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 29, 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 JULY 1, 1999, THERE WERE OUTSTANDING 16,766,764 SHARES
OF COMMON STOCK, $.01 PAR VALUE, OF THE REGISTRANT.
1
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TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--May 29, 1999 and August 29, 1998 ....... 3
Consolidated statements of operations--thirteen and thirty-nine
week periods ended May 29, 1999 and May 30, 1998,
respectively ............................................. 5
Consolidated statement of shareholders' equity -- thirty-nine
week period ended May 29, 1999 ........................... 6
Consolidated statements of cash flows--thirty-nine week periods
ended May 29, 1999 and May 30, 1998, respectively ........ 7
Notes to consolidated financial statements--May 29, 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 .................................... 20
SIGNATURES .................................................................. 21
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 29,
1999 August 29,
ASSETS (UNAUDITED) 1998*
----------- -----------
Current assets:
<S> <C> <C>
Cash ..................................................... $ 166,000 $ 66,000
Accounts receivable, less allowance for doubtful accounts
of $782,000 and $895,000, respectively ................. 10,643,000 14,206,000
Accounts receivable - related parties - net .............. 5,145,000 3,607,000
Inventories .............................................. 10,290,000 11,375,000
Prepaid expenses ......................................... 174,000 186,000
Other current assets ..................................... 156,000 141,000
----------- -----------
Total current assets ................................... 26,574,000 29,581,000
----------- -----------
Property, plant and equipment, less accumulated depreciation
of $9,983,000 and $8,805,000 ............................ 7,708,000 8,199,000
----------- -----------
Other assets:
Warrant valuation, less accumulated amortization
of $1,805,000 .......................................... -- 103,000
Other assets ............................................. 610,000 825,000
----------- -----------
Total other assets ..................................... 610,000 928,000
----------- -----------
Total assets ............................................... $34,892,000 $38,708,000
=========== ===========
</TABLE>
* Prepared from audited financial statements for the year ended August 29, 1998.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
MAY 29,
1999 August 29,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1998 *
------------ ------------
<S> <C> <C>
Current liabilities:
Book overdraft .............................................. $ -- $ 334,000
Revolving credit agreement borrowings, current .............. 6,126,000 7,612,000
Accounts payable--trade ..................................... 7,980,000 9,289,000
Accounts payable--related parties - net ..................... 2,619,000 5,185,000
Accrued bonuses ............................................ 232,000 164,000
Accrued interest expense-subordinated debt .................. 1,731,000 1,731,000
Other accrued expenses ...................................... 1,546,000 1,467,000
Current portion of capital lease obligations ................ 134,000 144,000
Current portion of long-term obligations .................... 1,168,000 822,000
------------ ------------
Total current liabilities ................................. 21,536,000 26,748,000
Long-term debt, less current portion .......................... 2,832,000 2,781,000
Obligations under capital leases, less current portion ........ 46,000 130,000
Subordinated long term debt - related parties ................. -- 1,700,000
------------ ------------
Total liabilities .......................................... 24,414,000 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 16,766,764 shares and
16,761,493 shares, respectively ........................... 168,000 168,000
Additional paid-in-capital .................................. 12,827,000 12,483,000
Foreign currency translation ................................ -- (376,000)
Accumulated deficit ......................................... (15,487,000) (14,103,000)
------------ ------------
Total shareholders' equity ................................ 10,478,000 7,349,000
------------ ------------
Total liabilities and shareholders' equity .................... $ 34,892,000 $ 38,708,000
============ ============
</TABLE>
* Prepared from audited financial statements for the year ended August 29, 1998.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- --------------------------
MAY 29, May 30, MAY 29, May 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 13,436,000 $ 17,185,000 $ 41,951,000 $ 52,893,000
Cost of sales ................................. 9,706,000 13,250,000 29,668,000 38,142,000
------------ ------------ ------------ ------------
Gross profit .................................. 3,730,000 3,935,000 12,283,000 14,751,000
Selling, general and administrative expenses .. 3,489,000 4,216,000 11,559,000 12,493,000
------------ ------------ ------------ ------------
