FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 25, 2000
-------------------
-OR-
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-13099
TRISTAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3129318
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
105 ST. MARY'S STREET, SUITE 1800, SAN ANTONIO, TEXAS 78205
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(Address of principal executive offices)
(Zip Code)
(210) 402-2200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
ON JANUARY 8, 2001, THERE WERE OUTSTANDING 16,786,756 SHARES
OF COMMON STOCK, $.01 PAR VALUE, OF THE REGISTRANT.
1
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TRISTAR CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION PAGE
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Item 1.Financial Statements (Unaudited)
Consolidated balance sheets--November 25, 2000 and August 26, 2000 3
Consolidated statements of operations--thirteen week periods 5
ended November 25, 2000 and November 27, 1999, respectively
Consolidated statement of shareholders' equity -- thirteen weeks 6
ended November 25, 2000
Consolidated statements of cash flows--thirteen week periods ended 7
November 25, 2000 and November 27, 1999, respectively
Notes to consolidated financial statements--November 25, 2000 8
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3.Qualitative and Quantitative Disclosure About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 25,
2000 AUGUST 26,
ASSETS (UNAUDITED) 2000 *
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<S> <C> <C>
Current assets:
Cash ........................................................... $ 294,000 $ 124,000
Accounts receivable, less allowance for doubtful accounts
of $802,000 and $852,000, respectively ....................... 19,073,000 19,577,000
Accounts receivable - related parties - net .................... 2,414,000 2,311,000
Inventories .................................................... 14,701,000 13,482,000
Other current assets ........................................... 336,000 340,000
------------ ------------
Total current assets ......................................... 36,818,000 35,834,000
------------ ------------
Property, plant and equipment, less accumulated depreciation
of $12,121,000 and $11,774,000 ................................. 8,421,000 8,271,000
------------ ------------
Other assets:
Goodwill, less accumulated amortization of $333,000 and $267,000 7,919,000 7,986,000
Other assets ................................................... 215,000 287,000
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Total other assets ........................................... 8,134,000 8,273,000
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Total assets ..................................................... $ 53,373,000 $ 52,378,000
============ ============
</TABLE>
* Prepared from audited financial statements for the year ended August 26, 2000
See accompanying notes to unaudited consolidated financial statements.
3
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
NOVEMBER 25,
2000 AUGUST 26,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 2000 *
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<S> <C> <C>
Current liabilities:
Revolving credit agreement borrowings ................................ $ 14,877,000 $ 15,167,000
Accounts payable--trade .............................................. 9,891,000 8,457,000
Accounts payable--related parties - net .............................. 1,167,000 1,809,000
Accrued expenses ..................................................... 8,726,000 8,179,000
Current portion of capital lease obligations ......................... 9,000 9,000
Current portion of long-term debt .................................... 1,796,000 1,712,000
Current portion of subordinated debt ................................. 945,000 945,000
------------ ------------
Total current liabilities .......................................... 37,411,000 36,278,000
Long-term debt, less current portion ................................... 1,862,000 2,077,000
Subordinated debt, less current portion ................................ 2,673,000 2,735,000
Obligations under capital leases, less current portion ................. 11,000 12,000
------------ ------------
Total liabilities ................................................... 41,957,000 41,102,000
------------ ------------
Commitments and contingencies (Note 5)
Shareholders' equity (deficit):
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 shares issued and outstanding .................... 1,173,000 1,173,000
Series C, 100,000 respectively, shares issued and outstanding ...... 6,133,000 6,133,000
Common stock, $.01 par value; authorized 30,000,000 shares; issued and
outstanding 16,786,756 shares and 16,783,909
shares, respectively .............................................. 168,000 168,000
Additional paid-in-capital ........................................... 14,740,000 14,723,000
Accumulated deficit .................................................. (14,558,000) (14,681,000)
------------ ------------
Total shareholders' equity ......................................... 11,416,000 11,276,000
------------ ------------
Total liabilities and shareholders' equity ............................. $ 53,373,000 $ 52,378,000
============ ============
</TABLE>
* Prepared from audited financial statements for the year ended August 26, 2000
See accompanying notes to unaudited consolidated financial statements.
