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 27, 1999
-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 APRIL 1, 1999, THERE WERE OUTSTANDING 16,765,256 SHARES
OF COMMON STOCK, $.01 PAR VALUE, OF THE REGISTRANT.
1
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TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--February 27, 1999 and August 29, 1998 ..... 3
Consolidated statements of operations--thirteen and twenty-six week
periods ended February 27, 1999 and February 28, 1998,
respectively ................................................... 5
Consolidated statement of shareholders' equity -- twenty-six week period 6
ended February 27, 1999
Consolidated statements of cash flows--twenty-six week periods ended
February 27, 1999 and February 28, 1998, respectively .......... 7
Notes to consolidated financial statements--February 27, 1999 .......... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 13
Item 3. Qualitative and Quantitative Disclosure About Market risk .............. 19
PART II.OTHER INFORMATION
Item 1. Legal Proceedings ...................................................... 20
Item 2. Changes in Securities .................................................. 20
Item 3. Defaults Upon Senior Securities ........................................ 20
Item 4. Submission of Matters to a Vote of Security Holders .................... 20
Item 5. Other Information ...................................................... 20
Item 6. Exhibits and Reports on Form 8-K ....................................... 21
SIGNATURES ..................................................................... 22
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 27,
1999 August 29,
ASSETS (UNAUDITED) 1998*
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<S> <C> <C>
Current assets:
Cash ..................................................... $ 48,000 $ 66,000
Accounts receivable, less allowance for doubtful accounts
of $697,000 and $895,000, respectively ................. 11,927,000 14,206,000
Accounts receivable - related parties - net .............. 3,315,000 3,607,000
Inventories .............................................. 10,510,000 11,375,000
Prepaid expenses ......................................... 248,000 186,000
Other current assets ..................................... 200,000 141,000
----------- -----------
Total current assets ................................... 26,248,000 29,581,000
----------- -----------
Property, plant and equipment, less accumulated depreciation
of $9,575,000 and $8,805,000 ............................ 7,840,000 8,199,000
----------- -----------
Other assets:
Warrant valuation, less accumulated amortization
of $1,805,000 .......................................... -- 103,000
Other assets ............................................. 569,000 825,000
----------- -----------
Total other assets ..................................... 569,000 928,000
----------- -----------
Total assets ............................................... $34,657,000 38,708,000
=========== ===========
</TABLE>
* Prepared from audited financial statements for the year ended August 29, 1998.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
FEBRUARY 27,
1999 August 29,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1998 *
------------ ------------
<S> <C> <C>
Current liabilities:
Book overdraft .............................................. $ -- $ 334,000
Revolving credit agreement borrowings, current .............. 4,992,000 7,612,000
Accounts payable--trade ..................................... 7,350,000 9,289,000
Accounts payable--related parties - net ..................... 4,525,000 5,185,000
Accrued bonuses ............................................ 164,000 164,000
Accrued interest expense-subordinated debt .................. 1,731,000 1,731,000
Other accrued expenses ...................................... 1,477,000 1,467,000
Current portion of capital lease obligations ................ 136,000 144,000
Current portion of long-term obligations .................... 900,000 822,000
------------ ------------
Total current liabilities ................................. 21,275,000 26,748,000
Long-term debt, less current portion .......................... 2,641,000 2,781,000
Obligations under capital leases, less current portion ........ 74,000 130,000
Subordinated long term debt - related parties ................. -- 1,700,000
------------ ------------
Total liabilities .......................................... 23,990,000 31,359,000
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.05 par value; authorized 1,000,000 shares;
Series A, 537,142 shares and 666,529 shares, respectively, 3,760,000 4,666,000
issued and outstanding
Series B, 120,690 shares issued and outstanding ........... 4,511,000 4,511,000
Series C, 78,333 shares issued and outstanding ............ 4,699,000 --
Common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 16,765,256 shares and
16,761,493 shares, respectively .......................... 168,000 168,000
Additional paid-in-capital .................................. 12,867,000 12,483,000
Foreign currency translation ................................ -- (376,000)
Accumulated deficit ......................................... (15,338,000) (14,103,000)
------------ ------------
Total shareholders' equity ................................ 10,667,000 7,349,000
------------ ------------
Total liabilities and shareholders' equity .................... $ 34,657,000 $ 38,708,000
============ ============
</TABLE>
* Prepared from audited financial statements for the year ended August 29, 1998.
