1
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13099
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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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12500 SAN PEDRO AVENUE, SUITE 500, SAN ANTONIO, TEXAS 78216
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(Address of principal executive offices)
Registrant's telephone number, including area code 210-402-2200
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Common Stock on December 4,
1997, as reported on the NASDAQ National Market System, was $28,467,000. As of
December 4, 1997, the Registrant had outstanding 16,749,569 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
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PART I
Certain statements contained in this Annual Report on Form 10K, including
statements regarding the anticipated development and expansion of the Company's
business, expenditures, the intent, belief or current expectations of the
Company, its directors or its officers, primarily with respect to the future
operating performance of the Company and other statements contained herein
regarding matters that are not historical facts, are "forward-looking"
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, those discussed in other filings made by the
Company with the Securities and Exchange Commission. The Company does not
intend to update such forward looking statements.
ITEM 1. Business
TRISTAR CORPORATION ("Tristar" or the "Company") is a Delaware corporation
headquartered in San Antonio, Texas. The Company is principally engaged in
developing, manufacturing, marketing and distributing value oriented designer
alternative fragrances, complementary products to those fragrances, and
cosmetic pencils in North and South America. The Company's fragrances are sold
under the Designer Classic Alternatives ("DCA"), Euro Collections ("Euro"),
Royal Selections, Regal Collections and Premiere Editions ("Premiere") brands.
They are designed for consumers who desire a scent similar to an original
designer fragrance, but are unwilling or unable to pay the high prices of the
originals. The Company also markets and distributes value oriented cosmetics,
including premium cosmetics that are alternatives to major brands sold in
department stores, again at significantly lower prices than original designer
brands. Cosmetics are primarily marketed under the DCA and the Gina Cosmetics
lines. The Company conducts business utilizing its sales and distribution
facilities in San Antonio, Texas, Miami, Florida, Mexico City, Mexico, and Sao
Paulo, Brazil, its state of the art manufacturing facility in Pleasanton,
Texas, and its corporate offices, design studio, and laboratory in San Antonio,
Texas.
The Company was incorporated in New York in 1982 and made an initial public
offering of its common stock in 1984. In 1987, the Company was reincorporated
in Delaware. The Company changed its name from Ross Cosmetics Distribution
Centers, Inc. to Tristar Corporation in 1993.
The Company's major shareholder, the Core Sheth Families ("Sheth Group"),
beneficially holds 78% of the Company's outstanding common stock. Through
their various worldwide vertically integrated companies, the Company believes
that the Sheth Group is the world's largest manufacturer (based on number of
units produced) of lower priced value oriented fragrances. They are also
significant manufacturers of lower priced, value oriented cosmetic products.
The Sheth Group is also a supplier of products and components to the Company's
sales, distribution and manufacturing operations, and a purchaser of the
Company's products.
The fragrance manufacturing capability of the Company was acquired in August
1995, as a result of a merger with Eurostar Perfumes, Inc., ("Eurostar"), an
affiliate of the Core Sheth Families and the manufacturer of substantially all
of the Company's products prior to the merger. The merger was accounted for in
a manner similar to a pooling of interests. Accordingly, for periods ending
August 31, 1995 and prior, the Company's financial statements have been
restated to include the results of Eurostar. All subsequent discussions and
disclosures in this document are as though Eurostar has been a part of Tristar
since the inception of Eurostar in 1992.
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Products
The Company's principal product category is fragrances with the balance
consisting of cosmetics, cosmetic pencils and toiletry products. The following
table reflects the dominance of the fragrance category's contribution to the
Company's net sales for the last three fiscal years:
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Product Category Fiscal 1997 Fiscal 1996 Fiscal 1995
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Fragrances 83% 80% 78%
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Other Products 17% 20% 22%
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Fragrance sales in fiscal 1997 grew both as a percentage of total sales as well
as in dollars of sales when compared to fiscal 1996. During fiscal 1997, the
Company continued the expansion of its distribution base to retail chains
through the distribution of the premium quality, premium priced DCA product
line which was introduced in December 1995 and a new value priced line
introduced in August 1997 called Regal Collections. The Company has also
continued to focus on the distribution of the popular Euro line into the retail
market both in the United States and Canada, as well as in Latin America, while
concurrently expanding the Royal Selections brand (introduced in September
1996) to serve the needs of other trade classes. The Company intends to
continue to transition to a broader based distribution strategy. The Company
implemented this strategy primarily as a result of increased opportunities in
the retail sector and in the wholesale, specialty store, and dollar store
channels in the U.S., Canada and Latin America. The Company is also building
brand equity by devoting increased resources to strengthen marketing support
programs.
The improved financial results for fiscal 1997 reflect a robust growth in sales
and major improvement in earnings. The Company benefited from costs incurred
in the prior fiscal year relating to the implementation of the strategies to
develop and introduce the Royal Selections product line, new DCA products,
development of the retail sales channels, repositioning the Euro line and
developing the Latin America channels of distribution. The Company believes
that opportunities exist to enhance its market share in the key areas in which
it competes.
Fragrances
The Company's marketing strategy for designer alternative fragrances now
addresses five distinct segments of the fragrance market with five separate
product lines uniquely positioned to enable the Company to pursue customized
marketing programs tailored to meet the specific needs of the different classes
of trade:
o The premium quality and premium priced DCA line, which was developed and
introduced in fiscal 1996, enables the Company to compete in retail chains
including leading drug, food and mass merchandisers, who look to promote
higher price point and higher profit brands. The Company directed
significant resources in fiscal 1996 and 1997 to the development of this
product line, the development of related distribution channels and in
programs to increase consumer awareness. (See further discussion of
investments in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.) DCA has a suggested retail price to
the consumer of $9.99 per bottle.
o The Euro line, which has lower price points than the DCA line, is also
marketed in traditional retail chain stores both in the United States and
Canada as well as Latin America. The Euro line, first introduced in 1989,
is the second largest fragrance line of the Company and until fiscal 1996
had been the Company's principal brand in the wholesale market. (The
Company's new Royal Selections brand, as discussed below, is now targeted
to the wholesale market, replacing the Euro line). To strengthen the Euro
Line's franchise in the retail channel, its packaging was redesigned in the
latter part of fiscal 1996 to enhance its image and position. Euro
fragrances suggested retail prices range from $3.99 to $4.99 per bottle.
o In the fourth quarter of fiscal 1996, the Company developed a new line,
Royal Selections, designed to recapture a significant part of the wholesale
trade class. Within one year of introduction the Royal Selection brand has
become the largest brand in the Company and a market leader. This line set
new standards for the industry in packaging and product innovation. In
August 1997 a significant line extension, Royal Nature, was introduced with
seven new original fragrances emulating "mother nature." Fragrances such as
Peach, Pear, and Very Berry attract a younger teen audience, a new market
segment for the Company. Generally these younger consumers find nature-type
fragrances more appealing than traditional designer alternative fragrances.
Royal Selections is competitively priced, and couples that with unsurpassed
quality packaging and merchandising
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support. This line was introduced at the beginning of fiscal 1997 and
sells to consumers at a suggested retail price range of $2.99 to $3.99 per
bottle.
o In the fourth quarter of fiscal 1997, the Company developed a new fragrance
brand called Regal Collections, focusing on major new opportunities in
retail channels of distribution. Regal Collections has a limited number of
designer alternative fragrance "best sellers" and will retail between $3.00
to $3.99 per bottle. This attractively packaged brand is aimed at mass
volume retailers including food accounts. Shipments commenced August 1997.
o The Premiere line is a budget price brand that is oriented toward dollar
stores and other budget-price retailers. This line of designer alternative
fragrances was newly re-staged at the end of fiscal 1996 by increasing the
bottle size and redesigning all packaging. Sales of the redesigned product
began in early fiscal 1997 at the same price points as previously sold,
providing increased value in comparison to competition. The consumer can
purchase fragrances in this line in a suggested retail price range of $0.99
to $1.50 per bottle.
In fiscal 1997, the Company discontinued Everscent, a minor budget priced
fragrance brand, and sold or disposed of related inventory.
The Company believes that to successfully market a fragrance product line, one
must identify a market niche and then fill that niche with a value-priced,
quality product presented in attractive bottles, cartons and displays. All of
the Company's fragrance lines feature quality glass bottles and caps designed
in various unique shapes and styles. The Company's fragrances are packaged in
colorful cartons designed with the latest technology to appear attractive to
the consumer. All fragrances are developed by the Company's and the Sheth
Group's expert perfumers as alternatives to the most popular, nationally
branded, designer fragrances. They are sold, however, at a fraction of the
original designer fragrance's retail price to satisfy the needs of the
consumers in specific niche markets. The Company also develops, markets and
distributes a limited number of its own original fragrances (non-designer
alternative fragrances) in the U.S. and Latin America.
Prior to the introduction of new or improved fragrances, market evaluation and
consumer testing is conducted by the Company with selective testing also done
by independent outside laboratories. The Company believes that the success of
these products is dependent on the Company correctly identifying the needs of a
particular market niche and then, ultimately, on the consumers' acceptance of
the product. Life cycles of products vary significantly, with some being
successfully marketed for more than five years, whereas other products may fail
to gain consumer acceptance and be discontinued within a shorter period of
time. The Company believes that the success of the Company's products in the
market place is largely dependent on the amount and quality of retail
advertising and promotion original designers provide for their brands, the
appeal of the scent itself, and the merchandising and trial programs that the
Company develops to accelerate consumer awareness.
Each of the Company's five fragrance product lines has, or will have, companion
products, which are discussed below in "Other Products".
The Company anticipates revenue growth in its fragrance lines in fiscal 1998 as
the Company strengthens its marketing programs and targets specific products at
specific market niches. The streamlining and upgrading of the Euro and
Premiere lines, increased consumer acceptance of the DCA line and the continued
rapid growth of the Royal Selections fragrance line (including the Royal Nature
fragrance line extensions) are expected to favorably contribute to sales
growth. The recently launched Regal Collections line had been received well in
its targeted market, and it is expected to contribute to fiscal 1998 sales
growth.
During fiscal 1998 the Company plans to sell other fragrance lines manufactured
by Core Sheth Family affiliates outside the U.S., into Latin America primarily
to the retail sector. These entries are anticipated to expand the Company's
market share by offering distinctive original (non-designer alternative) brands
into those markets with value benefits not presently offered by leading
competitors.
5
Other Products
The Company markets numerous complementary products within each fragrance line
such as deodorant sticks, dusting powders, shaker talcs, trial/travel sizes,
fragrance scented candles and gift sets. In most cases, these companion
products are marketed as designer alternatives and are value priced
significantly below the prices of the national brands.
The Company markets under the brand names of DCA and Gina Cosmetics,
proprietary lines of cosmetics including nail, lip color, eye products, and
other cosmetic items, all of which are manufactured by related parties.
Cosmetics sold under the DCA brand are premium quality lip and nail products
designed as alternatives to original designer products. The DCA products are
sold primarily in chain stores at prices significantly less than the original
designer's price. Cosmetic products under the Gina Cosmetics line are geared
to price conscious consumers and are primarily marketed in the wholesale class
of trade and in dollar stores.
The Apple line of lip and eye cosmetic pencils, which is manufactured by the
Company, is marketed and distributed in assorted colors and sizes. Private
label cosmetic pencils are also produced for selected customers, including an
affiliate of the Core Sheth Families.
With the exception of cosmetic pencils, new, redesigned, or replacement
cosmetics or specialty toiletries, are developed by the Company's suppliers at
the request of the Company. The Company believes that like fragrances,
selecting the right cosmetic or toiletry products for a particular market
segment and acceptance by the consumer play a large role in the success or
failure of any particular product.
The Company believes that revenues for both the complementary products to the
fragrance lines and cosmetics will increase in fiscal 1998. Such growth is
expected to result from increases in the existing lines, the addition of new
products, and further strengthening of our distribution network.
Customers
The Company distributes its products to more than 1,000 customers, including
wholesalers, distributors, drug and grocery chains, mass merchandisers and
specialty chain stores located primarily in North and South America. These
customers represent over 35,000 outlets for the Company's products. The
Company markets its products through Company sales personnel located in various
markets and through a network of independent sales representatives.
The Company has invested heavily in developing the mature U.S. retail markets
and in starting to develop the emerging mass markets in Latin America. The
Company believes that the customer base in the mass Latin American markets fit
the Company's target customer profile and presents an opportunity for future
growth.
The Company has focused the expansion of the customer base in the U.S. on
creating and repositioning products to better meet the needs of its existing
channels of distribution and in gaining entrance into certain new channels. A
major focus of investment in fiscal 1997 has been on developing customer bases
in the most populous countries in Latin America - Mexico and Brazil. This
development was facilitated by establishing sales and distribution operations
in those countries in fiscal 1995 and 1996, respectively. The Company services
other countries in Latin America through regional and national distributors
within the various countries. An entity of the Core Sheth Families is the
national distributor in Argentina. These distributors are primarily supplied
by the Company's Texas distribution center that also services the United States
and Canadian markets.
Sales to customers in the United States were $41.9, $37.2, and $28.5, million
for fiscal years 1997, 1996 and 1995, respectively. For the years ended August
30, 1997, August 31, 1996, and 1995, $27.0 million (39% of net sales), $14.5
million (28% of net sales), and $16.2 million (36% of net sales), respectively,
were exported directly to foreign customers or sold through the Company's
subsidiaries in Mexico and Brazil. Certain of the sales to U.S. customers are
ultimately resold outside of the U.S. The amount of these indirect export
sales cannot be determined as the Company does not have access to its
customers' sales information. As a significant portion of the Company's
products are sold directly or indirectly into the Latin American market, there
are certain factors such as political and economic conditions that could have
an adverse effect on these sales. See "Management's Discussion and
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Analysis of Financial Condition and Results of Operations (Potential Adverse
Effects on Results of Operations for Future Periods)" for a specific discussion
of those risks.
The North and South America markets will continue to be the focus of the
Company's marketing strategy as other Core Sheth Families affiliates distribute
similar products throughout the rest of the world. The Company anticipates
some increase in sales outside North and South America in fiscal 1998,
primarily in the newer Royal Selections and DCA product lines, and principally
to Core Sheth Families affiliates.
The Company is not dependent upon a single or a few customers, and the loss of
a single or a few customers would not have a material adverse effect on the
Company's business. In fiscal 1997, 1996, and 1995 no single customer
accounted for more than ten percent of the Company's total sales.
Suppliers
At present, the Company purchases the glass containers for its fragrances from
European glass manufacturers. If these products were unavailable from one of
these suppliers, the Company believes that it could purchase such products from
other suppliers without any significant delays.
In addition, the Company purchases specially blended fragrance compounds
principally from a Core Sheth Families affiliate in France. In the event that
the supplier was unable to provide the compounds, the Company could suffer
minor manufacturing delays until the primary supplier could be replaced by
another Core Sheth Families affiliate or a secondary source.