4
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------
NOVEMBER 25, NOVEMBER 27,
2000 1999
------------ ------------
Net sales ...................................... $ 13,378,000 $ 13,464,000
Cost of sales .................................. 8,915,000 9,166,000
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Gross profit ................................... 4,463,000 4,298,000
Selling, general and administrative expenses ... 3,674,000 3,458,000
------------ ------------
Income from operations ......................... 789,000 840,000
Other income (expense):
Interest expense ........................... (586,000) (421,000)
Other ...................................... 45,000 (30,000)
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Income before provision for income taxes ....... 248,000 389,000
Provision for income taxes ..................... 5,000 3,000
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Net income ..................................... $ 243,000 $ 386,000
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Less:
Preferred stock dividends .................. (178,000) (211,000)
Beneficial conversion feature .............. -- (341,000)
------------ ------------
Net income (loss) applicable to common stock ... $ 65,000 $ (166,000)
============ ============
Income (loss) per common share:
Basic ...................................... $ -- $ (.01)
============ ============
Diluted .................................... $ -- $ (.01)
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
THIRTEEN WEEKS ENDED NOVEMBER 25, 2000
<TABLE>
<CAPTION>
PREFERRED STOCK
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COMMON STOCK SERIES A SERIES B SERIES C
--------------------- ---------------------- ---------------------- ----------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
---------- -------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 26, 2000* . 16,783,909 $168,000 537,142 $3,760,000 31,890 $1,173,000 100,000 $6,133,000
Net income ................
Preferred Stock Dividends .
Contribution to 401(k) Plan 2,847 --
---------- -------- --------- ---------- --------- ---------- --------- ----------
Balance, November 25, 2000 16,786,756 $168,000 537,142 $3,760,000 31,890 $1,173,000 100,000 $6,133,000
========== ======== ========= ========== ========= ========== ========= ==========
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ADDITIONAL ACCUMULATED
PAID-IN-CAPITAL DEFICIT
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<S> <C> <C>
Balance, August 26, 2000* . $ 14,723,000 $(14,681,000)
Net income ................ 243,000
Preferred Stock Dividends . (120,000)
Contribution to 401(k) Plan 17,000
--------------- ------------
Balance, November 25, 2000 $ 14,740,000 $(14,558,000)
=============== ============
</TABLE>
*Prepared from audited financial statements for the year ended August 26, 2000.
See accompanying notes to unaudited consolidated financial statements.
6
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TRISTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------
NOVEMBER 25, NOVEMBER 27,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................. $ 243,000 $ 386,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation ......................................... 340,000 355,000
Other amortization costs ............................. 105,000 22,000
Provision for losses on accounts receivable .......... -- 193,000
Provision for inventory allowances ................... 55,000 125,000
Issuance of stock in connection with 401(k) plan ..... 17,000 --
Amortization of warrant valuation .................... 5,000 3,000
Amortization of deferred loan costs .................. 63,000 66,000
Change in operating assets and liabilities:
Accounts receivable ............................... 504,000 (1,959,000)
Accounts receivable affiliates .................... (103,000) (117,000)
Inventories ....................................... (1,274,000) (1,611,000)
Other assets ...................................... (1,000) (220,000)
Accounts payable .................................. 1,434,000 (496,000)
Accounts payable affiliates ....................... (642,000) 19,000
Accrued expenses .................................. 547,000 649,000
------------ ------------
Net cash provided by (used in) operating activities .. 1,293,000 (2,585,000)
------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures ................................... (490,000) (312,000)
Investment in business acquisition; net of cash acquired -- (579,000)
------------ ------------
Net cash used in investing activities ................ (490,000) (891,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving credit facility ................. (14,436,000) (16,976,000)
Borrowings under revolving credit facility ............. 14,147,000 19,086,000
Proceeds from long-term debt ........................... 270,000 547,000
Principal payments under long-term debt ................ (493,000) (365,000)
Principal payments on capital leases ................... (1,000) (34,000)
Issuance of Preferred Stock Series C ................... -- 1,300,000
Payment of issuance costs for Preferred Stock Series C . -- (22,000)
Payment of dividends on Preferred Stock Series C ....... (120,000) (108,000)
------------ ------------
Net cash provided by (used in) financing activities .. (633,000) 3,428,000
------------ ------------
NET INCREASE (DECREASE) IN CASH ............................ 170,000 (48,000)
CASH AT BEGINNING OF PERIOD ................................ 124,000 90,000
------------ ------------
CASH AT END OF PERIOD ...................................... $ 294,000 $ 42,000
============ ============
</TABLE>
Supplemental disclosure of noncash financing and investing activities:
FIRST QUARTER 2000
The Company purchased all of the capital stock of FIL for $730,000. In
conjunction with the 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 ........................ (730,000)
------------
Liabilities assumed ................................. $ 10,758,000
See accompanying notes to unaudited consolidated financial statements.
