<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: MAY 30, 1998
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-13099
TRISTAR CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3129318
------------------------------ -----------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
12500 SAN PEDRO AVENUE, SUITE 500, SAN ANTONIO, TEXAS 78216
-----------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(210) 402-2200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
ON JULY 8, 1998, THERE WERE OUTSTANDING 16,753,240 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
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--May 30, 1998 and August 30, 1997 3
Consolidated statements of operations--thirteen and thirty-nine 5
week periods ended May 30, 1998 and May 31, 1997
Consolidated statements of cash flows--thirty-nine week periods 6
ended May 30, 1998 and May 31, 1997
Notes to consolidated financial statements--May 30, 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 19
SIGNATURES 20
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 30,
1998 August 30,
ASSETS (unaudited) 1997 *
----------- ----------
<S> <C> <C>
Current assets:
Cash $ 311,000 $ 492,000
Accounts receivable, less allowance for doubtful accounts
of $1,315,000 and $ 1,052,000, respectively 15,447,000 15,267,000
Accounts receivable - related parties - net 2,848,000 1,820,000
Inventories 13,551,000 13,560,000
Prepaid expenses 647,000 632,000
----------- -----------
Total current assets 32,804,000 31,771,000
----------- -----------
Property, plant and equipment, less accumulated depreciation
of $8,429,000 and $7,101,000 8,006,000 8,094,000
----------- -----------
Other assets:
Warrant valuation, less accumulated amortization
of $1,801,000 and $1,769,000, respectively 107,000 320,000
Other assets 886,000 236,000
----------- -----------
Total other assets 993,000 556,000
----------- -----------
Total assets $41,803,000 $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 BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
May 30,
1998 August 30,
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) 1997 *
----------- ----------
<S> <C> <C>
Current liabilities:
Book overdraft $ 240,000 $ --
Revolving credit agreement borrowings, current 9,496,000 9,732,000
Accounts payable--trade 9,402,000 8,139,000
Accounts payable--related parties - net 4,692,000 4,463,000
Accrued bonuses 56,000 257,000
Accrued interest expense-subordinated debt 1,731,000 1,582,000
Other accrued expenses 1,118,000 1,384,000
Income taxes payable -- 11,000
Current portion of capital lease obligations 123,000 42,000
Current portion of long-term obligations 774,000 28,000
------------ ------------
Total current liabilities 27,632,000 25,638,000
Revolving credit agreement borrowings, noncurrent -- 473,000
Long-term debt, less current portion 2,794,000 2,474,000
Obligations under capital leases, less current portion 111,000 37,000
Subordinated long term debt - related parties 1,700,000 4,500,000
------------ ------------
Total liabilities 32,237,000 33,122,000
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.05 par value; authorized 1,000,000 shares;
Series A, 666,529 shares issued and outstanding 4,666,000 4,666,000
Series B, 120,690 shares issued and outstanding 4,511,000 4,511,000
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 16,753,240 shares and
16,729,074 shares, respectively 168,000 168,000
Additional paid-in-capital 12,327,000 10,566,000
Accumulated deficit (12,106,000) (12,612,000)
------------ ------------
Total shareholders' equity 9,566,000 7,299,000
------------ ------------
Total liabilities and shareholders' equity $ 41,803,000 $ 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 Thirty-Nine Weeks Ended
May 30, May 31, May 30, May 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 17,185,000 $ 18,117,000 $ 52,893,000 $ 51,183,000
Cost of sales 13,250,000 12,789,000 38,142,000 36,280,000
------------ ------------ ------------ ------------
Gross profit 3,935,000 5,328,000 14,751,000 14,903,000
Selling, general and administrative expenses 4,216,000 4,346,000 12,493,000 12,184,000
------------ ------------ ------------ ------------
Income (loss) from operations (281,000) 982,000 2,258,000 2,719,000
Other income (expense):
Interest expense (426,000) (479,000) (1,396,000) (1,589,000)
Other expense (105,000) (195,000) (301,000) (330,000)
------------ ------------ ---------- ------------