The Company's ability to satisfy sales orders for its fragrance products is
directly dependent on its ability to manufacture these products. If the
Company were physically unable to manufacture its products, and inventory and
demand levels were normal, the effect on the Company would in general be
minimal as Core Sheth Families affiliates and others have similar manufacturing
facilities available to support the Company. However, in instances where
demand for fragrances was strong and the Company had inadequate inventory
levels, the Company would be adversely impacted. The inability to manufacture
cosmetic pencils at its Texas facility until a secondary source could be
located would have a relatively minor adverse effect.
The Company is dependent on the supply of cosmetics, other than cosmetic
pencils, from Core Sheth Families affiliates. If any of these companies were
to cease or be unable to supply these cosmetic products, the lack of such
products could have an adverse effect on the Company until secondary suppliers
could be located.
Patents and Trademarks
The Company and a Core Sheth Families affiliate own or have applied for,
substantially all of the product name trademarks for the fragrance and cosmetic
products sold by the Company. The Company is dependent on the continued use of
these trademarks; however, the cessation of the Company's right to use such
trademarks of the Core Sheth Families affiliate would not have a materially
adverse effect on the Company's business.
Backlog of Orders
The Company had no substantial backlog of orders at the end of each of fiscal
years 1997, 1996 and 1995. At the end of fiscal year 1997, the Company's
backlog increased over prior years from $1.4 to $3.4 million for fiscal years
ended 1996 and 1997, respectively.
Raw Materials
The Company's raw material inventories support the fragrance and cosmetic
pencil manufacturing operations. The principal components of that inventory
are currently purchased from limited or single sources of supply. Management
believes the cessation of supply for the fragrance components from any of the
primary suppliers could be replaced by a Core Sheth Families affiliate or a
secondary source with minimal difficulties.
7
Environmental Laws
In the opinion of management, compliance by the Company with federal, state and
local laws relating to the protection of the environment has had no material
effect upon the Company's capital expenditures, earnings or competitive
condition. The Company has reformulated certain of its products to meet the
requirements of the California Air Resources Board, See "Legal Proceedings".
Competition in the Fragrance and Cosmetics Industry
The fragrance and cosmetics industry is characterized by intense competition,
particularly in the U.S. While pricing and terms are the principal factors in
competition, product quality, presentation, merchandising and advertising
programs, and customer service (incorporating available inventories and prompt
delivery) are also very important additional competitive features in the
overall industry.
Principal competitors in designer alternative fragrances include Jean Philippe
Fragrances, Inc., Paris Designs, Inc., and Parfums de Coeur, and in budget
cosmetics, Artmatic USA Cosmetics, Wet-N-Wild, and Jordana Cosmetics
Corporation.
While the Company is a significant participant in the value oriented designer
alternative fragrance market and has had historically many of the resources of
the Core Sheth Families available to it, the Company is a relatively small
participant in the total fragrance and cosmetics industry. Many of the other
companies in the industry, including virtually all large mass-advertised brand
manufacturers such as Unilever, Revlon, L'Oreal, Benckiser, and Renaissance
Cosmetics, Inc. are well established and have been in existence for a
significantly longer period of time than the Company. Such companies have
higher leverage and resources such as financial, marketing, research,
manufacturing, and personnel, substantially greater than the Company will have
available in the foreseeable future. Historically, however, these large
manufacturers have not sought to compete in the same value-oriented markets in
which the Company participates.
Inventory
The Company maintains finished goods inventory at its Texas, Florida, Mexico
and Brazil warehouse facilities to meet the demands of its customers. Raw
material and work-in-process inventories related to manufacturing of fragrances
and cosmetic pencils are located at the Pleasanton, Texas manufacturing
facility.
Seasonality
The Company's business has historically been subject to seasonal factors
relating to calendar year-end holidays, which has resulted in increased net
sales in the first and fourth quarters of the Company's fiscal year. The
Company believes that with its range of products, distribution channels, and
promotional activity, it should over time be able to reduce some of the
differences between quarters, however, the nature of the fragrance market will
result in a continuation of the pattern.
Employees
The Company employs approximately 400 regular employees and during peak
production periods the Company utilizes temporary or seasonal employees to
augment its workforce. During the past two fiscal peak production periods the
Company has utilized up to 400 seasonal employees. None of the Company's
employees are covered by a collective bargaining agreement and management
believes that the Company's relationship with its employees is satisfactory.
ITEM 2. Properties
The Company owns a manufacturing plant that consists of a 132,000 square-foot
facility on a 14-acre site in Pleasanton, Texas. That facility has
approximately 12,000 square feet of office space.
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The Company is currently subleasing approximately 30,000 square feet of storage
space in Pleasanton, Texas. The sublease has an annual rate of approximately
$56,700 and expires July 1998.
The Company is currently leasing approximately 72,000 square feet of storage,
shipping, and office space for its San Antonio distribution center. The lease
has an annual rate of $207,000, subject to adjustments, and expires in February
1998.
The San Antonio corporate offices, design studio, and laboratory occupy
approximately 23,000 square feet of office space. The leases have a current
annual rate of $289,000, subject to adjustments, and expire between January
1998 and January 1999.
The Company is leasing approximately 531 square feet in Los Angeles, California
as a show room. The lease has an annual current rate of $12,800, subject to
adjustments, and will expire in September 1998.
The Company also leases approximately 1,000 square feet of office space in New
York City and 26,000 square feet of office and distribution space in Mexico and
Brazil.
The Company currently has under lease approximately 1,900 square feet of office
space in Chicago, Illinois that it is subletting.
ITEM 3. Legal Proceedings
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 Core Sheth Families'
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. 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.
Insurance Policy Reimbursement
In November 1994 and June 1995, the United States District Court for the
District of South Carolina approved the disbursement of $1.25 and $0.75 million,
respectively, to the Company from the proceeds of an executive liability and
indemnification policy owned by the Company. Two other claimants under the
policy, Ross Freitas ("Freitas") and Carolyn Kenner ("Kenner"), sought
reconsideration of the latter court-approved disbursement. Pursuant to a
settlement agreement approved by the Court on December 18, 1997, Freitas and
Kenner have withdrawn their motion for reconsideration. As part of the
settlement, the Company will make payments totaling $175,000 to Freitas and
Kenner by April 15, 1998. The proceedings regarding the policy before the United
States District Court for the District of South Carolina have been dismissed.
California Air Resources Board
After not being in compliance with the regulations of the California Air
Resources Board (the "CARB") with respect to volatile organic compounds
("VOC's), since January 1, 1995 the Company achieved compliance by September
30, 1996. Under a temporary variance granted by the State of California, the
company was allowed to sell until September 30, 1997, non-complying product
manufactured prior to September 30, 1996.
9
Employment Claims
In May 1995, a suit was filed in Texas state court against the Company by the
former in-house counsel for Eurostar, who was terminated approximately 45 days
after his employment commenced and within the probationary period of his
employment arrangement. Plaintiff filed suit against the Company, making
certain allegations, including breach of contract, violations of various state
and federal laws, retaliatory termination and misrepresentations. A settlement
with the plaintiff was reached in November 1996.
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. The Company anticipates that it may incur expenses
related to ongoing litigation involving the non-settling defendants from
previously settled stockholder class action litigation against the Company and
from a related lawsuit against the Company's former auditors. Any expenses
incurred are not expected to be material to the Company's financial results.
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ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market For Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
The Company has a single class of common equity securities outstanding, its
Common Stock, $.01 par value ("Common Stock"). The Common Stock is traded
over-the-counter on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") Small Cap National Market under the symbol "TSAR". The
following table presents for the periods indicated the quarterly high and low
bid quotations in the over-the-counter market, as quoted by NASDAQ. These
quotations reflect the inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
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Fiscal 1997 Fiscal 1996
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High Low High Low
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First Quarter $7 3/8 $7 $7 1/8 $5 1/4
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Second Quarter $9 11/16 $6 7/8 $7 3/4 $6 1/2
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Third Quarter $9 5/8 $9 11/32 $8 $7 3/8
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Fourth Quarter $10 7/8 $9 3/8 $7 7/8 $7 1/4
==========================================================================
On December 4, 1997, the closing bid price for the Company's Common Stock, as
reported by NASDAQ, was $10 13/32.
(b) Holders
As of December 4, 1997, the approximate number of holders of the Company's
Common Stock was approximately 1,000.
(c) Dividends
The Company has paid no cash dividends on the Common Stock since its inception.
The payment by the Company of cash dividends, if any, in the future rests
within the discretion of the Board and will depend, among other things, upon
the Company's earnings, its capital requirements and its financial condition,
as well as other relevant factors. In addition, the Company's ability to pay
cash dividends is subject to restrictions imposed by the Company's principal
lender. See Note 5 of the Notes to Consolidated Financial Statements. The
Company has no plans to pay any cash dividends on the Common Stock in the
foreseeable future.
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ITEM 6. Selected Financial Data
The following is a summary of selected financial data for the Company and its
subsidiaries for each of the last five fiscal years:
=====================================================================================================================
Years Ended ,
--------------------------------------------------------------------------------
August 30, August 31, August 31, August 31, August 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Revenues $68,959,000 $51,720,000 $44,728,000 $51,244,000 $51,690,000
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Net (loss) income $1,083,000 $(12,053,000) $(932,000) $1,390,000 $(4,724,000)
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Net (loss) income applicable
to Common Stock $(454,000) $(12,053,000) $(932,000) $1,390,000 $(4,724,000)
- ---------------------------------------------------------------------------------------------------------------------
Net (loss) income per Common
Share: $(.03) $(.72) $(.06) $.08 $(.28)
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Weighted average number of
shares outstanding: 16,708,085 16,635,888 16,625,341 16,851,644 16,601,048
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Total assets $40,421,000 $33,767,000 $36,828,000 $40,902,000 $39,116,000
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Revolving Credit Agreement
Borrowings $10,205,000 $9,319,000 $5,383,000 $4,511,000 $2,505,000
- ---------------------------------------------------------------------------------------------------------------------
Long term debt $2,581,000 $3,234,000 $3,719,000 $4,861,000 $8,168,000
- ---------------------------------------------------------------------------------------------------------------------
Subordinated long term debt $4,500,000 $12,666,000 $12,666,000 $11,216,000 $10,469,000
- ---------------------------------------------------------------------------------------------------------------------
Cash dividends declared per
Common Share $ -0- $ -0- $ -0- $ -0- $-0-
=====================================================================================================================
The Company has significant related party transactions. See Note 7 of the
Notes to Consolidated Financial Statements.
In fiscal 1993, the Company recorded a $9.5 million (pretax) charge in
connection with settlement of the class action litigation.
The Company has recorded legal and professional expenses of $72,000, $162,000,
$269,000, $208,000 and $2,758,000 in fiscal 1997, 1996, 1995, 1994 and 1993,
respectively, associated with the stockholder litigation and other events that
were the subject of an internal investigation by the Special Committee of the
Board. See Note 16 of the Notes to the Consolidated Financial Statements.
The Company recorded other income of $2,065,000 in connection with receipt of
insurance proceeds in fiscal 1995. See Note 19 of the Notes to the
Consolidated Financial Statements.
The Company recorded expense of $63,000, $83,000, $986,000 and amortization of
$367,000 in fiscal 1997, 1996, 1995 and 1994, respectively, associated with the
value assigned to the granting of new common stock purchase warrants related to
the settlement of the prior stockholder class action litigation and to the
extension of the exercise date on existing warrants.
The Company recorded merger related expenses of $76,000 in fiscal 1996 and
$686,000 in fiscal 1995.
During the fourth quarter of fiscal 1996 the Company recorded deferred income
tax expense of $3,881,000 resulting from the establishment of a valuation
allowance for deferred tax assets. See Note 10 of the Notes to the
Consolidated Financial Statements.
During the first and second quarters of fiscal 1997 the Company's primary
shareholder, the Core Sheth Families, converted $8,166,000 of its subordinated
debt into Series A and Series B Preferred Stock. See Note 11 of the Notes to
the Consolidated Financial Statements.
12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations -- Fiscal 1997 Compared to Fiscal 1996
Tristar markets and distributes products to wholesalers, distributors, chain
stores, specialty chains, mass merchandisers, and independent retail stores in
various markets throughout North and South America. Net sales for the fiscal
year ended August 30, 1997 were $68,959,000, an increase of 33%, compared to
net sales of $51,720,000 in the fiscal year ended August 31, 1996. The
increase is primarily attributable to the success of the Royal Selections line
of fragrances which was introduced in early fiscal 1997. The Royal Selections
line was developed for the wholesale market and reversed the prior years'
trend in that market channel, achieving success in both the U.S. and Latin
America. Somewhat offsetting this increase was a loss of sales in the Euro
line and the DCA line. While not quantifiable, the Company also lost sales due
to the lack of sufficient production capability to satisfy the entire demand
for its products in fiscal 1997.
The Company believes that sales will increase in all channels of distribution
in fiscal 1998 primarily as a result of (1) adding additional manufacturing
capability in the first quarter of fiscal 1998, (2) continued strong demand for
the Royal Selections fragrance line, (3) opportunity with the increased
manufacturing capability to market the redesigned budget priced Premiere
fragrance line, and (4) continued growth of the Euro fragrance line in the
retail store channel. Sales in both the U.S. and Latin America are expected to
benefit from the aforementioned factors.
Overall, the Company's direct exports increased to $27,054,000, (39% of net
sales), in fiscal 1997 compared to $14,524,000, (28% of net sales), in fiscal
1996. The increase in direct exports is largely due to the success of the
Royal Selections fragrance line. In Brazil, the Company continued the
development of formal channels of distribution after establishing sales and
warehouse facilities in early fiscal 1996. While the growth of the Brazilian
market continues to be slower than anticipated, the Company believes that the
market presents a strategic opportunity for growth in sales in the future.
During fiscal 1997, sales in Mexico returned to the levels that were in
existence prior to the Nuevo Peso devaluation in fiscal 1995. The success of
the Royal Selections fragrance line combined with the Company's strategy to
formalize distribution of the Euro line in Mexico servicing retail outlets
through the Company's warehouse in Mexico City resulted in the improved sales.
The Company believes that export sales will continue to increase in fiscal
1998.
Included in export sales were sales of $3,866,000 in fiscal 1997 and $1,997,000
in fiscal 1996 to Core Sheth Families affiliates. See "Business (Suppliers)"
and Note 7 of the Notes to Consolidated Financial Statements.
Approximately 92% of the growth in sales resulted from increased sales in the
fragrance lines. The new Royal Selections fragrance line along with higher
sales in the redesigned Premiere line and the newly introduced Regal
Collections line accounted for the fragrance lines growth. Sales growth
outside the fragrance lines was principally realized in increased cosmetic
pencil sales.
Of the net sales in fiscal 1997, approximately 6%, or $4,427,000, resulted from
the sale of products purchased from related parties as finished goods. For
fiscal 1996, comparable numbers were 12%, or $6,165,000. In addition,
fragrance and other products manufactured and sold by the Company included
certain components that were purchased from related parties. The cost of those
components approximated 7% of cost of sales in fiscal 1997 and 8% of cost of
sales in fiscal 1996. See Note 7 of the Notes to the Consolidated Financial
Statements for additional information.
