<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: FEBRUARY 28, 1998
--------------------------
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-13099
TRISTAR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3129318
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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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(210) 402-2200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
ON APRIL 6, 1998, THERE WERE OUTSTANDING 16,751,947 SHARES OF
COMMON STOCK, $.01 PAR VALUE, OF THE REGISTRANT.
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TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--February 28, 1998 and August 30, 1997 3
Consolidated statements of operations--thirteen and twenty-six week
periods ended February 28, 1998 and March 1, 1997,
respectively 5
Consolidated statements of cash flows--twenty-six week periods ended
February 28, 1998 and March 1, 1997, respectively 6
Notes to consolidated financial statements--February 28, 1998 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
1998 August 30,
ASSETS (UNAUDITED) 1997*
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<S> <C> <C>
Current assets:
Cash $ 358,000 $ 492,000
Accounts receivable, less allowance for doubtful accounts
of $1,423,000 and $ 1,052,000, respectively 15,677,000 15,267,000
Accounts receivable - related parties - net 2,458,000 1,820,000
Inventories 16,168,000 13,560,000
Prepaid expenses 695,000 632,000
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Total current assets 35,356,000 31,771,000
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Property, plant and equipment, less accumulated depreciation
of $8,005,000 and $7,101,000 8,339,000 8,094,000
------------- -------------
Other assets:
Warrant valuation, less accumulated amortization
of $1,791,000 and $1,769,000, respectively 299,000 320,000
Other assets 939,000 236,000
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Total other assets 1,238,000 556,000
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Total assets $ 44,933,000 $ 40,421,000
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</TABLE>
* Prepared from audited financial statements for the year ended August 30, 1997.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
FEBRUARY 28,
1998 August 30,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1997 *
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<S> <C> <C>
Current liabilities:
Book overdraft $ 876,000 $ --
Revolving credit agreement borrowings, current 9,682,000 9,732,000
Accounts payable--trade 10,170,000 8,139,000
Accounts payable--related parties - net 5,140,000 4,463,000
Accrued bonuses 43,000 257,000
Accrued interest expense-subordinated debt 1,731,000 1,582,000
Other accrued expenses 1,399,000 1,384,000
Income taxes payable -- 11,000
Current portion of capital lease obligations 149,000 42,000
Current portion of long-term obligations 774,000 28,000
-------------- --------------
Total current liabilities 29,964,000 25,638,000
Revolving credit agreement borrowings, noncurrent -- 473,000
Long-term debt, less current portion 1,490,000 2,474,000
Obligations under capital leases, less current portion 120,000 37,000
Subordinated long term debt - related parties 4,500,000 4,500,000
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Total liabilities 36,074,000 33,122,000
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Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.05 par value; authorized 1,000,000 shares;
Series A, 666,529 shares issued and outstanding 4,666,000 4,666,000
Series B, 120,690 shares issued and outstanding 4,511,000 4,511,000
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 16,751,947 shares and
16,729,074 shares, respectively 168,000 168,000
Additional paid-in-capital 10,808,000 10,566,000
Accumulated deficit (11,294,000) (12,612,000)
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Total shareholders' equity 8,859,000 7,299,000
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Total liabilities and shareholders' equity $ 44,933,000 $ 40,421,000
============== ==============
</TABLE>
* Prepared from audited financial statements for the year ended August 30, 1997.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
FEBRUARY 28, MARCH 1, FEBRUARY 28, MARCH 1,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales $ 14,843,000 $ 15,577,000 $ 35,708,000 $ 33,066,000
Cost of sales 9,965,000 11,229,000 24,892,000 23,491,000
------------- ------------- ------------- -------------
Gross profit 4,878,000 4,348,000 10,816,000 9,575,000