Income (loss) before provision for income taxes (812,000) 308,000 561,000 800,000
Provision for income taxes -- 20,000 55,000 70,000
------------ ------------ ------------ ------------
Net income (loss) $ (812,000) $ 288,000 $ 506,000 $ 730,000
------------ ------------ ------------ ------------
Less:
Preferred stock dividends (113,000) (114,000) (339,000) (143,000)
Effect of beneficial conversion feature -- -- -- (1,011,000)
Warrant valuation adjustment -- -- -- (270,000)
============ ============ ============ ============
Net income (loss) applicable to common stock $ (925,000) $ 174,000 $ 167,000 $ (694,000)
============ ============ ============ ============
Earnings per common share:
Basic $ (.06) .01 $ .01 $ (.04)
============ ============ ============ ============
Diluted $ (.06) .01 $ .01 $ (.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>
Thirty-Nine Weeks Ended
May 30, May 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 506,000 $ 730,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,360,000 1,357,000
Provision for losses on accounts receivable 668,000 642,000
Provision for inventory allowances 660,000 170,000
Reduction of LIFO reserve (775,000) --
Issuance of stock in connection with 401K plan 38,000 32,000
Amortization of warrant valuations 32,000 62,000
Amortization of deferred loan costs 118,000 --
Compensation expense for extension of stock options 217,000 --
Change in operating assets and liabilities:
Accounts receivable (2,457,000) (5,496,000)
Inventories (612,000) 78,000
Prepaid expenses (128,000) (435,000)
Income taxes payable (11,000) (55,000)
Accounts payable 1,593,000 2,308,000
Accrued expenses (33,000) 570,000
------------ ------------
Net cash provided by (used in) operating activities 1,176,000 (37,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,068,000) (1,054,000)
Decrease in other assets (11,000) (6,000)
------------ ------------
Net cash used in investing activities (1,079,000) (1,060,000)
------------ ------------
Cash flows from financing activities:
Book overdraft 240,000 --
Net borrowings (repayment) under old revolving credit
facility (10,205,000) 1,334,000
Net borrowings under new revolving credit facility 9,496,000 --
Proceeds from long-term debt 4,021,000 29,000
Principal payments under new long-term debt (2,955,000) (516,000)
Principal payments on capital leases (95,000) (10,000)
Proceeds from exercise of stock options -- 129,000
Deferred loan costs (780,000) --
------------ ------------
Net cash provided by (used in) financing activities (278,000) 966,000
------------ ------------
Net (decrease) increase in cash (181,000) (131,000)
Cash at beginning of period 492,000 233,000
------------ ------------
Cash at end of period $ 311,000 $ 102,000
============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
PAGE 6
<PAGE> 7
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
May 30, 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 thirty-nine week periods ended May 30,
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 Thirty-Nine Weeks Ended
May 30, May 31, May 30, May 31,
1998 1997 1998 1997
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Basic EPS:
Net income (loss) applicable to common stock $ (925,000) $ 174,000 $ 167,000 $ (694,000)
Weighted-average number of common shares outstanding
16,752,473 16,712,280 16,740,248 16,703,739
----------- ----------- ----------- -----------
Basic EPS $ (.06) $ .01 $ .01 $ (.04)
=========== =========== =========== ===========
Diluted EPS (1):
Net income applicable to common stock $ (925,000) $ 174,000 $ 167,000 $ (694,000)
Weighted-average number of common shares outstanding 16,752,473 16,712,280 16,740,248 16,703,739
Add: effects of assumed exercise of options and
warrants
Exercise of stock options -- 749,969 269,352 --
Exercise of warrants 971,631 1,274,332
-- --
----------- ----------- ----------- -----------
Weighted-average number of common shares outstanding
plus shares from assumed exercise of options and 16,752,473 18,433,880 18,283,933 16,703,739
warrants
----------- ----------- ----------- -----------
Diluted EPS $ (.06) $ .01 $ .01 $ (.04)
=========== =========== =========== ===========
</TABLE>
1. Dilutive EPS equals basic EPS for the thirteen week period ended May 30,
1998 and the thirty-nine week period ended May 31, 1997 as the assumed
conversion of convertible preferred stock and the assumed exercise of
outstanding options and warrants would have an anti-dilutive effect.