Tristar's gross profit both in dollar terms and as a percentage of sales
increased in fiscal 1997 as compared to fiscal 1996. Comparable numbers were
$20,518,000, or 29.8%, in fiscal 1997 and $10,919,000, or 21.1%, in fiscal
1996. Factors which contributed to this increase were the increase in sales,
lower level of low margin sales of discontinued product and product lines in
fiscal 1997, a change in the product mix sold moving to higher margin products
and lower costs associated with the introduction and manufacturing of a new
product line. The Company believes that gross profit as a percentage of sales
in fiscal 1998 will improve over those of fiscal 1997, primarily as a result of
improved manufacturing efficiencies.
13
Selling, general and administrative expenses ("SG&A") increased in fiscal 1997
to $17,093,000 from the fiscal 1996 level of $16,285,000. The increase was
primarily attributed to expenses associated with the development of the chain
markets in the United States and the introduction and marketing of the Royal
Selections product line. As a percentage of sales, SG&A was 24.8% in fiscal
1997 compared to 31.5% in fiscal 1996.
Management believes that SG&A will increase in dollar terms, while decreasing
as a percentage of sales, in fiscal 1998 as the Company meets continued
customer demands and as it builds on investments in products and also markets
what were developed in prior years.
Interest expense decreased by $419,000 in fiscal 1997 from the 1996 level of
$2,359,000. This decrease is primarily attributable to the conversion of
certain subordinated debt into preferred stock. The decrease was partially
offset by increased average revolving credit agreement borrowings. The Company
believes that interest expense will be higher in fiscal 1998 as a result of
expected increased borrowing levels under the revolving credit line,
establishing a larger term loan, and a new capital equipment lending arrangement
to allow the Company to increase its manufacturing capability.
Fiscal 1997 other expenses included $63,000 of expenses related to the
amortization of the warrant valuation asset and $72,000 of litigation expenses
arising from events related to the shareholder litigation. These respective
expenses in fiscal 1996 were $83,000 and $162,000.
The Company recorded income tax expense of $78,000 in fiscal 1997 which compared
to an expense of $3,732,000 in fiscal 1996. The fiscal 1996 amount includes
$3,881,000 of deferred tax expense as a result of management's reassessment of
the realizability of its deferred tax assets under the guidelines of Statement
Financial Accounting Standards No. 109, "Accounting for Income Taxes". A
valuation allowance has been recorded to reduce the net deferred tax asset to
zero due to the uncertainty of realizing the benefits of these deductible
differences.
The Company recorded net income of $1,083,000 for fiscal 1997. After giving
effect to the beneficial conversion feature of a preferred stock issue, the
related warrant valuation adjustment, and preferred stock dividends described in
the following paragraph, in fiscal 1997 the Company recorded a net loss
applicable to common stock of $454,000 or $0.03 per share. In fiscal 1996, the
Company recorded net loss of $12,053,000 or $0.72 per share.
In a transaction effective February 21, 1997, Nevell Investments S.A.
("Nevell"), the holder of a subordinated long-term promissory note in the
principal amount of $4,000,000, converted $3,500,000 of that note into 120,690
shares of the Company's Series B convertible nonvoting preferred stock, $.05
par value ("Series B Preferred Stock"). The Series B Preferred Stock has
cumulative preferred dividends of $2.03 per share and a preferred liquidation
distribution of $29.00 per share plus accrued and unpaid dividends. Each share
of the Series B Preferred Stock is convertible at the option of Nevell, into
four shares of the Company's Common Stock. The Company can redeem the shares
of Series B Preferred Stock at any time for cash of $29.00 per share ($7.25 per
common share), plus all accrued and unpaid dividends.
On February 21, 1997, the closing bid price of the Company's Common Stock as
reported by the NASDAQ was $9 11/32. At that date, the Series B preferred
stock carried a beneficial conversion feature of $2 3/32, the difference
between the conversion price and the closing bid price per share of Common
Stock. The value of the beneficial conversion feature has been reflected in
the financial statements of the Company in a manner similar to that for a
dividend to the preferred shareholder. Accordingly, the Company has recorded a
charge to retained earnings and an increase in the value of the Series B
Preferred Stock in the amount of $1,011,000. Additionally, as a result of the
conversion, the Company wrote off $270,000 of warrant valuation costs
attributable to the converted debt. This charge has also been recorded to
retained earnings in a manner consistent with that for the beneficial
conversion feature described above.
14
Potential Adverse Effects on Results of Operations for Future Periods
The results for fiscal 1998 could be adversely affected by each or all of the
following factors:
1. Latin America Economies. Growth in sales, or even the maintenance of
existing sales levels, as well as the collection of accounts receivable in
certain Latin American countries (including Mexico) depend 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 and the collectability of accounts receivable.
2. 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.
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 which include related parties. 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 Core Sheth
Families 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 Markets. The Company continues to develop and expand sales and
marketing operations 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 nor that it will recover its
initial expenses and start up costs. In addition, certain countries from
time to time impose strict import restrictions and high levels of taxes on
imports, 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 will be
required to pay taxes from prior years and related interest thereon
exceeding $1,500,000, and it will lose a significant amount of its existing
net operating loss carryforward benefits. No accrual for the impact of the
proposed IRS adjustment 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 the Company's fiscal 1998 results.
15
Results of Operations -- Fiscal 1996 Compared to Fiscal 1995
Within the following discussion and analysis, financial information relating to
fiscal years 1995 reflects the financial results of the combined entities of
Tristar and Eurostar, which were merged on August 31, 1995. See Note 2 of the
Notes to Consolidated Financial Statements. The combination was treated in a
manner similar to a pooling of interests.
Net sales for the fiscal year ended August 31, 1996 were $51,720,000, an
increase of 15.6%, compared to net sales of $44,728,000 for the fiscal year
ended August 31, 1995. The increase was primarily attributable to the
development of the drug and grocery chain market utilizing the new DCA product
line as well as increased sales in Mexico, Brazil, and other U.S. chains,
specialty chains, and mass merchandisers. Somewhat offsetting these increases
was a loss of sales in the rest of Latin America and in the U.S. wholesale
channel. The loss in the U.S. wholesale channel was primarily due to increased
competition, a maturation of that market, a decrease in purchases by customers
who ultimately distributed the Company's products into Latin America, and as a
result of repositioning the Euro fragrance line outside of the wholesale
channel in the latter part of fiscal 1996 in anticipation of the introduction
of the new Royal Selections fragrance line into that channel in early fiscal
1997.
Overall, the Company's direct exports decreased to $14,524,000, (28%) of net
sales, in fiscal 1996 compared to $16,152,000, (36%) of net sales, in fiscal
1995. The decrease in direct exports was largely due to political and economic
uncertainties in certain Latin America countries. In Brazil, the Company
initiated the development of formal channels of distribution after establishing
sales and warehouse facilities in early fiscal 1996. During fiscal 1996, the
Company experienced an increase in the sales that were lost in Mexico after the
economic and political effects of the Nuevo Peso devaluation in fiscal 1995,
which severely affected the purchasing power of the Mexican population. After
the devaluation, the Company embarked on a strategy to formalize distribution
of the Euro line in Mexico servicing retail outlets primarily through the
Company's warehouse in Mexico City. While sales growth was achieved under this
distribution strategy, the economic and political pressures continued in fiscal
1996 and limited such growth. Sales in the rest of Latin America were down in
comparison to fiscal 1995, primarily as a result of economic and political
conditions in several of those countries.
Included in export sales were sales of $1,997,000 in fiscal 1996 and $1,299,000
in fiscal 1995 to Core Sheth Families affiliates. See "Business (Suppliers)"
and Note 7 of the Notes to Consolidated Financial Statements.
Approximately two-thirds of the growth in sales resulted from increased sales
in the fragrance lines. The new DCA fragrance line along with higher sales in
the two discontinued fragrance lines, Club Exclusif and Euro Elegance,
contributed to the growth in sales. The discontinued lines were sold at prices
significantly below list price, therefore generating additional sales, but at
reduced margins. The Euro line and the Premiere line remained essentially
constant in fiscal 1996 in comparison to fiscal 1995 levels.
Sales growth outside the fragrance lines was principally realized in increased
cosmetic pencil sales and in sales of the new DCA cosmetic line.
Of the net sales in fiscal 1996, approximately 12%, or $6,165,000, resulted
from the sale of products purchased from related parties as finished goods.
For fiscal 1995, comparable numbers were 15%, or $6,808,000. In addition,
fragrance and other products manufactured and sold by the Company included
certain components that were purchased from related parties. The cost of those
components approximated 8% of cost of sales in fiscal years 1996 and 1995.
Tristar's gross profit both in dollar terms and as a percentage of sales
declined in fiscal 1996 as compared to fiscal 1995. Comparable numbers were
$10,919,000, or 21.1%, in fiscal 1996 and $13,001,000, or 29.1%, in fiscal
1995. Several factors which contributed to this decline were the sale of
discontinued product and product lines at selling prices below normal,
manufacturing variances attributable to costs associated with the introduction
and manufacturing of a new product line, manufacturing variances associated
with the extension of production efforts to meet market demands, and the
write-down of certain inventories to market.
16
Selling, general and administrative expenses ("SG&A") increased in fiscal 1996
to $16,285,000 from the fiscal 1995 level of $11,654,000. The increase was
attributed to expenses associated with the introduction of the new DCA product
line, costs to develop new channels of distribution, costs to enter those
channels, growth in support of existing sales channels, and increased support
in other functions within the Company. As a percentage of sales, SG&A was
31.5% in fiscal 1996 compared to 26.1% in fiscal 1995. Fiscal 1995 SG&A
included expenses incurred in the relocation of the pencil manufacturing
operations from South Carolina to Texas and an expense of $187,000 to reduce
the book value of the plant and surrounding land in South Carolina to their
estimated net realizable value.
Interest expense increased by $718,000 in fiscal 1996 from the 1995 level of
$1,641,000. This increase was primarily attributable to increased average
short term borrowings.
Fiscal 1996 expenses included merger related expenses of $76,000, litigation
expenses arising from events related to the shareholder litigation of $162,000,
and $83,000 of expenses related to the amortization of the warrant valuation
asset. These respective expenses in fiscal 1995 were $686,000, $269,000, and
$986,000.
In fiscal 1995, the Company received a court approved distribution of $2,000,000
from the proceeds of an executive liability and indemnification policy owned by
the Company. In addition, a distribution of $65,000 of interest earned was
received. The distribution of $750,000 of the total was contested by two other
claimants under the policy. See Item 3, "Legal Proceedings (Insurance Policy
Reimbursement)".
The Company recorded income tax expense (net of income tax benefits of
$149,000) of $3,732,000 in fiscal 1996 which compared to an expense of $661,000
in fiscal 1995. The fiscal 1996 amount reflected the reduction of the deferred
tax assets ($3,881,000) to zero as a result of management's reassessment of the
realizability of the asset under the guidelines of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". While management believed
that the Company will ultimately realize the benefit of the asset, the
uncertainty of when those benefits would be realized, precluded reflecting the
asset on the financial statements as of August 31, 1996.
The Company recorded a net loss of $12,053,000 or $0.72 per share for fiscal
1996. In fiscal 1995, the Company recorded net loss of $932,000 or $0.06 per
share.
17
Liquidity and Capital Resources
OPERATING ACTIVITIES
Operating activities in fiscal 1997 provided $996,000 in cash. The cash
provided was primarily the result of earnings adjusted for non-cash items and
an increase in accounts payable offset by an increase in accounts receivable.
Accounts receivable grew primarily as a result of increased sales, varying
extended financing terms given to customers, and extended terms given to
foreign customers in order to develop those markets. Accounts payable
increased as the Company delayed payments to certain vendors (primarily
affiliates of the Core Sheth Families ) and increased its purchases of
inventory and expanded manufacturing capability.
INVESTING ACTIVITIES
Capital expenditures during fiscal 1997 totaled $1,274,000, primarily for
production related machinery and equipment, facilities related items, and
computer equipment. Capital expenditures in fiscal 1996 and 1995 were
$1,108,000 and $787,000, respectively. Capital expenditures in fiscal 1998 are
expected to exceed the fiscal 1997 level with the major portion being devoted
to manufacturing equipment.
FINANCING ACTIVITIES
The Company had at August 30, 1997, a revolving credit agreement, amended as of
July 7, 1995, October 1, 1996, February 22, 1997, June 25, 1997, September 5,
1997 and November 21, 1997, which provided for $15,500,000 of maximum
borrowings at the prime rate (8.5% at August 30, 1997) plus two percentage
points per annum, with additional fees approximating one percentage point per
annum. Borrowings under this credit agreement were limited to 75% of eligible
domestic accounts receivable, 60% of eligible foreign accounts receivable, 100%
of eligible related party receivables secured by letters of credit, 50% of
eligible finished goods inventories, and 40% of eligible manufacturing
inventories.
During fiscal 1997, borrowings under the revolving credit agreement increased
by $886,000 to $10,205,000 at August 30, 1997. As of August 30, 1997,
remaining availability was $1,512,000, based on the borrowing formulas above.
The term loan entered into in July 1995 with the same lender as the short term
revolving credit line, provided for borrowings of $3.9 million of which
$2,474,000 were outstanding as of August 30, 1997. This loan was subject to
the same interest rate, fees, and debt restrictions as listed above for the
revolving credit lines. The loan called for monthly installments assuming a
maturity date in 2002.
On December 19, 1997, the Company entered into a $22,000,000 credit agreement
with a new lender (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 Bank 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%. Borrowings under the Revolving Credit are limited by a formula based on
Eligible Accounts Receivable and Inventory, as defined. Additionally,
borrowings based on LIBOR can not exceed 60% of the total outstanding
borrowings under the Revolving Credit. Commitment fees equal to .50% per annum
on the unused portion of the Revolving Credit are payable monthly.
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 plus
2.00%. Principal payments on the Term Loan will be 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 2000. Additionally, 50% of annual
excess cash flow, as defined, must be applied to the Term Loan installments in
the inverse order of maturity.
18
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 five year amortization. However, a balloon
payment in an amount equal to all outstanding borrowings under the Cap Ex
Facility is also due in December 2000.
The new lines of credit, together with cash generated by operations and the
continued ability to delay payments to related party vendors as required should
provide sufficient cash to meet the cash requirements of the Company for fiscal
1998.
As of August 31, 1996, the Company was indebted in the amount of $4.7 million
to a Core Sheth Families affiliate under a loan agreement entered into in
August 1993. The note, which was subordinated to the commercial lender, bore
interest at the rate of 4.5% per annum. On December 11, 1996, the $4.7 million
of subordinated debt was converted into the Company's Series A convertible
preferred stock (See Note 11 of the Notes to the Consolidated Financial
Statements). The Company remains indebted to the affiliate for delinquent
interest payments ($567,000) on the converted debt.