Selling, general and administrative expenses 4,310,000 4,070,000 8,274,000 7,838,000
------------- ------------- ------------- -------------
Income from operations 568,000 278,000 2,542,000 1,737,000
Other income (expense):
Interest expense (496,000) (506,000) (970,000) (1,110,000)
Other expense (104,000) (96,000) (199,000) (135,000)
------------- ------------- ------------- -------------
Income (loss) before provision for income taxes (32,000) (324,000) 1,373,000 492,000
Provision for income taxes 5,000 20,000 55,000 50,000
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Net income (loss) $ (37,000) $ (344,000) $ 1,318,000 $ 442,000
------------- ------------- ------------- -------------
Less:
Preferred stock dividends (113,000) (29,000) (226,000) (29,000)
Effect of beneficial conversion feature -- (1,011,000) -- (1,011,000)
Warrant valuation adjustment (270,000)
============= ============= ============= =============
Net income (loss) applicable to common stock $ (150,000) $ (1,654,000) $ 1,092,000 $ (598,000)
============= ============= ============= =============
Earnings per common share:
Basic $ (.01) $ (.10) $ .07 $ (.04)
============= ============= ============= =============
Diluted $ (.01) $ (.10) $ .06 $ (.04)
============= ============= ============= =============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
FEBRUARY 28, March 1,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,318,000 $ 442,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 904,000 892,000
Provision for losses on accounts receivable 301,000 493,000
Provision for inventory allowances 322,000 276,000
Issuance of stock in connection with 401K plan 25,000 10,000
Amortization of warrant valuations 21,000 41,000
Amortization of deferred loan costs 42,000 --
Compensation expense for extension of stock options 217,000 --
Change in operating assets and liabilities:
Accounts receivable (1,349,000) (3,307,000)
Inventories (2,930,000) (1,479,000)
Prepaid expenses (63,000) (540,000)
Income taxes payable (11,000) (75,000)
Accounts payable 2,708,000 2,104,000
Accrued expenses (50,000) 353,000
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Net cash provided by (used in) operating activities 1,455,000 (790,000)
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (899,000) (345,000)
Increase in other assets (13,000) (95,000)
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Net cash used in investing activities (912,000) (440,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdraft 876,000 --
Net repayment of old revolving credit facility (10,205,000) --
Net borrowings under new revolving credit facility 9,682,000 --
Net borrowings under old revolving credit facility -- 1,334,000
Proceeds from long-term debt 2,385,000 29,000
Principal payments under new long-term debt (121,000) --
Principal payments on capital leases (60,000) (10,000)
Repayment of old long-term debt (2,502,000) (336,000)
Proceeds from exercise of stock options -- 129,000
Deferred loan costs (732,000) --
------------ ------------
Net cash provided by (used in) financing activities (677,000) 1,146,000
------------ ------------
NET (DECREASE) INCREASE IN CASH (134,000) (84,000)
CASH AT BEGINNING OF PERIOD 492,000 233,000
------------ ------------
CASH AT END OF PERIOD $ 358,000 $ 149,000
============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 28, 1998
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the thirteen and twenty-six week periods ended February
28, 1998, are not necessarily indicative of the results that may be expected for
the year ending August 29, 1998.
NOTE 2: EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings per Share," in February 1998. This
statement, which replaces APB Opinion No. 15, "Earnings per Share," establishes
simplified accounting standards for computing earnings per share ("EPS") and
makes them comparable to international EPS standards.
Basic EPS is computed by dividing income (loss) applicable to common
shareholders by the weighted-average number of common shares outstanding during
each period. Diluted EPS is computed by dividing net income (loss) applicable to
common shareholders, as adjusted for the assumed conversion of preferred stock,
if applicable, by the sum of the weighted-average number of common shares
outstanding, and the number of additional common shares that would have been
outstanding if dilutive options, warrants and convertible preferred stock had
been exercised or converted. All prior-period EPS amounts presented have been
restated to conform to the provisions of SFAS No. 128.