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NOTE 3: INVENTORIES
Inventory is stated at the lower of cost or market. The components of inventory
are as follows:
<TABLE>
<CAPTION>
------------------------------
May 30, August 30,
1998 1997
------------------------------
<S> <C> <C>
Raw materials $ 5,111,000 $ 6,105,000
Work-in-process 1,640,000 2,101,000
Finished goods 7,605,000 7,684,000
------------ ------------
14,356,000 15,890,000
Inventory reserves (805,000) (2,330,000)
------------ ------------
$ 13,551,000 $ 13,560,000
============ ============
------------------------------
</TABLE>
Cost of sales for the thirteen and thirty-nine week periods ended May 30, 1998
has been reduced by approximately $171,000 as a result of a LIFO inventory
decrement.
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. Remaining availability under the line as of May 30, 1998 approximated
$326,000, based on the borrowing formulas. 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 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.
PAGE 9
<PAGE> 10
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. Additional collateral in the form of a $1,500,000
standby letter of credit has been provided by the Core Sheth Family for the
benefit of the new lender. 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. The Company was in
violation of certain financial covenants as of May 30, 1998 and was granted
waivers to such covenants by the lender and is currently discussing
modifications thereof.
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 was required to make payments totalling $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.
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<PAGE> 11
Other
The Company is subject to ordinary and routine litigation arising out of the
conduct of its business. Management believes that the ultimate disposition of
these proceedings will not have a material adverse effect on the Company's
financial condition.
NOTE 6: RELATED PARTY TRANSACTIONS
Certain suppliers of fragrance product components and the primary suppliers of
cosmetic products are affiliates of the Core Sheth Families who beneficially own
73% of the Company's outstanding common stock. Related party accounts payable
result from the purchase of products from those vendors. Related party accounts
receivable result from the sale of products to those and other affiliates of the
Core Sheth Families. The payables and receivables balances for individual
parties are offset for presentation purposes and the net balance of accounts
receivable or accounts payable is presented on the balance sheet. Related party
payables also include payables due members of the Company's Board of Directors
which result, in the normal course of business, from expenses associated with
Board and related committee meetings. The following summarizes the presentations
at May 30, 1998 and August 30, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
------------------------------
May 30, August 30,
1998 1997
------------------------------
<S> <C> <C>
Accounts Receivable:
Total accounts receivable-related parties $ 3,347,000 $ 2,267,000
Offset amount (499,000) (447,000)
------------ ------------
Net related parties receivables $ 2,848,000 $ 1,820,000
============ ============
Accounts Payable:
Total accounts payable-related parties $ 5,191,000 $ 4,910,000
(499,000) (447,000)
Offset amount
------------ ------------
Net related parties payables $ 4,692,000 $ 4,463,000
============ ============
- --------------------------------------------------------------------------
</TABLE>
The Company purchases finished goods and fragrance product components from Core
Sheth Families affiliates. During the thirty-nine week period ended May 30,
1998, and for the comparable period in fiscal 1997, the Company purchased
approximately $2,407,000 and $4,476,000, respectively.
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<PAGE> 12
During the thirty-nine week period ended May 30, 1998, and for the comparable
period in fiscal 1997, the Company sold products to Core Sheth Families
affiliates in the amounts of approximately $5,418,000 and $2,872,000,
respectively.
In March 1998, the Company negotiated an agreement with Nevell Investments,
S.A.("Nevell") to eliminate any future accrual of interest on the
outstanding debt to Nevell.
NOTE 7: SALE OF WHOLLY-OWNED BRAZILIAN SUBSIDIARY
Effective May 30, 1998, the Company sold all of the capital stock and
distribution rights of its Brazilian Subsidiary to Transvit Distribution Corp.