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 27, FEBRUARY 28, FEBRUARY 27, FEBRUARY 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 13,440,000 $ 14,843,000 $ 28,515,000 $ 35,708,000
Cost of sales ................................. 9,620,000 9,965,000 20,052,000 24,892,000
------------ ------------ ------------ ------------
Gross profit .................................. 3,820,000 4,878,000 8,463,000 10,816,000
Selling, general and administrative expenses .. 3,967,000 4,310,000 8,032,000 8,274,000
------------ ------------ ------------ ------------
Income (loss) from operations ................. (147,000) 568,000 431,000 2,542,000
Other income (expense):
Interest expense .......................... (307,000) (496,000) (638,000) (970,000)
Amortization of warrants .................. (24,000) (11,000) (52,000) (21,000)
Other expense ............................. (8,000) (93,000) (3,000) (178,000)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (486,000) (32,000) (262,000) 1,373,000
Provision for income taxes .................... 24,000 5,000 24,000 55,000
------------ ------------ ------------ ------------
Net income (loss) ............................. $ (510,000) $ (37,000) $ (286,000) $ 1,318,000
------------ ------------ ------------ ------------
Less:
Preferred stock dividends ................. (197,000) (113,000) (404,000) (226,000)
Effect of beneficial conversion feature ... (40,000) -- (681,000) --
============ ============ ============ ============
Net income (loss) applicable to common stock .. $ (747,000) $ (150,000) $ (1,371,000) $ 1,092,000
============ ============ ============ ============
Earnings per common share:
Basic ..................................... $ (0.04) $ (.01) $ (.08) $ .07
============ ============ ============ ============
Diluted ................................... $ (0.04) $ (.01) $ (.08) $ .06
============ ============ ============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------------------------------------------
COMMON STOCK SERIES A SERIES B SERIES C
---------------------- --------------------- ------------------- --------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
---------- --------- ------- ----------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 28, 1998 16,761,493 $ 168,000 666,529 $ 4,666,000 120,690 $4,511,000 -- $ --
========== ========= ======= =========== ======= ========== ====== ==========
Net loss
Preferred Stock Dividends
Contribution to 401(k) Plan 3,763
Issuance of Series C
Preferred Stock and
related warrants 78,333 4,699,000
Sale of Mexican Subsidiary (129,387) (906,000)
---------- --------- ------- ----------- ------- ---------- ------ ----------
Balance, February 27, 1999 16,765,256 $ 168,000 537,142 $ 3,760,000 120,690 $4,511,000 78,333 $4,699,000
========== ========= ======= =========== ======= ========== ====== ==========
FOREIGN
ADDITIONAL CURRENCY ACCUMULATED
PAID-IN-CAPITAL TRANSLATION DEFICIT
------------ ----------- ------------
Balance, August 28, 1998 $ 12,483,000 $ (376,000) $(14,103,000)
============ ========= ============
Net loss (286,000)
Preferred Stock Dividends (188,000)
Contribution to 401(k) Plan 13,000
Issuance of Series C
Preferred Stock and
related warrants 307,000 (681,000)
Sale of Mexican Subsidiary 64,000 376,000 (80,000)
------------ --------- ------------
Balance, February 27, 1999 $ 12,867,000 $ -- $(15,338,000)
============ ========= ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
FEBRUARY 27, February 28,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................... $ (286,000) $ 1,318,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ........................ 868,000 904,000
Provision for losses on accounts receivable .......... 325,000 301,000
Provision for inventory allowances ................... 11,000 322,000
Issuance of stock in connection with 401K plan ....... 13,000 25,000
Amortization of warrant valuations ................... 52,000 21,000
Amortization of deferred loan costs .................. 127,000 42,000
Compensation expense for extension of stock options .. -- 217,000
Change in operating assets and liabilities:
Accounts receivable ............................... 167,000 (1,349,000)
Inventories ....................................... 717,000 (2,930,000)
Prepaid expenses .................................. (94,000) (63,000)
Other current assets .............................. 14,000 --
Income taxes payable .............................. -- (11,000)
Accounts payable .................................. (2,497,000) 2,708,000
Accrued expenses .................................. 17,000 (50,000)
----------- ------------
Net cash provided by (used in) operating activities .. (566,000) 1,455,000
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures .................................... (509,000) (899,000)
Increase in other assets ................................ -- (13,000)
----------- ------------
Net cash used in investing activities ................ (509,000) (912,000)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdraft .......................................... (334,000) 876,000
Net repayment of old revolving credit facility .......... -- (10,205,000)
Repayments under new revolving credit facility .......... (4,746,000) 9,682,000
Borrowings under new revolving credit facility .......... 2,126,000 --
Proceeds from long-term debt ............................ 380,000 2,385,000
Principal payments under new debt ....................... (442,000) (121,000)
Principal payments on capital leases .................... (64,000) (60,000)
Principle payments under old long-term debt ............. -- (2,502,000)
Issuance of Series C Preferred Stock and related warrants 4,699,000 --
Payment of issuance costs on Series C Preferred Stock ... (374,000) --
Payment of dividends on Series C Preferred Stock ........ (188,000) --
Deferred Loan Costs ..................................... -- (732,000)
----------- ------------
Net cash provided by (used in) financing activities .. 1,057,000 (677,000)
----------- ------------
NET DECREASE IN CASH ........................................ (18,000) (134,000)
CASH AT BEGINNING OF PERIOD ................................. 66,000 492,000
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CASH AT END OF PERIOD ....................................... $ 48,000 $ 358,000
=========== ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
7
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TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 27, 1999
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Tristar
Corporation ("the Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statement presentation.