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations, as required by SFAS No. 128, is presented
below:
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<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
FEBRUARY 28, MARCH 1, FEBRUARY 28, MARCH 1,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS:
Net income (loss) applicable to common stock (150,000) (1,654,000) 1,092,000 (598,000)
Weighted-average number of common shares outstanding 16,730,197 16,712,681 16,744,829 16,695,007
------------ ------------ ------------ ------------
Basic EPS: $ (.01) $ (.10) $ .07 $ (.04)
============ ============ ============ ============
Diluted EPS (1)
Net income applicable to common stock -- -- 1,092,000 --
Weighted-average number of common shares outstanding -- -- 16,744,829 --
Add effects of assumed exercise of options and warrants
Exercise of stock options -- -- 266,754 --
Exercise of warrants -- -- 1,275,783 --
------------ ------------ ------------ ------------
Weighted average number of common shares outstanding
plus shares from assumed exercise of options and
warrants -- -- 18,287,366 --
------------ ------------ ------------ ------------
Diluted EPS $ -- $ -- $ .06 $ --
============ ============ ============ ============
</TABLE>
1. Dilutive EPS equals basic EPS for the thirteen week periods ended
February 28, 1998 and March 1, 1997 and the twenty-six week period ended
March 1, 1997 as the assumed conversion of convertible preferred stock
and the assumed exercise of outstanding options and warrants would have
an anti-dilutive effect. The assumed conversion of convertible preferred
stock would also have an anti-dilutive effect for the twenty-six week
period ended February 28,1998.
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NOTE 3: INVENTORIES
Inventory is stated at the lower of cost or market.
<TABLE>
<CAPTION>
==============================================================
February 28, August 30,
1998 1997
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<S> <C> <C>
Raw materials $ 5,298,000 $ 6,105,000
Work-in-process 2,541,000 2,101,000
Finished goods 11,071,000 7,684,000
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18,910,000 15,890,000
Inventory reserves (2,742,000) (2,330,000)
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$ 16,168,000 $ 13,560,000
================== =================
==============================================================
</TABLE>
NOTE 4: CREDIT AGREEMENT BORROWINGS
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 ("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% (although,
borrowings based on LIBOR can not exceed 60% of the total outstanding borrowings
under the Revolving Credit.) Borrowings under the Revolving Credit are limited
by a formula based on Eligible Accounts Receivable and Eligible Inventory, as
defined. Unused Line fees equal to .50% per annum on the unused portion of the
Revolving Credit are payable monthly.
Remaining availability under the line as of February 28, 1998 approximated
$200,000, based on the borrowing formulas.
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 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 cash
is advanced 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.
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
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Worth, Minimum EBITDA, Minimum Fixed Charge Coverage, Maximum Leverage and
Maximum Capital Expenditures. Additional covenants limit borrowings, assets
sales and dividends.
NOTE 5: LITIGATION AND CONTINGENCIES
FREITAS AND KENNER
In October 1994, a suit was filed in Florida state court against the Company and
two of its directors by Ross Freitas, Carolyn Kenner, Rose Freitas and Melissa
Freitas. The complaint alleged causes of action by two plaintiffs for libel and
sought indemnification of legal costs allegedly incurred by those plaintiffs in
suits and proceedings arising from the facts which were the subject of the
investigation conducted by the Special Committee of the Board of Directors in
1992. The complaint also alleged, on behalf of all four plaintiffs, that the
Company's disclosures relating to the 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.
PROCEEDS OF AN EXECUTIVE LIABILITY AND INDEMNIFICATION POLICY
In November 1994 and June 1995, the United States District Court for the
District of South Carolina approved the disbursement of $1.25 and $.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 has and 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.
INTERNAL REVENUE SERVICE EXAMINATION
In February 1997, the Internal Revenue Service ("the IRS") concluded their
examination of the Company's tax returns submitted for fiscal years 1993, 1994
and 1995. The IRS proposed adjustments disallowing the deductions of payments
made in the settlement of the class action litigation and certain related legal
and professional fees. 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
these proceedings will not have a material adverse effect on the Company's
financial condition.