The settlement of the stockholder class action litigation recorded in May 1993
($9.5 million) resulted in a material change to the Company's long-term debt to
equity ratio. The Company at August 31, 1996 had outstanding subordinated
long-term debt to a Core Sheth Families affiliate of $8.0 million related to
that settlement. On February 21, 1997, $3.5 million of this debt was converted
into the Company's Series B convertible preferred stock (See Note 11 of the
Notes to the Consolidated Financial Statements). The remaining debt bears
interest at rates of 6.36% to 8.23% per annum. The Company remains indebted to
the affiliate for delinquent interest payments of $315,000 on the converted
debt ($3.5 million). Repayments on the remaining debt will begin in the year
2001. Due to the subordination of the debt to senior lenders, the long-term
nature of the debt, and the conversion of $3.5 million to preferred stock, the
Company does not believe that the ratio of long-term debt to equity has an
adverse effect on the Company.
On February 21, 1997, the closing bid price of the Company's Common Stock as
reported by the NASDAQ was $9 11/32. At that date, the Series B preferred
stock carried a beneficial conversion feature of $2 3/32, the difference
between the conversion price and the closing bid price per share of Common
Stock. The value of the beneficial conversion feature has been reflected in
the financial statements of the Company in a manner similar to that for a
dividend to the preferred shareholder. Accordingly, the Company has recorded a
charge to retained earnings and an increase in the value of the Series B
Preferred Stock in the amount of $1,011,000. Additionally, as a result of the
conversion, the Company wrote off $270,000 of warrant valuation costs
attributable to the converted debt. This charge has also been recorded to
retained earnings in a manner consistent with that for the beneficial
conversion feature described above.
As of August 30, 1997, the Company's financial statements reflect accrued
interest of $1,015,000 due on the above related party debt including the
delinquent amounts due on debt converted to preferred stock. A payment waiver
has been obtained from the related party for delinquent interest payments as
non-payment would be an event of default under that debt.
The Company also purchases certain equipment, primarily manufacturing
equipment, office furniture, computer equipment and software, under long-term
purchase agreements. These purchases are not material to the Company's cash
flow.
The Company does not have any plans to pay any cash dividends on the Common
Stock or the 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 revolving lines of credit.
19
Impact of Recently Issued Financial Accounting Standards:
Earnings per share (SFAS 128)
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" was issued in February 1997. SFAS No. 128 establishes simplified
accounting standards for computing earnings per share and makes them comparable
to international earnings per share standards. The company plans to adopt SFAS
No. 128 in fiscal 1998.
Reporting comprehensive income (SFAS 130)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components. The Company plans to adopt
SFAS No. 130 in fiscal 1998.
Disclosure about segments of an enterprise and related information (SFAS 131)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. This statement establishes
standards for the way that public companies report information about segments
in annual and interim financial statements. The Company plans to adopt SFAS
No. 131 in fiscal 1999.
The adoption of these recently issued financial accounting standards is not
expected to have a significant effect on the Company's consolidated financial
statements.
Inflation
During fiscal year ended 1997, and consistent with the Company's 1996 and 1995
fiscal years, inflation did not have a material adverse impact either on the
Company's net sales or income from continuing operations. However, the
devaluation of the Mexican Nuevo Peso in December 1994 had an impact on the
Company's sales with lower direct exports into Mexico. See Note 17 of the
Notes to the Consolidated Financial Statements for further discussion.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements and financial statement schedules listed
in Item 14(a)(1) and 14(a)(2) are annexed to this report as a separate section.
ITEM 9. Changes in and Disagreements on Accounting and Financial Disclosure
Dismissal of Independent Accountant
On July 22, 1997, the Company advised KPMG Peat Marwick LLP ("Peat Marwick")
that the Company intended to retain a different independent accounting firm for
the audit of its financial statements for the year ending August 30, 1997.
Peat Marwick had been engaged as the principal accountant to audit the
Company's consolidated financial statements.
Peat Marwick's reports on the Company's consolidated financial statements for
the fiscal years ended August 31, 1996 and 1995 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
The Audit Committee of the Company's Board of Directors recommended the action
taken with respect to Peat Marwick.
There have been no disagreements with Peat Marwick on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure during the Company's fiscal years ended August 31, 1995 and
20
1996 or in the subsequent interim period through July 22, 1997 (the date of
termination), which disagreements, if not resolved to Peat Marwick's
satisfaction, would have caused Peat Marwick to make reference to the subject
matter of the disagreement(s) in connection with its report.
Engagement of new independent accountant
Coopers & Lybrand, L.L.P. ("Coopers") has been engaged by the Company as its
new independent principal accountant to audit the Company's consolidated
financial statements. This engagement was effective as of July 22, 1997.
Coopers was the principal accountant for Tristar prior to the merger of
Eurostar with and into Tristar on August 31, 1995.
Prior to engaging Coopers, Tristar had not consulted with Coopers during the
Company's two most recent fiscal years or in the period since the end of the
most recent fiscal year.
21
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information required under this Item will be contained in the Company's Proxy
Statement for its 1998 Annual Meeting, which is incorporated herein by
reference.
ITEM 11. Executive Compensation
Information required under this Item will be contained in the Company's Proxy
Statement for its 1998 Annual Meeting, which is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required under this Item will be contained in the Company's Proxy
Statement for its 1998 Annual Meeting, which is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions
Information required under this Item will be contained in the Company's Proxy
Statement for its 1998 Annual Meeting, which is incorporated herein by
reference.
22
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) The following documents are filed as part of this report:
1. Financial Statements: Consolidated Financial Statements as
detailed in the Index to Financial Statements and Schedules
for the years ended August 30, 1997, August 31, 1996 and 1995
required in response to Item 8 of Part II of this report are
annexed to this report as a separate section.
2. Financial Statement Schedules: Any financial statement
schedules for the years ended August 30, 1997, August 31, 1996
and 1995, required in Item 8 of Part II of this report are
annexed to this report as a separate section.
(b) Reports on Form 8-K:
The Company filed a report on form 8-K dated July 22, 1997
reporting the change of the Company's accountants for fiscal
1997 to Coopers & Lybrand L.L.P., who had been the Company's
auditors prior to fiscal 1995.
(c) Exhibits
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Registrant, as amended. Incorporated by reference
to Exhibit 3.1 of the Report on Form 8-K dated August 31, 1995.
3.2 By-Laws of the Registrant (Amended as of August 14, 1992). Incorporated by reference
to Exhibit 3.2 of the Annual Report on Form 10-K for the year ended August 31, 1992.
4 Form of Registrant Common Stock certificate. Incorporated by reference to Exhibit 4.2
of the Quarterly Report on Form 10-Q for the quarterly period ended February 28, 1993.
10.1 1991 Amended and Restated Stock Option Plan of the Registrant. Incorporated by
reference to Exhibit 10.1 of the Annual Report on Form 10-K for the year ended August
31, 1992.
10.2 Loan and Security Agreement dated October 8, 1993 between Registrant and Fremont
Financial Corporation with Special Provisions Rider. Incorporated by reference to
Exhibit 10.11 of the Annual Report on Form 10-K for the year ended August 31, 1993.
10.3 First Amendment to Loan and Security Agreement dated July 7, 1995 between the Company
and Fremont Financial Corporation, amending Loan and Security agreement dated October
8, 1993. Incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q
for the quarterly period ended May 31, 1995.
10.4 Lease Agreement Re: South Carolina Facility. Incorporated by reference to Exhibit
10(q) of the Annual Report on Form 10-K for the year ended August 31, 1988.
23
10.5 Lease Agreement Re: San Antonio Facility. Incorporated by reference to Exhibit 10(r)
of the Annual Report on Form 10-K for the year ended August 31, 1988.
10.6 Lease Agreement Re: San Antonio Facility Extension. Incorporated by reference to
Exhibit 10.4.2 of the Annual Report on Form 10-K for the year ended August 31, 1991.
10.7 Lease Agreement Re: San Antonio Facility Extension dated July 7, 1992. Incorporated
by reference to Exhibit 10.3.4 of the Annual Report on Form 10-K for the year ended
August 31, 1992.
10.8 Lease Agreement Re: San Antonio Facility Extension dated July 31, 1992. Incorporated
by reference to Exhibit 10.3.5 of the Annual Report on Form 10-K for the year ended
August 31, 1992.
10.9 Lease Agreement Re: Corporate Headquarters in San Antonio dated January 13, 1993,
between Northwestern Mutual Life Insurance Co. and Registrant. Incorporated by
reference to Exhibit 10.17 of the Annual Report on Form 10-K for the year ended August
31, 1993.
10.10 Employment Agreement with Loren M. Eltiste dated October 6, 1992. Incorporated by
reference to Exhibit 10.4.5 of the Annual Report on Form 10-K for the year ended
August 31, 1992.
10.11 Non-Qualified Stock Option Grant to Loren M. Eltiste dated October 20,1992.
Incorporated by reference to Exhibit 10.26 of the Annual Report on Form 10-K for the
year ended August 31, 1993.
10.12 Distribution Agreement (the "Distribution Agreement") with Eurostar Perfumes, Inc. and
S&J Perfume, Ltd. dated October 28, 1992. Incorporated by reference to Exhibit 10.5
of the Annual Report on Form 10-K for the year ended August 31, 1992.
10.13 Letter Agreement Amendment dated August 30, 1993 to the Distribution Agreement.
Incorporated by reference to Exhibit 10.28 of the Annual Report on Form 10-K for the
year ended August 31, 1993.
10.14 Agreement and First Amendment to Distribution Agreement dated October 8, 1993 with
Eurostar Perfumes, Inc. and S&J Perfume, Ltd. Incorporated by reference to Exhibit
10.29 of the Annual Report on Form 10-K for the year ended August 31, 1993.
10.15 Agreement dated August 31, 1995, among the Company, Eurostar Perfumes, Inc. and
Starion International, Ltd., terminating the Distribution Agreement. Incorporated by
reference to Exhibit 10.3 of the Report on Form 8-K dated August 31, 1995.
10.16 Agreement dated August 31, 1993 between the Core Sheth Families, Viren Sheth, Starion
International, Ltd. and the Registrant. Incorporated by reference to Exhibit 10.31 of
the Annual Report on Form 10-K for the year ended August 31, 1993.
10.17 Financing Agreement dated August 31, 1993 between the Core Sheth Families and the
Registrant. Incorporated by reference to Exhibit 10.32 of the Annual Report on Form
10-K for the year ended August 31, 1993.
24
10.18 Lease Agreement Re: Bulk Warehouse Facility in San Antonio dated December 8, 1993,
between Northwestern Mutual Life Insurance Co. and Registrant. Incorporated by
reference to Exhibit 10.1 of Quarterly Report on Form 10-Q for period ended November
30, 1993.
10.19 Employment Agreement between the Company and Eugene H. Karam dated January 14, 1994.
Incorporated by reference to Exhibit 10.1 of Quarterly Report on Form 10-Q for period
ended February 28, 1994.
10.20 Incentive Stock Option between the Company and Eugene H. Karam dated February 14,
1994. Incorporated by reference to Exhibit 10.2 of Quarterly Report on Form 10-Q for
period ended February 28, 1994.
10.21 Sub-Lease Agreement Re: former San Antonio Distribution Facility, dated August 31,
1994, between DHI Enterprises, Inc. d/b/a Service Tech. Supply and Registrant.
Incorporated by reference to Exhibit 10.37 of the Annual Report on Form 10-K for the
year ended August 31, 1994.
10.22 Agreement and Plan of Merger dated as of July 1, 1995, among the Company, Eurostar
Perfumes, Inc. and Transvit Manufacturing Corporation. Incorporated by reference to
Exhibit 10.1 of the report on Form 8-K dated August 31, 1995.
10.23 Amendment to Common Stock Purchase Warrant dated August 31, 1995, between the Company
and Starion International, Ltd. Incorporated by reference to Exhibit 10.2 of the
Report on Form 8-K dated August 31, 1995.
10.24 Line of Credit Promissory Note dated August 1, 1993, between the Company (original
entered into with Eurostar) and Transvit Manufacturing Corporation. Incorporated by
reference to Exhibit 10.26 of the Annual Report on Form 10-K for the year ended August
31, 1995.
10.25 Loan and Security Agreement dated June 27, 1995, between the Company (originally
entered into with Eurostar) and Fremont Financial Corporation with Special provisions
Rider. Incorporated by reference to Exhibit 10.27 of the Annual Report on Form 10-K
for the year ended August 31, 1995.
10.26 Employment Agreement between the Company (originally entered into with Eurostar) and
Ricardo Bunge dated January 1, 1993, and as amended June 5, 1995. Incorporated by
reference to Exhibit 10.28 of the Annual Report on Form 10-K for the year ended August
31, 1995.
10.27 Employment Agreement between the Company and Joseph DeKama dated April 19, 1996.
Incorporated by reference to Exhibit 10 of Quarterly Report on Form 10-Q for period
ended June 1, 1996.
10.28 Non-Qualified Stock Option Grant to Joseph DeKama dated April 19, 1996. Incorporated
by reference to Exhibit 10.28 of the Annual Report on Form 10-K for the year ended
August 31, 1996.
10.29 Non-Qualified Stock Option Grant to Viren S. Sheth dated April 19, 1996. Incorporated
by reference to Exhibit 10.29 of the Annual Report on Form 10-K for the year ended
August 31, 1996.
25
10.30 Letter Agreement with Transvit Manufacturing Corporation Converting Line of Credit
Promissory Note to 666,529 Shares of Series A Convertible Preferred Stock dated
December 11, 1996. Incorporated by reference to Exhibit 10.30 of the Annual Report on
Form 10-K for the year ended August 31, 1996.
10.31 Promissory Note between the Company and Joseph DeKama dated October 1, 1996.
Incorporated by reference to Exhibit 10.31 of the Annual Report on Form 10-K for the
year ended August 31, 1996.
10.32 Promissory Note between the Company and Joseph DeKama dated October 15, 1996.
Incorporated by reference to Exhibit 10.32 of the Annual Report on Form 10-K for the
year ended August 31, 1996.
10.33 Incentive Stock Option between the Company and Peter C. Liman dated January 27, 1997.
Incorporated by reference to Exhibit 10.32 of the Quarterly Report on Form 10-Q for
the period ended March 1, 1997.
10.34 Termination of Employment Agreement between the Company and Joseph DeKama dated
February 13, 1997. Incorporated by reference to Exhibit 10.33 of the Quarterly Report
on Form 10-Q for the period ended March 1, 1997.
10.35 Letter Agreement with Nevell Investments S.A. converting Subordinated Debt Promissory
Note to 120,690 shares of Series B Convertible Preferred Stock dated February 21,
1997. Incorporated by reference to Exhibit 10.34 of the Quarterly Report on Form 10-Q
for the period ended March 1, 1997.
10.36 Third Amendment to Consolidated and Restated Loan and Security Agreement dated
February 22, 1997, between the Company and Fremont Financial Corporation.