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
27, 1999, are not necessarily indicative of the results that may be expected for
the year ending August 28, 1999.
NOTE 2: EARNINGS (LOSS) PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share computations, as required by SFAS No. 128, is
presented below:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
FEBRUARY 27, FEBRUARY 28, FEBRUARY 27, FEBRUARY 28,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Basic EPS:
Net earnings (loss) applicable to common stock ..... $ (747,000) $ (150,000) $(1,371,000) $ 1,092,000
Weighted-average number of common shares outstanding 16,763,845 16,730,197 16,762,669 16,774,829
-----------------------------------------------------------
Basic EPS .................................................. $ (.04) $ (.01) $ (.08) $ .07
===========================================================
Diluted EPS (1):
Net income (loss) applicable to common stock ....... $ (747,000) $ (150,000) $(1,371,000) $ 1,092,000
Weighted-average number of common shares outstanding 16,763,845 16,730,197 16,762,669 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 ............. 16,763,845 16,730,197 16,762,669 18,287,366
-----------------------------------------------------------
Diluted EPS ................................................ $ (.04) $ (.01) $ (.08) $ .06
===========================================================
</TABLE>
1. Dilutive EPS equals basic EPS for the thirteen week periods ended February
27, 1999, and February 28, 1998 and the twenty-six week period ended
February 27, 1999, as the assumed conversion of convertible preferred
stock and the assumed exercise of outstanding options and warrants would
have an anti-dilutive effect.
8
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NOTE 3: INVENTORIES
Inventory is stated at the lower of cost or market. The components of inventory
are as follows:
-----------------------------------
February 27, August 29,
1999 1998
-----------------------------------
Raw materials .................... $ 4,026,000 $ 4,728,000
Work-in-process .................. 693,000 1,209,000
Finished goods ................... 6,598,000 6,342,000
------------ ------------
11,317,000 12,279,000
Inventory reserves ............... (807,000) (904,000)
------------ ------------
$ 10,510,000 $ 11,375,000
============ ============
NOTE 4: CREDIT AGREEMENT BORROWINGS
The Company maintains a $22,000,000 Credit Agreement (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 cannot
exceed 60% of the total outstanding borrowings under the Revolving Credit). At
February 27, 1999, the Revolving Credit bore interest at a rate of 9.25%.
Borrowings under the Revolving Credit are limited by a formula based on Eligible
Accounts Receivable and Inventory. Remaining availability under the line as of
February 27, 1999 approximated $2,902,000 based on the borrowing formula.
Commitment fees equal to .50% per annum on the unused portion of the Revolving
Credit are payable monthly. The Credit Agreement contains certain provisions
giving the lender the right to accelerate payment of all outstanding amounts
upon the occurrence of certain events. Accordingly, all Revolving Credit amounts
are classified as current in the accompanying consolidated balance sheets. All
outstanding amounts under the Revolving Credit Agreement are due in December
2001.
The Credit Agreement also provides for a $3,400,000 term loan (the "Term Loan")
and a $3,500,000 capital expenditure facility (the "Cap Ex Facility"). The Term
Loan bears interest, payable monthly, at the Alternate Base Rate (8.5% at
February 27, 1999) plus 2.00%. Principal repayments of the Term Loan are $56,667
per month for 35 months beginning in January 1998 with a $1,416,655 balloon
payment due in December 2001. Additionally, 50% of annual excess cash flow, as
defined in the Cap Ex Facility 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
related borrowing at an amount based on a three year amortization. However, a
balloon payment in an amount equal to all outstanding borrowings under the Cap
Ex Facility is also due in December 2001. As of February 27, 1999, the Company
had outstanding borrowings under the Cap Ex Facility totaling $916,000;
principal repayments are currently set at the rate of $18,300 per month.
9
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Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. The Credit Agreement contains restrictive financial
covenants including Minimum Tangible Net Worth ("MTNW"), Minimum EBITDA, Maximum
Loss, Minimum Fixed Charge Coverage, Maximum Leverage and Maximum Capital
Expenditures. Additional covenants limit borrowings, asset sales and dividends.
The Company was in violation of the MTNW financial covenant as of February 27,
1999 primarily as a result of the disposal of it's wholly-owned Mexican
subsidiary and the reduction of subordinated debt due to a related party. The
Company was granted waivers by the lender and is currently discussing a
modification to such covenant.
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
seeks indemnification of legal costs allegedly incurred by those plaintiffs in
suits and proceedings arising from the facts which were the subject of the
investigation conducted by the Special Committee of the Board of Directors in
1992. The complaint also alleged, on behalf of all four plaintiffs, that the
Company's disclosures relating to the Sheth Group's 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. In October 1998, the Court dismissed the claim against the one
director. 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.
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. In April 1998, the Company filed a protest letter with
the IRS. In a letter dated August 17, 1998, the IRS rejected the Company's
response. The Company has raised this issue with the Dallas Appeals office and
has scheduled a hearing for later this year. If the Company is unsuccessful in
its discussions or ultimately in an appeal, it could be required to pay taxes
from prior years and related interest thereon exceeding $1,800,000, and it could
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.