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NOTE 6: RELATED PARTY TRANSACTIONS
Certain suppliers of fragrance product components and the primary suppliers of
cosmetic products are affiliates of the Core Sheth families who beneficially own
78% of the Company's outstanding common stock. Related party accounts payable
result from the purchase of products from those vendors. Related party accounts
receivable result from the sale of products to those and other affiliates of the
Core Sheth Families. The payables and receivables balances are offset for
presentation purposes and the net balance of accounts receivable or accounts
payable is presented on the balance sheet. Related party payables also include
payables due members of the Company's Board of Directors which result, in the
normal course of business, from expenses associated with Board and related
committee meetings. The following summarizes the presentations at February 28,
1998 and August 30, 1997.
<TABLE>
<CAPTION>
===============================================================================
FEBRUARY 28, August 30,
1998 1997
------------------------------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties $ 2,742,000 $ 2,267,000
Offset amount (284,000) (447,000)
------------------------------
Net related parties receivables $ 2,458,000 $ 1,820,000
==============================
ACCOUNTS PAYABLE:
Total accounts payable-related parties $ 5,424,000 $ 4,910,000
Offset amount (284,000) (447,000)
------------------------------
Net related parties payables $ 5,140,000 $ 4,463,000
==============================
===============================================================================
</TABLE>
The Company purchases finished goods and fragrance product components from Core
Sheth Families affiliates. During the twenty-six week period ended February 28,
1998, and for the respective period in fiscal 1997, the Company purchased
approximately $2,148,000 and $3,162,000, respectively.
During the twenty-six week period ended February 28, 1998, and for the
respective period in fiscal 1997, the Company sold products to Core Sheth
Families affiliates in the amounts of approximately $2,131,000 and $1,841,000,
respectively.
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NOTE 7: SHAREHOLDERS' EQUITY (DEFICIT)
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 non-voting 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
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 non-voting 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.
NOTE 8: RESTATEMENT OF FIRST QUARTER NET INCOME
Net income for the thirteen months ended November 29, 1997 has been restated to
reflect additional compensation expense of approximately $217,000, or $.01 per
share related to extending the term of certain stock options for a former
employee during such period.
NOTE 9: NON CASH FINANCING AND INVESTING ACTIVITIES
Excluded from the Consolidated Statement of Cash Flows for the twenty-six weeks
ended February 28, 1998 is a non-cash increase in capital expenditures and
capital leases of approximately $250,000.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED
FEBRUARY 28, 1998 AND MARCH 1, 1997.
This document contains certain statements that are "forward-looking" statements
within the meaning of Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities exchange Act of 1934. All statements other than
statements of historical facts included in this document, including without
limitation statements that use terminology such as "anticipate", "believe,"
"continue,"" estimate," "expect," "intend," "may,", "plan," "predict," "should,"
"will," and similar expressions, are forward-looking statements. These
forward-looking statements include, among other things, the Company's business
strategy and expectations concerning the Company's market position, future
operations, margins, profitability, liquidity and capital resources,
expenditures for capital projects and attempts to reduce costs. Although the
Company believes that the assumptions upon which the forward-looking statements
contained in this document are based are reasonable, any of the assumptions
could prove to be inaccurate and, as a result, the forward-looking statements
based on those assumptions also could be incorrect. All phases of the operations
of the Company involve risks and uncertainties, many of which are outside the
control of the Company and any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether the
forward-looking statements ultimately prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations are set forth under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this document. Actual results and trends in the future may differ materially
depending on a variety of factors including, but not limited to, the timing and
extent of changes in fragrance components, fragrance and cosmetic prices and
underlying demand and availability of fragrance components; changes in the cost
or availability of means of transporting products; execution of planned capital
projects; adverse changes in the credit ratings assigned to the Company's trade
credit; the extent of the Company's success in developing and marketing new
product lines; state and federal environmental, economic, safety and other
policies and regulations, and changes therein, and any legal or regulatory
delays or other factors beyond the Company's control; adverse rulings,
judgments, or settlements in litigation or other legal matters; actions of
customers and competitors; economic conditions affecting the areas in which the
Company's products are marketed; political developments in foreign countries;
and the conditions of the capital markets and equity markets during the periods
covered by the forward-looking statements. Many of the factors are described in
greater detail in other of the Company's filings with the Commission. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the foregoing. The Company undertakes no obligation to publicly
release the results of any revisions to any such forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
For the thirteen week period ended February 28, 1998 the Company recorded a net
loss of $37,000 compared to a net loss of $344,000 for the thirteen week period
ended March 1, 1997. The February 28, 1998 period ending results were favorably
impacted by the reversal of a $166,000 bonus accrual which management determined
was no longer necessary based upon the finalization of actual bonus payments for
fiscal year ended August 30, 1997. After giving effect to the preferred stock
dividends, the Company recorded a net loss applicable to common shares of
$150,000 or $.01 per share. For the same period of fiscal 1997, the Company
recorded a net loss applicable to common shares of $1,654,000 or $.10 per share.
