FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 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.)
105 ST. MARY'S STREET, SUITE 1800, SAN ANTONIO, TEXAS 78205
(Address of principal executive offices)
Registrant's telephone number, including area code 210-402-2200
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Common Stock on November 27,
2000, as reported on the NASDAQ National Market System, was $23,285,505. As of
November 27, 2000, the Registrant had outstanding 16,786,756 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 2001 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
<PAGE>
PART I
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 expression, 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 basis for the assumptions upon which the forward-looking statements
contained in this document 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 caption "Factors Affecting the Company's Business, Operating
Results and Financial Condition", 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; the conditions of the capital markets and
equity markets during the periods covered by the forward-looking statements; and
other factors described in greater detail in this Form 10-K, the Company's
current report on Form 8-K filed June 7, 2000, and in the Company's other
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.
ITEM 1. BUSINESS
TRISTAR CORPORATION ("Tristar" or the "Company") is a Delaware corporation
headquartered in San Antonio, Texas. The Company is principally engaged in
developing, manufacturing, marketing and distributing value oriented designer
alternative fragrances, complementary products to those fragrances, and cosmetic
pencils in North and South America. The Company also manufactures and markets
its own original fragrances in the form of contemporary botanical scents and
lifestyle fragrances. The Company's fragrances are sold under the Fragrance
Impressions Ltd. ("FIL"), Euro Collections ("Euro"), Euro Garden Collections
("Euro Garden"), Royal Selections ("Royal"), Regal Collections ("Regal"), Club
Exclusif ("Club"), Premiere Editions ("Premiere") and American Dreams brands.
The alternative designer fragrances are designed for consumers who desire a
scent similar to an original designer fragrance but are unwilling or unable to
pay the high prices of originals. The Company also markets eye and lip liner
cosmetic pencils, mascara and other value oriented complementary cosmetic
products, including high quality lipsticks that are alternatives to major
prestige brands sold in department stores, priced at levels significantly lower
than original designer brands. Cosmetics are primarily marketed under the
Designer Classic Alternatives ("DCA"), Apple Pencil and Royal Selections lines.
The Company currently conducts business utilizing its sales and distribution
facilities in San Antonio, Texas, its state of the art manufacturing facility, a
fragrance and cosmetic laboratory in Pleasanton, Texas, its FIL sales office in
Bridgeport, Connecticut, its marketing headquarters in New York City, New York,
and its corporate office and design studio in San Antonio, Texas.
The Company was incorporated in New York in 1982 and made an initial public
offering of its common stock in 1984. In 1987, the Company was reincorporated in
Delaware. The Company changed its name from Ross Cosmetics Distribution Centers,
Inc. to Tristar Corporation in 1993.
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The Company's major shareholder, the Core Sheth Family ("Sheth Group"), owns 73%
of the Company's outstanding common stock. The Sheth Group is a significant
manufacturer of lower priced, value oriented fragrances and cosmetic products.
The Sheth Group is also a supplier of products and components to the Company's
sales, distribution and manufacturing operations and a purchaser of the
Company's products.
The Company purchases finished goods and components from Sheth Group affiliates.
During fiscal 2000, 1999 and 1998 the Company purchased approximately
$2,777,000, $2,979,000 and $4,227,000 respectively, of such products.
The Company sold products to Sheth Group affiliates in fiscal 2000, 1999 and
1998 of approximately $2,960,000, $5,418,000 and $6,557,000 respectively. As a
percent of net sales, these amounts represent approximately 5% for 2000 and 10%
for 1999 and 1998.
The Company's retail fragrance business in the United States was enhanced by the
acquisition of FIL in November 1999. This further allowed Tristar to extend its
market leadership position in alternative designer fragrance products, into the
chain drug and supermarket channels.
PRODUCTS
The Company's principal product category is fragrances with the balance
consisting of cosmetics, cosmetic pencils, bath and toiletry products. The
following table reflects the dominance of the fragrance category's contribution
to the Company's net sales for the last three fiscal years:
==================================================================
PRODUCT CATEGORY FISCAL 2000 FISCAL 1999 FISCAL 1998
------------------------------------------------------------------
FRAGRANCES 83% 89% 88%
------------------------------------------------------------------
OTHER PRODUCTS 17% 11% 12%
==================================================================
In fiscal 2000, fragrance sales as a percentage of total sales declined in
dollars when compared to fiscal 1999. A significant part of the Company's
marketing strategy is to continue transitioning to a broader based distribution
as well as to diversify its product mix into new growth categories within the
cosmetic and toiletry segments of the market. In recent years there has been
numerous new products introduced into the consumer marketplace which provide a
fragrance experience different than that offered by traditional colognes and
fragrances. This is manifested in the growth of the bath and body and skin care
categories. The Company has been aggressively seeking out areas of opportunity
in these segments during fiscal 2000 with its Euro Garden botanical collection.
In additional, the Company introduced new cosmetic products under the Apple,
Royal Selections and Regal brands which helped to further diversify its product
portfolio. The Company also became a private label supplier for a nationally
marketed cosmetic brand.
Additionally, the Company is building brand equity by allocating resources
towards strengthening marketing support programs and value-added services. These
efforts are aimed at creating consumer awareness and trial of its fragrance and
cosmetic products at retail point-of-sale. Such activities include cooperative
advertising, premium offers and merchandise displays.
FRAGRANCES
The Company's marketing strategy for designer alternative fragrances and
original fragrance scents addresses seven distinct segments of the fragrance
market with seven separate product lines uniquely positioned to enable the
Company to pursue customized marketing programs tailored to meet the specific
needs of the different classes of trade:
o The Euro line is marketed in traditional mass, retail, and specialty retail
chain stores in the United States, Canada and Latin America. Euro, first
introduced in 1989, is the second largest fragrance brand of the Company and
until fiscal 1996 had been the Company's principal product line for the
wholesale class of trade. In August 1998 a trendy line extension, Euro
Garden, was introduced with new original fragrances emulating "mother
nature." Fragrances such as Peach, Pear, and Very Berry are believed to
attract a younger teen audience market segment for the Company. Generally
these younger consumers find nature-type fragrances more appealing than
traditional designer alternative fragrances. In 1999, the Euro Garden brand
was further extended into botanical scented hand and body lotions, and
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shower gels in order to capitalize on the growing bath category. The
Company's Royal Selections brand, as discussed below, is now targeted to the
wholesale market replacing Euro.
o In 1996, the Company launched a new line called Royal, designed to recapture
a significant part of the wholesale trade class. Within one year, Royal
became the largest brand in the Company and is today the overall market
leader. This line set new standards in packaging and product innovation for
the industry. Royal is competitively priced and couples that with quality
packaging and merchandising support. In August 1999, the Company introduced
Royal Selections Crown II Series into the U.S. wholesale marketplace. It
represents the latest in design innovation and carries a higher price point
than Royal Selections which is sold in international markets where there is
more price sensitivity.
o In fiscal 1997, the Company developed and launched a new fragrance brand
called Regal, focusing on new opportunities in retail channels of
distribution. Regal has a limited number of designer alternative fragrance
"best sellers". The Regal brand is aimed at mass volume retailers including
food accounts.
o The Premiere line is a budget price brand that is oriented toward dollar
stores and other budget-price retailers.
o In 1998, the Company introduced a new line of contemporary alternative
designer fragrances called Club Exclusif, positioned as a value oriented
quality brand for the Latin American market.
o In August 1999, a new original fragrance brand called American Dreams was
introduced for distribution into international markets.
o In November 1999, the Company acquired Fragrance Impressions Limited. The FIL
brand is the market leader in alternative designer fragrances in the chain
drug channel of distribution and further bolstered the Company's overall
market leadership position.
The Company believes that to successfully market a fragrance product line, one
must identify a market niche and then fill that niche with a value-priced,
quality product presented in attractive bottles, cartons and displays. All of
the Company's major fragrance lines feature quality glass bottles, caps and
collars designed in various unique shapes and styles. In addition, the Company's
fragrances are packaged in colorful cartons technologically designed to appear
attractive to the consumer. All fragrances are developed by the Company's expert
perfumers either as alternatives to the most popular, nationally branded,
designer fragrances or for customized original scents. Alternative designer
fragrances are sold, however, at a fraction of the original designer fragrance's
retail price to satisfy the needs of the consumers in specific niche markets.
The Company's own original fragrances (non-designer alternative fragrances) are
marketed and distributed in the U.S. and Latin America and other international
markets. The majority of these are botanical fragrances, a growth niche targeted
to a younger demographic consumer.
Prior to the introduction of new or improved fragrances, market evaluation and
consumer testing is conducted by the Company with selective testing also done by
independent outside laboratories. The Company believes that the success of these
products is dependent on the Company correctly identifying the needs of a
particular market niche and then, ultimately, on the consumers' acceptance of
the product. Life cycles of products vary significantly, with some being
successfully marketed for more than five years, whereas other products may fail
to gain consumer acceptance and be discontinued within a shorter period of time.
The Company believes that the success of the Company's products in the
marketplace is largely dependent on the amount and quality of retail advertising
and promotion original designers provide for their brands, the appeal of the
scent itself and the merchandising and trial programs that the Company develops
to accelerate consumer awareness.
Many of the Company's fragrance product lines have currently, or will have in
the future, companion products, which are discussed below in "Other Products".
OTHER PRODUCTS
The Company markets numerous complementary products within various fragrance
lines such as deodorant sticks, hand and body lotions, shower gels, body sprays,
dusting powders, shaker talcs, trial/travel sizes, roll-on perfumes, body
glitter and gift sets. In many cases, these companion products are marketed as
designer alternatives and are value priced below the prices of the national
brands.
The Company markets under the brand name DCA a proprietary line of lipstick
cosmetics, manufactured by related parties. Cosmetics sold under the DCA brand
are premium quality lipstick products designed as alternatives to original
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designer lipsticks. The DCA products are sold primarily in mass retail chain
stores at prices significantly less than the original designer's price in
department stores.
The Apple line of lip and eyeliner cosmetic pencils that the Company
manufactures is marketed and distributed in assorted colors and sizes
principally to the wholesale class of trade.
New Regal blister packaged lip and eyeliner pencils are value priced and are
targeted to budget conscious consumers who shop in retail outlets. These were
introduced in June 1999. To enhance the Company's strong franchise in the
wholesale sector, Royal Selections lip and eye pencils, and mascara were
introduced. The Company believes it has increased opportunities to expand its
color cosmetics business in both the retail and wholesale trade channels, and is
actively developing new products to increase its permanent planogram and
promotional business.
With the exception of cosmetic eye and lip liner pencils, new, redesigned, or
replacement cosmetics or specialty toiletries are developed by the Company's
suppliers at the request of the Company. The Company believes that similar to
fragrances, selecting the right cosmetic or toiletry products for a particular
market segment and their acceptance by the consumer play a large role in the
success or failure of any particular product.
CUSTOMERS
The Company distributes its products to more than 1,200 customers, including
wholesalers, distributors, drug and grocery chains, mass merchandisers and
specialty chain stores located primarily in North and South America. These
customers provide approximately 40,000 outlets for the Company's products. The
Company markets its products through Company sales personnel located in various
markets and through a network of independent sales representatives.
It is an industry practice in the United States for businesses that market
fragrances, cosmetics and toiletry products to provide the right to return
merchandise. The Company's products are subject to such return rights. It is the
Company's practice to establish reserves and provide allowances for product
returns at the time of sale. The Company believes that such reserves and
allowances are adequate based on past experience; however, no assurance can be
made that reserves and allowances will continue to be adequate. Consequently, if
product returns are in excess of the reserves and allowances made by the
Company, net sales will be reduced when such fact becomes known.
The Company has invested heavily in developing the mature U.S. retail markets as
well as the emerging mass markets in Latin America and other international
markets. The Company believes that the customer base in these markets fits the
Company's target customer profile and presents an opportunity for future growth.
The Company has focused the expansion of its customer base in the U.S. by
creating and repositioning products to better meet the needs of its existing
channels of distribution and in gaining entrance into certain new channels. The
Company has strengthened its position in the U.S. markets by the recent
(November 1999) acquisition of Fragrance Impressions Ltd. which markets
fragrances through its complementary distribution network.
Sales to customers in the United States were $39,150,000, $35,282,000 and
$37,993,000 for fiscal years 2000, 1999 and 1998, respectively. For those same
fiscal years, $16,458,000 (30% of net sales), $20,712,000 (37% of net sales),
and $29,690,000 (44% of net sales) respectively, were exported directly to
foreign customers or sold through the Company's subsidiaries in Mexico and
Brazil (prior to the disposition of the Company's Mexican and Brazilian
subsidiaries discussed more fully in Notes 7 and 8 of the Notes to Consolidated
Financial Statements). Certain of the sales to U.S. customers are ultimately
resold outside of the U.S. The amount of these indirect export sales cannot be
determined as the Company does not have access to its customers' sales
information. As a significant portion of the Company's products are sold
directly or indirectly into the Latin American market, there are certain factors
such as local political and economic conditions that could have an adverse
effect on these sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations (Factors Affecting the Company's Business,
Operating Results and Financial Condition) for a specific discussion of those
risks.
The North and South American markets will continue to be a primary focus of the
Company's marketing strategy as other Sheth Group affiliates or other company
alliances distribute similar products throughout the rest of the world.
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In fiscal 2000, 1999 and 1998 one customer accounted for approximately 14%, 13%
and 10% respectively, of the Company's net sales. The Company is not dependent
upon a single or a few customers. However, the loss of a single or a few
customers may have a material adverse effect on the Company's business.
