass merchandiser channel. The Company is continuing to
devote resources to all channels of distribution, with emphasis placed on
promotional programs and limited advertising. The impact of these marketing
efforts on the balance of fiscal 1995 is not known at this time.
NET SALES - FOREIGN-BASED CUSTOMERS
The Company's customers are located primarily in the United States, Mexico and
Canada. Sales made directly to foreign-based customers as a group, which
includes those in Mexico and Canada, decreased in the three month and nine
month periods ended May 31, 1995, when compared to the same period ended May
31, 1994. These direct sales decreased to $3,042,000 (12.6% of net sales) from
$6,278,000 (17.5% of net sales) when comparing the respective nine month
periods ended May 31, 1995, and 1994. A major component of this continuing
decline was sales to Mexico where economic conditions, including the Peso
devaluation, and political conditions severely affected the purchasing power of
a majority of the Mexican population. The conditions in Mexico also had a
material adverse effect on indirect sales, by certain of the Company's U. S.
based customers, into Mexico.
In the first three quarters of fiscal 1994, certain of the Company's U. S.
based customers continued to export a significant portion of their purchases to
countries outside the Company's exclusive marketing territories. In the latter
part of fiscal 1994 and in the first nine months of fiscal 1995, as expected,
sales to such customers decreased significantly, due to the Distribution
Agreement concluded in October 1992 between the Company and its fragrance
suppliers, wherein the Company agreed not to sell or cause to be sold any
products of those suppliers in any country other
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than the United States, Mexico, Canada and Puerto Rico. The amount of any
sales lost cannot be determined as the Company does not have access to such
customer information.
NET SALES - PRODUCTS PURCHASED FROM RELATED PARTIES
Of the net sales for the three and nine months ended May 31, 1995,
approximately 88.3% ($5,889,000) and 90.0% ($21,686,000), respectively,
resulted from the sale of products purchased from related parties. For the
comparable periods ended May 31, 1994, sales of products purchased from related
parties accounted for 92% of total net sales. The balance of the net sales in
those periods was generated primarily from products produced by the Company's
cosmetic pencil factory. Sales of cosmetic pencils included sales of $220,000
and $630,000, respectively, for the three and nine months ended May 31, 1995,
to Emicos International, Ltd. ("Emicos"), a related party. For the comparable
three and nine month periods in fiscal 1994, sales to the same related party
were $79,000 and $191,000, respectively.
GROSS PROFIT
The Company's gross profit for the three and nine months ended May 31, 1995,
was $894,000, or 13.4% of net sales and $4,270,000 or 17.7% of net sales,
respectively, compared to $1,648,000, or 17.2% of net sales and $6,571,000 or
18.3% of net sales, respectively, for the same periods in fiscal 1994. The
decrease in gross profit percentage when comparing both periods was principally
due to increasing inventory reserves by $261,000 to re-value certain
inventories discontinued in the third quarter of fiscal 1995 to anticipated
market prices. In addition, in fiscal 1995, the Company has experienced
increased freight costs offset somewhat by selective pricing policy changes
that were instituted in the last quarter of fiscal 1994.
The Company anticipates that gross profits, as a percentage of sales, for the
balance of the year are expected to remain at or will be slightly lower than
those of the previous quarters of fiscal 1995 as the Company pares its
inventory levels.
EXPENSES
The Company's selling, general and administrative ("SG&A") expenses decreased
for the three and nine months ended May 31, 1995 by 16.8% to $2,300,000 and by
20.8% to $6,576,000, respectively. As a percentage of net sales for the three
and nine month periods ended May 31, 1995, the Company's SG&A increased to
34.5% and 27.3%, respectively, from 28.9% and 23.1%, respectively, for the same
periods in fiscal 1994. These increases in SG&A expenses as a percentage of
sales were attributable to lower sales in the fiscal 1995 periods as compared
to the same periods in fiscal 1994. The decrease of SG&A expenses in the
fiscal 1995 periods were largely attributable to restructuring, and reduced
marketing promotions and advertising production costs occurring in the first
nine months of fiscal 1995, closure of the South Carolina distribution center
in May 1994 and the effect of selective headcount reductions in fiscal 1994.
Included in the three and nine month amounts for fiscal 1995 are expenses of
$149,000 incurred in the sale and closing of the pencil plant manufacturing
operations in May 1995. Also included is an expense of $150,000 to write the
pencil manufacturing facility and land down to estimated net realizable value.
See Note 11 to the financial statements for further discussion of the sale of
the Company's cosmetic pencil manufacturing business.
Management expects that for the remainder of fiscal 1995, SG&A expenses will
remain below the 1994 levels as the Company continues to realize benefits
associated with the lower advertising expenses, closure of the South Carolina
distribution center and the selective headcount reductions that occurred in
fiscal 1994, plus continued efforts to control expenses in fiscal 1995.