Income (loss) from operations ................. 241,000 (281,000) 724,000 2,258,000
Other income (expense):
Interest expense .......................... (273,000) (426,000) (986,000) (1,396,000)
Amortization of warrants .................. (24,000) -- (76,000) --
Other expense ............................. 42,000 (105,000) 62,000 (301,000)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (14,000) (812,000) (276,000) 561,000
Provision (benefit) for income taxes .......... (24,000) -- -- 55,000
------------ ------------ ------------ ------------
Net income (loss) ............................. $ 10,000 $ (812,000) $ (276,000) $ 506,000
------------ ------------ ------------ ------------
Less:
Preferred stock dividends ................. (197,000) (113,000) (601,000) (339,000)
Effect of beneficial conversion feature ... -- -- (681,000) --
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock .. $ (187,000) $ (925,000) $ (1,558,000) $ 167,000
============ ============ ============ ============
Earnings (loss) per common share:
Basic ..................................... $ (.01) $ (.06) $ (.09) $ .01
============ ============ ============ ============
Diluted ................................... $ (.01) $ (.06) $ (.09) $ .01
============ ============ ============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<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>
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 5,271 -- -- -- -- -- -- --
Issuance of Series C
Preferred Stock and
related warrants ....... -- -- -- -- -- -- 78,333 $4,699,000
Sale of Mexican Subsidiary -- -- (129,387) (906,000) -- -- -- --
---------- -------- --------- ----------- --------- ---------- --------- ----------
Balance, May 29, 1999 ..... 16,766,764 $168,000 537,142 $ 3,760,000 120,690 $4,511,000 78,333 $4,699,000
========== ======== ========= =========== ========= ========== ========= ==========
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY ACCUMULATED
PAID-IN-CAPITAL TRANSLATION DEFICIT
--------------- ----------- ------------
<S> <C> <C> <C>
Balance, August 28, 1998 .. $ 12,483,000 $ (376,000) $(14,103,000)
=============== =========== ============
Net loss .................. -- -- (276,000)
Preferred Stock Dividends . -- -- (281,000)
Contribution to 401(k) Plan 37,000 -- --
Issuance of Series C
Preferred Stock and
related warrants ....... 307,000 -- (681,000)
Sale of Mexican Subsidiary -- 376,000 (146,000)
--------------- ----------- ------------
Balance, May 29, 1999 ..... $ 12,827,000 $ -- $(15,487,000)
=============== =========== ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------
MAY 29, May 30,
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................... $ (276,000) $ 506,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ....................... 1,277,000 1,360,000
Provision for losses on accounts receivable ......... 561,000 668,000
Provision for inventory allowances .................. -- 660,000
Reduction in LIFO reserve ........................... -- (775,000)
Issuance of stock in connection with 401K plan ...... 37,000 38,000
Amortization of warrant valuations .................. 76,000 32,000
Amortization of deferred loan costs ................. 135,000 118,000
Compensation expense for extension of stock options . -- 217,000
Change in operating assets and liabilities:
Accounts receivable ............................. (615,000) (2,457,000)
Inventories ..................................... 948,000 (612,000)
Prepaid expenses ................................ (20,000) (128,000)
Other current assets ............................ -- --
Income taxes payable ............................ -- (11,000)
Accounts payable ................................ (3,773,000) 1,593,000
Other current assets ............................ (15,000)
Accrued expenses ................................ 24,000 (33,000)
----------- ------------
Net cash provided by (used in) operating activities . (1,641,000) 1,176,000
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures .................................... (786,000) (1,068,000)
Increase in other assets ................................ -- (11,000)
----------- ------------
Net cash used in investing activities ............... (786,000) (1,079,000)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdraft .......................................... (334,000) 240,000
Net repayment of old revolving credit facility .......... -- (10,205,000)
Repayments under new revolving credit facility .......... (4,746,000) --
Borrowings under new revolving credit facility .......... 3,260,000 9,496,000
Proceeds from long-term debt ............................ 1,039,000 4,021,000
Principal payments under new debt ....................... (642,000) --
Principal payments on capital leases .................... (94,000) (95,000)
Principle payments under old long-term debt ............. -- (2,955,000)
Issuance of Series C Preferred Stock and related warrants 4,699,000 --
Payment of issuance costs on Series C Preferred Stock ... (373,000) --
Payment of dividends on Series C Preferred Stock ........ (282,000) --
Deferred loan costs ..................................... -- (780,000)
----------- ------------
Net cash provided by (used in) financing activities . 2,527,000 (278,000)