SUPPLIERS
The company has a unique core manufacturing capability in aerosol filling of
fragrances. At present, the Company purchases pressurized glass containers for
its fragrances primarily from European glass manufacturers. If these products
were unavailable from any of these suppliers, the Company believes that it could
purchase such products from other suppliers but could experience disruption in
its supply chain which would thereby adversely effect the Company.
In addition, the Company purchases specially blended fragrance compounds
principally from a Sheth Group affiliate in France. In the event such supplier
was unable to provide such compounds, the Company could suffer minor
manufacturing delays until such supplier could be replaced.
The Company is dependent on the supply of certain lipstick cosmetics, mascara
and nail polish products from Sheth Group affiliates. If any of these companies
were to cease or be unable to supply these cosmetic products, the lack of such
products would not have a material adverse effect on the Company while secondary
suppliers were being located.
PATENTS AND TRADEMARKS
The Company owns or has applied for substantially all of the product name
trademarks for products sold by the Company. The Company is dependent on the
continued use of these trademarks; however, the cessation of the Company's right
to use such trademarks would not have a materially adverse effect on the
Company's business.
BACKLOG OF ORDERS
The Company had no substantial backlog of orders at the end of each of fiscal
years 2000, 1999 and 1998.
RAW MATERIALS
The Company's raw material inventories support the fragrance and cosmetic pencil
manufacturing operations. The principal components of that inventory are
currently purchased from limited or single sources of supply. Management
believes the cessation of supply for the fragrance components from any of the
primary suppliers could be replaced by a secondary source with minimal
difficulties.
ENVIRONMENTAL LAWS
In the opinion of management, compliance by the Company with federal, state and
local laws relating to the protection of the environment has had no material
effect upon the Company's capital expenditures, earnings or competitive
condition.
COMPETITION IN THE FRAGRANCE AND COSMETICS INDUSTRY
The fragrance and cosmetics industry is characterized by intense competition,
particularly in the U.S. The Company believes it competes primarily on the basis
of pricing and payment terms. Product quality, presentation, merchandising and
advertising programs and customer service (incorporating inventory availability
and prompt delivery) are also important additional competitive features in the
overall industry.
Principal competitors in designer alternative fragrances include Inter Parfums,
Inc., YAZ Enterprises Inc., Paris Designs, Inc., and Parfums de Coeur, and in
budget cosmetics, Artmatic USA Cosmetics, Wet-N-Wild, and Jordana Cosmetics
Corporation.
While the Company is a significant participant in the value oriented designer
alternative fragrance market and has had historically many of the resources of
the Sheth Group available to it, the Company is a relatively small participant
in the total fragrance and cosmetics industry. Many other companies in the
industry, including virtually all large mass-
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advertised brand manufacturers such as Procter and Gamble, Unilever, Revlon,
L'Oreal, Benckiser, and French Fragrances are well established and have been in
existence for a significantly longer period of time. Such companies have greater
leverage and resources than the Company including financial, marketing,
research, manufacturing and personnel. Historically, however, these large
manufacturers have not sought to compete in the same value-oriented markets in
which the Company participates.
INVENTORY
The Company maintains finished goods inventory at its San Antonio, Texas
facility to meet the demands of its customers. Raw material and work-in-process
inventories related to manufacturing of fragrances and cosmetic pencils are
located at the Pleasanton, Texas manufacturing facility.
SEASONALITY
The Company's business has historically been subject to seasonal factors
relating to calendar year-end holidays. However, the Company believes that with
its range of products, distribution channels, and promotional activity, it has
over time been able to reduce some of the differences in sales volume between
quarters.
EMPLOYEES
As of August 2000, the Company employed approximately 388 full-time employees
and during peak production periods utilizes temporary or seasonal employees to
augment its workforce. During the two most recent peak production periods the
Company has utilized up to 225 seasonal employees. None of the Company's
employees are covered by a collective bargaining agreement and management
believes that its relationship with employees is satisfactory.
ITEM 2. PROPERTIES
The Company owns a manufacturing plant that consists of a 144,000 square-foot
facility on a 14-acre site in Pleasanton, Texas. That facility has approximately
12,000 square feet of office space.
The Company rents approximately 30,000 square feet of storage space in
Pleasanton, Texas on a month to month basis at the rate of $4,200 per month or
$50,400 annually.
The Company is currently leasing approximately 72,000 square feet of storage,
shipping and office space for its San Antonio distribution center. The lease has
an annual cost of $269,000, subject to adjustments, and expires in February
2001.
The San Antonio corporate office and design studio occupies approximately 10,000
square feet of office space. The lease has a current annual cost of $111,000
subject to adjustments and expires in January 2005.
The Company is currently leasing approximately 2,400 square feet of office space
for its marketing headquarters in New York City. The lease has an annual cost of
$72,000 subject to adjustments and expires March 2004.
The Company is currently leasing approximately 700 square feet of space for its
FIL sales division in Bridgeport, Connecticut on a month-to-month basis. The
lease has an annual cost of $15,000 or $1,250 per month.
On October 10, 2000, the Company broke ground on a project to construct a new,
60,000 square foot distribution center and office complex, adjacent to its
existing manufacturing facility in Pleasanton, Texas.
According to the credit agreement with its principal lender, all of the
Company's present and future assets have been collateralized. See Management
Discussion and Analysis section for further discussion.
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ITEM 3. LEGAL PROCEEDINGS
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. Any expenses incurred are not expected to be material to
the Company's financial results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company has a single class of common equity securities outstanding, its
Common Stock, $.01 par value ("Common Stock"). The Common Stock is traded
over-the-counter on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") Small Cap National Market under the symbol "TSAR". The
following table presents for the periods indicated the quarterly high and low
bid quotations in the over-the-counter market, as quoted by NASDAQ. These
quotations reflect the inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
=========================================================
FISCAL 2000 FISCAL 1999
--------------- ------------------
HIGH LOW HIGH LOW
---------------------------------------------------------
FIRST QUARTER $6 1/8 $5 $9 1/2 $4 5/8
---------------------------------------------------------
SECOND QUARTER $6 3/16 $4 3/4 $11 1/8 $5 3/4
---------------------------------------------------------
THIRD QUARTER $6 3/8 $4 3/4 $11 5/8 $4 11/16
---------------------------------------------------------
FOURTH QUARTER $6 1/4 $4 5/8 $7 1/4 $5 5/8
=========================================================
On November 27, 2000, the closing bid price for the Company's Common Stock, as
reported by NASDAQ, was $5 3/16.
(B) HOLDERS
As of November 27, 2000, the number of record holders of the Company's Common
Stock was approximately 119.
(C) DIVIDENDS
The Company has paid no cash dividends on its Common Stock since its inception.
The payment by the Company of cash dividends, if any, in the future rests within
the discretion of the Board and will depend, among other things, upon the
Company's earnings, its capital requirements and its financial condition, as
well as other relevant factors. In addition, the Company's ability to pay cash
dividends is subject to restrictions imposed by the Company's principal lender
(See Note 6 of the Notes to Consolidated Financial Statements) and of Series C
Senior Convertible Preferred Stock investor (See Note 15 of the Notes to
Consolidated Financial Statements). The Company has no plans to pay any cash
dividends on the Common Stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Company and its
subsidiaries for each of the last five fiscal years:
<TABLE>
<CAPTION>
============================================================================================================
YEARS ENDED
-------------------------------------------------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29, AUGUST 30, AUGUST 31,
------------ ------------ ------------ ------------ ------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 55,608,000 $ 55,994,000 $ 67,683,000 $ 68,959,000 $ 51,720,000
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,673,000 $ 422,000 $ (1,491,000) $ 1,083,000 $(12,053,000)
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)
APPLICABLE TO COMMON
STOCK $ 420,000 $ (1,056,000) $ (1,944,000) $ (454,000) $(12,053,000)
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER
COMMON SHARE:
------------------------------------------------------------------------------------------------------------
BASIC $ .03 $ (.06) $ (.12) $ (.03) $ (.72)
------------------------------------------------------------------------------------------------------------
DILUTED $ .02 $ (.06) $ (.12) $ (.03) $ (.72)
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 55,248,000 $ 36,129,000 $ 38,708,000 $ 41,084,000 $ 33,767,000
------------------------------------------------------------------------------------------------------------
REVOLVING CREDIT
AGREEMENT BORROWINGS $ 15,167,000 $ 8,926,000 $ 7,612,000 $ 10,205,000 $ 9,319,000
------------------------------------------------------------------------------------------------------------
SHORT-TERM & LONG-TERM
BORROWINGS INCLUDING
CAPITAL LEASES $ 3,810,000 $ 4,173,000 $ 3,877,000 $ 2,581,000 $ 3,234,000
------------------------------------------------------------------------------------------------------------
SUBORDINATED LONG-TERM
DEBT $ 3,680,000 $ -0- $ 1,700,000 $ 4,500,000 $ 12,666,000
------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ -0- $ -0- $ -0- $ -0- $ -0-
============================================================================================================
</TABLE>
The Company has significant related party transactions. See Note 11 of the Notes
to Consolidated Financial Statements.
The Company had subordinated debt of $3,680,000 as of August 26, 2000 incurred
in connection with the purchase of FIL. See Note 9 of the Notes to Consolidated
Financial Statements.
The Company had subordinated debt totaling $1,700,000 as of August 29, 1998
representing the remaining portion of a loan made by the Sheth Group through
their affiliate Nevell Investments, S.A. ("Nevell"). Such indebtedness was
extinguished in connection with the sale of the Company's wholly owned Mexican
subsidiary. See Note 8 of the Notes to Consolidated Financial Statements.
The Company had subordinated debt totaling $4,500,000 as of August 30, 1997
representing the remaining portion of a loan made by the Sheth Group through
their affiliate Nevell. Such indebtedness was reduced by $2,800,000 in
connection with the sale of the Company's wholly owned Brazilian subsidiary. See
Note 7 of the Notes to Consolidated Financial Statements.
During the first and second quarters of fiscal 1997 affiliates of the Company's
primary shareholder, the Sheth Group, converted $8,166,000 of their subordinated
debt into shares of Series A and Series B Preferred Stock.
During the fourth quarter of fiscal 1996, the Company recorded deferred income
tax expense of $3,881,000 resulting from the establishment of a valuation
allowance for deferred tax assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - FISCAL YEAR ENDED AUGUST 26, 2000 COMPARED TO FISCAL
YEAR ENDED AUGUST 28, 1999
NET SALES
Net sales for the fiscal year ended August 26, 2000 were $55,608,000 versus net
sales of $55,994,000 in fiscal year ended August 28, 1999. The slight decline
was mainly attributable to volume decreases in the U.S. wholesale and Latin
America markets, primarily in the Royal and Euro product lines. The decrease was
virtually entirely offset by volume increases associated with the acquisition of
FIL (see Note 9 of the Notes to Consolidated Financial Statements), mainly in
the Fragrance Impressions fragrance line, coupled with an increase in the Euro
Gardens product line in the U.S. chain, specialty chain and mass merchandising
channel.
Overall, the Company's direct exports decreased to $16,458,000 (30% of net
sales) in fiscal 2000 compared to $20,712,000 (37% of net sales) in fiscal 1999.
Of the overall $4,254,000 decrease in export sales, $1,796,000 related to a
volume decline in Latin America stemming from unfavorable economic conditions in
that market. The remaining $2,458,000 decrease was attributable to a strategic
decision to reduce sales to related parties with such sales amounting to
$2,960,000 in fiscal 2000 versus $5,418,000 in the prior year. See Business
("Suppliers") and Note 11 of the Notes to Consolidated Financial Statements for
further details.
Of the net sales in fiscal 2000, approximately 2.3% or $1,294,000, resulted from
the sale of products purchased from related parties as finished goods. For
fiscal 1999, comparable numbers were approximately 1.5%, or $835,000. In
addition, fragrance and other products manufactured and sold by the Company
included certain components that were purchased from related parties. The
Company purchased approximately $1,978,000 and $2,770,000 of fragrance product
components from related parties in fiscal years 2000 and 1999, respectively. See
Note 11 of the Notes to Consolidated Financial Statements for additional
information.
Consolidated net sales are anticipated to grow moderately in fiscal 2001 as the
Company continues strategic direction to broaden its product offerings beyond
traditional fragrance type products, while focusing distribution expansion in
the U.S. chain, mass merchandising and specialty chain market segments.
GROSS PROFIT
The Company's gross profit for fiscal years 2000 and 1999 was $18,265,000 or
32.8% of net sales and $16,127,000 or 28.8% of net sales, respectively. The
improvement over the prior period was primarily due to a decrease in cost of
sales as a result of increased operational efficiencies as well as an overall
favorable product mix relating largely to the acquisition of FIL whose primary
market is the U.S. chain drug retail market. Gross profit margins in this
segment tend to be greater than the Company's other market segments but require
an increase level of direct marketing support expenditures accounted for in SG&A
expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for fiscal year 2000 were
$14,517,000, an increase of 1.8% from $14,255,000 for fiscal year 1999. The SG&A
increase was primarily due to the acquisition of FIL (See Note 9 of the Notes to
Consolidated Financial Statements). As a percentage of net sales, SG&A was 26.1%
and 25.5% for fiscal years 2000 and 1999, respectively. The increase in SG&A as
percentage of sales in fiscal 2000 is primarily due to slightly lower sales
levels with an increase in direct marketing expenses relating mainly to the
acquisition of Fragrance Impressions Ltd. (See Note 9 of the Notes to
Consolidated Financial Statements).