However, as sales continue to be impacted by instability in the Company's
markets, SG&A expenses as a percentage of sales may remain above levels of
fiscal 1994.
INTEREST EXPENSE
Interest expense increased in the first nine months of fiscal 1995 to $961,000,
compared to $859,000 for the comparable period of fiscal 1994, primarily as a
result of a higher rate of interest due to prime rate increases under the
$10,000,000 revolving credit facility.
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OTHER (EXPENSE) INCOME
The third quarter included expenses of $87,000 incurred in preparing for the
possible merger of Eurostar with and into the Company, $177,000 of litigation
expenses arising from events related to the shareholder litigation, and $63,000
from the amortization of the valuation of warrants offset partially by
miscellaneous income items.
In addition, the nine months of fiscal 1995 included $127,000 of warrant
valuation amortization for the first six months of fiscal 1995.
The Company anticipates that expenses related to the proposed merger will be
materially higher in the fourth quarter of fiscal 1995.
INSURANCE REIMBURSEMENT
On December 6, 1994, the Company received a court approved distribution of
$1,250,000 from the proceeds of an executive liability and indemnification
policy owned by the Company, which was recorded as other income in the
financial statements of the Company for the quarter ended November 30, 1994.
On June 23, 1995, the Company received a court approved distribution of the
balance ($750,000) of the proceeds of an executive liability and
indemnification policy owned by the Company. In addition, the Company received
a distribution of $65,000 of interest earned during the period the court held
the proceeds. This court approved distribution is subject to appeal by other
claimants under the policy.
NET LOSS
The Company recorded a net loss for the third quarter of fiscal 1995 of
$1,196,000, or $.18 per share compared to a net loss of $1,413,000 or $.21 per
share for the same period in fiscal 1994. The net loss for the nine months
ended May 31, 1995, was $1,621,000 or $.24 per share, compared to a net loss of
$2,574,000, or $.39 per share, in the same period of fiscal 1994.
POTENTIAL ADVERSE EFFECTS ON RESULTS OF OPERATIONS FOR FUTURE PERIODS
Each or all of the following factors could have an adverse effect on
anticipated results for the balance of fiscal 1995.
1. The Mexican Market. In late December 1994, the Mexican government
devalued the Mexican Neuvo Peso by allowing the Peso to float freely
against the U. S. dollar. This devaluation has resulted in a general
increase of 80% or more in the cost of imported products to the
Mexican consumer. The increase and the resultant instability,
including significant business failures and resultant unemployment,
has caused a sharp decline in purchases of the Company's products by
the Mexican consumer. It is not known if and when the Peso will
stabilize at a level where somewhat normal purchasing will resume.
Prior to the above mentioned economic and political instability, sales
directly and indirectly into Mexico accounted for a significant
portion of the Company's total sales.
The Company's products have been and are sold, directly or indirectly,
into the Mexican market. 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.
The Company has been unable to determine the effect, if any, that the
implementation of the North American Free Trade Agreement (the
"NAFTA") has had or will have on the Company's business.
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15
2. The Economy. Weak economic conditions in Mexico combined with the
devaluation of the Mexican currency, noted above, will continue to
adversely impact sales.
3. The Distribution Channels. Although the Company is making extensive
efforts to market products into the chain/mass merchandiser
marketplace, the Company remains heavily dependent on its original
markets, the wholesale and independent retail distribution channels.
The maturation of these original markets, combined with the continued
economic conditions and competitive pressures, have resulted in a
slowing of the general growth of the market. These factors are
expected by management to have some effect on the remainder of fiscal
1995.
4. Loss of Foreign-Based Customers. Under the Distribution Agreement
concluded in October 1992 between the Company and its fragrance
suppliers, the Company agreed not to sell or cause to be sold any
products of those suppliers in any country other than the United
States, Mexico, Canada and Puerto Rico. In fiscal 1994 and 1995,
direct sales outside of the named countries were negligible.
However, through the first three quarters of fiscal 1994, certain of
the Company's U. S. based customers continued to export a significant
portion of their purchases to countries outside the Company's
exclusive marketing territories. In the latter part of fiscal 1994
and in the first nine months of fiscal 1995, as expected, sales to
such customers decreased significantly due to the Distribution
Agreement. While management believed that the amount of these lost
sales would be replaced by additional sales within the exclusive
marketing territories, to date, due to economic conditions and slower
than anticipated growth in the mass merchandising channel, the Company
has not been successful in doing so, and it is not expected that this
will occur in the remainder of fiscal 1995.
5. Supply of Products. The Company's ability to satisfy sales orders for
its fragrance products is directly dependent on the supply of products
from Eurostar, which is a related party. As part of the settlement of
the stockholders' class action litigation, Eurostar and the Company
reached an agreement whereby the relationship between the two entities
will continue through at least fiscal 1999. If Eurostar was
physically unable to provide product, the effect on the Company would
be minimal as two other related parties have similar manufacturing
facilities available to support the Company.