Net income for the thirteen week period ended November 29, 1997 has been
restated to reflect additional compensation expense of approximately $217,000,
or $.01 per share related to extending the term of certain stock options for a
former employee during such period.
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For the twenty-six week period ended February 28,1998 the Company recorded net
income of $1,318,000 compared to net income of $442,000 for the comparable
period in 1997. Net income applicable to common shares after giving effect to
preferred stock dividends was $1,092,000 or $.07 per basic share and $.06 per
diluted share for the twenty-six week period compared to a net loss applicable
to common shares of $598,000 or $(.04) per share for the same period in 1997.
NET SALES
Net sales were $14,843,000 for the thirteen week period ended February 28, 1998,
a decrease of 5% versus net sales of $15,557,000 for the same period in 1997.
For the twenty-six week period ended February 28, 1998, net sales were
$35,708,000, an increase of 8% over the twenty-six week period ended March
1,1997 net sales of $33,066,000. The decline in the thirteen week period ended
February 28,1998 is related mainly to reduced sales in the U.S. wholesale
channel of distribution. The increase experienced in the twenty-six week period
ended February 28,1998 over the prior period is primarily related to sales
growth in the U.S. wholesale and Latin American markets as a result of the
continued market growth of the Royal Selections fragrance line.
NET SALES - CHANNELS OF DISTRIBUTION
The Company markets and distributes products to wholesalers, distributors, chain
stores, mass merchandisers, and independent retail channels in various markets
throughout North and South America. For the thirteen week period ended February
28,1998, the Company experienced a slight decline in the U.S. wholesale and
combined chain, specialty chain and mass merchandising channels, offset somewhat
by growth in Latin America. Continued market expansion of the Royal Selections
fragrance line in both the U.S. wholesale and Latin America markets was offset
entirely by decreased sales in the Euro Collections and the Apple pencil lines
in the U.S. wholesale market coupled with decreased sales in Designer Collection
Alternatives in the retail, mass merchandiser and chain store channels of
distribution. For the twenty-six week period ended February 28,1998, the Company
experienced growth in the U.S. wholesale and Latin America channels while
experiencing a decline in the combined chain, specialty chain and mass
merchandising channels when compared to the comparable period in 1997. The
competitive, both in price and presentation, Royal Selections line, designed for
the wholesale and Latin America markets, has received significant acceptance in
those markets to the extent that the Company was at times unable to completely
satisfy the demand for specific fragrances in that product line. The Company is
continuing in its efforts to equalize availability and demand. The Company
continues to devote resources to all channels of distribution in the U.S. and
Latin America with programs including, but not limited to, promotions and
limited advertising. In certain Latin America markets, economic and political
conditions continue to restrict growth.
NET SALES - RELATED PARTIES
In the thirteen week and twenty-six week period ended February 28, 1998, sales
to affiliates of the Core Sheth Families, the Company's major stockholder, were
$1,089,000 and $2,131,000, respectively, compared with $1,137,000 and $1,841,000
for the same period in 1997.