Incorporated by reference to Exhibit 10.35 of the Quarterly Report on Form 10-Q for
the period ended March 1, 1997.
10.37 Fourth Amendment to Consolidated and Restated Loan and Security Agreement dated June
25, 1997, between the Company and Fremont Financial Corporation. Incorporated by
reference to Exhibit 10.36 of the Quarterly Report on Form 10-Q for the period ended
May 31, 1997.
*10.38 Employment Agreement between the Company and Richard Howard dated November 26, 1997.
16 Letter from KPMG Peat Marwick LLP to the Securities and Exchange Commission pursuant
to Item 304(a)(3) of Regulation S-K. Incorporated by reference to Exhibit 16 of the
Current Report on Form 8-K dated July 22, 1997.
18 Preferability letter from KPMG Peat Marwick LLP regarding change in accounting
principles dated November 6, 1995. Incorporated by reference to Exhibit 18 of the
Annual Report on Form 10-K for the year ended August 31, 1995.
*23.1 Consent by Coopers and Lybrand L.L.P. for Fiscal 1997.
*23.2 Consent by KPMG Peat Marwick LLP for Fiscal 1996 and Fiscal 1995.
*27 Financial Data Schedule.
- -----------------------
* Filed herewith.
26
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
Date: December 15, 1997 TRISTAR CORPORATION
By: /s/ Viren S. Sheth
-----------------------------------------
VIREN S. SHETH,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/Viren S. Sheth
-----------------------------------------
VIREN S. SHETH,
President and Chief Executive Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: December 15, 1997 /s/Richard P. Rifenburgh
--------------------------------------------
RICHARD P. RIFENBURGH, Director
Date: December 15, 1997 /s/Robert R. Sparacino
--------------------------------------------
ROBERT R. SPARACINO, Director
Date: December 15, 1997 /s/Viren S. Sheth
--------------------------------------------
VIREN S. SHETH, Director
Date: December 15, 1997 /s/Aaron Zutler
--------------------------------------------
AARON ZUTLER, Director
Date: December 15, 1997 /s/Jay J. Sheth
--------------------------------------------
JAY J. SHETH, Director
Date: December 15, 1997 /s/B. J. Harid
--------------------------------------------
B. J. Harid, Director
27
TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
ITEM 14(a)(1) AND (2)
The following consolidated financial statements of TRISTAR CORPORATION and
subsidiaries are included in Item 8:
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports F1 and F2
Consolidated Financial Statements:
Balance sheets as of August 30, 1997 and August 31, 1996 F3 and F4
Statements of operations for each of the three years in the period ended August 30, 1997 F5
Statements of shareholders' equity for each of the three years in the
period ended August 30, 1997 F6
Statements of cash flows for each of the three years in the period ended August 30, 1997 F7
Notes to consolidated financial statements F8 to F21
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule of TRISTAR CORPORATION
and subsidiaries are included in Item 14(d):
Schedule II - Valuation and qualifying accounts F22
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Tristar Corporation:
We have audited the consolidated financial statements and the financial
statement schedule of Tristar Corporation and subsidiaries as of and for the
year ended August 30, 1997 as listed in the accompanying index. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tristar
Corporation and subsidiaries as of August 30, 1997, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
December 19, 1997
F-1
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tristar Corporation:
We have audited the consolidated balance sheet of Tristar Corporation and
subsidiaries as of August 31, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the years in the
two-year period ended August 31, 1996. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule for each of the years in the two-year period ended August 31, 1996
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tristar Corporation
and subsidiaries as of August 30, 1996, and the results of their operations and
their cash flows for each of the years in the two-year period ended August 31,
1996 in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule for each of the years in the
two-year period ended August 31, 1996, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
San Antonio, Texas
December 11, 1996
F-2
30
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 30, August 31,
ASSETS 1997 1996
------------ ------------
Current assets:
Cash $ 492,000 $ 233,000
Accounts receivable, less allowance for doubtful accounts
of $1,052,000 and $850,000, respectively 15,267,000 9,522,000
Accounts receivable - related parties - net 1,820,000 1,518,000
Inventories 13,560,000 12,691,000
Prepaid expenses 632,000 258,000
------------ ------------
Total current assets 31,771,000 24,222,000
Property, plant and equipment, less accumulated depreciation
of $7,101,000 and $5,391,000 8,094,000 8,532,000
------------ ------------
Other assets:
Warrant valuation, less accumulated amortization
of $1,769,000 and $1,436,000 respectively 320,000 653,000
Other assets 236,000 360,000
------------ ------------
Total other assets 556,000 1,013,000
------------ ------------
Total assets $ 40,421,000 $ 33,767,000
============ ============
See accompanying notes to the consolidated financial statements.
F-3
31
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND August 30, August 31,
SHAREHOLDERS' EQUITY (DEFICIT) 1997 1996
------------ ------------
Current liabilities:
Revolving credit agreement borrowings, current $ 9,732,000 $ 9,319,000
Accounts payable - trade 8,139,000 5,233,000
Accounts payable - related parties - net 4,463,000 2,900,000
Accrued bonuses 257,000 202,000
Accrued interest expense - subordinated debt 1,582,000 1,174,000
Other accrued expenses 1,384,000 847,000
Income taxes payable 11,000 85,000
Current portion of capital lease obligations 42,000 38,000
Current portion of long-term debt 28,000 3,134,000
------------ ------------
Total current liabilities 25,638,000 22,932,000
Revolving credit agreement, borrowings, noncurrent 473,000 --
Long-term debt, less current portion 2,474,000 3,000
Obligations under capital leases, less current portion 37,000 59,000
Subordinated long-term debt - related parties 4,500,000 12,666,000
------------ ------------
Total liabilities 33,122,000 35,660,000
------------ ------------
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 --
Series B, 120,690 shares issued and outstanding 4,511,000 --
Common stock, $.01 par value; authorized 30,000,000 shares; issued and
outstanding 16,729,074 shares in 1997 and 16,650,176 shares in 1996 168,000 167,000
Additional paid-in capital 10,566,000 10,354,000
Accumulated deficit (12,612,000) (12,414,000)
------------ ------------
Total shareholders' equity (deficit) 7,299,000 (1,893,000)
------------ ------------
Total liabilities and shareholders' equity $ 40,421,000 $ 33,767,000
============ ============
See accompanying notes to the consolidated financial statements.
F-4
32
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
----------------------------------------------
August 31,
August 30, -----------------------------
1997 1996 1995
------------ ------------ ------------
Net sales $ 68,959,000 $ 51,720,000 $ 44,728,000
Cost of sales 48,441,000 40,801,000 31,727,000
------------ ------------ ------------
Gross profit 20,518,000 10,919,000 13,001,000
Selling, general and administrative expenses 17,093,000 16,285,000 11,654,000
------------ ------------ ------------
Income (loss) from operations 3,425,000 (5,366,000) 1,347,000
Other income (expense):
Interest expense (1,940,000) (2,359,000) (1,641,000)
Other expense (252,000) (434,000) (1,773,000)
Insurance reimbursement -- -- 2,065,000
Litigation expenses (72,000) (162,000) (269,000)
------------ ------------ ------------
Income (loss) before income taxes 1,161,000 (8,321,000) (271,000)
Income tax expense 78,000 3,732,000 661,000
------------ ------------ ------------
Net income (loss) 1,083,000 (12,053,000) (932,000)
Less:
Cumulative preferred stock dividends in arrears (256,000) -- --
Beneficial conversion feature (Note 11) (1,011,000) -- --
Warrant valuation adjustment (Note 11) (270,000) -- --
------------ ------------ ------------
Net loss applicable to common stock $ (454,000) $(12,053,000) $ (932,000)
============ ============ ============
Net loss per common share $ (.03) $ (0.72) $ (0.06)
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding 16,708,085 16,635,888 16,625,341
============ ============ ============
See accompanying notes to the consolidated financial statements.
F-5
33
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 30, 1997 AND AUGUST 31, 1996 AND 1995
Preferred Stock
---------------------------------------------------
Common Stock Series A Series B
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
----------- ---------- ----------- ----------- ----------- -----------
Balance, August 31, 1994 16,619,348 $ 166,000
Adjustments to conform
fiscal year of Eurostar
Perfumes, Inc.
Net loss
Contribution to 401(k)
Plan 10,335
Repayment of receivable
from shareholders
----------- ---------- ----------- ----------- ----------- -----------
Balance, August 31, 1995 16,629,683 166,000
Net loss
Exercise of stock
options 10,000
Contribution to 401(k)
Plan 10,493 1,000
----------- ---------- ----------- ----------- ----------- -----------
Balance, August 31, 1996 16,650,176 167,000
Net income
Exercise of stock
options 73,500 1,000
Contribution to 401(k)
Plan 5,398
Issuance of Series A
Preferred Stock 666,529 $ 4,666,000
Issuance of Series B
Preferred Stock 120,690 $ 4,511,000
Beneficial conversion
feature (Note 11)
Warrant valuation
adjustment (Note 11)
----------- ---------- ----------- ----------- ----------- -----------
Balance, August 30, 1997 16,729,074 $ 168,000 666,529 $ 4,666,000 120,690 $ 4,511,000
=========== ========== =========== =========== =========== ===========
Retained
Additional Earnings Receivables
Paid-In (Accumulated from
Capital Deficit) Shareholders
----------- ----------- ------------
Balance, August 31, 1994 $10,229,000 $ 1,401,000 $ (500,000)
Adjustments to conform
fiscal year of Eurostar (830,000)
Perfumes, Inc.
Net loss (932,000)
Contribution to 401(k)
Plan 52,000
Repayment of receivable
from shareholders 500,000
----------- ----------- -----------
Balance, August 31, 1995 10,281,000 (361,000) 0
Net loss (12,053,000)
Exercise of stock
options 5,000
Contribution to 401(k)
Plan 68,000
----------- ----------- -----------
Balance, August 31, 1996 10,354,000 (12,414,000) 0
Net income 1,083,000
Exercise of stock
options 179,515
Contribution to 401(k)
Plan 32,485
Issuance of Series A
Preferred Stock
Issuance of Series B
Preferred Stock
Beneficial conversion
feature (Note 11) (1,011,000)
Warrant valuation
adjustment (Note 11) (270,000)
----------- ----------- -----------
Balance, August 30, 1997 $10,566,000 $(12,612,000) $ 0
=========== ============ ===========
See accompanying notes to the consolidated financial statements.
F-6
34
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
--------------------------------------------
August 30, August 31,
----------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,083,000 $(12,053,000) $ (932,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,710,000 1,847,000 1,611,000
Provision for losses on accounts receivable 729,000 1,028,000 349,000
Provision for market valuation of inventory 1,005,000 1,468,000 469,000
Provision for LIFO valuation (525,000) 198,000 995,000
Deferred income tax expense (benefit) -- 3,881,000 (537,000)
Loss on disposal of assets 2,000 6,000 50,000
Reserve for impairment of assets -- -- 187,000
Issuance of stock in connection with 401K plan 32,000 69,000 52,000
Amortization of warrant valuation 63,000 83,000 986,000
Change in operating assets and liabilities:
Accounts receivable (6,776,000) (5,368,000) (522,000)
Inventories (1,348,000) 49,000 (3,111,000)
Prepaid expense (374,000) (5,000) 169,000
Refundable income taxes -- -- 1,774,000
Accounts payable 4,469,000 5,612,000 (337,000)
Accrued expenses 1,000,000 275,000 (163,000)
Income taxes payable (74,000) (423,000) (1,787,000)
Other liabilities -- -- (8,000)
Shareholder litigation settlement liability -- -- (4,500,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 996,000 (3,333,000) (5,255,000)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (1,274,000) (1,108,000) (787,000)
Proceeds from sale of fixed assets -- 580,000 64,000
Decrease (increase) in other assets 124,000 (170,000) (120,000)
------------ ------------ ------------
Net cash used in investing activities (1,150,000) (698,000) (843,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in revolving credit agreement borrowings 886,000 3,936,000 872,000
Proceeds from subordinated long-term debt -- -- 6,500,000
Payments of subordinated long-term debt -- -- (5,050,000)
Proceeds from long-term debt -- 274,000 3,570,000
Principal payments under debt obligations (18,000) (25,000) (177,000)
Principal payments on long-term debt (635,000) (732,000) (23,000)
Collection on receivable from stockholder -- -- 500,000
Proceeds from issuance of common stock 180,000 5,000 --
------------ ------------ ------------
Net cash provided by financing activities 413,000 3,458,000 6,192,000
------------ ------------ ------------
Net increase (decrease) in cash 259,000 (573,000) 94,000
Cash at beginning of year 233,000 806,000 1,700,000
Pooling adjustment to beginning of year balance to conform
fiscal years -- -- (988,000)
------------ ------------ ------------
Cash at end of year $ 492,000 $ 233,000 $ 806,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,527,000 $ 1,786,000 $ 1,446,000
Income taxes paid, net of refunds $ 144,000 $ 293,000 $ 672,000
Supplemental disclosure of noncash financing and investing activities:
* During fiscal year 1997, Nevell Investments, S.A. and Transvit
Manufacturing Corporation converted $4,511,000 and $4,666,000,
respectively, of subordinated debt into preferred stock. The beneficial
conversion feature associated with the conversion of the Nevell
Investments, S.A. subordinated debt totaled $1,011,000. Additionally, as a
result of this conversion, the Company wrote off $270,000 of warrant
valuation costs. Refer to Note 11 for additional discussion.
See accompanying notes to the consolidated financial statements.
F-7
35
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
AFFILIATION
The Company, which is primarily owned by companies under the control of the Core
Sheth Families (Starion International, Ltd., a British Virgin Islands Limited
Partnership ("Starion B.V.I.") and Transvit Manufacturing Corporation
("Transvit")), merged with its primary fragrance supplier and manufacturer,
Eurostar Perfumes, Inc., on August 31, 1995. The merger has been accounted for
in a manner similar to a pooling of interests, as the companies were considered
entities under common control. See Note 2 for further discussion of the merger
transaction. The Company operates in one industry segment, the development,
manufacturing, marketing and distribution of designer alternative fragrances,
complementary products to those fragrances, and cosmetic pencils and in the
marketing and distribution of other cosmetic products and selected toiletry
products.
FISCAL YEAR END
The Company changed its fiscal year end in 1996 from one ending on August 31 to
a 52-53 week fiscal year ending on the Saturday nearest the last day of the
month of August in each year. There was no effect on the accompanying financial
statements because the 1996 fiscal year also ended on August 31. The 1997 fiscal
year ended on August 30.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Tristar
Corporation and all subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
INVENTORY
Inventories are stated at the lower of last-in-first-out (LIFO) cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is determined by
the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs are charged to operations.
REVENUE RECOGNITION
Revenue is recognized by the Company when goods are shipped and title passes to
the purchaser.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted average
number of common shares outstanding during each year and common equivalent
shares of dilutive stock options, warrants and convertible preferred stock. Net
income (loss) applicable to common stock has been adjusted for dividend
requirements on the preferred stock, the beneficial conversion feature of the
Series B preferred stock, and the related warrant valuation adjustment (see Note
11). Fully diluted income (loss) per share is not less than the primary income
(loss) per share for the years presented.