NON-OPERATING INCOME OR EXPENSE
Interest expense was $1,968,000 in fiscal 2000, an increase of 57.9% over the
comparable fiscal 1999 amount of $1,246,000. The significant increase was
attributable to debt incurred in connection with the acquisition of Fragrance
Impressions Ltd. (see Note 9 of the Notes to Consolidated Financial Statements)
coupled with higher interest rates.
NET INCOME OR LOSS
The Company recorded net income of $1,673,000, an increase of $1,251,000 versus
net income of $422,000 in fiscal 1999. After giving effect to preferred stock
dividends and beneficial conversion feature of a preferred stock issue, the
Company recorded a net income available to common stockholders of $420,000 in
fiscal 2000 versus a comparable net
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loss available to common stockholders of $1,056,000 in fiscal 1999, an
improvement of $1,476,000. Related earnings per diluted common share were $.02
versus a loss of $.06 per diluted common share for each respective fiscal year.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED AUGUST 28, 1999 COMPARED TO FISCAL
YEAR ENDED AUGUST 29, 1998
NET SALES
Net sales for the fiscal year ended August 28, 1999 were $55,994,000, a decrease
of 17.3% compared to net sales of $67,683,000 in fiscal year ended August 29,
1998. The decrease is primarily attributable to volume decreases in the Latin
America and U.S. wholesale markets in the Royal Selections line and reduced DCA
sales to the U.S. retail channel. As well, approximately 4% of the sales decline
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 the Company's sales to related parties. This
decline was somewhat offset by volume increases in the combined U.S. chain,
specialty chain and mass merchandising channel in the Euro and Regal fragrance
lines.
Overall, the Company's direct exports decreased to $20,712,000 (37% of net
sales) in fiscal 1999 compared to $29,690,000 (44% of net sales) in fiscal 1998.
The decrease in direct exports is primarily due to volume decreases in Latin
America as well as sales to related parties. While the Company continues to
aggressively pursue the strategically important Latin America channel, the
Company believes that the Mexican and Brazilian markets will grow at a slower
than desired rate and as a result, the Company sold its Brazilian subsidiary to
an affiliate of the Sheth Group in May 1998 (described more fully in Note 7 of
the Notes to the Consolidated Financial Statements). The Company sold its
Mexican subsidiary to an affiliate of the Sheth Group in November 1998
(described more fully in Note 8 of the Notes to Consolidated Financial
Statements).
Included in export sales were sales of $5,418,000 in fiscal 1999 and $6,557,000
in fiscal 1998 to Sheth Group affiliates. See Business ("Suppliers") and Note 11
of the Notes to Consolidated Financial Statements.
Of the net sales in fiscal 1999, approximately 1.5% or $835,000, resulted from
the sale of products purchased from related parties as finished goods. For
fiscal 1998, comparable numbers were approximately 4%, or $2,833,000. In
addition, fragrance and other products manufactured and sold by the Company
included certain components that were purchased from related parties. The cost
of those components approximated 7% of cost of sales in fiscal 1999 and 6% of
cost of sales in fiscal 1998. See Note 11 of the Notes to Consolidated Financial
Statements for additional information.
GROSS PROFIT
The Company's gross profit for fiscal year 1999 and fiscal year 1998 was
$16,127,000 or 28.8% of net sales and $16,643,000 or 24.6% of net sales
respectively. Although achieving significant improvement in gross margin,
overall gross profit dollars declined 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 fiscal year 1999 were
$14,255,000, a decrease of 9.9% from $15,816,000 for fiscal year 1998. The SG&A
decrease was primarily due to the sale of the Company's wholly owned
subsidiaries in Mexico and Brazil (described previously). As a percentage of
sales, SG&A were 25.5% and 23.4% for fiscal years 1999 and 1998 respectively.
The increase in SG&A as percentage of sales in fiscal 1999 is primarily due to
lower sales levels.
NON-OPERATING INCOME OR EXPENSE
Interest expense for fiscal year 1999 was $1,246,000, a decrease of 30.2% from
$1,786,000 for fiscal year 1998 as a result of lower revolving credit borrowings
in the current fiscal year. Other expense for fiscal year 1999 was $128,000,
versus other expense of $240,000 for fiscal year 1998, which was primarily due
to a decrease in foreign exchange losses.
NET INCOME OR LOSS
The Company recorded net income of $422,000 for fiscal 1999. After giving effect
to preferred stock dividends and beneficial conversion feature of a preferred
stock issue, the Company recorded a fiscal 1999 net loss applicable to common
stock of $ 1,056,000 or $.06 per share. In fiscal 1998, the Company recorded a
net loss of $1,491,000. After
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giving effect to preferred stock dividends, the Company recorded a net loss of
$1,944,000 or $.12 per share applicable to common stock.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Operating activities in fiscal 2000 used $1,221,000 in cash. The cash used was
primarily the result of earnings adjusted for non-cash items, increases in
accounts payable and accrued expenses, offset by increases in accounts
receivable and inventory during fiscal 2000.
Accounts receivable grew as a result of significantly higher fourth quarter
sales in fiscal year 2000 compared to the same period in fiscal 1999 coupled
with slower collections. Inventory and accounts payable increased primarily as a
result of the FIL acquisition. Accrued expenses increased primarily due to the
direct marketing costs and provisions associated with the significant level of
retail sales volume recorded in the fourth quarter of fiscal 2000, consisting
mainly of commissions, cooperative advertising and anticipated returns and
allowances.
INVESTING ACTIVITIES
Capital expenditures during fiscal 2000 amounted to $1,201,000, relating mainly
to production related machinery and equipment, and facilities related items and
computer equipment. Capital expenditures in fiscal 1999 and 1998 were $1,892,000
and $1,599,000, respectively. In addition, $554,000 of cash was invested in the
FIL business acquisition in fiscal 2000 (See Note 9 of the Notes to Consolidated
Financial Statements).
FINANCING ACTIVITIES
Net cash provided by financing activities during fiscal 2000 was primarily due
to proceeds from the issuance of Series C Senior Convertible Preferred Stock and
a net increase in borrowings under the revolving credit facility.
In December 1997, the Company entered into a $22,000,000 credit agreement (the
"Credit Agreement")with its principal lender. In November 1999, the Credit
Agreement was amended and restated to provide for a revolving credit facility
(the "Revolving Credit") of $16,000,000 of maximum borrowings; with a $4,500,000
sublimit allocated to support the requirements of Tristar USA (see Note 9 of the
Notes to Consolidated Financial Statements for further details on Tristar USA
acquisition). Such borrowings bear 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 1.00% or the London Interbank Offered Rate (LIBOR) plus 3.50%. At
August 26, 2000, the Revolving Credit bore interest at rates of 10.50 % and
10.12 %, 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, as defined. Remaining availability based on
the borrowing formulas as of August 26, 2000 approximated $756,000.
Additionally, borrowings based on LIBOR can not exceed 60% of the total
outstanding borrowings under the Revolving Credit. Commitment fees equal to .50%
per annum on the unused portion of the Revolving Credit are payable monthly. 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 (10.50 % at
August 26, 2000) plus 2.00%. Principal payments on the Term Loan consist of
equal monthly principal payments in the amount of $56,667 for 60 months
beginning in January 1998. Additionally, 50% of annual excess cash flow, as
defined, must be applied to the Term Loan installments in the inverse order of
maturity. As of August 26, 2000, the Company had outstanding borrowings under
the Term Loan totaling $1,600,000.
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
(10.50% at
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August 26, 2000) plus 2.00%. Principal payments on the Cap Ex Facility commence
one month after the take down in 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 August 26, 2000,
the Company had outstanding borrowings under the Cap Ex Facility totaling
$2,189,000. Principal payments are due at the rate of $86,000 per month.
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. Restrictive financial covenants including Minimum
Tangible Net Worth, Minimum EBITDA, Maximum Loss, Minimum Fixed Charge Coverage,
Maximum Leverage and Maximum Capital Expenditures were agreed upon in connection
with the FIL acquisition. Additional covenants limit borrowings, asset sales and
dividends. The Company was in violation of certain financial covenants at August
26, 2000 and was granted waivers to such covenants by its lender. The Company is
currently in discussions with its lender concerning new restrictive financial
covenants for fiscal 2001.
The Credit Agreement, together with cash generated by operations, should provide
sufficient cash to meet the cash requirements of the Company for the foreseeable
future.
As of August 31, 1996, the Company was indebted in the amount of $4.7 million to
a Sheth Group affiliate under a loan agreement entered into in August 1993. The
note, which was subordinated to the principal lender, bore interest at the rate
of 4.5% per annum. On December 11, 1996, the $4.7 million of subordinated debt
was converted into the Company's Series A convertible preferred stock, $.05 par
value ("Series A Preferred Stock"), (See Note 15 of the Notes to Consolidated
Financial Statements). The Company remains indebted to the affiliate for
delinquent interest payments of $1,631,000 on the converted debt. At August 26,
2000, cumulative dividends in arrears on the Series A Preferred Stock
approximate $612,000.
In a transaction effective February 21, 1997, Nevell Investments S.A.
("Nevell"), the holder of a subordinated long-term promissory note in the
principal amount of $4,000,000, converted $3,500,000 of that note into 120,690
shares of the Company's Series B convertible nonvoting preferred stock, $.05 par
value ("Series B Preferred Stock"). The Series B Preferred Stock has cumulative
preferred dividends of $2.03 per share and a preferred liquidation distribution
of $29.00 per share plus accrued and unpaid dividends. Each share of the Series
B Preferred Stock is convertible at the option of Nevell, into four shares of
the Company's Common Stock. The Company can redeem the shares of Series B
Preferred Stock at any time for cash of $29.00 per share ($7.25 per common
share), plus all accrued and unpaid dividends. See Note 15 of the Notes to
Consolidated Financial Statements. At August 26, 2000, cumulative dividends in
arrears on the Series B Preferred Stock approximate $224,000.
Certain related party accounts receivable balances were determined not to be
settled in the normal course of business. Accordingly, outstanding balances
totaling $2,365,000 were reclassified to shareholder's equity at August 28,
1999. During fiscal 2000, the amount of these outstanding balances increased to
$2,740,000. As of August 26, 2000, the Sheth Group settled this outstanding
balance due to the Company. Payment was made by the redemption of 88,800 shares
of Series B Convertible Preferred Stock, $.05 par value ("Series B Preferred"),
issued to Nevell. The agreed to redemption value was determined to be $23.75 per
share of Series B Preferred based upon the closing price of $5.938 per share of
the Company's common stock on August 26, 2000. This amounted to $2,109,000 with
the remaining $631,000 representing dividends in arrears. The difference between
the stated redemption price of $29.00 and the agreed to price of $23.75 per
Series B Preferred share amounted to $1,229,000 and was ascribed to additional
paid in capital. As part of this share redemption transaction, the Sheth Group
agreed to transfer 12,500 shares of common stock owned by Transvit to the holder
of the Company's Series C Preferred Stock.
Effective May 30, 1998, the Company sold all of the capital stock and
distribution rights of its Brazilian subsidiary to Transvit Distribution Corp.
("TDC"), a wholly owned affiliate of the Sheth Group, for $2,800,000. The
agreement provides for a non-compete restriction and a supply arrangement
whereby the Company agreed to continue selling product to the Brazilian unit
through May 31, 2001. The Company also received an option to repurchase the
stock and distribution rights from TDC at anytime prior to May 31, 2003. The
Company currently has no plans to repurchase the stock and distribution rights
under this option.
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In conjunction with the sale of the Company's Brazilian subsidiary, the Company
received payment from TDC in the form of a $2,800,000 reduction of the
subordinated debt to Nevell, another affiliated company within the Sheth Group
(described more fully in Note 7 of the Notes to the Consolidated Financial
Statements). The subordinated debt reduction, net of the related write-down of
warrant valuation costs attributable to such debt, exceeded the carrying value
of the Company's Brazilian investment by $1,506,000 and was recorded as an
increase in additional paid-in-capital.
On March 15, 1999, pursuant to a stock purchase agreement entered into by and
among the Company, Transvit Holding Corporation ("THC"), a wholly owned
affiliate of the Sheth Group, the majority stockholder of the Company, and
Nevell, the Company 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 Mexico. The
transaction was effective as of November 29, 1998.
The transaction provides for a non-compete restriction and a supply agreement
whereby the Company agreed to continue selling certain products to Trimex. The
Company 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 Company
currently has no plans to exercise such option but may do so in the future.
The Company received payment for Trimex Stock in the form of a reduction of debt
due Nevell, and redemption of shares of the Company's Series A Preferred Stock,
issued to Nevell, at a redemption price of $7.62 per share. Of the total
purchase price for Trimex Stock 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 Stock 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
Company's investment in Trimex over the proceeds received was recorded as an
increase in accumulated deficit. See Note 8 of the Notes to Consolidated
Financial Statements.
Effective September 3, 1998, the Company completed a private placement whereby
it 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 common shares at a conversion
price of $5.44 per share. In addition, the Company issued a warrant to purchase
125,000 shares of Common Stock at an exercise price of between $4.00 to $6.28
per share. The Company received proceeds of approximately $4,700,000 from such
private placement.
On October 14, 1999, the Company completed another private placement whereby it
sold an additional 21,667 shares of Series C Preferred Stock to the private
investor mentioned previously for $60 per share. Each share of Series C
Preferred Stock is convertible into 11.0345 common shares at a conversion price
of $5.44 per share. In connection with such sale, the Company issued warrants to
purchase an aggregate of 60,000 shares of Common Stock at an exercise price of
$4.75 per share. The Company received approximately $1,300,000 from such private
placement.