----------- ------------
NET INCREASE IN CASH ......................................... 100,000 (181,000)
CASH AT BEGINNING OF PERIOD .................................. 66,000 492,000
----------- ------------
CASH AT END OF PERIOD ........................................ $ 166,000 $ 311,000
=========== ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
7
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TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 29, 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 thirty-nine week periods ended May 29,
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 THIRTY-NINE WEEKS ENDED
MAY 29, MAY 30, MAY 29, MAY 30,
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Basic EPS:
Net earnings (loss) applicable to common stock ................. $ (187,000) $ (925,000) $ (1,558,000) $ 167,000
Weighted-average number of common shares outstanding ........... 16,765,621 16,752,473 16,763,538 16,740,248
============ ============ ============ ===========
Basic EPS ............................................................ $ (.01) $ (.06) $ (.09) $ .01
============ ============ ============ ===========
Diluted EPS (1):
Net income (loss) applicable to common stock ................... $ (187,000) $ (925,000) $ (1,558,000) $ 167,000
Weighted-average number of common shares outstanding ........... 16,765,621 16,752,473 16,763,538 16,740,248
Add: effects of assumed exercise of options and warrants
Exercise of stock options ................................... -- -- -- 269,352
Exercise of warrants ........................................ -- -- -- 1,274,332
------------ ------------ ------------ -----------
Weighted-average number of common shares outstanding
plus shares from assumed exercise of options and
warrants .................................................... 16,765,621 16,752,473 16,763,538 18,283,932
------------ ------------ ------------ -----------
Diluted EPS .......................................................... $ (.01) $ (.06) $ (.09) $ .01
============ ============ ============ ===========
</TABLE>
1. Dilutive EPS equals basic EPS for the thirteen and thirty-nine week
periods ended May 29, 1999, and thirteen week period ended May 30, 1998,
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:
May 29, August 29,
1999 1998
------------ ------------
Raw materials ........................ $ 3,864,000 $ 4,728,000
Work-in-process ...................... 733,000 1,209,000
Finished goods ....................... 6,446,000 6,342,000
------------ ------------
11,043,000 12,279,000
Inventory reserves ................... (753,000) (904,000)
------------ ------------
$ 10,290,000 $ 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
May 29, 1999, the Revolving Credit bore interest at rates of 9.25% and 8.4%,
respectively, in accordance with the above noted interest computations.
Borrowings under the Revolving Credit are limited by a formula based on Eligible
Accounts Receivable and Inventory. Remaining availability under the line as of
May 29, 1999 approximated $1,450,000 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 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 repayments on the Cap Ex Facility commence one month after the
related borrowing at an amount based on a three to 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 2001. As of May 29, 1999, the
Company had outstanding borrowings under the Cap Ex Facility totaling
$1,494,000; principal repayments are currently set at the rate of $40,700 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 Minimum EBITDA financial covenant as of May
29, 1999 as a result of lower sales and has obtained a waiver from its lender.
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 raised this issue with the Dallas Appeals office and in
June 1999 reached an agreement resulting in a non-cash settlement and thereby
concluded the matter with no additional tax liability. The Company's revised net
operating loss carryforward at August 29, 1998 approximates $8 million.
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 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
10
<PAGE>
normal course of business, from expenses associated with Board and related
committee meetings. The following summarizes the presentations at May 29, 1999
and August 29, 1998.
MAY 29, August 29,
1999 1998
----------- -----------
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties ........ $ 5,733,000 $ 4,153,000
Offset amount .................................... (588,000) (546,000)
=========== ===========
Net related parties receivables .................. $ 5,145,000 $ 3,607,000
=========== ===========
ACCOUNTS PAYABLE:
Total accounts payable-related parties ........... $ 3,207,000 $ 5,731,000
Offset amount .................................... (588,000) (546,000)
=========== ===========
Net related parties payables ..................... $ 2,619,000 $ 5,185,000
=========== ===========
The Company purchases finished goods and fragrance product components from Sheth
Group affiliates. During the thirty-nine week period ended May 29, 1999, and for
the comparable period in fiscal 1998, the Company purchased approximately
$3,027,000 and $2,407,000, respectively.