WARRANT VALUATION
Common stock purchase warrants related to the Stockholder Class Action
Litigation Settlement were valued using the Black Scholes Method. Amortization
of the value will be straight line into fiscal 2006.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
36
FOREIGN CURRENCY TRANSACTIONS
The Company purchases a significant portion of its inventory for its
manufacturing operations from foreign suppliers. Such inventory is recorded
using currency exchange rates in effect on the date of purchase. Gains and
losses on the settlement of accounts payable for such purchases are recorded
based upon the currency exchange rates in effect on the date of settlement.
Gains and losses on accounts payable to be settled subsequent to August 30, 1997
and August 31, 1996 have been provided based upon the currency exchange rates in
effect on August 30, 1997 and August 31, 1996. Financial statements from foreign
subsidiaries have been translated based on the U.S. dollar being the functional
currency of the subsidiaries. Assets, with the exception of inventories and
property, plant and equipment, and liabilities are translated at the appropriate
period ending exchange rates. Inventories and property, plant and equipment are
translated at historical exchange rates. Results of operations, with the
exception of cost of sales and depreciation, are translated using the average
exchange rates prevailing throughout the year. Cost of sales and depreciation
are translated at the historic rates of the inventory sold and underlying
property, plant and equipment, respectively. Translation gains or losses and
exchange gains or losses are reflected in the Statements of Operations.
The net gain (loss) on transactions in foreign currencies and translation gains
(losses) for the years ended August 30, 1997 and August 31, 1996 and 1995 were
approximately $(156,000), ($95,000) and ($94,000), respectively.
2. MERGER:
On August 30, 1995 the stockholders of Tristar Corporation ("Tristar"), approved
the merger of Eurostar Perfumes, Inc., ("Eurostar"), with and into Tristar where
Tristar is the surviving corporation. The merger was effective August 31, 1995.
Under the terms of the agreement the sole stockholder of Eurostar, Transvit
Manufacturing Corporation ("Transvit"), a Core Sheth Families affiliate,
received an aggregate of 9,977,810 shares of Tristar Common Stock in exchange
for all the issued and outstanding shares of Eurostar Common Stock. Immediately
subsequent to the merger, the Core Sheth Families beneficially owned
approximately 84% of the outstanding shares of Tristar Common Stock (86%
assuming the exercise of all outstanding warrants).
The merger qualified as a tax-free reorganization and was accounted for in a
manner similar to a pooling of interests. Accordingly, the Company's financial
statements have been restated to include the results of Eurostar for all periods
presented. All significant intercompany transactions have been eliminated.
In connection with the merger, the Company recorded transaction costs of
$686,000 in fiscal 1995 and $76,000 in fiscal 1996. The transaction costs
include expenses for investment bankers and other professional fees.
3. INVENTORIES:
August 30, 1997 August 31, 1996
--------------- ---------------
Raw materials $ 6,105,000 $ 6,598,000
Work-in-process 2,101,000 469,000
Finished goods 7,684,000 7,710,000
------------ ------------
15,890,000 14,777,000
Reserves for market valuation (1,381,000) (612,000)
LIFO valuation allowance (949,000) (1,474,000)
------------ ------------
$ 13,560,000 $ 12,691,000
============ ============
F-9
37
4. PROPERTY, PLANT AND EQUIPMENT:
August 30, August 31,
1997 1996
------------ ------------
Land $ 43,000 $ 43,000
Building 3,767,000 3,762,000
Leasehold improvements 235,000 235,000
Machinery and equipment 7,802,000 6,689,000
Computer equipment 2,403,000 2,264,000
Furniture and equipment 945,000 930,000
------------ ------------
15,195,000 13,923,000
Less accumulated depreciation (7,101,000) (5,391,000)
------------ ------------
$ 8,094,000 $ 8,532,000
============ ============
5. REVOLVING CREDIT AGREEMENT BORROWINGS AND LONG-TERM DEBT:
August 30, August 31,
1997 1996
------------ ------------
Revolving credit agreement borrowings, current $ 9,732,000 $ 9,319,000
Revolving credit agreement borrowings, noncurrent 473,000 --
------------ ------------
$ 10,205,000 $ 9,319,000
============ ============
Term loan $ 2,474,000 $ 3,003,000
Other 28,000 134,000
------------ ------------
2,502,000 3,137,000
Less current portion (28,000) (3,134,000)
------------ ------------
Long-term debt, less current portion $ 2,474,000 $ 3,000
============ ============
The Company had at August 30, 1997, a revolving credit agreement which provided
for $15,500,000 of maximum borrowings at the prime rate (8.5% at August 30,
1997) plus 2% per annum, with additional fees approximating one percentage point
per annum. Borrowings under this credit agreement are limited to 75% of eligible
domestic accounts receivable, 60% of eligible foreign accounts receivable, 100%
of eligible related party receivables secured by letters of credit, 50% of
eligible finished goods inventories and 40% of eligible manufacturing
inventories. Eligibility is as defined in the credit agreement.
The credit facility is collateralized by substantially all of the assets of the
Company. The agreements contain material adverse change provisions, as well as
certain restrictions and conditions among which are limitations on cash
dividends, capital expenditures and repayments of a prior financing arrangement
with a related party (See Note 6).
As of August 30, 1997, remaining availability was $1,512,000, based on the
borrowing formulas above.
The term loan entered into in July 1995 with the same lender as the revolving
credit agreement provides for borrowings of $3.9 million. This loan is subject
to the same debt restrictions listed above for the revolving credit agreement.
The interest rate on this debt is the prime rate plus 2% per annum plus
additional fees.
F-10
38
On December 19, 1997, the Company entered into a $22,000,000 credit agreement
with a new lender (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 Bank 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%. Borrowings under the Revolving Credit are limited by a formula based on
Eligible Accounts Receivable and Inventory, as defined. Additionally, borrowings
based on LIBOR can not exceed 60% of the total outstanding borrowings under the
Revolving Credit. Commitment fees equal to .50% per annum on the unused portion
of the Revolving Credit are payable monthly.
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 plus 2.00%.
Principal payments on the Term Loan will be 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 2000. 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 five year amortization. However, a balloon
payment in an amount equal to all outstanding borrowings under the Cap Ex
Facility is also due in December 2000.
The Company used the initial borrowings under the Credit Agreement, which
included $3,400,000 of borrowings under the Term Loan, to repay amounts
outstanding under the $15,500,000 credit agreement and the related term loan.
Accordingly, an amount of revolving credit agreement and term loan borrowings
outstanding at August 30, 1997 equal to the portion of the borrowings under the
New Term Loan which will be repaid subsequent to August 30, 1998 has been
classified as noncurrent in the accompanying consolidated balance sheet.
Aggregate maturities of revolving credit agreement and long-term debt
borrowings, as adjusted for the refinancing described above, are as follows as
of August 30, 1997:
Fiscal Year Amount
----------- -----------
1998 $ 9,760,000
1999 680,000
2000 680,000
2001 1,587,000
-----------
$12,707,000
===========
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, Minimum Fixed
Charge Coverage, Maximum Leverage and Maximum Capital Expenditures.
Additional covenants limit borrowings, asset sales and dividends.
6. SUBORDINATED LONG-TERM DEBT:
August 30, 1997 August 31, 1996
--------------- ---------------
Subordinated Debt-Nevell Investments, S.A., a related party $ 4,500,000 $ 8,000,000
Subordinated Debt-Transvit Manufacturing Corporation, a related party --- 4,666,000
--------------- ---------------
Total $ 4,500,000 $ 12,666,000
=============== ===============
F-11
39
Subordinated Debt-Nevell Investments represents loans made by the Core Sheth
Families through their affiliate Nevell Investments, S.A., to finance the
Company's payments under the stockholder litigation settlement (see Note 16).
The debt bears interest at 6.36% to 8.23% per annum and has a term of ten years
with principal payable 20% at the end of the eighth and ninth years and the
remaining 60% payable at the end of the tenth year. During 1997, the Company was
in default with respect to the subordinated debt as a result of the failure to
make scheduled interest payments. Waivers were received from the lenders for
such events of default.
The agreement with Transvit, a related party, was entered into in August 1993
with maximum borrowings available of $9 million at an interest rate of 4.5% per
annum.
During 1997, $3,500,000 of Subordinated Debt-Nevell Investments and the entire
balance of the Subordinated Debt-Transvit Manufacturing Corporation were
converted into convertible preferred stock of the Company (see Note 11).
Aggregate maturities of subordinated long-term debt for each of the five years
subsequent to August 30, 1997 are as follows:
Fiscal Year Amount
--------------- ---------------
2001 $ 200,000
2002 820,000
Thereafter 3,480,000
---------------
$ 4,500,000
===============
7. RELATED PARTY TRANSACTIONS:
As of August 30, 1997, a majority of the Company's outstanding stock (78%) is
owned by companies under control of the Core Sheth Families. The acquisition of
this ownership occurred in several stages beginning in February 1986 and ending
in August 1995 as a result of the merger of Tristar and Eurostar discussed in
Note 2. Effective October 22, 1996, the Core Sheth Families sold 1,000,000
shares of the Company's stock to a business associate. The purchase price was
substantially lower than the price reported by NASDAQ, reflecting a discount
from the market price due to the magnitude of the transaction and the relatively
low trading volume of the Company's stock. This transaction reduced the Core
Sheth Families holdings to 78% of the Company's outstanding stock.
The Company purchases finished goods and components from Core Sheth Families
affiliates. During fiscal 1997, 1996 and 1995 the Company purchased
approximately $6,503,000, $7,037,000 and $6,285,000, respectively, of such
products.
During fiscal 1997, 1996 and 1995, the Company sold products to Core Sheth
Families affiliates in the amounts of approximately $3,866,000, $1,997,000 and
$1,299,000, respectively.
In fiscal 1997, 1996 and 1995, the Company incurred fees to directors of
approximately $260,000, $229,000 and $248,000, respectively, of which
approximately $30,000 and $19,000 were unpaid at August 30, 1997 and August 31,
1996, respectively. Such fees related to the Board of Directors' meetings, other
committee meetings and events associated with the investigation performed by the
Special Committee of the Board of Directors, formed in October 1992 to conduct a
review of matters associated with the Stockholder Class Action Litigation. See
Note 16 for further discussion.
As part of a sale of Common Stock to the Core Sheth Families in 1990, for
$50,000 the Company issued common stock purchase warrants to the Core Sheth
Families to purchase 400,000 shares of the Company's common stock at a per share
price of $2.75. In connection with the settlement of the shareholder litigation,
the expiration date of these warrants was extended to 2003.
F-12
40
In connection with the settlement of the stockholder class action litigation,
common stock warrants to purchase 2,000,000 shares of the Company's common stock
at a per share price of $5.34 were granted to the Core Sheth Families. The
warrants are exercisable for a period of ten years from their issuance. A
noninterest bearing receivable in the amount of $500,000 (the cost of the
warrants), was recorded in Shareholder's equity in the fiscal 1994 financial
statements. This receivable was paid in full in December 1994. See Note 16 for a
description of the litigation settlement.
In recognition that value was received by the Company in return for extending
the expiration date of the warrants to purchase 400,000 shares and the granting
of the new warrants to purchase 2,000,000 shares as described above, the Company
utilized the Black Scholes Method to compute the value. The computation resulted
in the assignment of a value of $2,089,000 (net of the purchase price of the
warrants of $500,000). This net value was recorded as part of "Other assets" and
as an addition to "Additional paid-in capital."
In fiscal 1997, 1996 and 1995, approximately $63,000, $83,000, and $986,000,
respectively, of the $2,089,000 was charged to Other income (expense). The
fiscal 1995 amortization expense of $986,000 included additional warrant
amortization expense of approximately $743,000 which resulted from (1) the
write-off of the portion of the warrant valuation associated with the
distribution agreement between Eurostar and Tristar, which was no longer
applicable after the Merger, and (2) the repayment of $1 million of the
subordinated debt with a portion of the proceeds received from the insurance
policy reimbursement (See Note 19). Additionally, in fiscal 1997, $270,000 of
warrant valuation costs were charged directly to retained earnings in connection
with the conversion of subordinated long-term debt to preferred stock (see Note
11). The remainder of the balance, which is attributable to the favorable terms
of the subordinated long-term financing of the shareholder litigation settlement
provided by the Core Sheth Families, will be amortized to expense through fiscal
2006 when the final payment is made on the related subordinated debt.
8. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE - RELATED PARTIES:
Related parties are the primary suppliers of the Company's cosmetics and are
also suppliers of certain components. Related party accounts payable result from
the purchase of those items. Related party accounts receivable result from the
sale of the Company's products to related parties. 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 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 August 30, 1997 and August 31, 1996.
August 30, 1997 August 31, 1996
--------------- ---------------
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties $ 2,267,000 $ 1,679,000
Offset amount (447,000) (161,000)
-------------- --------------
Net related parties receivables $ 1,820,000 $ 1,518,000
============== ==============
ACCOUNTS PAYABLE:
Total accounts payable-related parties $ 4,910,000 $ 3,061,000
Offset amount (447,000) (161,000)
-------------- --------------
Net related parties payables $ 4,463,000 $ 2,900,000
============== ==============
F-13
41
9. LEASES:
At August 30, 1997, the approximate aggregate minimum annual rental payments
under noncancelable operating leases for facilities, excluding renewals, are as
follows:
Fiscal Year Amount
--------------- ---------------
1998 $ 240,000
1999 27,000
2000 17,000
---------------
$ 284,000
===============
Certain of the above leases include escalation charges based on increases in
real estate taxes, utilities and common maintenance charges.
Rental expense for fiscal 1997, 1996 and 1995 amounted to approximately
$614,000, $423,000 and $568,000, respectively.
10. INCOME TAXES:
The components of income (loss) before income taxes are as follows:
Years Ended
---------------------------------------------------
August 30, August 31, August 31,
1997 1996 1995
--------------- --------------- ---------------
Domestic $ 3,055,000 $ (6,088,000) $ (103,000)
Foreign (1,894,000) (2,233,000) (168,000)
--------------- --------------- ---------------
$ 1,161,000 $ (8,321,000) $ (271,000)
=============== =============== ===============
Under the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the asset and
liability method is used in accounting for income taxes. Deferred tax balances
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted marginal tax rates and
laws that will be in effect when the differences are expected to reverse.