NET SALES - PRODUCTS PURCHASED FROM RELATED PARTIES
Of the net sales in the twenty-six week period of fiscal 1998, approximately 4%,
or $1,407,000, resulted from the sale of products purchased from related parties
as finished goods. For the same period in fiscal 1997, comparable numbers were
9%, or $2,988,000. In addition, fragrances and other products manufactured and
sold by the Company included some components that were purchased from related
parties. The cost of those components approximated 7% and 4% of cost of sales in
the same periods of fiscal 1998 and 1997, respectively.
Page 14
<PAGE> 15
GROSS PROFIT
The Company's gross profit for the thirteen week periods ended February 28,1998
and March 1, 1997 was $4,878,000 or 33% of sales and $4,348,000 or 28% of sales,
respectively. Gross profit for the twenty-six week periods ended February
28,1998 and March 1,1997 was $10,816,000, or 30% of sales and $9,575,000, or 29%
of sales, respectively. The improvement in gross profit in fiscal 1998 in
comparison to fiscal 1997 was primarily due to enhanced profit margins relating
to a price increase in the Royal Selections fragrance line and improved
manufacturing variances.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the thirteen and
twenty-six week periods ended February 28,1998 increased 6% in both periods to
$4,310,000 and $8,274,000, respectively, from $4,070,000 and $7,838,000,
respectively. The increase over the prior fiscal year is primarily due to higher
salaries for new employees, travel incurred in connection with obtaining the new
bank facility, increased monthly fees associated with the new bank facility, and
the compensation expense relating to extending the term of certain stock options
for a former employee. See Note 8 of the Notes to the Consolidated Financial
Statements.
NON OPERATING INCOME OR EXPENSE
Interest expense decreased slightly when comparing the thirteen and twenty-six
week periods of fiscal 1998 to the comparable periods of fiscal 1997 as a result
of the conversion of interest bearing subordinated debt into preferred stock.
See Note 7 of the Notes to the Consolidated Financial Statements. Other expense
was higher in both the thirteen and twenty-six week periods ended February
28,1998 as compared with the same periods in fiscal 1997 due mainly to an
increase in foreign exchange losses.
POTENTIAL ADVERSE AFFECTS ON RESULTS OF OPERATIONS FOR FUTURE PERIODS
The Company's business, financial condition and results of operations could be
adversely affected by each or all of the following factors:
1. Mexican Market. The market for the Company's products continues to be
negatively impacted as a result of the devaluation of the Mexican Nuevo
Peso in December 1994 and the subsequent economic and political
instability. These factors sharply reduced the purchasing power of the
Mexican consumer and therefore the demand for the Company's products was
adversely affected. Any future significant deterioration of the Peso's
value would be expected to further adversely affect the Company's sales in
Mexico and also the collectability of accounts receivable. The Company
believes that some of its customers based in the United States sell the
Company's products (as well as the products of other companies) to
purchasers who, in turn, may attempt to import goods into Mexico without
full payment of applicable Mexican taxes and customs duties. Enhanced
enforcement efforts by Mexican authorities may have an adverse effect on
the Company's sales to such customers.
2. Latin America Economies. Growth in sales, or even the maintenance of
existing sales levels, in certain Latin American countries depends to a
large extent on the economic health and political stability of those
countries. Any deterioration in the economic or political stability in such
countries could adversely affect sales.
Page 15
<PAGE> 16
3. Supply of Products. The Company's ability to manufacture and to satisfy
consumer demand for fragrances is dependent on the supply of certain
components from single sources including an affiliate of the Core Sheth
Families. 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 and Developing Markets. The Company continues in its attempts to
develop and expand sales in Latin America. In the process, the Company
incurs significant expenses in order to establish a marketing presence and
an economically viable amount of sales. There is no assurance that the
Company will be successful in those endeavors or that it will recover its
initial expenses and start up costs. In addition, certain countries from
time to time impose strict import restrictions, high levels of taxes on
imports, and restrictions on currency transactions, all of which could
affect the success of sales and marketing activities and also affect the
profitability of such activities.