The holder of the Series C Preferred Stock is entitled to receive a cumulative
cash dividend of $4.80 per share per annum. The dividend is payable quarterly in
arrears ($1.20 per quarter). See Note 15 of the Notes to the Consolidated
Financial Statements for further discussion.
Effective November 1999 the Company, through a newly formed wholly-owned
subsidiary Tristar USA, Inc. ("Tristar USA"), purchased all of the issued and
outstanding common stock of Fragrance Impressions Limited ("FIL") for $350,000
in cash, $3,050,000 in interest bearing promissory notes ("Notes") due in equal
annual installments on November 15, 2000 through 2004 and options to purchase up
to 100,000 shares of the Company's common stock. The Notes are subject to post
closing adjustment to the outstanding principal balance, based upon sales
achievement during the next two calendar years. Cash used to finance this
transaction was derived from the sales of 21,667 shares of Series C Preferred
Stock in October 1999, discussed above. See Note 9 of the Notes to Consolidated
Financial Statements for further discussion.
The Company does not have any plans to pay any cash dividends on the Common
Stock, the Series A Preferred Stock or the Series B Preferred Stock in the
foreseeable future. Further, payments of such dividends are subject to
restrictions imposed by the Company's principal lender in connection with the
existing revolving line of credit.
On October 10, 2000, the Company began the construction of a new, 60,000 square
foot distribution center and office complex, adjacent to its existing
manufacturing facility in Pleasanton, Texas. The project is scheduled for
completion in April 2001. The financing of this project will be mainly provided
through the utilization of the Company's existing credit facility.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement as amended in June 2000 by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133", establishes accounting and
reporting standards for derivative instruments and all hedging activities. The
Company must adopt SFAS No. 133, as amended by SFAS No. 138, in the first
quarter of fiscal 2001. The Company has completed assessing the impact adoption
of this standard will have and has concluded that there is no expected material
effect on its financial presentation and results of operations as a result of
this standard.
In December 1999, the Securities and Exchage Commission staff issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", which provides
guidance on the recognition and disclosure of revenues. Adoption of SAB No. 101
is required by the fourth quarter of fiscal 2001. The Company is in the process
of evaluating the effect adoption of SAB No. 101 will have on the Company's
consolidated financial position and results of operations.
INFLATION
During fiscal year ended 2000, and consistent with the Company's 1999 and 1998
fiscal years, inflation did not have a material adverse impact either on the
Company's net sales or income from continuing operations. The Company does not
expect inflation to have a material adverse impact in fiscal year 2001.
ITEM 7A. 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 August 26, 2000 bear interest at
variable rates (See Note 8 of the Notes to the Consolidated Financial
Statements). A one-percentage point increase in the effective interest rate
would result in an approximate $226,000 and $130,000 for 2000 and 1999,
respectively, 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
August 26, 2000.
As discussed in Note 21 of the Notes to the Consolidated Financial Statements,
the Company's direct exports comprise approximately 30% of net sales for the
fiscal year ended August 26, 2000. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules listed
in Item 14(a)(1) and 14(a)(2) are annexed to this report as a separate section.
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ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item will be contained in the Company's Proxy
Statement for its 2001 Annual Meeting, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's Proxy
Statement for its 2001 Annual Meeting, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Company's Proxy
Statement for its 2001 Annual Meeting, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's Proxy
Statement for its 2001 Annual Meeting, which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS: Consolidated Financial Statements as
detailed in the Index to Financial Statements and Schedules for
the years ended August 26, 2000, August 28, 1999, and August
29, 1998 required in response to Item 8 of Part II of this
report are annexed to this report as a separate section.
2. FINANCIAL STATEMENT SCHEDULES: Any financial statement
schedules for the years ended August 26, 2000, August 28, 1999
and August 29, 1998, required in Item 8 of Part II of this
report are annexed to this report as a separate section.
(B) REPORTS ON FORM 8-K:
1. The Form 8-K filed June 7, 2000, updating factors that have
potential adverse effects on results of operations for future
periods.
2. The Form 8-K filed July 19, 2000, reporting a change in
control.
(C) EXHIBITS
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EXHIBIT INDEX
2.1 Stock purchase agreement between the Company and Transvit Holding
Corporation dated November 29, 1998. Incorporated herein by
reference to Exhibit 2.1 to the Company's current report on Form
8-K dated March 25, 1999.
2.2 Plan of Merger and Acquisition agreement dated effective November
1, 1999 by and among Tristar Corporation, Tristar USA, Inc. and
Fragrance Impressions Limited (incorporated herein by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K filed
November 30, 1999).
3.1 Certificate of Incorporation of the Registrant, as amended.
Incorporated herein by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended August 29,
1998.
3.2 By-Laws of the Registrant (Amended as of August 14, 1992).
Incorporated by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for the year ended August 31, 1992.
4 Form of Registrant Common Stock certificates. Incorporated by
reference to Exhibit 4.2 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended February 28, 1993.
10.01 1991 Amended and Restated Stock Option Plan of the Registrant.
Incorporated by reference to Exhibit 10.1 of the Company's Annual
Report on Form 10-K for the year ended August 31, 1992.
10.02 Agreement dated August 31, 1993 between the Core Sheth Families,
Viren Sheth, Starion International, Ltd. and the Registrant.
Incorporated by reference to Exhibit 10.31 of the Company's Annual
Report on Form 10-K for the year ended August 31, 1993.
10.03 Financing Agreement dated August 31, 1993 between the Core Sheth
Families and the Registrant. Incorporated by reference to Exhibit
10.32 of the Company's Annual Report on Form 10-K for the year
ended August 31, 1993.
10.04 Lease Agreement Re: Bulk Warehouse Facility in San Antonio dated
December 8, 1993, between Northwestern Mutual Life Insurance Co.
and Registrant. Incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for period ended November
30, 1993.
10.05 Amendment to Common Stock Purchase Warrant dated August 31, 1995,
between the Company and Starion International, Ltd. Incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 8-K dated
August 31, 1995.
10.06 Non-Qualified Stock Option Grant to Viren S. Sheth dated April 19,
1996. Incorporated by reference to Exhibit 10.29 of the Company's
Annual Report on Form 10-K for the year ended August 31, 1996.
10.07 Letter Agreement with Transvit Manufacturing Corporation Converting
Line of Credit Promissory Note to 666,529 shares of Series A
Convertible Preferred Stock dated December 11, 1996. Incorporated
by reference to Exhibit 10.30 of the Company's Annual Report on
Form 10-K for the year ended August 31, 1996.
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10.08 Incentive Stock Option between the Company and Peter C. Liman dated
January 27, 1997. Incorporated by reference to Exhibit 10.32 of the
Company's Quarterly Report on Form 10-Q for the period ended March
1, 1997.
10.09 Letter Agreement with Nevell Investments S.A. converting
Subordinated Debt Promissory Note to 120,690 shares of Series B
Convertible Preferred Stock dated February 21, 1997. Incorporated
by reference to Exhibit 10.34 of the Company's Quarterly Report on
Form 10-Q for the period ended March 1, 1997.
10.10 Revolving Credit Term Loan and Security Agreement dated December
19, 1997 between the Company and BNY Financial Corporation,
incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the period ended November 29,
1997.
10.11 Stock purchase agreement between the Company and Transvit
Distribution Corporation dated May 30, 1998. Incorporated herein
the reference to Exhibit 10.40 of the Company's annual report on
Form 10-K for the fiscal year ended August 29, 1998.
10.12 Letter agreement between the Company and Nevell Investments, S.A.
("Nevell") dated March 1, 1998. Incorporated herein the reference
to Exhibit 10.41 of the Company's annual report on Form 10-K for
the fiscal year ended August 29, 1998.
10.13 Investment agreement between the Company and Pioneer Ventures
Associates Limited Partnership, dated September 3, 1998.
Incorporated herein the reference to Exhibit 10.42 of the Company's
annual report on Form 10-K for the fiscal year ended August 29,
1998.
10.14 Warrant to purchase shares of common stock of the Company granted
to Pioneer Ventures Associates Limited Partnership, dated September
3, 1998. Incorporated herein the reference to Exhibit 10.43 of the
Company's annual report on Form 10-K for the fiscal year ended
August 29, 1998.
10.15 Trademark agreement between the Company and S&J Perfume Company,
dated September 3, 1998. Incorporated herein the reference to
Exhibit 10.44 of the Company's annual report on Form 10-K for the
fiscal year ended August 29, 1998.
10.16 Voting and shareholders agreement dated September 3, 1998.
Incorporated herein the reference to Exhibit 10.45 of the Company's
annual report on Form 10-K for the fiscal year ended August 29,
1998.
10.17 Employment agreement between the Company and Richard Howard dated
September 1, 1998. Incorporated herein by reference to Exhibit 10.1
of the Company's quarterly report on Form 10-Q for the quarter
ended November 28, 1998.
10.18 Employment agreement between the Company and Robert M. Viola dated
September 1, 1998. Incorporated herein by reference to Exhibit 10.2
of the Company's quarterly report on Form 10-Q for the quarter
ended November 28, 1998.
10.19 Warrant to purchase shares of Common Stock of the Company granted
to Pioneer Ventures Associates Limited Partnership, dated October
14, 1999. Incorporated herein by reference to Exhibit 10.48 of the
Company's annual report on Form 10-K for the fiscal year ended
August 28, 1999.
18
<PAGE>
10.20 Form of Option agreement between Tristar Corporation and each of
the former stockholders of Fragrance Impressions Limited
(incorporated herein by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K filed November 30, 1999.
10.21 Employment agreement dated November 10, 1999 between Tristar USA<
Inc. and Thomas E. McCann (incorporated herein by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K filed
November 30, 1999.
*10.22 Employment agreement between the Company and Richard Howard dated
September 21, 2000.
*10.23 Employment agreement between the Company and Robert M. Viola dated
September 21, 2000.
18 Preferability letter from KPMG Peat Marwick LLP regarding change in
accounting principles dated November 6, 1995. Incorporated by
reference to Exhibit 18 of the Annual Report on Form 10-K for the
year ended August 31, 1995.
*24.1 Consent by PricewaterhouseCoopers LLP.
*27 Financial Data Schedule.