During the thirty-nine week period ended May 29, 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 $5,418,000, 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.
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.
11
<PAGE>
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 of the
carrying value of the Registrant's investment in Trimex over the proceeds
received was recorded as an increase in accumulated deficit.
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.
The holders of the Series C Preferred Stock 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 $282,000 were paid in cash
on the Series C Preferred Stock during the thirty-nine week period ended May 29,
1999. The holders of the Series C Preferred Stock 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 date of the issuance of the Series C Preferred Stock,
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
holders of the Series C Preferred Stock 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 holders of the Company's Series A and B Preferred Stock 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 May 29, 1999 and May 30, 1998 of approximately
$103,000 and $113,000, respectively, and for the thirty-nine week periods then
ended of approximately $319,000 and $339,000, 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 $948,000 at
May 29, 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 THIRTY-NINE WEEK PERIODS ENDED MAY
29, 1999 AND MAY 30, 1998
For the thirteen week period ended May 29, 1999, the Company recorded net income
of $10,000 compared to a net loss of $812,000 for the thirteen week period ended
May 30, 1998. The May 29, 1999 fiscal year results improved significantly over
the prior period despite lower sales. Reduced cost of sales resulting from
increased efficiencies in operations as well as lower selling, general and
administrative expenses ("SG&A") and interest expense, contributed to the
improvement. After giving effect to preferred stock dividends, the Company
recorded a net loss applicable to common stock of $187,000 or $.01 per diluted
share for the thirteen week period ended May 29, 1999 compared to net loss
applicable to common stock of $925,000 or $.06 per diluted share for the related
fiscal 1998 period.
For the thirty-nine week period ended May 29, 1999, the Company recorded a net
loss of $276,000 compared to net income of $506,000 for the comparable period in
1998. The May 29, 1999 fiscal year-to-date results were negatively impacted by
lower sales largely offset by reduced cost of sales as a result of increased
efficiencies in operations as well as lower selling, general and administrative
expenses
13
<PAGE>
("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 $1,558,000 or $.09
per diluted share for the thirty-nine week period ended May 29, 1999. This
compares to net income applicable to common stock of $167,000 or $.01 per
diluted share for the same period in 1998.
NET SALES
Net sales were $13,436,000 for the thirteen week period ended May 29, 1999, a
decrease of 21.8% versus net sales of $17,185,000 for the same period in fiscal
1998. For the thirty-nine week period ended May 29, 1999, net sales were
$41,951,000 versus net sales of $52,893,000 for the thirty-nine week period
ended May 30, 1998. The decline in the thirteen week period ended May 29, 1999
is primarily due to volume decreases in the Latin America and U.S. wholesale
markets in the Royal Selections fragrance line and Apple Cosmetics pencil line.
As well, approximately nine percent of the sales decline was attributed to the
disposal of the Company's wholly-owned subsidiaries in Mexico (as of November
1998) and Brazil (as of May 1998) coupled with a strategic decision to reduce
the Company's sales to related parties. This decline was somewhat offset by a
volume increase in the combined U.S. chain, specialty chain and mass
merchandising channel and particularly, in the Euro Collections fragrance line.
The decrease in net sales for the thirty-nine week period ended May 29, 1999,
amounted to 20.7% and is primarily due to volume decreases in the U.S. wholesale
and Latin America markets, largely in the Royal Selections fragrance line, and
in the Designer Classic Alternative line ("DCA") in the combined U.S. chain,
specialty chain and mass merchandising market. Of the overall sales decline,
three percent was attributable to the disposal of the Company's wholly-owned
subsidiaries in Mexico (as of November 1998) and Brazil (as of May 1998) coupled
with a strategic decision to reduce sales to related parties. This decline was
somewhat offset by a volume increase in the combined U.S. chain, specialty
chain, and mass merchandising channel primarily in the Euro Collections
fragrance line.
NET SALES - CHANNELS OF DISTRIBUTION
The Company markets and distributes products to wholesalers, distributors, chain
stores, mass merchandisers and independent retail channels in various markets
throughout North and South America. For the thirteen week period ended May 29,
1999, the Company experienced a decline mainly in the Latin America, U.S.
wholesale markets and sales to related parties. As well, sales were lower as a
result of the disposal of the Company's wholly-owned subsidiaries in Mexico (as
of Nov. '98) and Brazil (as of May '98). This decline was somewhat offset by an
increase in combined U.S. chain, specialty chain, and mass merchandise channel.