5. Internal Revenue Service. In February 1997, the Internal Revenue Service
("the IRS") concluded its examination of the Company's tax returns
submitted for fiscal years 1993, 1994 and 1995. The IRS proposed
adjustments disallowing the deductions of payments made in the settlement
of the class action litigation and certain related legal and professional
fees. The Company is in discussions with the IRS on these issues and will
appeal the proposed adjustments if necessary. If the Company is
unsuccessful in its discussions or ultimately in an appeal, it 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.
At this time, it is not known whether, or to what degree, the above factors will
have a material adverse impact on future results.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently is obtaining its working capital from three primary
sources: a revolving line of credit, cash generated by operations, and from
delaying payments to vendors (primarily related parties) beyond customary terms.
Operating Activities
Operations in the twenty-six week period ended February 28, 1998, provided
$1,455,000 in cash primarily due to net income adjusted for non-cash items and
increases in accounts payable. Offsetting this somewhat were increases in trade
accounts receivable and inventories
Accounts receivable grew primarily as a result of increased sales and varying
extended financing terms given to customers. Inventory increased to support
anticipated sales growth. Accounts payable increased as the Company extended
payments to certain vendors and increased its purchases of inventory to support
the anticipated growth in sales.
Investing Activities
Capital expenditures during the twenty-six week period were $899,000, consisting
primarily of investments in production related machinery and equipment,
facilities related items, and computer equipment. Capital expenditures in fiscal
1998 are expected to exceed the fiscal 1997 level with the major portion being
devoted to manufacturing equipment.
Page 16
<PAGE> 17
Financing Activities
During the twenty-six week period ended February 28,1998, the Company repaid
approximately $12,707,000 for the pay off of the old revolving credit facility
and long-term debt, borrowed $12,067,000 under the new revolving credit
facility and long-term debt, and paid $732,000 in loan costs and $131,000 in
payments of long-term debt and capital leases. Additionally the Company was in
a book overdraft position as of February 28, 1998. Remaining availability
based on the borrowing formulas as of February 28,1998 approximated $200,000.
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 Base Rate (the higher of the prime rate or the Federal Funds
Rate plus .50%) plus 1.50% or the London Interbank Offered Rate (LIBOR) plus
3.50% (although, borrowings based on LIBOR can not exceed 60% of the total
outstanding borrowings under the Revolving Credit.) Borrowings under the
Revolving Credit are limited by a formula based on Eligible Accounts Receivable
and Eligible Inventory, as defined. Unused Line 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 believes the new lines of credit, together with cash generated by
operations and the continued ability to delay payments to related party vendors
as required will provide sufficient cash to meet the 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 7 of the Notes to the Consolidated Financial
Statements). The Company remains indebted to the affiliate for delinquent
interest payments of $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 7 of the Notes
to the Consolidated Financial Statements). The remaining debt bears interest at
rates of 6.36% to 8.23% per annum. Repayments on the remaining $4.5 million debt
will begin in the year 2001. As of February 28, 1998, the Company's financial
statements reflect accrued interest of $1,164,000 due on this related party debt
including the delinquent amounts due on debt converted to preferred stock.
The Company also purchases certain equipment, primarily office furniture,
computer equipment and software, under long-term purchase agreements. These are
not material to the Company's cash flow.
Page 17
<PAGE> 18
The Company does not have any plans to pay any cash dividends on the Common or
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.
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent on its computer
software programs and operating systems (collectively, "Programs and Systems").
These Programs and Systems are used in several key areas of the Company's
business, including information management services and financial reporting, as
well as in various administrative functions. The Company has been evaluating its
Programs and Systems to identify potential year 2000 compliance problems, as
well as manual processes, external interfaces with customers, and services
supplied by vendors to coordinate year 2000 compliance and conversion. The year
2000 problem refers to the limitations of the programming code in certain
existing software programs to recognize date sensitive information for the year
2000 and beyond. Unless modified prior to the year 2000, such systems may not
properly recognize such information and could generate erroneous data or cause a
system to fail to operate properly.