NOTE 6: RELATED PARTY TRANSACTIONS
Certain suppliers of fragrance product components and the primary suppliers of
cosmetic products are affiliates of the Sheth Group who beneficially own 73% of
the Company's outstanding common stock. Related party accounts payable result
from the purchase of products from those vendors. Related party
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accounts receivable result from the sale of products to those and other
affiliates of the Sheth Group. 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 February 27, 1999 and August 29, 1998.
- --------------------------------------------------------------------------------
FEBRUARY 27, August 29,
1999 1998
----------- -----------
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties .... $ 3,721,000 $ 4,153,000
Offset amount ................................ (406,000) (546,000)
----------- -----------
Net related parties receivables .............. $ 3,315,000 $ 3,607,000
=========== ===========
ACCOUNTS PAYABLE:
Total accounts payable-related parties ....... $ 4,931,000 $ 5,731,000
Offset amount ................................ (406,000) (546,000)
----------- -----------
Net related parties payables ................. $ 4,525,000 $ 5,185,000
=========== ===========
- --------------------------------------------------------------------------------
The Company purchases finished goods and fragrance product components from Sheth
Group affiliates. During the twenty-six week period ended February 27, 1999, and
for the comparable period in fiscal 1998, the Company purchased approximately
$2,266,000 and $2,148,000, respectively.
During the twenty-six week period ended February 27, 1999, and for the
comparable period in fiscal 1998, the Company sold products to Sheth Group
affiliates in the amounts of approximately $1,881,000 and $2,131,000,
respectively.
NOTE 7: SALE OF WHOLLY-OWNED MEXICAN SUBSIDIARY
On March 15, 1999, pursuant to a stock purchase agreement entered into by and
among Tristar Corporation ("Registrant"), Transvit Holding Corporation ("THC"),
a wholly-owned affiliate of the Core Sheth Family ("Sheth Group"), the majority
stockholder of the Registrant, and Nevell Investments, S.A. ("Nevell"), another
affiliate of the Sheth Group, the Registrant sold to THC for $2,686,000 all of
the issued and outstanding capital stock ("Trimex Stock") and certain
distribution rights of its wholly-owned subsidiary, Tristar de Mexico, S.A. de
C.V. ("Trimex"), a distributor of fragrance and cosmetic products into the
formal retail market in the United Mexican States. The transaction was effective
as of November 29, 1998.
11
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The transaction provides for a non-compete restriction and a supply agreement
whereby the Registrant agreed to continue selling certain products to Trimex.
The Registrant also received an option to repurchase the Trimex Stock and
distribution rights from THC at a fair value at anytime prior to March 15, 2004.
The Registrant currently has no plans to exercise such option but may do so in
the future.
The Registrant received payment in the form of a reduction of debt due Nevell,
and redemption of shares of the Registrant's Series A Convertible Preferred
Stock, $.05 par value ("Series A Preferred"), issued to Nevell, at a redemption
price of $7.62 per share. Of the total purchase price of $2,686,000, an amount
equal to $1,700,000 was applied to a reduction of debt due Nevell with the
remaining $986,000 attributed to redeemed shares of the Series A Preferred at a
total redemption of approximately $906,000 plus $80,000 of dividends in arrears.
Warrant valuation costs of $99,000 associated with the subordinated debt
reduction were written-off in connection with the sale. The excess proceeds over
the carrying value of the Registrant's investment in Trimex was recorded as an
increase in additional paid-in-capital.
NOTE 8: ISSUANCE OF SERIES C PREFERRED STOCK
Effective September 3, 1998 (pursuant to a private placement), the Company sold
78,333 shares of Series C Senior Convertible Preferred Stock ("Series C
Preferred Stock") to a private investor for $60 per share. Each share of Series
C Preferred Stock is convertible into 11.0345 shares of the Company's common
stock. In connection with the Series C Preferred Stock issuance, the Company
issued 125,000 common stock warrants which are exercisable at a price of between
$4.00 and $6.28 per share. The Company received proceeds from issuance of the
Series C Preferred Stock of approximately $4,699,000 and expects to receive an
additional $1,300,000 in fiscal 1999 upon issuance of an additional 21,667
shares of Series C Preferred Stock to the same investor, in accordance with the
stated closing schedule.
The Series C Preferred Stockholders are entitled to receive a cumulative cash
dividend of $4.80 per share annually. The dividend is payable quarterly ($1.20
per share). The dividends may be paid by issuance of additional shares of Series
C Preferred Stock except such shares bear a cumulative cash dividend of $7.80
per share annually. Dividends of approximately $188,000 were paid in cash on the
Series C Preferred Stock during the twenty-six week period ended February 27,
1999. The Series C Preferred Stockholders are entitled to receive a liquidation
preference equal to $60.00 per share plus interest thereon from the date of
issue until redemption or conversion at a compound rate of 20% per year. The
Series C Preferred Stock has full voting rights based on the number of common
shares into which it is convertible and is voted together with the Common Stock
as one class.