--------------------
* Filed herewith.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 28, 2000 TRISTAR CORPORATION
By: /s/ RICHARD R. HOWARD
RICHARD R. HOWARD
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ ROBERT M. VIOLA
ROBERT M. VIOLA
Senior Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: November 28, 2000 /s/ RICHARD P. RIFENBURGH
RICHARD P. RIFENBURGH, Director
Date: November 28, 2000 /s/ B. J. HARID
B. J. HARID, Director
Date: November 28, 2000 /s/ RICHARD R. HOWARD
RICHARD R. HOWARD, Director
Date: November 28, 2000 /s/ ROBERT A. LERMAN
ROBERT A. LERMAN, Director
Date: November 28, 2000 /s/ VIREN S. SHETH
VIREN S. SHETH, Director
20
<PAGE>
TRISTAR CORPORATION
SAN ANTONIO, TEXAS
ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 26, 2000
ITEM 14(A)(1) AND (2), (C), AND (D)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
ITEM 14(A)(1) AND (2)
The following consolidated financial statements of TRISTAR CORPORATION and
subsidiaries are included in Item 8:
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants .................................... F1
Balance sheets as of August 26, 2000 and August 28, 1999 ............. F2 and F3
Statements of operations and comprehensive income for
each of the three years in the period ended August 26, 2000 ....... F4
Statements of shareholders' equity for each of the three years in the
period ended August 26, 2000 ...................................... F5
Statements of cash flows for each of the three years in the period
ended August 26, 2000 ............................................. F6 and F7
Notes to consolidated financial statements ........................... F8 to F23
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:
The following consolidated financial statement schedule of TRISTAR CORPORATION
and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts ...................... F24
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Tristar Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2), present fairly, in all material respects,
the financial position of Tristar Corporation and its subsidiaries at August 26,
2000 and August 28, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended August 26, 2000 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(1) and (2), presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
November 28, 2000
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 26, AUGUST 28,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash ......................................................... $ 124,000 $ 90,000
Accounts receivable, less allowance for doubtful accounts
of $852,000 and $651,000, respectively ................... 19,745,000 13,519,000
Accounts receivable - related parties - net .................. 5,013,000 4,118,000
Inventories .................................................. 13,482,000 9,531,000
Other current assets ......................................... 340,000 72,000
------------ ------------
Total current assets .................................. 38,704,000 27,330,000
Property, plant and equipment, less accumulated depreciation
of $11,774,000 and $10,434,000, respectively ................. 8,271,000 8,364,000
------------ ------------
Other assets:
Goodwill, less accumulated amortization
of $267,000 in 2000 ...................................... 7,986,000 --
Other assets ................................................. 287,000 435,000
------------ ------------
Total other assets .................................... 8,273,000 435,000
------------ ------------
Total assets ................................. $ 55,248,000 $ 36,129,000
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY AUGUST 26, 2000 AUGUST 28, 1999
---------------- ----------------
<S> <C> <C>
Current liabilities:
Revolving credit agreement borrowings ....................................... $ 15,167,000 $ 8,926,000
Accounts payable - trade .................................................... 8,624,000 7,055,000
Accounts payable - related parties - net .................................... 4,512,000 3,516,000
Accrued expenses ............................................................ 8,179,000 3,728,000
Current portion of capital lease obligations ................................ 9,000 132,000
Current portion of long-term debt ........................................... 1,712,000 1,283,000
Current portion of subordinated debt ........................................ 945,000 --
---------------- ----------------
Total current liabilities ............................................... 39,148,000 24,640,000
Long-term debt, less current portion ............................................ 2,077,000 2,738,000
Subordinated debt, less current portion ......................................... 2,735,000 --
Obligations under capital leases, less current portion .......................... 12,000 20,000
---------------- ----------------
Total Liabilities ....................................................... 43,972,000 27,398,000
---------------- ----------------
Commitments and contingencies (Note 19)
Shareholders' equity:
Preferred stock, $.05 par value; authorized 1,000,000 shares:
Series A, 537,142 shares issued and outstanding ......................... 3,760,000 3,760,000
Series B, 31,890 and 120,690 shares, respectively issued and outstanding 1,173,000 4,511,000
Series C, 100,000 and 78,333 shares, respectively issued and outstanding 6,133,000 4,699,000
Common stock, $.01 par value; authorized 30,000,000 shares; issued and
outstanding 16,783,909 shares in 2000 and 16,768,859 shares in 1999 ..... 168,000 168,000
Additional paid-in capital .................................................. 14,723,000 12,841,000
Related party receivables ................................................... -- (2,365,000)
Accumulated deficit ......................................................... (14,681,000) (14,883,000)
---------------- ----------------
Total shareholders' equity .............................................. 11,276,000 8,731,000
---------------- ----------------
Total liabilities and shareholders' equity .......................... $ 55,248,000 $ 36,129,000
================ ================
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ............................................... $ 55,608,000 $ 55,994,000 $ 67,683,000
Cost of sales ........................................... 37,343,000 39,867,000 51,040,000
------------ ------------ ------------
Gross profit ............................................ 18,265,000 16,127,000 16,643,000
Selling, general and administrative expenses ............ 14,517,000 14,255,000 15,816,000
------------ ------------ ------------
Income from operations .................................. 3,748,000 1,872,000 827,000
Other income (expense):
Interest expense .............................. (1,968,000) (1,246,000) (1,786,000)
Other income (expense) ........................ 11,000 (128,000) (240,000)
Litigation expenses ........................... (21,000) (69,000) (230,000)
------------ ------------ ------------
Income (loss) before income taxes ....................... 1,770,000 429,000 (1,429,000)
Income tax expense ...................................... 97,000 7,000 62,000
------------ ------------ ------------
Net income (loss) ....................................... 1,673,000 422,000 (1,491,000)
Less:
Cumulative preferred stock dividends .......... (881,000) (797,000) (453,000)
Beneficial conversion feature ................. (372,000) (681,000) --
------------ ------------ ------------
Net income (loss) applicable to common stock ............ $ 420,000 $ (1,056,000) $ (1,944,000)
============ ============ ============
Earnings per Common Share:
Basic ................................................... $ 0.03 $ (0.06) $ (0.12)
============ ============ ============
Diluted ................................................. $ 0.02 $ (0.06) $ (0.12)
============ ============ ============
Net income (loss) ....................................... $ 1,673,000 $ 422,000 $ (1,491,000)
Foreign currency translation adjustment, net of tax ..... -- 376,000 (376,000)
------------ ------------ ------------
Comprehensive income (loss) ............................. $ 1,673,000 $ 798,000 $ (1,867,000)
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 26, 2000, AUGUST 28, 1999 AND AUGUST 29, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------------------------------
COMMON STOCK SERIES A SERIES B SERIES C
-------------------- ----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- -------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 30, 1997 ......... 16,729,074 $168,000 666,529 $ 4,666,000 120,690 $ 4,511,000 -- --
Net loss ......................... -- -- -- -- -- -- -- --
Exercise of stock options ........ 27,495 -- -- -- -- -- -- --
Contribution to 401(k) Plan ...... 4,924 -- -- -- -- -- -- --
Sale of Brazilian subsidiary ..... -- -- -- -- -- -- -- --
Issuance of Warrants ............. -- -- -- -- -- -- -- --
Foreign currency translation ..... -- -- -- -- -- -- -- --
---------- -------- -------- ----------- -------- ----------- -------- ----------
Balance, August 29, 1998 ......... 16,761,493 168,000 666,529 4,666,000 120,690 4,511,000 -- --
Net income ....................... -- -- -- -- -- -- -- --
Preferred Stock Dividends ........ -- -- -- -- -- -- -- --
Contribution to 401(K) Plan ...... 7,366 -- -- -- -- -- -- --
Issuance of Series C Preferred
Stock and related warrants ...... -- -- -- -- -- -- 78,333 $4,699,000
Related Party Receivables ........ -- -- -- -- -- -- -- --
Sale of Mexican Subsidiary ....... -- -- (129,387) (906,000) -- -- -- --
---------- -------- -------- ----------- -------- ----------- -------- ----------
Balance, August 28, 1999 ......... 16,768,859 168,000 537,142 3,760,000 120,690 4,511,000 78,333 4,699,000
Net income ....................... -- -- -- -- -- -- -- --
Series C Preferred Stock Dividends -- -- -- -- -- -- -- --
Stock option exercise ............ 5,000 -- -- -- -- -- -- --
Contribution to 401(k) Plan ...... 10,050 -- -- -- -- -- -- --
Issuance of Series C Preferred
Stock and related warrants ....... -- -- -- -- -- -- 21,667 1,434,000
Issuance of options relating to
FIL Acquisition .................. -- -- -- -- -- -- -- --
Increase in Related Party
Receivables ...................... -- -- -- -- -- -- -- --
Related Party Receivables
Settlement ....................... -- -- -- -- (88,800) (3,338,000) -- --
---------- -------- -------- ----------- -------- ----------- -------- ----------
Balance, August 26, 2000 ......... 16,783,909 $168,000 537,142 $ 3,760,000 31,890 $ 1,173,000 100,000 $6,133,000
========== ======== ======== =========== ======== =========== ======== ==========
<CAPTION>
FOREIGN
ADDITIONAL RELATED CURRENCY
PAID-IN PARTY TRANSLATION ACCUMULATED
CAPITAL RECEIVABLES ADJUSTMENT DEFICIT
----------- ----------- ----------- ------------
<S> <C> <C>
Balance, August 30, 1997 ......... $10,566,000 -- -- $(12,612,000)
Net loss ......................... -- -- -- (1,491,000)
Exercise of stock options ........ 264,000 -- -- --
Contribution to 401(k) Plan ...... 51,000 -- -- --
Sale of Brazilian subsidiary ..... 1,506,000 -- -- --
Issuance of Warrants ............. 96,000 -- -- --
Foreign currency translation ..... -- -- $ (376,000) --
----------- ----------- ----------- ------------
Balance, August 29, 1998 ......... 12,483,000 -- (376,000) (14,103,000)
Net income ....................... -- -- -- 422,000
Preferred Stock Dividends ........ -- -- -- (375,000)
Contribution to 401(K) Plan ...... 51,000 -- -- --
Issuance of Series C Preferred
Stock and related warrants ...... 307,000 -- -- (681,000)
Related Party Receivables ........ -- $(2,365,000) -- --
Sale of Mexican Subsidiary ....... -- -- 376,000 (146,000)
----------- ----------- ----------- ------------
Balance, August 28, 1999 ......... 12,841,000 (2,365,000) -- (14,883,000)
Net income ....................... -- -- -- 1,673,000
Series C Preferred Stock Dividends -- -- -- (468,000)
Stock option exercise ............ 7,000 -- -- --
Contribution to 401(k) Plan ...... 60,000 -- -- --
Issuance of Series C Preferred
Stock and related warrants ....... 185,000 -- -- (372,000)
Issuance of options relating to
FIL Acquisition .................. 401,000 -- -- --
Increase in related Party
Receivables .................... -- (375,000) -- --
Related Party Receivables
Settlement ..................... 1,229,000 2,740,000 -- (631,000)
----------- ----------- ----------- ------------
Balance, August 26, 2000 ......... $14,723,000 $ -- $ -- $(14,681,000)
=========== =========== =========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
AUGUST 26, AUGUST 28, AUGUST 29,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 1,673,000 $ 422,000 $ (1,491,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation ................................................. 1,340,000 1,727,000 1,775,000
Amortization of goodwill ..................................... 267,000 -- --
Other amortization costs ..................................... 60,000 -- --
Provision for losses on accounts receivable .................. 608,000 886,000 998,000
Provision for market valuation of inventory .................. 292,000 170,000 720,000
Provision for (reduction in) LIFO reserve ................... 8,000 109,000 (685,000)
Foreign currency translation adjustment ...................... -- -- (376,000)
Compensation expense related to extension of stock options ... -- -- 217,000
Issuance of stock in connection with 401K plan ............... 60,000 51,000 51,000
Amortization of deferred loan origination costs .............. 252,000 255,000 188,000
Amortization of warrant valuation ............................ 15,000 4,000 60,000
Change in operating assets and liabilities:
Accounts receivable ....................................... (4,599,000) (2,278,000) 145,000
Accounts receivable, affiliates ........................... (1,270,000) (2,876,000) (1,787,000)
Inventories ............................................... (3,021,000) 1,428,000 1,414,000
Other current assets ...................................... (387,000) 350,000 264,000
Accounts payable .......................................... (449,000) (2,234,000) 1,251,000
Accounts payable, affiliates .............................. 996,000 (1,567,000) 722,000
Accrued expenses .......................................... 2,859,000 243,000 (239,000)
Income taxes payable ...................................... 75,000 -- (11,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities ....... (1,221,000) (3,310,000) 3,216,000
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ............................................ (1,201,000) (1,892,000) (1,599,000)
Investment in business acquisition; net of cash acquired ........ (554,000) --
Decrease (increase) in other assets ............................. -- -- (20,000)
------------ ------------ ------------
Net cash used in investing activities ..................... (1,755,000) (1,892,000) (1,619,000)
------------ ------------ ------------
Cash flows from financing activities:
Book overdraft .................................................. -- (334,000) 334,000
Borrowings under revolving credit facility ...................... 69,076,000 80,993,000 53,948,000
Repayments under revolving credit facility ...................... (65,817,000) (79,679,000) (46,336,000)
Net borrowings (repayment) under former revolving credit facility -- -- (10,205,000)
Proceeds from long-term debt .................................... 1,271,000 1,414,000 4,258,000
Principal payments on capital leases ............................ (131,000) (122,000) (132,000)
Principal payments on long-term debt ............................ (2,175,000) (996,000) (3,157,000)
Deferred loan costs relating to revolving credit facility ....... -- -- (780,000)
</TABLE>
F-6
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Issuance of Preferred Stock C ................................................. 1,300,000 4,699,000 --
Payment of issuance costs for Preferred Stock C ............................... (53,000) (374,000) --
Payment of dividends on Preferred Stock C ..................................... (468,000) (375,000) --
Proceeds from issuance of common stock ........................................ 7,000 -- 47,000
------------- ------------- -------------
Net cash provided by (used in) financing activities ....................... 3,010,000 5,226,000 (2,023,000)
============= ============= =============
Net increase (decrease) in cash .................................................... 34,000 24,000 (426,000)
Cash at beginning of year .......................................................... 90,000 66,000 492,000
------------- ------------- -------------
Cash at end of year ................................................................ $ 124,000 $ 90,000 $ 66,000
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ................................................................... $ 1,683,000 $ 991,000 $ 1,637,000
Income taxes paid (received) ............................................... $ 63,000 $ (38,000) $ 131,000
</TABLE>
Supplemental disclosure of noncash financing and investing activities:
2000
o The Company purchased all of the capital stock of FIL for $730,000. In
conjunction with this acquisition, liabilities were assumed as follows:
Fair value of assets acquired ........... $ 11,795,000
Value of options issued ................. (307,000)
Cash paid for the capital stock,
including acquisition costs ........... (730,000)
------------
Liabilities assumed ................. $ 10,758,000
o As of August 26, 2000, the Sheth Group settled the related party accounts
receivable outstanding balance of $2,740,000 due to the Company. Payment
was made by the redemption of 88,800 shares of Series B Convertible
Preferred Stock, $.05 par value ("Series B Preferred"), issued to Nevell.
The agreed to redemption value of $23.75 per share of Series B Preferred
amounted to $2,109,000 with the remaining $631,000 representing dividends
in arrears.
1999
o Sale of a Mexican subsidiary to an affiliated company for $2,686,000. The
result was a non-cash decrease of subordinated debt to Nevell Investments,
S.A. of $1,700,000 and the remaining $986,000 attributed to redeemed
shares of Series A Preferred Stock (See Note 15 of the Notes to
Consolidated Financial Statements for further discussion).
o Certain related party accounts receivable balances will not be collected
in the normal course of business. Accordingly, as of August 28, 1999,
outstanding balances totaling $2,365,000 have been reclassified to
shareholder's equity.
1998
o A non-cash increase in property and equipment and obligations under
capital leases of $327,000.
o Sale of a Brazilian subsidiary to an affiliated company for $2,800,000.
The result was a non-cash decrease of subordinated debt to Nevell
Investments, S.A. of $2,800,000 (See Note 15 of the Notes to Consolidated
Financial Statements for further discussion).
o Warrants issued to an investment banker resulted in a non-cash increase in
additional paid-in-capital and other assets of $96,000.
See accompanying notes to the consolidated financial statements.