("TDC"), a wholly owned affiliate of the Core Sheth Family for $2,800,000. The
agreement provides for a non-compete restriction and a supply arrangement
whereby the Company agreed to continue selling product to the Brazilian unit
through May 31, 2001. The Company also received an option to repurchase
the stock and distribution rights from TDC at anytime prior to May 31, 2003.
The Company currently has no plans to repurchase the stock and distribution
rights under this option.
The Company received payment in the form of a reduction of the subordinated
debt to Nevell Investments, S.A., ("Nevell") another affiliated company
within the Core Sheth Family (described more fully in Note 8). The
subordinated debt reduction, net of the related write-down of warrant
valuation costs attributable to such debt,exceeded the carrying value of the
Company's Brazilian investment by $1,506,000,which was recorded as an
increase in additional paid-in-capital.
NOTE 8: 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, 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.
As described more fully in Note 7 above, the Company sold all of the capital
stock of its Brazilian subsidiary to TDC, an affiliate of the Core Sheth
Family for $2,800,000, resulting in $1,506,000 of additional paid-in-capital.
NOTE 9: NON CASH FINANCING AND INVESTING ACTIVITIES
Excluded form the Consolidated Statement of Cash Flows for the thirty-nine weeks
ended May 30, 1998, is a non-cash increase in capital expenditures and capital
leases of approximately $250,000 and a non-cash decrease in subordinated debt to
Nevell of $2,800,000 relating to the sale of the Brazilian Subsidiary.
PAGE 12
<PAGE> 13
ITEM 2.
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
Results Of Operations For The Thirteen And Thirty-nine Week Periods Ended
May 30, 1998 And May 31, 1997.
This document contains certain statements that are "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this document, including without limitation
statements that use terminology such as "anticipate", "believe," "continue,"
"estimate," "expect," "intend," "may,", "plan," "predict," "should," "will," and
similar expressions, are forward-looking statements. These forward-looking
statements include, among other things, the Company's business strategy and
expectations concerning the Company's market position, future operations,
margins, profitability, liquidity and capital resources, expenditures for
capital projects and attempts to reduce costs. Although the Company believes
that the assumptions upon which the forward-looking statements contained in this
document are based are reasonable, any of the assumptions could prove to be
inaccurate and, as a result, the forward-looking statements based on those
assumptions also could be incorrect. All phases of the operations of the Company
involve risks and uncertainties, many of which are outside the control of the
Company and any one of which, or a combination of which, could materially affect
the results of the Company's operations and whether the forward-looking
statements ultimately prove to be correct. Important factors that could cause
actual results to differ materially from the Company's expectations are set
forth under the captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this document. Actual
results and trends in the future may differ materially depending on a variety of
factors including, but not limited to, the timing and extent of changes in
fragrance components, fragrance and cosmetic prices and underlying demand and
availability of fragrance components; changes in the cost or availability of
means of transporting products; execution of planned capital projects; adverse
changes in the credit ratings assigned to the Company's trade credit; the extent
of the Company's success in developing and marketing new product lines; state
and federal environmental, economic, safety and other policies and regulations,
and changes therein, and any legal or regulatory delays or other factors beyond
the Company's control; adverse rulings, judgments, or settlements in litigation
or other legal matters; actions of customers and competitors; economic
conditions affecting the areas in which the Company's products are marketed;
political developments in foreign countries; and the conditions of the capital
markets and equity markets during the periods covered by the forward-looking
statements. Many of the factors are described in greater detail in other of the
Company's filings with the Commission. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the foregoing. The Company
undertakes no obligation to publicly release the results of any revisions to any
such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PAGE 13
<PAGE> 14
For the thirteen week period ended May 30, 1998, the Company recorded a net loss
of $812,000 compared to a net income of $288,000 for the thirteen week period
ended May 31, 1997. The May 30, 1998 results were negatively affected by lower
sales and reduced gross profit margins. After giving effect to preferred stock
dividends, the Company recorded a net loss applicable to common stock of
$925,000 or $.06 per diluted share compared to net income of $174,000 or $.01
per diluted share for the thirteen week periods ended May 30, 1998 and May 31,
1997, respectively.