Income tax expense (benefit) consists of the following:
Current Deferred Total
----------- ----------- -----------
Year ended August 30, 1997
U.S. Federal $ 76,000 $ -- $ 76,000
State 2,000 -- 2,000
----------- ----------- -----------
$ 78,000 $ -- $ 78,000
=========== =========== ===========
Year ended August 31, 1996
U.S. Federal $ (149,000) $ 3,566,000 $ 3,417,000
State 315,000 315,000
----------- ----------- -----------
$ (149,000) $ 3,881,000 $ 3,732,000
=========== =========== ===========
Year ended August 31, 1995
U.S. Federal $ 1,128,000 $ (493,000) $ 635,000
State 70,000 (44,000) 26,000
----------- ----------- -----------
$ 1,198,000 $ (537,000) $ 661,000
=========== =========== ===========
F-14
42
Income tax expense in fiscal 1997, 1996 and 1995 differed from the amounts
computed by applying the U.S. federal income tax rate to income (loss) before
income taxes as a result of the following:
Years ended
----------------------------------------------------
August 31,
August 30, ----------------------------------
1997 1996 1995
--------------- --------------- -----------------
Computed expected tax expense (benefit) $ 406,000 $ (2,829,000) $ (92,000)
Increase (decrease) in income taxes resulting from:
State income tax net operating loss carryforward
(generated) utilized -- (250,000) (220,000)
Merger costs not deductible for income tax purposes -- 7,000 248,000
Warrant expenses not deductible for income tax
purposes 22,000 28,000 335,000
Foreign subsidiary loss not deductible for income tax
purposes 1,291,000 475,000 189,000
State income taxes, net of federal income tax benefit 104,000 -- 2,000
Foreign sales corporation commissions not subject to
income taxes (34,000)
Deferred tax asset valuation allowance (1,888,000) 6,609,000 --
Alternative minimum tax 76,000 -- --
Other, net 67,000 (308,000) 233,000
--------------- --------------- --------------
Total income tax expense $ 78,000 $ 3,732,000 $ 661,000
=============== =============== ================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 30, 1997 and
August 31, 1996 are presented below:
August 30, 1997 August 31, 1996
--------------- ---------------
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts
and sales returns $ 623,000 $ 509,000
Inventories, principally due to allowance for obsolescence and difference
in LIFO reserve, and certain costs capitalized for tax purposes 225,000 176,000
Start-up, organizational costs, and packaging design costs 375,000 264,000
Accrued expenses, principally due to accrual of related party interest
expense for financial reporting purposes 746,000 536,000
Net operating loss carryforward 3,111,000 4,946,000
Alternative minimum tax credit carryforwards 280,000 204,000
Investments in foreign subsidiaries, principally due to foreign
subsidiaries' losses not recognized for tax purposes -- 648,000
Other 65,000 --
----------- -----------
Total deferred tax assets 5,425,000 7,283,000
Less valuation allowance (4,721,000) (6,609,000)
----------- -----------
704,000 674,000
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation (704,000) (674,000)
----------- -----------
Total deferred tax liabilities (704,000) (674,000)
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========
F-15
43
The valuation allowance for deferred taxes increased (decreased) during fiscal
1997 and 1996 by ($1,888,000) and $6,609,000, respectively. There was no change
in the valuation allowance during fiscal 1995. In assessing the realizability of
deferred tax assets under the guidelines of SFAS No. 109, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. A valuation allowance of
$4,721,000 has been recorded at August 30, 1997 in accordance with SFAS No. 109
to reduce the net deferred tax asset to zero due to the uncertainty of realizing
the benefits of these deductible differences.
At August 30, 1997, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $8,408,000 which are available to offset
future federal taxable income, if any, through 2011. The Company also has
alternative minimum tax credit carryforwards of approximately $280,000 which are
available to reduce future federal regular income taxes, if any, over an
indefinite period.
11. PREFERRED STOCK:
To strengthen the financial position of the Company, effective December 11,
1996, Transvit Manufacturing Corporation ("Transvit"), a related party and
principal stockholder, agreed to convert a $4,666,000 subordinated note payable
into 666,529 shares of the Company's Series A convertible nonvoting preferred
stock. The preferred stock has cumulative preferred dividends of $0.315 per
share and a preferred distribution of $7.00 per share plus accrued and unpaid
dividends. Each share of the Series A preferred stock is convertible, at the
option of Transvit, into one share of the Company's common stock. The Company
can redeem the shares of Series A preferred stock at any time for cash of $7 per
share, plus all accrued and unpaid dividends. The conversion price approximated
the closing bid price of the Company's common stock as reported by the NASDAQ on
the date of this transaction. At August 30, 1997, cumulative dividends in
arrears on the Series A preferred stock approximated $134,000.
In a subsequent transaction effective February 21, 1997, Nevell Investments,
S.A. ("Nevell"), the holder of a subordinated long-term promissory note in the
principal amount of $4,000,000, converted $3,500,000 of that note into 120,690
shares of the Company's Series B convertible nonvoting preferred stock. The
Series B preferred stock has cumulative preferred dividends of $2.03 per share
and a preferred distribution of $29.00 per share plus accrued and unpaid
dividends. Each share of the Series B preferred stock is convertible, at the
option of Nevell, into four shares of the Company's common stock. The Company
can redeem the shares of Series B preferred stock at any time for cash of
$29.00 per share ($7.25 per common share), plus all accrued and unpaid
dividends. At August 31, 1997, cumulative dividends in arrears on the Series B
preferred stock approximated $122,000.
On February 21, 1997, the closing bid price of the Company's common stock as
reported by the NASDAQ was $9 11/32. At that date, the Series B preferred stock
carried a beneficial conversion feature of $2 3/32, the difference between the
conversion price and the closing bid price. The value of the beneficial
conversion feature has been reflected in the financial statements of the Company
in a manner similar to that for a dividend to the preferred shareholder.
Accordingly, the Company has recorded a charge to retained earnings and an
increase in the value of the Series B preferred stock in the amount of
$1,011,000. Additionally, as a result of the conversion, the Company wrote off
$270,000 of warrant valuation costs attributable to the converted debt. This
charge has also been recorded to retained earnings in a manner consistent with
that for the beneficial conversion feature described above.
The Series A preferred stock is considered a common stock equivalent based on
its cash yield at the time of issuance. The Series B preferred stock is not
considered a common stock equivalent based on its cash yield at time of
issuance. In the fiscal 1997 loss per common share computation, the cumulative
dividends in arrears on both the Series A and Series B preferred stock have been
deducted from net income as the assumed conversion of the preferred stock would
have an anti-dilutive impact. Additionally, the charge applicable to the
beneficial conversion feature and the warrant valuation adjustment have been
deducted in computing net loss applicable to common stock in the accompanying
consolidated statement of operations.
F-16
44
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of the financial assets of cash, accounts receivable - net,
and accounts receivable - related parties - net and the financial liabilities of
short-term borrowings, accounts payable - trade, and accounts payable - related
parties - net, approximate their respective fair value because of the short-term
maturity of those instruments.
The carrying amount of long-term debt approximates fair value as the interest
rates approximate those currently offered to the Company for debt with similar
maturities.
The fair value of the subordinated long-term debt could not be determined
without incurring excessive cost given the related party nature of the lending
arrangement.
13. STOCK OPTION PLANS:
The Company has granted stock options under the Amended and Restated Option Plan
(the "1991 Plan") and other plans (collectively the "Plans"). The Company
applies APB Opinion 25 and related interpretations in accounting for the Plans.
In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which, if fully adopted by the Company, would change
the methods the Company applies in recognizing the cost of the Plans. Adoption
of the cost recognition provisions of SFAS 123 is optional and the Company has
decided not to elect these provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the cost recognition provisions of SFAS
123 in 1995 are required by SFAS 123 and are presented below.
Under the 1991 Plan, the Company is authorized to issue up to 800,000 shares of
Common Stock pursuant to "Awards" granted in various forms, including incentive
stock options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended), nonqualified stock options, and other similar
stock-based Awards. The Company granted nonqualified stock options in fiscal
1996 under other plans and granted incentive stock options in fiscal 1997 under
the 1991 Plan.
The stock options granted in fiscal 1997 and 1996 have contractual terms of 10
years and an exercise price equal to the fair market value of the stock at grant
date. The options vest over various vesting schedules. Most vest ratably at the
rate of 20% per year beginning on the date of grant or the first anniversary of
the date of grant. Others vest according to shorter schedules.
A summary of the status of the Company's stock options as of August 30, 1997 and
August 31, 1996 and 1995 and the changes during the years then ended are
presented below:
Options Outstanding
----------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------- -------------------
Weighted Weighted Weighted
Number Average Average Number Average
of Exercise Number of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- --------- ---------- -----------
Outstanding at beginning of the year 786,626 $6.73 266,626 $4.84 266,626 $4.84
Granted 670,000 $8.82 530,000 $7.56
Exercised (73,500) $2.45 (10,000) $0.50
Forfeited (169,420) $6.35
--------- ----- --------- ----- -------- -----
Outstanding at end of year 1,213,706 $8.20 786,626 $6.73 266,626 $4.84
========= ===== ========= ===== ======== =====
Exercisable at end of year 312,238 $7.45 273,486 $5.44 200,206
========= ===== ========= ===== ========
Weighted average fair value of options
granted $4.38 $3.67
=================== ===================
F-17
45
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in fiscal 1997 and 1996: dividend yield of 0%; risk-free
interest rates ranging from 6.28% to 6.64%; an expected life of options of 5 or
6 years; and a volatility of 45.9% for all grants.
Options outstanding as of August 30, 1997 are summarized below:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------- -------------- ------------------- --------------- -------------- ----------------
$1.4375 5,000 3.08 $ 1.4375 5,000 $ 1.4375
$6.875 to $7.5625 688,706 8.49 $ 7.35 268,738 $ 7.28
$9.375 520,000 9.65 $ 9.375 38,500 $ 9.375
----------------- --------- ---- --------- ------- ----------
$1.4375 to $9.375 1,213,706 8.97 $ 8.20 312,238 $ 7.45
================= ========= ==== ========= ======= ==========
Had the compensation cost for the Plans been determined consistent with SFAS
123, the Company's net income (loss), net loss applicable to common stock, and
net loss per common share for 1997 and 1996 would approximate the pro forma
amounts below:
August 30, 1997 August 31, 1996
----------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
----------------- ---------------------------------- -----------------
SFAS 123 Charge $0 $1,188,000 $0 $401,000
APB 25 Charge $0 $0 $0 $0
Net income (loss) $1,083,000 ($105,000) ($12,053,000) ($12,454,000)
Net loss applicable to common stock ($454,000) ($1,642,000) ($12,053,000) ($12,454,000)
Net loss per common share ($.03) ($.10) ($.72) ($.75)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards granted prior to the 1996
fiscal year.
14. BENEFIT PLAN:
Substantially all of the Company's full time employees are eligible to
participate in the Company's 401(k) Plan. The Plan specifies that one-half of
the Company's matching contribution is to be paid by the issuance of common
stock based on the closing price at the end of each calendar quarter. During
fiscal 1997, 1996 and 1995, a total of 5,398, 10,493 and 10,335, respectively,
of such shares were issued to the Plan. Contributions including the issuance of
Common Stock to the Plan were $80,000 in 1997, $137,000 in 1996 and $118,000 in
1995.
15. COMMITMENTS 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 alleges causes of action by two plaintiffs for libel and
seeks indemnification in connection with the work of the Special Committee of
the Board of Directors that investigated, among other things, a prior failure to
disclose the Core Sheth Families' holdings of Company stock. The complaint also
alleges, on behalf of all four plaintiffs, that the Company's disclosures
relating to these 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. 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 financial condition.
F-18
46
CALIFORNIA AIR RESOURCES BOARD
After not being in compliance with the regulations of the California Air
Resources Board (the "CARB") with respect to volatile organic compounds
("VOC's), since January 1, 1995 the Company achieved compliance by September 30,
1996. Under a temporary variance granted by the State of California, the
company was allowed to sell until September 30, 1997, non-complying product
manufactured prior to September 30, 1996.
INTERNAL REVENUE SERVICE
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. 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 will be required
to pay taxes from prior years and related interest thereon exceeding $1,500,000,
and it will 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.
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
any of these proceedings will not have a material adverse effect on the
Company's financial condition.
16. CLASS ACTION LITIGATION:
In December 1993, the Company reached an agreement to settle stockholder class
action litigation regarding alleged violations of the federal securities laws,
as well as common law fraud and negligence in connection with, among other
things, the nondisclosure of the ownership interest of the Core Sheth Families
prior to 1992, for a cash payment of $9.5 million. The settlement resulted in a
release of claims by the plaintiff class against the Company and certain other
defendants. Utilizing $9 million obtained under a financing agreement with the
Core Sheth Families (See Note 6), the Company paid the total settlement in four
installments ($1.5 million in August 1993, $900,000 in January 1994, $2.6
million in May 1994, and $4.5 million in December 1994).
In connection with the settlement, common stock purchase warrants to purchase
2,000,000 shares of the Company's common stock at a per share price of $5.34
were granted to the Core Sheth Families. The warrants are exercisable for a
period of ten years from their issuance. A noninterest bearing receivable in the
amount of $500,000 (the cost of the warrants), recorded in Shareholder's Equity
in the fiscal 1994 financial statements, was paid in December 1994. The per
share price of the common stock under the warrants will increase by ten percent
per year after the first seven years. As part of the settlement, the Company
also extended to August 31, 2003, the exercise date of warrants held by a Core
Sheth Families affiliate to purchase 400,000 shares of the Company's common
stock.
In recognition that value was received by the Company in return for extending
the expiration date of the warrants to purchase 400,000 shares and the granting
of the new warrants to purchase 2,000,000 shares as described above, the Black
Scholes Method was utilized by the Company to compute the value. The computation
resulted in the assignment of a value of $2,089,000 (net of the purchase price
of the warrants of $500,000). This net value was recorded as part of "Other
assets" and as an addition to "Additional paid-in capital" in fiscal 1994.
The class action settlement included a provision that protects the Company and
other settling defendants against further liability to the class for damages in
connection with related ongoing litigation.
The Company anticipates that it will continue to incur litigation expenses
related to ongoing litigation involving the defendants not covered under the
class action litigation settlement and related to a lawsuit against the
Company's former auditors separate from, but related to, the stockholder class
action against the Company. Any expenses incurred are not expected to be
material to the Company's financial results.
F-19
47
The Company has recorded legal and professional expenses associated with the
stockholder litigation settlement and other related events that were the subject
of an internal investigation by a Special Committee of the Board of Directors.
These expenses were approximately $72,000, $162,000 and $269,000 in fiscal 1997,
1996, and 1995, respectively.
17. FOREIGN SALES:
The Company exports a significant portion of its sales directly or through its
Mexican and Brazilian subsidiaries to foreign customers. For the years ended
August 30, 1997 and August 31, 1996 and 1995, these sales were $27,054,000 (39%
of net sales), $14,524,000 (28% of net sales), and $16,152,000 (36% of net
sales), respectively. These customers were primarily located in Latin America.
In addition, certain U.S. based customers ultimately distribute the Company's
products in foreign countries ("indirect exports"). The volume of the indirect
exports, which may be significant, could only be estimated as customers do not
provide that information to the Company.