F-7
<PAGE>
TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
AFFILIATION
The Company, which is primarily owned by companies under the control of the
Sheth Group (Starion International, Ltd., a British Virgin Islands Limited
Partnership ("Starion B.V.I.") and Transvit Manufacturing Corporation
("Transvit")), operates in one industry segment; the development, manufacturing,
marketing and distribution of designer alternative fragrances, complimentary
products to those fragrances and cosmetic pencils, and in the marketing and
distribution of other cosmetic and selected toiletry products. The Company
distributes its products to wholesalers, distributors, drug and grocery chains,
mass merchandisers and specialty chain stores located primarily in North and
South America. In fiscal 2000, 1999 and 1998, one customer accounted for
approximately 14%, 13% and 10%, respectively, of the Company's net sales.
FISCAL YEAR END
The Company utilizes a 52-53 week fiscal year ending on the Saturday nearest the
last day of the month of August in each year. The 2000, 1999 and 1998 fiscal
years ended on August 26, August 28, and August 29, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Tristar
Corporation and all subsidiaries (the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation. Effective May 30, 1998, the
company sold its Brazilian subsidiary. See Note 7 of the Notes to Consolidated
Financial Statements for further discussion. Effective November 29, 1998, the
Company sold its Mexican subsidiary. See Note 8 of the Notes to Consolidated
Financial Statements for further discussion. Effective November 15, 1999, the
Company acquired FIL. See Note 9 of the Notes to Consolidated Finanaical
Statements for further discussion.
INVENTORY
Inventories are stated at the lower of last-in-first-out (LIFO) cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is determined by
the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs are charged to operations.
The estimated useful lives are as follows:
Buildings 32 years
Leasehold improvements Term of the lease or estimated useful
life, whichever is less
Furniture and equipment 7 to 10 years
Manufacturing equipment 7 years
Vehicles 5 years
Computer equipment 5 years
Gains and losses from disposals of property and equipment are reflected in the
Statement of Operations in the period of disposal.
EQUIPMENT UNDER CAPITAL LEASES
Equipment under capital leases is amortized over the term of the lease or the
estimated useful life of the equipment, whichever is less.
REVENUE RECOGNITION
Revenue is recognized by the Company when goods are shipped and title passes to
the purchaser.
NET INCOME (LOSS) PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings per Share," in fiscal 1998.
Accordingly, basic EPS is computed
F-8
<PAGE>
by dividing net income (loss) applicable to common shareholders by the
weighted-average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income (loss) applicable to common shareholders,
as adjusted for the assumed conversion of preferred stock, if applicable, by the
sum of the weighted-average number of common shares outstanding, and the number
of additional common shares that would have been outstanding if dilutive
options, warrants and convertible preferred stock had been exercised or
converted.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTIONS
The Company purchases a significant portion of its inventory for its
manufacturing operations from foreign suppliers. Such inventory is recorded
using currency exchange rates in effect on the date of purchase. Gains and
losses on the settlement of accounts payable for such purchases are recorded
based upon the currency exchange rates in effect on the date of settlement.
Foreign currency denominated accounts payable balances outstanding at August 26,
2000 and August 28, 1999 have been translated to U.S. dollars utilizing exchange
rates in effect at the respective balance sheet dates.
The net foreign currency transaction and translation gains/(losses) reflected in
the Statement of Operations for the years ended August 26, 2000, August 28, 1999
and August 29, 1998 were approximately $77,000, $157,000, and ($111,000)
respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were approximately
$2,583,000, $1,909,000 and $1,860,000, for the year ended August 26, 2000,
August 28, 1999 and August 29, 1998, respectively.
RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
2. NET INCOME/(LOSS) PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic and diluted
loss per share computations, as required by SFAS No. 128, is presented below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 26, 2000
-------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------ ------------ ------------
<S> <C> <C> <C>
Basic EPS:Net income available to common stockholders .................... $ 420,000 16,773,840 $ .03
============ ============ ============
Effect of Dilutive Securities:
Stock Options ............................................................ -- 15,646 --
Warrants ................................................................. -- 374,629 --
------------ ------------ ------------
Dilutive EPS:
Net income available to common stockholders and assumed conversions ...... $ 420,000 17,164,115 $ .02
============ ============ ============
<CAPTION>
FOR THE YEAR ENDED AUGUST 28, 1999
-------------------------------------------
PER SHARE
LOSS SHARES AMOUNT
------------ ------------ ------------
Basic/Diluted EPS:
Net loss available to common stockholders ................................ $ (1,056,000) 16,764,506 $ (.06)
============ ============ ============
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 29, 1998
-------------------------------------------
PER SHARE
LOSS SHARES AMOUNT
------------ ------------ ------------
Basic/Diluted EPS:
<S> <C> <C> <C>
Net loss available to common stockholders ....................... $ (1,944,000) 16,748,798 $ (.12)
============ ============ ============
</TABLE>
Options to purchase 1,875,000 shares of common stock and warrants to purchase
50,000 shares of common stock at $5.766 per share were outstanding at August 26,
2000 but were not included in the computation of diluted EPS because the
options' and warrants' exercise price was greater than the average market price
of the common shares and would have an anti-dilutive effect. Dilutive EPS equals
basic EPS for the years ended August 28, 1999 and August 29, 1998 as the assumed
conversion of convertible preferred stock and the assumed exercise of
outstanding options and warrants would have an anti-dilutive effect.
3. INVENTORIES:
<TABLE>
<CAPTION>
August 26, 2000 August 28, 1999
--------------- ---------------
<S> <C> <C>
Raw materials .................... $ 7,331,000 $ 4,183,000
Work-in-process .................. 1,498,000 630,000
Finished goods ................... 6,575,000 5,395,000
--------------- ---------------
15,404,000 10,208,000
Reserves for market valuation .... (1,542,000) (305,000)
LIFO valuation allowance ......... (380,000) (372,000)
--------------- ---------------
$ 13,482,000 $ 9,531,000
=============== ===============
</TABLE>
Cost of sales was increased by approximately $362,000 as a result of LIFO
inventory decrements in 1999.
4. PROPERTY, PLANT AND EQUIPMENT:
August 26, 2000 August 28, 1999
--------------- ---------------
Land ................................... $ 33,000 $ 33,000
Building and leasehold improvements .... 4,894,000 4,903,000
Machinery and equipment ................ 11,527,000 10,359,000
Computer equipment ..................... 2,735,000 2,667,000
Furniture and equipment ................ 856,000 836,000
--------------- ---------------
20,045,000 18,798,000
Less accumulated depreciation .......... (11,774,000) (10,434,000)
--------------- ---------------
$ 8,271,000 $ 8,364,000
=============== ===============
During the fiscal years ended August 26, 2000, August 28, 1999 and August 29,
1998, the Company recorded depreciation expense of $1,340,000, $1,727,000 and
$1,775,000.
F-10
<PAGE>
5. ACCRUED EXPENSES:
The company's accrued expenses consist of the following:
August 26, 2000 August 28, 1999
--------------- ---------------
Accrued interest expense - subordinated debt. $ 1,631,000 $ 1,731,000
Accrued cooperative advertising ............. 1,028,000 96,000
Accrued allowance for sales returns ......... 3,501,000 618,000
Other ....................................... 2,019,000 1,283,000
--------------- ---------------
$ 8,179,000 $ 3,728,000
=============== ===============
6. REVOLVING CREDIT AGREEMENT BORROWINGS AND LONG-TERM DEBT:
August 26, 2000 August 28, 1999
---------------- ----------------
Revolving credit agreement borrowings . $ 15,167,000 $ 8,926,000
================ ================
Term loan ............................. $ 1,600,000 $ 2,286,000
Capital expenditure loan .............. 2,189,000 1,713,000
Other note payable .................... -- 22,000
---------------- ----------------
3,789,000 4,021,000
Less current portion .................. (1,712,000) (1,283,000)
---------------- ----------------
Long-term debt, less current portion .. $ 2,077,000 $ 2,738,000
================ ================
In December 1997, the Company entered into a $22,000,000 credit agreement (the
"Credit Agreement")with its principal lender. In November 1999, the Credit
Agreement was amended and restated to provide for a revolving credit facility
(the "Revolving Credit") of $16,000,000 of maximum borrowings; with a $4,500,000
sublimit allocated to support the requirements of Tristar USA ("FIL") (see Note
9 of the Notes to Consolidated Fiancial Statements for further details on
Tristar USA acquisition). Such borrowings bear 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 1.00% or the London Interbank Offered Rate
(LIBOR) plus 3.50% (although, borrowings based on LIBOR cannot exceed 60% of the
total oustanding borrowings under the Revolving Credit). At August 26, 2000, the
Revolving Credit bore interest at rates of 10.50% and 10.12%, 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, as defined in the agreement. Remaining availability under the
line as of August 26, 2000 approximated $756,000 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 in
the event of a "material adverse change", as defined. 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 (10.50 % at
August 26, 2000) plus 2.00%. Principal payments on the Term Loan consist of
equal monthly principal payments in the amount of $56,667 for 60 months
beginning in January 1998. Additionally, 50% of annual excess cash flow, as
defined, must be applied to the Term Loan installments in the inverse order of
maturity. As of August 26, 2000, the Company had outstanding borrowings under
the Term Loan totaling $1,600,000.
F-11
<PAGE>
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
(10.50 % at August 26, 2000) plus 2.00%. Principal payments on the Cap Ex
Facility commence one month after the related borrowing in 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 August 26, 2000 the Company had outstanding borrowings under the Cap Ex
Facility totalling $2,189,000. Principal payments are due at the rate of $86,000
per month.
Aggregate maturities of amounts outstanding under the Term Loan and Cap Ex
Facility are as follows as of August 26, 2000:
Fiscal Year Amount
----------- ---------------------
2001 $ 1,712,000
2002 2,077,000
2003 -
2004 -
---------------------
$ 3,789,000
=====================
Borrowings under the Credit Agreement are collateralized by all of the Company's
present and future assets. Restrictive financial covenants including Minimum
Tangible Net Worth, Minimum EBITDA, Maximum Loss, Minimum Fixed Charge Coverage,
Maximum Leverage and Maximum Capital Expenditures, were agreed upon in
connection with the FIL acquisition. Additional covenants limit borrowings,
asset sales and dividends. The Company was in violation of certain financial
covenants at August 26, 2000 and was granted waivers to such covenants by its
lender. The Company is currently in discussions with its lender concerning new
restrictive financial covenants for fiscal 2001.
7. SALE OF WHOLLY OWNED BRAZILIAN SUBSIDIARY
Effective May 30, 1998, the Company sold all of the capital stock and
distribution rights of its Brazilian subsidiary to Transvit Distribution Corp.
("TDC"), a wholly owned affiliate of the Sheth Group, for $2,800,000. The
agreement provides for a non-compete restriction and a supply arrangement
whereby the Company agreed to continue selling product to the Brazilian unit
through May 31, 2001. The company also received an option to repurchase the
stock and distribution rights from TDC at anytime prior to May 31, 2003. The
Company currently has no plans to repurchase the stock and distribution rights
under this option.
The Company received payment in the form of a reduction of the subordinated debt
to Nevell Investments, S.A., ("Nevell") another affiliated company within the
Sheth Group. The subordinated debt reduction, net of the related write-down of
warrant valuation costs attributable to such debt, exceeded the carrying value
of the Company's Brazilian investment by $1,506,000 and was recorded as an
increase in additional paid-in-capital.
8. SALE OF WHOLLY OWNED MEXICAN SUBSIDIARY
On March 15, 1999, pursuant to a stock purchase agreement entered into by and
among the Company, Transvit Holding Corporation ("THC"), a wholly owned
affiliate of the Sheth Group, the majority stockholder of the Company, and
Nevell Investments, S.A. ("Nevell"), another affiliate of the Sheth Group, the
Company 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.
F-12
<PAGE>
The transaction provides for a non-compete restriction and a supply agreement
whereby the Company agreed to continue selling certain products to Trimex. The
Company 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 Company
currently has no plans to exercise such option but may do so in the future.
The Company received payment in the form of a reduction of debt due Nevell, and
redemption of 129,387 shares of the Company'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 (See Note 8 of
the Notes to Consolidated Financial Statements) 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 Company's investment in Trimex over the proceeds received
was recorded as an increase in accumulated deficit.
9. PURCHASE OF FRAGRANCE IMPRESSIONS LIMITED ("FIL")
On November 15, 1999, the Company, and its newly formed wholly owned subsidiary,
Tristar USA, Inc. ("Tristar USA"), entered into an acquisition agreement dated
effective November 1, 1999 to acquire Fragrance Impressions Limited, a
Connecticut corporation ("FIL"). FIL, headquartered in Bridgeport, Connecticut,
markets and distributes designer alternative fragrances, cosmetics and bath and
body products. Under the terms of the acquisition agreement, FIL was merged into
Tristar USA which purchased all of the issued and outstanding common stock of
FIL for $350,000 in cash, $3,050,000 in promissory notes ("Notes"), and options
to purchase up to 100,000 shares of the Company's common stock at $5.82 per
share which were valued at approximately $307,000 utilizing the Black Scholes
Method. Pursuant to the purchase agreement, the Notes are subject to post
closing adjustments to the outstanding principle balance, based upon sales
achievement during the next two calendar years and other post acquisition
adjustments. As of August 26, 2000, the Company has recorded additional reserves
for product returns and obsolete inventory with a corresponding increase in
goodwill. The Company is currently in negotiations with the FIL selling
shareholders concerning the fair value of the assets acquired as provided in the
acquisition agreement. The outcome of these negotiations is still uncertain and
although management believes that the ultimate outcome will substantially reduce
subordinated notes payable to the FIL selling shareholders, such notes are
unadjusted as of August 26, 2000.