The Company is dependent on the supply of cosmetic products and
cosmetic pencils, from related parties. If such related parties were
to cease or to be unable to supply these products, the lack of such
products would have an adverse effect on the Company until a secondary
supplier could be located.
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 had available at May 31, 1995, a revolving line of credit that
permits borrowings of up to $10 million at prime rate plus five percentage
points per annum, with additional fees approximating a percentage point per
annum. Borrowings under this credit agreement are limited to 70% of eligible
accounts receivable and 30% of eligible inventories as defined in the
agreement. Collateral for the credit agreement consists of all assets of the
Company. The agreement contains a material adverse change provision as well as
certain restrictions and conditions, among which are limitations on cash
dividends and capital expenditures.
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As of July 7, 1995, the Company and its lender amended the existing credit
agreement and extended the maturity date to July 7, 1997 from the original
maturity date of October 7, 1995. Under the terms of the amendment, borrowing
availability was increased to 75% of eligible accounts receivable and 50% of
eligible inventories as defined in the original agreement. In addition, the
interest expense was reduced to prime rate plus three percentage points per
annum with additional fees approximating a percentage point per annum.
During the nine months ended May 31, 1995, net borrowings decreased by $547,000
to $3,964,000 under the revolving line of credit. Additional borrowings of
$875,000 were available as of May 31, 1995, under the revolving line of credit
based on the formulas used to determine availability. See Note 5 of the Notes
to Consolidated Financial Statements for additional information on the line of
credit.
Operations in the nine months ended May 31, 1995, utilized $2,827,000 in cash
primarily due to increased inventories ($830,000), decreased accrued expenses
($420,000) and the final payment into escrow of the stockholders litigation
settlement ($4,500,000) and net loss adjusted for non-cash items ($202,000)
which included an executive liability and indemnification insurance policy
reimbursement of $2,000,000, plus $65,000 in accumulated interest. This item
was the major factor in reducing the net loss for the nine months ended May 31,
1995. Offsetting these were a refund of federal income taxes of $1,722,000,
decreased trade accounts receivable ($1,268,000), and increased accounts
payable ($1,004,000).
Maturity of the varying financing terms offered to customers due to seasonality
and competitive pressures and lower sales levels, were the major contributors
to the $1,268,000 decrease in accounts receivable balances for the first nine
months of fiscal 1995. Inventories increased ($830,000) partially in
anticipation of historical seasonal upsurge in sales in the last few months of
the calendar year, which did not occur, and the loss of sales due to economic
and political conditions in the Mexican market. Accrued expenses were reduced
as payments were made of bonuses, sales promotions and interest that had been
accrued during fiscal 1994.
Capital expenditures during the nine months ended May 31, 1995 were $129,000,
consisting primarily of investments in machinery and equipment. Capital
expenditures in the remainder of fiscal 1995 are expected to be primarily for
computer equipment and software with minimal amounts being invested in
equipment for distribution activities. These amounts are not expected to be
material to the cash flow of the Company.
Additional subordinated debt borrowings of $4,000,000 plus $500,000 received
from the purchase of warrants for 2 million shares of the Company's common
stock by the Core Sheth Families were used to fund the final payment on the
stockholder litigation settlement. Offsetting the increase in subordinated
debt was utilization of $1,000,000 of the $1,250,000 insurance proceeds
received in December 1994 for repayment of subordinated debt.
Management believes that the Company's revolving line of credit and the
continued ability to extend credit terms as necessary with the Company's
primary supplier, Eurostar, a related party, should be sufficient to meet the
cash requirements of the Company for the remainder of fiscal 1995.
INFLATION
During the nine months ended May 31, 1995, and consistent with the nine months
ended May 31, 1994, inflation did not have a material adverse impact either on
the Company's net sales or results from operations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1993, Talamas Enterprises, Inc., a former customer of the Company
("Talamas"), filed suit against the Company, alleging that the Company had sold
products to Talamas' customers in Mexico in breach of promises and
representations made by the Company to Talamas. Although the Company denied the
allegations in the suit, the suit was settled in April 1995 for an immaterial
amount.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
10. First Amendment to Loan and Security Agreement with Fremont
Financial
23. Awareness Letter of Coopers and Lybrand.
27. Financial Data Schedule
B) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused thisreport to be signed on its behalf by the
undersigned thereunto duly authorized.
TRISTAR CORPORATION
(Registrant)
Date: July 13, 1995 /s/ Viren S. Sheth
------------------------------------------
Viren S. Sheth
President and Chief Executive Officer
Date: July 13, 1995 /s/ Loren M. Eltiste
------------------------------------------
Loren M. Eltiste
Vice-President and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number
- - ------
10. First Amendment to Loan and Security agreement with Fremont Financial
23. Awareness Letter of Coopers and Lybrand
27. Financial Data Schedule