18. QUARTERLY RESULTS (UNAUDITED):
1997 Quarter Ended
----------------------------------------------------------
Nov. 30 Mar. 1 May 31 Aug. 30
------------ ------------ ------------ ------------
Net Sales $ 17,489,000 $ 15,577,000 $ 18,117,000 $ 17,776,000
Gross Profit 5,227,000 4,348,000 5,328,000 5,615,000
Net Income (Loss) 786,000 (344,000) 288,000 353,000
Net Income (Loss) Applicable to
Common Stock 786,000 (1,654,000) 174,000 240,000
Net Income (Loss) Per Common Share $ .04 $ (.10) $ .01 $ .01
1996 Quarter Ended
----------------------------------------------------------
Dec. 2 Mar. 2 Jun. 1 Aug. 31
------------ ------------ ------------ ------------
Net Sales $ 17,403,000 $ 10,112,000 $ 10,997,000 $ 13,208,000
Gross Profit 4,578,000 1,923,000 2,314,000 2,104,000
Net Income (Loss) 204,000 (2,478,000) (3,133,000) (6,646,000)
Net Income (Loss) Per Common Share $ .01 $ (.15) $ (.19) $ (.40)
The second quarter of fiscal 1997 includes $1,011,000 and $270,000,
respectively, of charges to retained earnings for the beneficial conversion
feature and warrant valuation adjustment attributable to the Company's
conversion of subordinated long-term debt to Series B convertible preferred
stock. These charges reduced net income applicable to common stock in this
period. The $270,000 warrant valuation adjustment was previously reflected as a
charge to other expense in the Company's Form 10-Q for the period ended March 1,
1997.
The fourth quarter of fiscal 1996 includes $3,881,000 of deferred income tax
expense (See Note 10) resulting from the establishment of a valuation allowance
for deferred tax assets.
The summation of the quarterly earnings per share may not be equal to the annual
earnings per share due to rounding.
19. PROCEEDS OF AN EXECUTIVE LIABILITY AND INDEMNIFICATION POLICY:
In November 1994, the United States District Court for the District of South
Carolina approved the disbursement of $1.25 million to the Company from the
proceeds of an executive liability and indemnification policy owned by the
Company, which is recorded under other income in the accompanying financial
statements. In December 1994, $1,000,000 of the proceeds were utilized to repay
a portion of the existing long-term subordinated debt in accordance with the
financing agreement with the Core Sheth Families, a related party.
F-20
48
In June 1995, the Company received the balance ($750,000) of the proceeds of
the policy as well as approximately $65,000 of interest earned during the period
the court held the proceeds, all of which is recorded under other income in the
accompanying financial statements.
Two other claimants under the policy, Ross Freitas ("Freitas") and Carolyn
Kenner ("Kenner"), sought reconsideration of the latter court-approved
disbursement. Pursuant to a settlement agreement approved by the Court on
December 18, 1997, Freitas and Kenner have withdrawn their motion for
reconsideration. As part of the settlement, the Company will make payments
totaling $175,000 to Freitas and Kenner by April 15, 1998. The proceedings
regarding the policy before the United States District Court for the District
of South Carolina have been dismissed. The $175,000 settlement has been accrued
in the fiscal 1997 financial statements.
20. IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS:
EARNINGS PER SHARE (SFAS 128)
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," was issued in February 1997. SFAS No. 128 establishes simplified
accounting standards for computing earnings per share and makes them comparable
to international earnings per share standards. The Company plans to adopt SFAS
No. 128 in fiscal 1998.
REPORTING COMPREHENSIVE INCOME (SFAS 130)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components. The Company plans to adopt
SFAS No. 130 in fiscal 1999.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS 131)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. This statement establishes
standards for the way that public companies report information about segments in
annual and interim financial statements. The Company plans to adopt SFAS No. 131
in fiscal 1999.
The adoption of these recently issued financial accounting standards is not
expected to have a significant effect on the Company's consolidated financial
statements.
49
SCHEDULE II
TRISTAR CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS- DEDUCTIONS- END
OF PERIOD EXPENSES DESCRIBE DESCRIBE (*) OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended August 30, 1997 $850,000 $729,000 $527,000 $1,052,000
Year ended August 31, 1996 $419,000 $1,028,000 $597,000 $850,000
Year ended August 31, 1995 $589,000 $349,000 $519,000 $419,000
- ------------------------------------------------------------------------------------------------------------------------------
(*) Uncollectible accounts written off, net of recoveries.
- ------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS- DEDUCTIONS- END
OF PERIOD EXPENSES DESCRIBE (**) DESCRIBE (***) OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
Inventory reserves:
Year ended August 30, 1997 $612,000 $1,005,000 $0 $236,000 $1,381,000
Year ended August 31, 1996 $621,000 $1,666,000 ($198,000) $1,477,000 $612,000
Year ended August 31, 1995 $750,000 $1,229,000 ($995,000) $363,000 $621,000
- ------------------------------------------------------------------------------------------------------------------------------
(**) Transfer to LIFO Valuation
(***) Write-offs against the reserve
50
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Certificate of Incorporation of the Registrant, as amended. Incorporated by reference
to Exhibit 3.1 of the Report on Form 8-K dated August 31, 1995.
3.2 By-Laws of the Registrant (Amended as of August 14, 1992). Incorporated by reference
to Exhibit 3.2 of the Annual Report on Form 10-K for the year ended August 31, 1992.
4 Form of Registrant Common Stock certificate. Incorporated by reference to Exhibit 4.2
of the Quarterly Report on Form 10-Q for the quarterly period ended February 28, 1993.
10.1 1991 Amended and Restated Stock Option Plan of the Registrant. Incorporated by
reference to Exhibit 10.1 of the Annual Report on Form 10-K for the year ended August
31, 1992.
10.2 Loan and Security Agreement dated October 8, 1993 between Registrant and Fremont
Financial Corporation with Special Provisions Rider. Incorporated by reference to
Exhibit 10.11 of the Annual Report on Form 10-K for the year ended August 31, 1993.
10.3 First Amendment to Loan and Security Agreement dated July 7, 1995 between the Company
and Fremont Financial Corporation, amending Loan and Security agreement dated October
8, 1993. Incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q
for the quarterly period ended May 31, 1995.
10.4 Lease Agreement Re: South Carolina Facility. Incorporated by reference to Exhibit
10(q) of the Annual Report on Form 10-K for the year ended August 31, 1988.
10.5 Lease Agreement Re: San Antonio Facility. Incorporated by reference to Exhibit 10(r)
of the Annual Report on Form 10-K for the year ended August 31, 1988.
10.6 Lease Agreement Re: San Antonio Facility Extension. Incorporated by reference to
Exhibit 10.4.2 of the Annual Report on Form 10-K for the year ended August 31, 1991.
10.7 Lease Agreement Re: San Antonio Facility Extension dated July 7, 1992. Incorporated
by reference to Exhibit 10.3.4 of the Annual Report on Form 10-K for the year ended
August 31, 1992.
10.8 Lease Agreement Re: San Antonio Facility Extension dated July 31, 1992. Incorporated
by reference to Exhibit 10.3.5 of the Annual Report on Form 10-K for the year ended
August 31, 1992.
10.9 Lease Agreement Re: Corporate Headquarters in San Antonio dated January 13, 1993,
between Northwestern Mutual Life Insurance Co. and Registrant. Incorporated by
reference to Exhibit 10.17 of the Annual Report on Form 10-K for the year ended August
31, 1993.
10.10 Employment Agreement with Loren M. Eltiste dated October 6, 1992. Incorporated by
reference to Exhibit 10.4.5 of the Annual Report on Form 10-K for the year ended
August 31, 1992.
51
10.11 Non-Qualified Stock Option Grant to Loren M. Eltiste dated October 20,1992.
Incorporated by reference to Exhibit 10.26 of the Annual Report on Form 10-K for the
year ended August 31, 1993.
10.12 Distribution Agreement (the "Distribution Agreement") with Eurostar Perfumes, Inc. and
S&J Perfume, Ltd. dated October 28, 1992. Incorporated by reference to Exhibit 10.5
of the Annual Report on Form 10-K for the year ended August 31, 1992.
10.13 Letter Agreement Amendment dated August 30, 1993 to the Distribution Agreement.
Incorporated by reference to Exhibit 10.28 of the Annual Report on Form 10-K for the
year ended August 31, 1993.
10.14 Agreement and First Amendment to Distribution Agreement dated October 8, 1993 with
Eurostar Perfumes, Inc. and S&J Perfume, Ltd. Incorporated by reference to Exhibit
10.29 of the Annual Report on Form 10-K for the year ended August 31, 1993.
10.15 Agreement dated August 31, 1995, among the Company, Eurostar Perfumes, Inc. and
Starion International, Ltd., terminating the Distribution Agreement. Incorporated by
reference to Exhibit 10.3 of the Report on Form 8-K dated August 31, 1995.
10.16 Agreement dated August 31, 1993 between the Core Sheth Families, Viren Sheth, Starion
International, Ltd. and the Registrant. Incorporated by reference to Exhibit 10.31 of
the Annual Report on Form 10-K for the year ended August 31, 1993.
10.17 Financing Agreement dated August 31, 1993 between the Core Sheth Families and the
Registrant. Incorporated by reference to Exhibit 10.32 of the Annual Report on Form
10-K for the year ended August 31, 1993.
10.18 Lease Agreement Re: Bulk Warehouse Facility in San Antonio dated December 8, 1993,
between Northwestern Mutual Life Insurance Co. and Registrant. Incorporated by
reference to Exhibit 10.1 of Quarterly Report on Form 10-Q for period ended November
30, 1993.
10.19 Employment Agreement between the Company and Eugene H. Karam dated January 14, 1994.
Incorporated by reference to Exhibit 10.1 of Quarterly Report on Form 10-Q for period
ended February 28, 1994.
10.20 Incentive Stock Option between the Company and Eugene H. Karam dated February 14,
1994. Incorporated by reference to Exhibit 10.2 of Quarterly Report on Form 10-Q for
period ended February 28, 1994.
10.21 Sub-Lease Agreement Re: former San Antonio Distribution Facility, dated August 31,
1994, between DHI Enterprises, Inc. d/b/a Service Tech. Supply and Registrant.
Incorporated by reference to Exhibit 10.37 of the Annual Report on Form 10-K for the
year ended August 31, 1994.
10.22 Agreement and Plan of Merger dated as of July 1, 1995, among the Company, Eurostar
Perfumes, Inc. and Transvit Manufacturing Corporation. Incorporated by reference to
Exhibit 10.1 of the report on Form 8-K dated August 31, 1995.
52
10.23 Amendment to Common Stock Purchase Warrant dated August 31, 1995, between the Company
and Starion International, Ltd. Incorporated by reference to Exhibit 10.2 of the
Report on Form 8-K dated August 31, 1995.
10.24 Line of Credit Promissory Note dated August 1, 1993, between the Company (original
entered into with Eurostar) and Transvit Manufacturing Corporation. Incorporated by
reference to Exhibit 10.26 of the Annual Report on Form 10-K for the year ended August
31, 1995.
10.25 Loan and Security Agreement dated June 27, 1995, between the Company (originally
entered into with Eurostar) and Fremont Financial Corporation with Special provisions
Rider. Incorporated by reference to Exhibit 10.27 of the Annual Report on Form 10-K
for the year ended August 31, 1995.
10.26 Employment Agreement between the Company (originally entered into with Eurostar) and
Ricardo Bunge dated January 1, 1993, and as amended June 5, 1995. Incorporated by
reference to Exhibit 10.28 of the Annual Report on Form 10-K for the year ended August
31, 1995.
10.27 Employment Agreement between the Company and Joseph DeKama dated April 19, 1996.
Incorporated by reference to Exhibit 10 of Quarterly Report on Form 10-Q for period
ended June 1, 1996.
10.28 Non-Qualified Stock Option Grant to Joseph DeKama dated April 19, 1996. Incorporated
by reference to Exhibit 10.28 of the Annual Report on Form 10-K for the year ended
August 31, 1996.
10.29 Non-Qualified Stock Option Grant to Viren S. Sheth dated April 19, 1996. Incorporated
by reference to Exhibit 10.29 of the Annual Report on Form 10-K for the year ended
August 31, 1996.
10.30 Letter Agreement with Transvit Manufacturing Corporation Converting Line of Credit
Promissory Note to 666,529 Shares of Series A Convertible Preferred Stock dated
December 11, 1996. Incorporated by reference to Exhibit 10.30 of the Annual Report on
Form 10-K for the year ended August 31, 1996.
10.31 Promissory Note between the Company and Joseph DeKama dated October 1, 1996.
Incorporated by reference to Exhibit 10.31 of the Annual Report on Form 10-K for the
year ended August 31, 1996.
10.32 Promissory Note between the Company and Joseph DeKama dated October 15, 1996.
Incorporated by reference to Exhibit 10.32 of the Annual Report on Form 10-K for the
year ended August 31, 1996.
10.33 Incentive Stock Option between the Company and Peter C. Liman dated January 27, 1997.
Incorporated by reference to Exhibit 10.32 of the Quarterly Report on Form 10-Q for
the period ended March 1, 1997.
10.34 Termination of Employment Agreement between the Company and Joseph DeKama dated
February 13, 1997. Incorporated by reference to Exhibit 10.33 of the Quarterly Report
on Form 10-Q for the period ended March 1, 1997.
10.35 Letter Agreement with Nevell Investments S.A. converting Subordinated Debt Promissory
Note to 120,690 shares of Series B Convertible Preferred Stock dated February 21,
1997. Incorporated by reference to Exhibit 10.34 of the Quarterly Report on Form 10-Q
for the period ended March 1, 1997.
53
10.36 Third Amendment to Consolidated and Restated Loan and Security Agreement dated
February 22, 1997, between the Company and Fremont Financial Corporation.
Incorporated by reference to Exhibit 10.35 of the Quarterly Report on Form 10-Q for
the period ended March 1, 1997.
10.37 Fourth Amendment to Consolidated and Restated Loan and Security Agreement dated June
25, 1997, between the Company and Fremont Financial Corporation. Incorporated by
reference to Exhibit 10.36 of the Quarterly Report on Form 10-Q for the period ended
May 31, 1997.
*10.38 Employment Agreement between the Company and Richard Howard dated November 26, 1997.
16 Letter from KPMG Peat Marwick LLP to the Securities and Exchange Commission pursuant
to Item 304(a)(3) of Regulation S-K. Incorporated by reference to Exhibit 16 of the
Current Report on Form 8-K dated July 22, 1997.
18 Preferability letter from KPMG Peat Marwick LLP regarding change in accounting
principles dated November 6, 1995. Incorporated by reference to Exhibit 18 of the
Annual Report on Form 10-K for the year ended August 31, 1995.
*23.1 Consent by Coopers and Lybrand L.L.P. for Fiscal 1997.
*23.2 Consent by KPMG Peat Marwick LLP for Fiscal 1996 and Fiscal 1995.
*27 Financial Data Schedule.
- -----------------------
* Filed herewith.