In connection with the FIL acquisition, the Company assumed and entered into
other notes payable with key employees and consultants for change in control and
other liabilities amounting to $1,498,000 (See Note 10 of the Notes to
Consolidated Financial Statements). Cash used to finance this transaction was
derived from the sale of 21,667 shares of Series C Preferred Stock in October
1999 (See Note 15 of the Notes to Consolidated Financial Statements). The
consideration paid by Tristar USA was arrived at through negotiations between
the Company, Tristar USA, and FIL and was based on a variety of issues,
including without limitation, earnings and revenue, the value of goodwill and
the nature of alternative designer fragrance, cosmetic and bath and body
industry.
The acquisition of FIL has been treated as a purchase acquisition for accounting
purposes. Accordingly, net assets acquired have been adjusted to fair value as
appropriate. The excess of the purchase price over the related fair value of net
assets acquired of approximately $8 million has been recorded as goodwill to be
amortized on a straight line basis over 20 years.
F-13
<PAGE>
The following represents supplemental consolidated pro-forma information for the
fifty-two weeks ended August 26, 2000 and August 28, 1999 assuming the FIL
acquisition had occurred at the beginning of each respective period:
2000 1999
(UNAUDITED) (UNAUDITED)
-------------- --------------
Net Sales .................... $ 56,173,000 $ 66,314,000
Net Income/(Loss) applicable
to common stock............. $ 658,000 $ (1,226,000)
EPS .......................... $ .04 $ (.07)
10. SUBORDINATED LONG-TERM DEBT:
Subordinated debt as of August 26, 2000, consists of the following (See Note 9
of the Notes to Consolidated Financial Statements):
<TABLE>
<CAPTION>
<S> <C>
Notes to selling shareholders; senior subordinated debt; interest
at prime payable annually; principal is payable in four
annual installments of $731,108 through November 2003 ......................... $ 2,683,000
Notes to key employees for change in control; senior subordinated debt;
interest at 7 1/2% payable quarterly; principal is payable in
twelve quarterly installments of $34,166 through November 2002 ................ 282,000
Notes to consultant; senior subordinated debt; interest at prime
payable quarterly; principal is payable in twelve quaterly
installments of $29,167 through November 2002 ................................. 239,000
Notes to creditor; senior subordinated debt; interest at prime payable
quarterly; principal is payable in 16 quarterly installments
of $37,436 through November 2003 .............................................. 446,000
Notes payable - other .......................................................... 30,000
-----------
Total subordinated debt ........................................................ $ 3,680,000
Less: current portion of subordinated debt ..................................... (945,000)
-----------
Total subordinated debt less current portion ................................... $ 2,735,000
===========
</TABLE>
--------------------------------------------------------------------------------
Aggregate maturities of amounts outstanding under Subordinated debt is as
follows as of August 26, 2000:
Fiscal Year Amount
----------- --------------------
2001 $ 945,000
2002 1,307,000
2003 1,045,000
2004 383,000
---------------------
$ 3,680,000
=====================
F-14
<PAGE>
The Company is currently in negotiations with the FIL selling shareholders
concerning the fair value of assets acquired as provided in the acquisition
agreement. The outcome of these negotiations is still uncertain and although
management believes that the ultimate outcome will substantially reduce
subordinated notes payable to the FIL selling shareholders, such notes are
unadjusted as of August 26, 2000.
11. RELATED PARTY TRANSACTIONS:
As of August 26, 2000, a majority of the Company's outstanding common stock
(73%) is owned by companies under control of the Sheth Group. Effective April
22, 1998, the Sheth Group sold 700,000 shares of the Company's stock to a
business associate. The purchase price was substantially lower than the price
reported by NASDAQ, reflecting a discount from the market price due to the
magnitude of the transaction and the relatively low trading volume of the
Company's stock. This transaction reduced the Sheth Group holdings to 73% of the
Company's outstanding stock.
The Company purchases finished goods and components from Sheth Group affiliates.
During fiscal 2000, 1999 and 1998 the Company purchased approximately
$2,777,000, $2,979,000, and $4,227,000, respectively, of such products.
The Company sold products to Sheth Group affiliates during fiscal 2000, 1999 and
1998 of approximately $2,960,000, $5,418,000, and $6,557,000, respectively.
Gross margins on these sales during fiscal 2000, 1999, and 1998 were 25%, 36%
and 16%, respectively.
In fiscal 2000, 1999 and 1998, the Company incurred fees to directors of
approximately $103,000, $206,000 and $279,000, respectively, of which
approximately $72,000 and $27,000 were unpaid at August 28, 1999 and August 29,
1998, respectively. As of August 26, 2000, all incurred fees to directors have
been paid.
At August 26, 2000, warrants to purchase 400,000 and 2,000,000 of the Company's
common stock at an exercise price of $2.75 and $5.34 per share, respectively,
were owned by the Sheth Group. The warrants are exercisable through 2003.
12. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE - RELATED PARTIES:
Related parties are the primary suppliers of the Company's cosmetics and are
also suppliers of certain components. Related party accounts payable result from
the purchase of those items. Related party accounts receivable result from the
sale of the Company's products to related parties. The following summarizes the
presentations at August 26, 2000 and August 28, 1999. See Note 10 of the Notes
to Consolidated Financial Statements for further discussion.
<TABLE>
<CAPTION>
August 26, 2000 August 28, 1999
--------------- ---------------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties ...... $ 5,199,000 $ 4,568,000
Offset amount .................................. (186,000) (450,000)
--------------- ---------------
Net related parties receivables ................ $ 5,013,000 $ 4,118,000
=============== ===============
ACCOUNTS PAYABLE:
Total accounts payable-related parties ......... $ 4,698,000 $ 3,966,000
Offset amount .................................. (186,000) (450,000)
--------------- ---------------
Net related parties payables ................... $ 4,512,000 $ 3,516,000
=============== ===============
</TABLE>
F-15
<PAGE>
Certain related party accounts receivable balances were determined not to be
settled in the normal course of business. Accordingly, outstanding balances
totaling $2,365,000 were reclassified to shareholder's equity at August 28,
1999. During fiscal 2000, the amount of these outstanding balances increased to
$2,740,000. As of August 26, 2000, the Sheth Group settled this outstanding
balance due to the Company. Payment was made by the redemption of 88,800 shares
of Series B Convertible Preferred Stock, $.05 par value ("Series B Preferred"),
issued to Nevell. The agreed to redemption value was determined to be $23.75 per
share of Series B Preferred based upon the closing price of $5.938 per share of
the Company's common stock on August 26, 2000. This amounted to $2,109,000 with
the remaining $631,000 representing dividends in arrears. The difference between
the stated redemption price of $29.00 and the agreed to price of $23.75 per
Series B Preferred share amounted to $1,229,000 and was recorded to additional
paid-in-capital. Federal witholding taxes on the dividends amounting to $189,227
will be remitted to the Company by the Sheth Group in satisfaction of this
obligation and a related party receivable equal to such amount is reflected in
the August 26, 2000 Consolidated Balance Sheet. As Part of this share redemption
transaction, the Sheth Group agreed to transfer 12,500 shares of common stock
owned by Transvit to the holders of the Company's Series C Preferred Stock.
13. LEASES:
The future minimum lease payments required under capital leases (together with
the present value of minimum lease payments) and future minimum lease payments
required under operating leases that have an initial or remaining lease term in
excess of one year as of August 26, 2000 are as follows:
Operating Capital
Fiscal Year Leases Leases
------------------------------------- ---------- --------
2001 ................................... $ 380,000 $ 9,000
2002 ................................... 219,000 9,000
2003 ................................... 198,000 4,000
2004 ................................... 164,000 --
2005 ................................... 50,000 --
---------- --------
Total minimum lease payments .................... $1,011,000 22,000
==========
Less imputed interest ........................... (1,000)
--------
Present value of minimum lease payments ......... 21,000
Less current portion ............................ (9,000)
--------
Long-term portion ............................... $ 12,000
========
Certain of the above leases include escalation charges based on increases in
real estate taxes, utilities and common maintenance charges.
Rental expense for fiscal 2000, 1999 and 1998 amounted to approximately
$783,000, $788,000, and $745,000, respectively.
14. INCOME TAXES:
The components of income (loss) before income taxes are as follows:
Years Ended
-------------------------------------------------------
August 26, 2000 August 28, 1999 August 29, 1998
---------------- ---------------- ----------------
Domestic ........... $ 1,770,000 $ 300,000 $ (495,000)
Foreign ............ -- 129,000 (934,000)
---------------- ---------------- ----------------
$ 1,770,000 $ 429,000 $ (1,429,000)
================ ================ ================
F-16
<PAGE>
Under the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), the asset and
liability method is used in accounting for income taxes. Deferred tax balances
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted marginal tax rates and
laws that will be in effect when the differences are expected to reverse.
Income tax expense (benefit) consists of the following:
Current Deferred Total
------------ ------------ ------------
Year ended August 26, 2000
U.S. Federal ............. $ 97,000 $ -- $ 97,000
State .................... -- -- --
------------ ------------ ------------
$ 97,000 $ -- $ 97,000
============ ============ ============
Year ended August 28, 1999
U.S. Federal ............. $ 7,000 $ -- $ 7,000
State .................... -- -- --
------------ ------------ ------------
$ 7,000 $ -- $ 7,000
============ ============ ============
Year ended August 29, 1998
U.S. Federal ............. $ 62,000 $ -- $ 62,000
State .................... -- -- --
------------ ------------ ------------
$ 62,000 $ -- $ 62,000
============ ============ ============
Income tax expense in fiscal 2000, 1999 and 1998 differed from the amounts
computed by applying the statutory income tax rate to income (loss) before
income taxes as a result of the following:
<TABLE>
<CAPTION>
August 26, August 28, August 29,
------------ ------------ ------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Computed expected tax expense (benefit) ................. $ 655,000 $ 159,000 $ (522,000)
Increase (decrease) in income taxes resulting from:
Net operating loss carryforward utilized .......... (657,000) (46,000) --
Warrant expenses not deductible for income tax
Purposes ...................................... -- 22,000
Foreign subsidiary (income) loss not included for
Income tax purposes ........................... (36,000) 327,000
U.S. loss providing no current year benefit ....... -- 558,000
Deferred tax asset valuation allowance inclusive of
other items providing no current period benefit ... 1,084,000 (518,000) (287,000)
Alternative minimum tax ........................... 63,000 7,000 --
Prior year return to provision adjustments ........ (913,000) (518,000) 62,000
IRS settlement impact on net operating
loss
carryforward ...................................... -- 925,000 --
Other, net ........................................ (135,000) 34,000 (98,000)
------------ ------------ ------------
Total income tax expense ................................ $ 97,000 $ 7,000 $ 62,000
============ ============ ============
</TABLE>
F-17
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 26, 2000 and
August 28, 1999 are presented below:
<TABLE>
<CAPTION>
August 26, 2000 August 28, 1999
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts
and sales returns ................................................... $ 1,184,000 $ 469,000
Inventories, principally due to allowance for obsolescence and difference
in certain costs capitalized for tax purposes ....................... 144,000 174,000
Packaging design costs .................................................. 145,000 270,000
Accrued expenses, principally due to accrual of related party interest
expense for financial reporting purposes ............................ 867,000 841,000
Net operating loss carryforward ......................................... 3,302,000 2,852,000
Alternative minimum tax credit carryforwards ............................ 363,000 306,000
--------------- ---------------
Total deferred tax assets ..................................................... 6,005,000 4,912,000
Less valuation allowance ...................................................... (5,111,000) (4,027,000)
--------------- ---------------
894,000 885,000
--------------- ---------------
Deferred tax liabilities:
LIFO reserve ............................................................ (194,000) (207,000)
Plant and equipment, principally due to differences in depreciation ..... (700,000) (678,000)
--------------- ---------------
Total deferred tax liabilities ................................................ (894,000) (885,000)
--------------- ---------------
Net deferred tax asset ........................................................ $ -- $ --
=============== ===============
</TABLE>
The valuation allowance for deferred taxes increased during fiscal 2000 by
$1,084,000 and decreased in 1999 by $407,000. In assessing the realizability of
deferred tax assets under the guidelines of SFAS No. 109, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. While management
anticipates generating future taxable income, a valuation allowance of
$5,111,000 has been recorded at August 26, 2000 in accordance with SFAS No. 109
to reduce the net deferred tax asset to zero due to the uncertainty of realizing
the benefits of these deductible differences.
At August 26, 2000, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $8,924,000 which are available to offset
future federal taxable income, if any, through 2019. The Company also has
alternative minimum tax credit carryforwards of approximately $363,000 which are
available to reduce future federal regular income taxes, if any, over an
indefinite period.
15. PREFERRED STOCK:
To strengthen the financial position of the Company, effective December 11,
1996, Transvit Manufacturing Corporation ("Transvit"), a related party and
principal stockholder, agreed to convert a $4,666,000 subordinated note payable
into 666,529 shares of the Company's Series A convertible nonvoting preferred
stock. The preferred stock has cumulative preferred dividends of $0.315 per
share and a preferred distribution of $7.00 per share plus accrued and unpaid
dividends. Each share of the Series A preferred stock is convertible, at the
option of Transvit, into one share of the Company's common stock. The Company
can redeem the shares of Series A preferred stock at any time for cash of $7 per
share, plus all accrued and unpaid dividends. The Company redeemed 129,387
shares of the Series A Stock in connection with the sale of its wholly-owned
Mexican subsidiary in fiscal 1999. See Note 8 of the Notes to Consolidated
Financial Statements. At August 26, 2000, cumulative dividends in arrears on the
Series A preferred stock approximated $612,000.