The Company recorded net income of $506,000 for the thirty-nine week period
ended May 30, 1998, compared with net income of $730,000 for the same period in
1997. Net income applicable to common stock for the thirty-nine week period
ended May 30, 1998 was $167,000 or $.01 per diluted share compared to a net loss
of $694,000 or $.04 per diluted share for the thirty-nine week period ended May
31, 1997, after giving effect to preferred stock dividends, the beneficial
conversion feature of the preferred stock issue and the warrant valuation
adjustment.
Net Sales
Net sales were $17,185,000 for the thirteen week period ended May 30, 1998, a
decrease of 5% versus net sales of $18,117,000 for the same period in 1997. For
the thirty-nine week period ended May 30, 1998, net sales were $52,893,000, an
increase of 3% over the thirty-nine week period ended May 31, 1997 net sales of
$51,183,000. The decrease in the thirteen week period ended May 30, 1998 is
related mainly to volume decreases in both the U.S. wholesale and Latin America
markets, primarily in the Royal Selections fragrance line offset by an increase
in the Apple Cosmetics line. This decline was somewhat offset by a volume
increase in chain accounts, mainly in the Regal Collections fragrance line,
launched in August of 1997.
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 May 30,
1998, the Company experienced a decline in the U.S. wholesale and Latin America
markets while experiencing strong growth in the combined chain, specialty chain
and mass merchandising channels. Royal Selections market expansion slowed
somewhat in the thirteen week period as compared to the comparable period in
fiscal 1997 as the product line achieved full distribution in the U.S. wholesale
and Latin America channel and competition intensified aggressive pricing
initiatives. Apple Cosmetics experienced strong sales growth in the period as
market demand increased significantly in the U.S. wholesale and Latin America
channel. Overall sales volume increased in the chain, specialty chain and mass
merchandise market in the thirteen week period, with sales of the Regal
Collections fragrance line, which was launched in August 1997, fueling the
growth in this channel.
Net sales - related parties
In the thirteen and thirty-nine week periods ended May 30, 1998, sales to
affiliates of the Core Sheth Family, the Company's major stockholder, were
$3,254,000 and $5,418,000 respectively, reflecting increased sales relating to
an inventory reduction program that the Company implemented in the thirteen
week period ended May 30, 1998, compared with $1,030,000 and $2,872,000 for
the same periods of 1997.
Net sales - products purchased from related parties
Of the net sales in the thirty-nine week period of fiscal 1998, approximately 6%
or $2,990,000, resulted from the sale of products purchased from related parties
as finished goods. For the same period in fiscal 1997, comparable numbers were
7%, or $3,428,000. In addition, fragrances and other products manufactured and
sold by the Company included some components that were purchased from related
PAGE 14
<PAGE> 15
parties. The cost of those components approximated 6% and 7% of cost of sales in
the same periods of fiscal 1998 and 1997, respectively.
Gross profit
The Company's gross profit for the thirteen week periods ended May 30,1998 and
May 31, 1997 was $3,935,000 or 23% of sales and $5,328,000 or 29% of sales,
respectively. Gross profit for the thirty-nine week periods ended May 30, 1998
and May 31, 1997 was $14,751,000, or 28% of sales and $14,903,000 or 29% of
sales, respectively. The decline in gross profit in the thirteen week period
related primarily to the overall sales decrease and an inventory reduction
program that the Company implemented which was designed to sell slower rotating
finished goods at reduced margins as well as excess raw materials at prices
slightly above cost. The decline was partially offset by a cost of sales
reduction of approximately $171,000 as a result of a LIFO inventory decrement.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") decreased by 3% to
$4,216,000 in the thirteen week period ended May 30, 1998 from $4,346,000 in the
comparable period of fiscal 1997. For the thirty-nine week periods ended May 30,
1998 and May 31, 1997, SG&A increased by 3% from $12,184,000 to $12,493,000. The
increase in the thirty-nine week period versus the prior fiscal period was
primarily due to compensation expense relating to extending the term of certain
stock options to a former employee.