The U.S. wholesale and Latin America channels continue to experience significant
turmoil relating to instability in currencies and overall financial conditions.
Sales of the Euro Collections fragrance line grew significantly in the combined
U.S. chain, specialty chain, and mass merchandise channels.
For the thirty-nine week period ended May 29, 1999, the Company experienced a
decline in Latin America, U.S. wholesale and sales to related parties while
combined U.S. chain, specialty chain, and mass merchandise channels remained
somewhat flat when compared to the thirty-nine week period ended May 30,1998. As
well, sales were lower as a result of the disposal of the Company's wholly-owned
subsidiaries in Mexico (as of November '98) and Brazil (as of May '98) coupled
with the strategic decision to reduce sales to related parties.
NET SALES - RELATED PARTIES
In the thirteen and thirty-nine week periods ended May 29, 1999, sales to
affiliates of the Sheth Group were $1,274,000 and $1,881,000, respectively,
compared with $3,254,000 and $5,418,000 for the same periods in fiscal 1998. For
the thirteen and thirty-nine week periods ended May 29, 1999, net sales to
14
<PAGE>
related parties have decreased, when compared to the same periods in fiscal
1998, primarily due to lower sales of slow rotation products (i.e. close-outs).
PRODUCTS PURCHASED FROM RELATED PARTIES
The Company purchases finished goods and fragrance components from Sheth Group
affiliates. During the thirty-nine week period ended May 29, 1999, and for the
comparable period in fiscal 1998, the Company purchased approximately $3,027,000
and $2,407,000, respectively.
GROSS PROFIT
The Company's gross profit for the thirteen week periods ended May 29, 1999 and
May 30, 1998 was $3,730,000 or 27.8% of sales and $3,935,000 or 22.9% of sales,
respectively. Gross profit for the thirty-nine week periods ended May 29, 1999
and May 30, 1998 was $12,283,000, or 29.3% of sales and $14,751,000 or 27.9% of
sales, respectively. Although achieving significant improvement in gross margin,
overall gross profit dollars declined in both the thirteen and thirty-nine week
periods relating primarily to the overall sales decrease offset by significant
improvements in cost of sales as a result of increased operational efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the thirteen week
period ended May 29, 1999 was $3,489,000, a decrease of 17.2% from $4,216,000
for the period ended May 30, 1998. SG&A for the thirty-nine week period ended
May 29, 1999 was $11,559,000, a decrease of 7.5% from $12,493,000 for the period
ended May 30, 1998. For both the thirteen and thirty-nine week periods ended May
29, 1999, SG&A decreased primarily due to restructuring of business processes
and expense levels together with staff realignment. In addition, a portion of
the SG&A decrease resulted from the sale of the Company's wholly-owned
subsidiaries in Mexico and Brazil (described previously). As a percentage of
sales, SG&A was 26.0% and 24.5% for the thirteen week periods and 27.6% and
23.6% for the thirty-nine week periods ended May 29, 1999 and May 30, 1998,
respectively. The increase in SG&A as a percentage of sales in fiscal 1999 is
primarily due to lower sales in that period offset by lower expense levels.
NON OPERATING INCOME OR EXPENSE
Interest expense decreased when comparing the thirteen and thirty-nine week
periods of fiscal 1999 to the same periods of fiscal 1998 as a result of lower
revolving credit borrowings in the current fiscal year. Other expense declined
in the thirteen and thirty-nine week periods ended May 29,1999 as compared with
the same periods in fiscal 1998 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. LATIN AMERICA ECONOMIES. The market for the Company's products continues
to be negatively impacted as a result of devaluation and economic and
political instability. These factors sharply reduced the purchasing power
of the Latin America consumer, and therefore, the demand for the Company's
products was adversely affected. Any future significant deterioration of
these economies would adversely affect the Company's sales in Latin
America and also the collectability of accounts receivable.
2. MEXICAN MARKET. Growth in sales, or even the maintenance of existing sales
levels, in Mexico, depends to a large extent on the economic health and
political stability of that country. Any deterioration in the economic or
political stability could adversely affect sales. Although the Company
15
<PAGE>
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.