Based on current information, the Company expects to attain year 2000 compliance
and institute appropriate testing of its modifications and replacements in a
timely fashion and in advance of the year 2000 date change. It is anticipated
that modification or replacement of the Company's Programs and Systems will be
performed in-house by company personnel. The Company believes that, with
modifications to existing software and conversions to new software, the year
2000 problem will not pose a significant operational problem for the Company.
However, because most computer systems are, by their very nature,
interdependent, it is possible that non-compliant third party computers may not
interface properly with the Company's computer systems. The Company could be
adversely affected by the year 2000 problem if it or unrelated parties fail to
successfully address this issue. Management of the Company currently anticipates
that the expenses and capital expenditures associated with its year 2000
compliance project will not have a material effect on its financial position or
results of operations.
Page 18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Proceeds of an Executive Liability and Indemnification Policy
In November 1994 and June 1995, the United States District Court for
the District of South Carolina approved the disbursement of $1.25 and
$.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 Keener ("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 has and 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.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders was held on February 12, 1998.
b) The following directors were elected to serve until the next
Annual Meeting of Stockholders or until their successors have been
elected and qualified:
Richard P. Rifenburgh Aaron Zutler
Robert R. Sparacino Jay J. Sheth
Viren Sheth B.J. Harid
c) (1)The director's in b) above were elected by the following votes:
<TABLE>
<CAPTION>
NAME NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
---- ------------------- ------------------------
<S> <C> <C>
Richard P. Rifenburgh 16,679,556 6,060
Robert R. Sparacino 16,679,556 6,060
Viren S. Sheth 16,677,556 8,060
Aaron Zutler 16,679,556 6,060
Jay J. Sheth 16,677,556 8,060
B.J. Harid 16,679,556 6,060
</TABLE>
(2) With respect to a proposal to approve the adoption of the
Company's 1997 Long Term Incentive Option Plan (the "Plan")
14,190,332 shares voted for the Plan, 768,391 shares voted
against the Plan, and 3,652 shares abstained from voting.
(3) Of the 16,685,616 number shares voting at the meeting,
16,660,316 shares voted for the ratification of the
appointment of the firm Coopers & Lybrand L.L.P. as the
Company's independent public accountants for fiscal 1998. The
number of shares that voted against the ratification was
23,200 and the holders of 2,100 shares abstained from voting.
ITEM 5. OTHER INFORMATION
None.
Page 19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
b) REPORTS ON FORM 8-K
None.
Page 20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRISTAR CORPORATION
(Registrant)
Date: April 14, 1998 /s/ Viren S. Sheth
--------------- ----------------------------------------
VIREN S. SHETH
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 14, 1998 /s/ Robert M. Viola
--------------- ----------------------------------------
ROBERT M. VIOLA
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<S> <C>
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-29-1997
<PERIOD-END> FEB-28-1998
<CASH> 358,000
<SECURITIES> 0
<RECEIVABLES> 18,135,000
<ALLOWANCES> 1,423,000
<INVENTORY> 16,168,000
<CURRENT-ASSETS> 35,356,000
<PP&E> 8,339,000
<DEPRECIATION> 8,005,000
<TOTAL-ASSETS> 44,933,000
<CURRENT-LIABILITIES> 26,754,000
<BONDS> 0
0
9,177,000
<COMMON> 168,000
<OTHER-SE> (486,000)
<TOTAL-LIABILITY-AND-EQUITY> 44,933,000
<SALES> 35,708,000
<TOTAL-REVENUES> 35,708,000
<CGS> 24,892,000
<TOTAL-COSTS> 33,166,000
<OTHER-EXPENSES> 1,169,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 970,000
<INCOME-PRETAX> 1,373,000
<INCOME-TAX> 55,000
<INCOME-CONTINUING> 1,092,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,318,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> AUG-31-1997 AUG-31-1997
<PERIOD-START> DEC-1-1996 AUG-31-1996
<PERIOD-END> MAR-01-1997 MAR-01-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 0
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-PRIMARY> (0.10) (0.04)
<EPS-DILUTED> (0.10) (0.04)
</TABLE>