Non operating income or expense
Interest expense decreased slightly when comparing the thirteen and thirty-nine
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 8 of the Notes to the Consolidated Financial Statements). Other
expense declined in both the thirteen and thirty-nine week periods ended May
30,1998 as compared with the same periods in fiscal 1997 due mainly to a
decrease in foreign exchange losses.
Potential adverse affects on results of operations for future periods
The Company's business, financial condition and results of operations could be
materially adversely affected by each or all of the following factors:
1. Mexican Market. The market for the Company's products continues to be
negatively impacted as a result of the devaluation of the Mexican Nuevo
Peso in December 1994 and the subsequent economic and political
instability. These factors sharply reduced the purchasing power of the
Mexican consumer and therefore the demand for the Company's products was
adversely affected. Any future significant deterioration of the Peso's
value would be expected to further adversely affect the Company's sales in
Mexico and also the collectability of accounts receivable. The Company
believes that some of its customers based in the United States sell the
Company's products (as well as the products of other companies) to
purchasers who, in turn, may attempt to import goods into Mexico without
full payment of applicable Mexican taxes and customs duties. Enhanced
enforcement efforts by Mexican authorities may have an adverse effect on
the Company's sales to such customers.
2. Latin America Economies. Growth in sales, or even the maintenance of
existing sales levels, in certain Latin American countries depends to a
large extent on the economic health and political stability of those
countries. Any deterioration in the economic or political stability in such
countries could adversely affect sales.
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 from operations, and by
delaying payments to vendors (primarily related parties) beyond customary terms.
Operating Activities
Operations in the thirty-nine week period ended May 30, 1998, provided
$1,176,000 in cash primarily due to net income adjusted for non-cash items and
an increase in accounts payable, offset by an increase in accounts receivable.
Accounts receivable grew primarily due to increased related party sales and
varying extended financing terms given to customers. Accounts payable increased
as the Company extended payments to certain vendors.
Investing Activities
Capital expenditures during the thirty-nine week period were $1,068,000,
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 which will enable
the Company to enhance its level of customer service.
PAGE 16
<PAGE> 17
Financing Activities
During the thirty-nine week period ended May 30, 1998, the Company refinanced
its former credit facility. Net cash used in financing activities during this
period was primarily a result of related deferred loan costs. Remaining
availability based on the borrowing formulas as of May 30, 1998 approximated
$326,000.
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. 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.
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. Additional collateral in the form of a $1,500,000
standby letter of credit has been provided by the Core Sheth Family for the
benefit of the new lender. 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. The Company was in
violation of certain financial covenants as of May 30, 1998 and was granted
waivers to such covenants by the lender and is currently discussing
modifications thereof.
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 May 30, 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
PAGE 17
<PAGE> 18
converted to preferred stock. In March 1998, the Company negotiated an agreement
with Nevell Investments, S.A., ("Nevell") to eliminate any future accrual of
interest on the outstanding debt to Nevell.
The Company also purchases certain equipment, primarily office furniture,
computer equipment and software, under long-term purchase agreements. These are
not material to the Company's cash flow. The Company does not have any plans to
pay any cash dividends on the Common or Preferred Stock in the foreseeable
future. Further, payments of such dividends are subject to restrictions imposed
by the Company's commercial lender in connection with the existing Credit
Agreement.
The Company is currently negotiating with a third party to obtain additional
capital and anticipates that the negotiations will conclude successfully,
however, no assurance can be given that the Company will obtain additional
capital or, if such capital is obtained, it will be on terms advantageous to
the Company.
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 requirements of the Company
for fiscal 1998.