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 could have
an adverse effect on the Company until a secondary supplier could be
located.
4. NEW AND DEVELOPING MARKETS. The Company continues to pursue sales
expansion in the U.S., Canada, and Latin America markets. In the process,
the Company incurs certain 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.
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.
OPERATING ACTIVITIES
Operations in the thirty-nine week period ended May 29, 1999, used $1,641,000 in
cash primarily due to net loss adjusted for non-cash items, an increase in
accounts receivable and decreases in inventory and accounts payable (all as
adjusted for the disposal of the Mexican wholly-owned subsidiary in November
1998).
Accounts receivable increased mainly due to extended terms given to related
parties. Inventory decreased in anticipation of reduced sales levels. Accounts
payable decreased as the Company made payments to related parties and certain
vendors, bringing those accounts closer to normal terms.
INVESTING ACTIVITIES
Capital expenditures during the thirty-nine week period were $786,000,
consisting primarily of investments in production related machinery and
equipment, facilities related items, and computer equipment. Capital
expenditures in fiscal 1999 are expected to meet or exceed the fiscal 1998 level
with the major portion being devoted to manufacturing equipment to enable the
Company to enhance its capacity, efficiency and level of customer service.
FINANCING ACTIVITIES
During the thirty-nine week period ended May 29, 1999, revolving credit
decreased by $1,486,000. The reduction 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 $2,527,000 for the period.
16
<PAGE>
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
May 29, 1999, the Revolving Credit bore interest at rates of 9.25% and 8.4%,
respectively, in accordance with the above noted interest computations.
Borrowings under the Revolving Credit are limited by a formula based on Eligible
Accounts Receivable and Inventory. Remaining availability under the line as of
May 29, 1999 approximated $1,450,000 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 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 to 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 2001. As of May 29, 1999, the
Company had outstanding borrowings under the Cap Ex Facility totaling
$1,494,000; principal payments are currently set at the rate of $40,700 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 Minimum EBITDA financial covenant as of May
29, 1999 as a result of lower sales and has obtained a waiver from its lender.
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 thirty-nine week
period ended May 29, 1999, the Company paid $282,000 in dividends to the holders
of the Series C Preferred Stock.
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
17
<PAGE>
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 holders of the Series C Preferred Stock 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 $282,000 were paid in cash
on the Series C Preferred Stock during the thirty-nine week period ended May 29,
1999. The holders of the Series C Preferred Stock 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 date of the issuance of the Series C Preferred Stock,
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
holders of the Series C Preferred Stock 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 stockholders and thus have been
charged directly to accumulated deficit and have been reflected as a reduction
in net income applicable to common stock.
The holders of the Company's Series A and B Preferred Stock 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 the Company's
wholly-owned Mexican subsidiary (see Note 7 of the notes to the consolidated
Financial Statements). Dividends accumulated on the Series A and B Preferred
Stock for the thirteen week periods ended May 29, 1999 and May 30, 1998 of
approximately $103,000 and $113,000, respectively, and for the thirty-nine week
periods then ended of approximately $319,000 and $339,000, 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 $948,000 at May 29, 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.
The Company is in the process of upgrading it's operating systems and plans to
have the upgrade completed by the end of the fiscal year. Additionally, the
Company plans to receive a vendor supplied upgrade of it's Enterprise Resource
Planning ("ERP") Software by the end of the fiscal year. The extent of required
modifications of the upgraded software and related year 2000 compliance testing
will accordingly be determined in the fourth fiscal quarter. Actual program
modifications and testing are anticipated to be completed before December 31,
1999. The Company has also addressed hardware, secondary software applications,
and production and facilities equipment and does not anticipate any related year
2000 issues.
18
<PAGE>
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.
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 cash flow of the Company.
The Company's short term and long term debt at May 29, 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 May 29, 1999 would result in an
approximate $100,000 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 May 29, 1999.
The Company's direct exports comprise approximately 39% of net sales for the
thirty-nine week period ended May 29, 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
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
*27.1 FINANCIAL DATA SCHEDULE.
---------------------------
* FILED HEREWITH.
20
<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: July 13, 1999 /s/ Richard R. Howard
RICHARD R. HOWARD
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 13, 1999 /s/ Robert M. Viola
ROBERT M. VIOLA
Executive Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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