On September 3, 1998, the closing bid price of the Company's common stock as
reported by the NASDAQ was $5.44. The Series C Preferred Stock conversion ratio
was based on this closing bid price at date of issuance. The common stock
warrants issued to the Series C Preferred Stockholders were valued at
approximately $307,000 utilizing the Black Scholes Method. Additionally, the
Company incurred costs totaling $374,000 in connection with the Series C
Preferred Stock sale. The value of the common stock warrants and the issuance
costs have been accounted for as a beneficial conversion feature to the
preferred shareholders and thus have been charged directly to Accumulated
Deficit and have been reflected as a reduction in net income applicable to
common stock.
NOTE 9: SERIES A AND B PREFERRED STOCK
The Company's Series A and B Preferred Stockholders are entitled to receive
cumulative dividends of $.315 per share and $2.03 per share, respectively. To
date, no dividends have been paid on the Series A and B Preferred Stock except
those paid in connection with the sale of Trimex Stock (see Note 7). Dividends
accumulated on the Series A and B Preferred Stock for the thirteen week periods
ended February 27, 1999 and February 28, 1998 of approximately $103,000 and
$113,000, respectively and for the twenty-six week period then ended of
approximately $216,000 and $226,000, respectively have been reflected as a
reduction in net income applicable to common stock. Cumulative dividends in
arrears on the Series A and B Preferred Stock totaled approximately $845,000 at
February 27, 1999.
12
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This document contains certain statements that are "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this document, including without limitation
statements that use terminology such as "anticipate", "believe," "continue,"
"estimate," "expect," "intend," "may,", "plan," "predict," "should," "will," and
similar expressions, are forward-looking statements. These forward-looking
statements include, among other things, the Company's business strategy and
expectations concerning the Company's market position, future operations,
margins, profitability, liquidity and capital resources, expenditures for
capital projects and attempts to reduce costs. Although the Company believes
that the assumptions upon which the forward-looking statements contained in this
document are based are reasonable, any of the assumptions could prove to be
inaccurate and, as a result, the forward-looking statements based on those
assumptions also could be incorrect. All phases of the operations of the Company
involve risks and uncertainties, many of which are outside the control of the
Company and any one of which, or a combination of which, could materially affect
the results of the Company's operations 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.
RESULTS OF OPERATIONS FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED
FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
For the thirteen week period ended February 27, 1999, the Company recorded a net
loss of $510,000 compared to a net loss of $37,000 for the thirteen week period
ended February 28, 1998. The February 27, 1999 results were negatively affected
primarily by lower sales and reduced profit margins relating to the final phase
of an inventory reduction plan, partially offset by lower selling, general and
administrative expenses ("SG&A") and interest expense. After giving effect to
preferred stock dividends and the beneficial conversion feature associated with
the issuance of Series C Preferred Stock, the Company recorded a net loss
applicable to common stock of $747,000 or $.04 per diluted share for the
thirteen week period ended February 27, 1999 compared to net loss applicable to
common stock of $150,000 or $.01 per diluted share for the related fiscal 1998
period.
13
<PAGE>
For the twenty-six week period ended February 27, 1999, the Company recorded a
net loss of $286,000 compared to net income of $1,318,000 for the comparable
period in 1998. The February 27, 1999 year-to-date results were negatively
impacted by lower sales and reduced profit margins relating to the final phase
of an inventory reduction plan, partially offset by lower SG&A and interest
expense. Net loss applicable to common stock after giving effect to preferred
stock dividends and the beneficial conversion feature associated with the
issuance of Series C Preferred Stock was $1,371,000 or $.08 per diluted share
for the twenty-six week period ended February 27, 1999. This compares to a net
income applicable to common stock of $1,092,000 or $.07 per basic share and $.06
per diluted share for the same period in 1998.
NET SALES
Net sales were $13,440,000 for the thirteen week period ended February 27, 1999,
a decrease of 9.5% versus net sales of $14,843,000 for the same period in fiscal
1998. For the twenty-six week period ended February 27, 1999, net sales were
$28,515,000, a decrease of 20.1% versus net sales of $35,708,000 for the
twenty-six week period ended February 28, 1998. The decline in the thirteen week
period ended February 27, 1999 is related mainly to volume decreases in Latin
America, primarily in the Royal Selections fragrance line. This decline was
somewhat offset by a volume increase in combined U.S. chain, specialty chain,
and mass merchandise channels, primarily in the Euro Collections line. The
decrease in the twenty-six week period ended February 27, 1999, is related
mainly to volume decreases in both the U.S. wholesale and Latin America markets,
primarily in the Royal Selections fragrance lines. Additionally, for both the
thirteen and twenty-six week periods ended February 27, 1999, sales were lower
over the previous year as a result of the Company's sale of its wholly-owned
Mexican subsidiary ("Tristar de Mexico").