F-18
<PAGE>
In a subsequent transaction effective February 21, 1997, Nevell, the holder of a
subordinated long-term promissory note in the principal amount of $4,000,000,
converted $3,500,000 of that note into 120,690 shares of the Company's Series B
convertible nonvoting preferred stock. The Series B preferred stock has
cumulative preferred dividends of $2.03 per share and a preferred distribution
of $29.00 per share plus accrued and unpaid dividends. Each share of the Series
B preferred stock is convertible, at the option of Nevell, into four shares of
the Company's common stock. The Company can redeem the shares of Series B
preferred stock at any time for cash of $29.00 per share ($7.25 per common
share), plus all accrued and unpaid dividends. At August 26, 2000, cumulative
dividends in arrears on the Series B preferred stock approximated $224,000. The
Company redeemed 88,800 shares of the Series B Preferred in connection with the
settlement of certain accounts receivable balances due from the Sheth Group as
of August 26, 2000. See Note 12 of the Notes to Consolidated Financial
Statements.
On February 21, 1997, the closing bid price of the Company's common stock as
reported by the NASDAQ was $9 11/32. At that date, the Series B preferred stock
carried a beneficial conversion feature of $2 3/32, the difference between the
conversion price and the closing bid price. The value of the beneficial
conversion feature has been reflected in the financial statements of the Company
in a manner similar to that for a dividend to the preferred shareholder.
Accordingly, the Company has recorded a charge to retained earnings and an
increase in the value of the Series B preferred stock in the amount of
$1,011,000. Additionally, as a result of the conversion, the Company wrote off
$270,000 of warrant valuation costs attributable to the converted debt. This
charge has also been recorded to retained earnings in a manner consistent with
that for the beneficial conversion feature described above. Additionally, the
charge applicable to the beneficial conversion feature and the warrant valuation
adjustment have been deducted in computing net loss applicable to common stock
in the accompanying consolidated statement of operations.
Effective September 3, 1998, the Company completed a private placement whereby
it 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 common shares at a conversion
price of $5.44 per share. In addition, the Company issued a warrant to purchase
125,000 shares of Common Stock at an exercise price of between $4.00 and $6.28
per share. The Company received proceeds of approximately $4,700,000 in such
private placement. On 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.
On October 14, 1999, the Company completed another private placement whereby it
sold an additional 21,667 shares of Series C Preferred Stock to the private
investor mentioned previously for $60 per share. Each share of Series C
Preferred Stock is convertible into 11.0345 common shares at a conversion price
of $5.44 per share. In connection with such sale, the Company issued warrants to
purchase an aggregate of 60,000 shares of Common Stock at an exercise price of
$4.75 per share. The Company received approximately $1,300,000 from such private
placement.
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 $468,000 were paid in cash
on the Series C Preferred Stock during the fifty-two week period ended August
26, 2000. 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.
F-19
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying value of cash, accounts receivable - net, and accounts receivable -
related parties - net, accounts payable - trade, and accounts payable - related
parties - net, approximate their respective fair value because of the short-term
maturity of those instruments.
The carrying value of amounts outstanding under the Credit Agreement
approximates fair value as the interest rates approximate those currently
offered to the Company for debt with similar maturities. The carrying amounts of
subordinated debt approximate fair value.
17. STOCK OPTION PLANS:
The Company has granted stock options under the Amended and Restated Option Plan
(the "1991 Plan"), 1997 Long Term Incentive Plan and other plans (collectively
the "Plans"). The Company applies APB Opinion 25 and related interpretations in
accounting for the Plans. In 1995, the FASB issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which, if fully adopted
by the Company, would change the methods the Company applies in recognizing the
cost of the Plans. Adoption of the cost recognition provisions of SFAS 123 is
optional and the Company has decided not to elect these provisions of SFAS 123.
However, pro forma disclosures as if the Company adopted the cost recognition
provisions of SFAS 123 in 1995 are required by SFAS 123 and are presented below.
Under the Plans, the Company is authorized to issue up to 1,800,000 shares of
Common Stock pursuant to awards granted in various forms, including incentive
stock options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended) and other similar stock-based awards.
The stock options granted in fiscal 2000, 1999 and 1998 have contractual terms
of 10 years and an exercise price equal to the fair market value of the stock at
grant date. The options vest over various vesting schedules. Most vest ratably
at the rate of 20% per year beginning on the date of grant or the first
anniversary of the date of grant. Others vest according to shorter schedules.
F-20
<PAGE>
A summary of the status of the Company's stock options as of August 26, 2000,
August 28, 1999 and August 29, 1998 and the changes during the years then ended
are presented below:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year . 1,755,000 $ 6.24 1,462,500 $ 8.99 1,175,711 $ 8.20
Granted .............................. 405,000 $ 5.78 302,500 $ 5.78 580,000 $ 10.37
Exercised ............................ (5,000) $ 1.44 0 N/A (7,000) $ 6.88
Forfeited ............................ (108,000) $ 5.90 (10,000) $ 4.81 (252,958) $ 8.93
Expired .............................. 0 N/A 0 N/A (33,253) $ 7.32
---------- -------------- ---------- -------------- ---------- --------------
Outstanding at end of year ........... 2,047,000 $ 6.18 1,755,000 $ 6.24 1,462,500 $ 8.99
========== ============== ========== ============== ========== ==============
Exercisable at end of year ........... 1,264,000 $ 6.23 1,018,000 $ 6.31 588,500 $ 8.35
========== ============== ========== ============== ========== ==============
Weighted average fair value of options
Granted .......................... $ 2.57 $ 2.70 $ 4.57
============================ ============================ ============================
</TABLE>
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in fiscal 2000, 1999 and 1998: dividend yield of 0%;
risk-free interest rates ranging from 5.18% to 5.19%; an expected life of
options of 6 years; and a volatility ranging from 33.48% to 41.88% for all
grants.
The following table summarizes information about stock options oustanding at
August 26, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$4.81 to $6.88 2,047,000 7.28 $ 6.18 1,264,000 $ 6.23
======================= =========== ================= ============== =========== ==============
</TABLE>
SFAS 123 establishes a fair value of accounting for stock-based compensation
plans. Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net income (loss),
net loss applicable to common stock and net loss per common share would
approximate the pro forma amounts below:
F-21
<PAGE>
<TABLE>
<CAPTION>
August 26, 2000 August 28, 1999 August 29, 1998
--------------------------- ---------------------------- ----------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 Charge ..................... -- $ 1,033,000 -- $ 2,199,000 $ -- $ 2,005,000
APB 25 Charge ....................... -- -- -- -- -- --
Net income (loss) ................... $ 1,673,000 $ 640,000 $ 422,000 $(1,777,000) $ (1,491,000) $(3,496,000)
Net income (loss) applicable
To common stock ..................... $ 420,000 $ (613,000) $ (1,056,000) $(3,255,000) $ (1,944,000) $(3,949,000)
Basic EPS ........................... $ 0.03 $ (0.04) $ (0.06) $ (0.19) $ (0.12) $ (0.24)
Diluted EPS ......................... $ 0.02 $ (0.04) $ (0.06) $ (0.19) $ (0.12) $ (0.24)
</TABLE>
The effects of applying SFAS 123 as disclosed above are not indicative of future
amounts. SFAS 123 does not apply to awards granted prior to the 1995 fiscal
year.
On November 17, 1998, the Board of Directors approved a plan to reprice all
outstanding options. Accordingly, all outstanding options as of December 9, 1998
were repriced to $6.31, the common stock market price at that date.
On February 3, 2000, the Board of Directors agreed to terminate and reissue a
non-qualified stock option agreement covering 480,000 options to an existing
board member. Among other things, the reissued agreement eliminates certain
conditions for early forfeiture. The option price and terms under the reissued
agreement remain consistent with the original agreement that was simultaneously
terminated. The market value of the Company's common stock was less than the
option price stated in the agreement on the amendment date.
18. BENEFIT PLAN:
Substantially all of the Company's full time employees are eligible to
participate in the Company's 401(k) Plan. The Plan specifies that one-half of
the Company's matching contribution is to be paid by the issuance of common
stock based on the closing price at the end of each calendar quarter. During
fiscal 2000, 1999 and 1998, a total of 10,050, 7,366 and 4,924, respectively, of
such shares were issued to the Plan. Contributions including the issuance of
Common Stock to the Plan were $ 122,000 in 2000, $106,000 in 1999, and $106,000
in 1998.
19. COMMITMENTS AND CONTINGENCIES:
The Company is subject to ordinary and routine litigation arising out of the
conduct of its business. Management believes that the ultimate disposition of
any of these proceedings will not have a material adverse effect on the
Company's financial condition.
20. CLASS ACTION LITIGATION:
In December 1993, the Company reached an agreement to settle stockholder class
action litigation regarding alleged violations of the federal securities laws,
as well as common law fraud and negligence in connection with, among other
things, the nondisclosure of the ownership interest of the Sheth Group prior to
1992, for a cash payment of $9.5 million. The settlement resulted in a release
of claims by the plaintiff class against the Company and certain other
defendants.
The Company has recorded legal and professional expenses associated with the
stockholder litigation settlement and other related events that were the subject
of an internal investigation by a Special Committee of the Board of Directors.
These expenses were approximately $21,000, $69,000 and $230,000 in fiscal 2000,
1999 and 1998, respectively.
F-22
<PAGE>
21. FOREIGN SALES:
During fiscal 1999 and 1998, prior to the Company's disposition of its Mexican
and Brazilian subsidiaries, the Company exported a significant portion of its
sales directly through these subsidiaries. For the years ended August 26, 2000,
August 28, 1999 and August 29, 1998, these sales were $16,458,000 (30% of net
sales), $20,712,000 (37% of net sales) and $29,690,000 (44% of net sales),
respectively. These customers are primarily located in Latin America. In
addition, certain U.S. based customers ultimately distribute the Company's
products into foreign countries ("indirect exports"). The volume of the indirect
exports, which may be significant, could only be estimated as customers do not
provide that information to the Company.
22. QUARTERLY RESULTS (UNAUDITED):
Summarized quarterly results for 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 Quarter Ended
------------------------------------------------------------------
Nov. 27 Feb. 26 May 27 Aug. 26
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales ................................................... $ 13,464,000 $ 13,624,000 $ 12,011,000 $ 16,509,000
Gross Profit ................................................ 4,298,000 4,129,000 3,817,000 6,065,000
Net Income (Loss) ........................................... 386,000 (179,000) 133,000 1,333,000
Net Income (Loss) Applicable to
Common Stock .......................................... (166,000) (433,000) (90,000) 1,109,000
Net Income (Loss) Per Common Share
Basic ................................................. $ (.01) $ (.03) $ (.01) $ .07
Diluted ............................................... $ (.01) $ (.03) $ (.01) $ .06
<CAPTION>
1999 Quarter Ended
------------------------------------------------------------------
Nov. 28 Feb. 27 May 29 Aug. 28
------------ ------------ ------------ ------------
Net Sales ................................................... $ 15,075,000 $ 13,440,000 $ 13,436,000 $ 14,043,000
Gross Profit ................................................ 4,469,000 3,575,000 3,601,000 4,482,000
Net Income (Loss) ........................................... 224,000 (510,000) 10,000 698,000
Net Income (Loss) Applicable to Common Stock ................ (624,000) (747,000) (187,000) 502,000
Net Income (Loss) Per Common Share
Basic ................................................. $ (.04) $ (.04) $ (.01) $ .03
Diluted ............................................... $ (.04) $ (.04) $ (.01) $ .03
</TABLE>
23. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement as amended in June 2000 by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133," establishes accounting and
reporting standards for derivative instruments and all hedging activities. The
Company must adopt SFAS No. 133, as amended by SFAS No. 138, in the first
quarter of fiscal 2001. The Company has completed assessing the impact adoption
of this standard will have and has concluded that there is no expected material
effect on its financial presentation and results of operations as a result of
this standard.
In December 1999, the Securities and Exchage Commission staff issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition, which provides
guidance on the recognition and disclosure of revenues. Adoption of SAB No. 101
is required by the fourth quarter of fiscal 2001. The Company is in the process
of evaluating the effect adoption of SAB No. 101 will have on the Company's
consolidated financial position and results of operations.
F-23
<PAGE>
SCHEDULE II
TRISTAR CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADDITIONS
--------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS- DEDUCTIONS- END
OF PERIOD EXPENSES DESCRIBE DESCRIBE * OF PERIOD
-------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended August 26, 2000 $651,000 $608,000 - $407,000 $852,000
Year ended August 28, 1999 $895,000 $886,000 - $1,130,000 $651,000
Year ended August 29, 1998 $1,052,000 $998,000 - $1,155,000 $895,000
-------------------------------------------------------------------------------------------------------------------------------
* Uncollectible accounts written off, net of recoveries.
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
--------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS- DEDUCTIONS- END
OF PERIOD EXPENSES DESCRIBE DESCRIBE * OF PERIOD
-------------------------------------------------------------------------------------------------------------------------------
Inventory reserves:
Year ended August 26, 2000 $305,000 $292,000 $1,290,000 $345,000 $1,542,000
Year ended August 28, 1999 $490,000 $170,000 - $355,000 $305,000
Year ended August 29, 1998 $1,381,000 $720,000 - $1,611,000 $490,000
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Additional reserves required relating to the acquisition of FIL
*** Write-offs against the reserve
F-24