Effective May 30, 1998, the Company sold all of the capital stock and
distribution rights of its Brazilian subsidiary to TDC, a wholly owned affiliate
of the Core Sheth Group for $2,800,000. In exchange, the Company received
payment in the form of a reduction of the subordinated debt to Nevell
Investments S.A., another affiliate of the Core Sheth Group. The Subordinated
debt reduction, net of the related write-down of warrant valuation costs
attributable to such debt, exceeded the carrying value of the Company's
Brazilian investment by $1,506,000, which was recorded as an increase in
additional paid-in-capital.
Year 2000 Compliance
The efficient operation of the Company's business is dependent on its computer
software programs and operating systems (collectively, "Programs and Systems").
These Programs and Systems are used in several key areas of the Company's
business, including information management services and financial reporting, as
well as in various administrative functions. The Company has been evaluating its
Programs and Systems to identify potential year 2000 compliance problems, as
well as manual processes, external interfaces with customers, and services
supplied by vendors to coordinate year 2000 compliance and conversion. The year
2000 problem refers to the limitations of the programming code in certain
existing software programs to recognize date sensitive information for the year
2000 and beyond. Unless modified prior to the year 2000, such systems may not
properly recognize such information and could generate erroneous data or cause a
system to fail to operate properly.
Based on current information, the Company expects to attain year 2000 compliance
and is in the process of instituting appropriate testing of its modifications
and replacements in a timely fashion and in advance of the year 2000 date
change. It is anticipated that modification or replacement of the Company's
Programs and Systems will be performed by Company or contract personnel. The
Company believes that, with modifications to existing software and conversions
to new software, the year 2000 problem will not pose a significant operational
problem for the Company. However, because most computer systems are, by their
very nature, interdependent, it is possible that non-compliant third party
computers may not interface properly with the Company's computer systems. The
Company could be adversely affected by the year 2000 problem if it or unrelated
parties fail to successfully address this issue. 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
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
PAGE 19
<PAGE> 20
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: July 20, 1998 /s/ VIREN S. SHETH
------------- ----------------------------------------
Viren S. Sheth
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 20, 1998 /s/ ROBERT M. VIOLA
------------- ----------------------------------------
Robert M. Viola
Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
PAGE 20
<PAGE> 21
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> AUG-29-1998
<PERIOD-END> MAY-30-1998
<CASH> 311,000
<SECURITIES> 0
<RECEIVABLES> 18,295,000
<ALLOWANCES> 1,315,000
<INVENTORY> 13,551,000
<CURRENT-ASSETS> 32,804,000
<PP&E> 8,006,000
<DEPRECIATION> 8,429,000
<TOTAL-ASSETS> 41,803,000
<CURRENT-LIABILITIES> 27,632,000
<BONDS> 0
0
9,177,000
<COMMON> 168,000
<OTHER-SE> 221,000
<TOTAL-LIABILITY-AND-EQUITY> 41,803,000
<SALES> 17,185,000
<TOTAL-REVENUES> 17,185,000
<CGS> 13,250,000
<TOTAL-COSTS> 17,466,000
<OTHER-EXPENSES> 531,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 426,000
<INCOME-PRETAX> (812,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (812,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812,000)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> MAR-02-1997
<PERIOD-END> MAY-31-1997
<CASH> 102,000
<SECURITIES> 0
<RECEIVABLES> 15,894,000
<ALLOWANCES> 1,084,000
<INVENTORY> 12,443,000
<CURRENT-ASSETS> 29,132,000
<PP&E> 8,229,000
<DEPRECIATION> 6,749,000
<TOTAL-ASSETS> 38,048,000
<CURRENT-LIABILITIES> 26,754,000
<BONDS> 0
0
9,177,000
<COMMON> 167,000
<OTHER-SE> (2,592,000)
<TOTAL-LIABILITY-AND-EQUITY> 38,048,000
<SALES> 18,117,000
<TOTAL-REVENUES> 18,117,000
<CGS> 12,789,000
<TOTAL-COSTS> 17,135,000
<OTHER-EXPENSES> 674,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 479,000
<INCOME-PRETAX> 308,000
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 288,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 288,000
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