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
27, 1999, the Company experienced a decline mainly in the Latin America market
somewhat offset by increases in combined U.S. chain, specialty chain, and mass
merchandise channels. U.S. wholesale and Latin America channels experienced
significant turmoil relating to instability in the global financial markets.
Sales of the Euro Collections fragrance line grew significantly in the chain,
specialty chain, and mass merchandise channels and Latin America. For the
twenty-six week period ended February 27, 1999, the Company experienced a
decline in the U.S. wholesale and Latin America markets while combined chain,
specialty chain, and mass merchandise channels remain somewhat flat when
compared to the comparable period in 1998.
NET SALES - RELATED PARTIES
In the thirteen and twenty-six week periods ended February 27, 1999, sales to
affiliates of the Sheth Group were $1,274,000 and $1,881,000, respectively,
compared with $1,089,000 and $2,131,000 for the same period in fiscal 1998.
PRODUCTS PURCHASED FROM RELATED PARTIES
The Company purchases finished goods and fragrance product components from Sheth
Group affiliates. During the twenty-six week period ended February 27, 1999, and
for the comparable period in fiscal 1998, the Company purchased approximately
$2,266,000 and $2,148,000, respectively.
14
<PAGE>
GROSS PROFIT
The Company's gross profit for the thirteen week periods ended February 27, 1999
and February 28, 1998 was $3,820,000 or 28.4% of sales and $4,878,000 or 32.9%
of sales, respectively. Gross profit for the twenty-six week periods ended
February 27, 1999 and February 28, 1998 was $8,463,000, or 29.7% of sales and
$10,816,000 or 30.3% of sales, respectively. The decline in gross profit in the
thirteen and twenty-six week periods related primarily to the overall sales
decrease and reduced profit margins relating to the final phase of an inventory
reduction plan.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the thirteen week
period ended February 27, 1999 was $3,967,000, a decrease of 8.0% versus the
$4,310,000 for the February 28, 1998 period. SG&A for the twenty-six week period
was $8,032,000, a decrease of 2.9% versus the $8,274,000 for the February 28,
1998 period. For both the thirteen and twenty-six week periods ended February
27, 1999, a portion of the SG&A decrease resulted from the sale of the Company's
wholly-owned Mexican subsidiary ("Tristar de Mexico"). As a percentage of sales
SG&A was 29.5% and 29.0% for the thirteen week periods ended February 27, 1999
and February 28, 1998, respectively, or relatively flat. SG&A as a percentage of
sales for the twenty-six week periods ended February 27, 1999 and February 28,
1998 were 28.2% and 23.2% respectively. The increase in SG&A as a percentage of
sales in fiscal 1999 is primarily due to lower sales in that period.
NON OPERATING INCOME OR EXPENSE
Interest expense decreased when comparing the thirteen and twenty-six week
periods of fiscal 1999 to the same period of fiscal 1998 as a result of lower
revolving credit borrowings in the current fiscal year. Other expense declined
in the thirteen and twenty-six week periods ended February 27,1999 as compared
with the same period in fiscal 1998 due mainly to a decrease in foreign exchange
losses and disposal of the Company's wholly-owned Mexican subsidiary.
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. Although the
Company has no such knowledge, some of its customers based in the United
States may 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, should they
arise, 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.
15
<PAGE>
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 Sheth Group.
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 Sheth Group 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 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 has raised this issue with the Dallas Appeals office and
has scheduled a hearing for later this year. If the Company is
unsuccessful in its discussions or ultimately in an appeal, it may be
required to pay taxes from prior years and related interest thereon
exceeding $1,800,000, and it may 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 a revolving line of
credit and cash generated from operations.
OPERATING ACTIVITIES
Operations in the twenty-six week period ended February 27, 1999, used $566,000
in cash primarily due to net loss adjusted for non-cash items and decreases in
accounts receivable and inventory, offset by a decrease in accounts payable.
Accounts receivable decreased due to lower sales and more aggressive collection
efforts. Inventory decreased as a result of an inventory reduction plan that the
Company implemented in fiscal 1998 which was designed to sell slower rotating
finished goods at reduced margins. Accounts payable decreased as the Company
made payments to certain vendors in accordance with their terms.
INVESTING ACTIVITIES
Capital expenditures during the twenty-six week period were $509,000, consisting
primarily of investments in production related machinery and equipment,
facilities related items, and computer equipment. Capital expenditures in fiscal
1999 are expected to exceed the fiscal 1998 level with the major portion being
devoted to manufacturing equipment which will enable the Company to enhance its
capacity, efficiency and level of customer service.
16
<PAGE>
FINANCING ACTIVITIES
During the twenty-six week period ended February 27, 1999, revolving credit
decreased by $2,620,000. This was offset primarily by proceeds from the sale of
Series C Preferred Stock and related warrants, resulting in net cash provided by
financing activities of $1,057,000 for the period.
The Company maintains a $22,000,000 credit agreement (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 cannot
exceed 60% of the total outstanding borrowings under the Revolving Credit). At
February 27, 1999, the Revolving Credit bore interest at a rate of 9.25%.
Borrowings under the Revolving Credit are limited by a formula based on Eligible
Accounts Receivable and Inventory. Remaining availability under the line as of
February 27, 1999 approximated $2,902,000 based on the borrowing formula.
Commitment fees equal to .50% per annum on the unused portion of the Revolving
Credit are payable monthly. The Credit Agreement contains certain provisions
giving the lender the right to accelerate payment of all outstanding amounts
upon the occurrence of certain events. Accordingly, all revolving Credit amounts
are classified as current in the accompanying consolidated balance sheets. All
outstanding amounts under the Revolving Credit Agreement are due in December
2001.
The Credit Agreement also provides for a $3,400,000 term loan (the "Term Loan")
and a $3,500,000 capital expenditure facility (the "Cap Ex Facility"). The Term
Loan bears interest, payable monthly, at the Alternate Base Rate (8.5% at
February 27, 1999) 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 2001.
Additionally, 50% of annual excess cash flow, as defined in the Cap Ex Facility,
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
related borrowing at an amount based on a three year amortization. However, a
balloon payment in an amount equal to all outstanding borrowings under the Cap
Ex Facility is also due in December 2001. As of February 27, 1999, the Company
had outstanding borrowings under the Cap Ex Facility totaling $916,000;
principal payments are currently set at the rate of $18,300 per month.
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. The Credit Agreement contains restrictive financial
covenants including Minimum Tangible Net Worth ("MTNW"), Minimum EBITDA, Maximum
Loss, Minimum Fixed Charge Coverage, Maximum Leverage and Maximum Capital
Expenditures. Additional covenants limit borrowings, asset sales and dividends.
The Company was in violation of the MTNW financial covenant as of February 27,
1999 primarily as a result of the disposal of it's wholly-owned Mexican
subsidiary and the reduction of subordinated debt due to a related party. The
Company was granted waivers by the lender and is currently discussing a
modification to such covenant.
The Company also purchases certain equipment, primarily office furniture,
computer equipment and software, under long-term purchase agreements. These
amounts 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 the Series A and B
Preferred Stock in the foreseeable future. Further, payments of such dividends
are subject to restrictions imposed by the Company's commercial lender in
connection with the existing Credit Agreement. During the twenty-six week period
ended February 27, 1999, the Company paid $188,000 in dividends to the Series C
Preferred Stockholders.
17
<PAGE>
The Company believes the lines of credit, together with cash generated by
operations will provide sufficient cash to meet the requirements of the Company
for fiscal 1999.
Effective September 3, 1998 (pursuant to a private placement), the Company sold
78,333 shares of Series C Senior Convertible Preferred Stock ("Series C
Preferred Stock") to a private investor for $60 per share. Each share of Series
C Preferred Stock is convertible into 11.0345 shares of the Company's common
stock. In connection with the Series C Preferred Stock issuance, the Company
issued a warrant to purchase 125,000 shares of common stock ("The Series C
Warrant") which is exercisable at a price of between $4.00 and $6.28 per share.
The Company received proceeds from issuance of the Series C Preferred Stock of
approximately $4,699,000 and expects to receive an additional $1,300,000 in
fiscal 1999 upon issuance of an additional 21,667 shares of Series C Preferred
Stock to the same investor, in accordance with the stated closing schedule.
The Series C Preferred Stockholders are entitled to receive a cumulative cash
dividend of $4.80 per share annually. The dividend is payable quarterly ($1.20
per share). The dividends may be paid by issuance of additional shares of Series
C Preferred Stock except such shares bear a cumulative cash dividend of $7.80
per share annually. Dividends of approximately $188,000 were paid in cash on the
Series C Preferred Stock during the twenty-six week period ended February 27,
1999. The Series C Preferred Stockholders are entitled to receive a liquidation
preference equal to $60.00 per share plus interest thereon from the date of
issue until redemption or conversion at a compound rate of 20% per year. The
Series C Preferred Stock has full voting rights based on the number of common
shares into which it is convertible and is voted together with the Common Stock
as one class.
On September 3, 1998, the closing bid price of the Company's common stock as
reported by the NASDAQ was $5.44. The Series C Preferred Stock conversion ratio
was based on this closing bid price at date of issuance. The common stock
warrants issued to the Series C Preferred Stockholders were valued at
approximately $307,000 utilizing the Black Scholes Method. Additionally, the
Company incurred costs totaling $374,000 in connection with the Series C
Preferred Stock sale. The value of the common stock warrants and issuance costs
have been accounted for as a beneficial conversion feature to the preferred
shareholders and thus have been charged directly to Accumulated Deficit and have
been reflected as a reduction in net income applicable to common stock.
The Company's Series A and B Preferred Stockholders are entitled to receive
cumulative dividends of $.315 per share and $2.03 per share, respectively. To
date, no dividends have been paid on the Series A and B Preferred Stock except
those paid in connection with the sale of Trimex Stock (see Note 7). Dividends
accumulated on the Series A and B Preferred Stock for the thirteen week periods
ended February 27, 1999 and February 28, 1998 of approximately $103,000 and
$113,000, respectively and for the twenty-six week periods then ended of
approximately $216,000 and $226,000, respectively have been reflected as a
reduction in net income applicable to common stock. Cumulative dividends in
arrears on the Series A and B Preferred Stock totaled approximately $845,000 at
February 27, 1999.
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 all 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.
18
<PAGE>
The Company believes that it will be year 2000 compliant and plans to test its
modificaations and replacements in September 1999. Modification and replacement
of the Company's Programs and Systems are being made 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.
Although the ultimate costs of attaining Year 2000 compliance is not fully known
at this time, management anticipates that its external costs will not exceed
$200,000.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness Disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act (the "Act"),
which was signed into law on October 19, 1998. The Act provides added protection
from liability for certain public and private statements concerning a Company's
Year 2000 readiness. The Act also potentially provides added protection from
liability for certain types of Year 2000 disclosures made after January 1, 1996
and before October 19, 1998. As such, to the extent permitted by applicable law,
previously disclosed statements of or by the Company and its management
concerning the Company's Year 2000 readiness are intended to constitute "Year
2000 Readiness Disclosures" as defined by the Act.
ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the risk of loss that may occur due to adverse changes in
financial market prices, including interest rate risk and foreign currency
exchange risk, and the effect they may have on the financial position, results
of operation or cashflow of the Company.
The Company's short term and long term debt at February 27, 1999 bears interest
at variable rates (See Note 4 of the Notes to the consolidated Financial
Statements). A one percentage point increase in the effective interest rate on
the debt based on amounts outstanding at February 27, 1999 would result in an
approximate $90,000 reduction in annual pretax earnings. This estimate assumes
no change in the volume or composition of the short term and long term debt as
of February 27, 1999.
The Company's direct exports comprise approximately 39% of net sales for the
twenty-six week period ended February 27, 1999. In addition, certain U.S. based
customers ultimately distribute the Company's products into foreign countries.
As a result, the Company has exposure to risk associated with the decrease in
value of foreign currencies. Although the risk cannot be quantified, any
significant decrease in value of the currency of foreign countries where the
Company's products are distributed could have a material adverse effect on the
Company's sales and results of operations.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of the Notes to the Consolidated Financial Statement.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a.) The Annual Meeting of Stockholders was held on February 10, 1999.
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 Jay J. Sheth
Robert R. Sparacino Robert A. Lerman
Viren S. Sheth B. J. Harid
Aaron Zutler
c.) (1) The director's listed in item 4 b) above were elected by the
following votes:
NUMBER OF VOTES
NAME NUMBER OF VOTES FOR WITHHELD
---- ------------------- --------
Richard P. Rifenburgh 15,535,436 8,700
Robert R. Sparacino 15,535,336 8,800
Viren S. Sheth 15,535,336 8,800
Aaron Zutler 15,535,336 8,800
Jay J. Sheth 15,535,336 8,800
Robert A. Lerman 15,535,336 8,800
B. J. Harid 15,535,436 8,700
(2) Of the 15,544,136 number shares voting at the meeting,
15,538,536 voted for the ratification of the appointment of
the firm PricewaterhouseCoopers LLP as the Company's
independent public accountants for fiscal 1999. The number of
shares that voted against such ratification was 1,600 and the
holders of 4,000 shares abstained from voting on this matter.
ITEM 5. OTHER INFORMATION
Not Applicable.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT
2.1 STOCK PURCHASE AGREEMENT BETWEEN THE COMPANY AND TRANSVIT
HOLDING CORPORATION DATED EFFECTIVE AS OF NOVEMBER 29, 1998
(INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.1 TO COMPANY'S
CURRENT REPORT FORM 8-K DATED MARCH 25, 1999).
*27.1 FINANCIAL DATA SCHEDULE.
b) REPORT
FORM 8-K DATED MARCH 25, 1999.
---------------------------
* FILED HEREWITH.
21
<PAGE>
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 13, 1999 /s/ Richard R. Howard
RICHARD R. HOWARD
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 13, 1999 /s/ Robert M. Viola
ROBERT M. VIOLA
Executive Vice-President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
22
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<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-END> FEB-27-1999
<CASH> 48,000
<SECURITIES> 0
<RECEIVABLES> 15,242,000
<ALLOWANCES> 697,000
<INVENTORY> 10,510,000
<CURRENT-ASSETS> 26,248,000
<PP&E> 7,840,000
<DEPRECIATION> 9,575,000
<TOTAL-ASSETS> 34,657,000
<CURRENT-LIABILITIES> 21,275,000
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168,000
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<COMMON> 12,970,000
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<TOTAL-LIABILITY-AND-EQUITY> 34,657,000
<SALES> 13,440,000
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<CGS> 9,620,000
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