7
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TRISTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 25, 2000
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Tristar
Corporation ("the Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statement presentation.
The accompanying unaudited consolidated financial statements include the
accounts of Tristar Corporation and its subsidiaries. Effective November 1,
1999, the Company, through a newly formed wholly owned subsidiary, Tristar USA,
Inc. ("Tristar USA") acquired Fragrance Impressions Limited (See Note 7 of the
Notes to Consolidated Financial Statements for further details).
Certain prior period amounts have been reclassified to conform to the current
year presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the thirteen week period ended November 25, 2000 are not
necessarily indicative of the results that may be expected for the year ending
August 25, 2001.
NOTE 2: EARNINGS (LOSS) PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share computations, as required by SFAS No. 128, is
presented below:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
---------------------------
NOVEMBER 25, NOVEMBER 27,
2000 1999
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<S> <C> <C>
Basic EPS:
Net income (loss) applicable to common stock .............. $ 65,000 $ (166,000)
Weighted-average number of common shares outstanding ...... 16,784,503 16,769,724
------------ ------------
Basic EPS ..................................................... $ -- $ (.01)
============ ============
Diluted EPS (1):
Net income (loss) applicable to common stock .............. $ 65,000 $ (166,000)
Weighted-average number of common shares outstanding ...... 16,784,503 16,769,724
Add: effects of assumed exercise of options and warrants
Exercise of stock options ............................... 6,867 --
Exercise of warrants .................................... 196,190 --
------------ ------------
Weighted-average number of common shares outstanding plus
shares from assumed exercise of options and warrants .... 16,987,560 16,769,724
------------ ------------
Diluted EPS ................................................... $ -- $ (.01)
============ ============
</TABLE>
8
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1. Options to purchase 1,977,000 shares of common stock and warrants to purchase
2,175,000 shares of common stock were outstanding at November 25, 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 thirteen week period November 27, 1999, as the assumed
conversion of convertible preferred stock and the assumed exercise of
outstanding options and warrants would have an anti-dilutive effect.
NOTE 3: INVENTORIES
Inventory is stated at the lower of cost or market. The components of inventory
are as follows:
November 25, August 26,
2000 2000
------------ ------------
Raw materials .......................... $ 6,555,000 $ 7,331,000
Work-in-process ........................ 1,512,000 1,498,000
Finished goods ......................... 7,962,000 6,575,000
------------ ------------
16,029,000 15,404,000
Reserves for market valuation .......... (1,043,000) (1,542,000)
LIFO valuation allowance ............... (285,000) (380,000)
------------ ------------
$ 14,701,000 $ 13,482,000
============ ============
NOTE 4: CREDIT AGREEMENT BORROWINGS
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
sub-limit allocated to support the requirements of Tristar USA (See Note 7 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 November 25, 2000, the Revolving
Credit bore interest at rates of 10.50% and 10.125%, 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 November 25, 2000 approximated $663,000 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 2002.
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% at
November 25, 2000) plus 2.00%. Principal payments on the Term Loan
9
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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 November 25, 2000, the Company had outstanding borrowings
under the Term Loan totaling $1,430,000.
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%
at November 25, 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 2002.
As of November 25, 2000, the Company had outstanding borrowings under the Cap Ex
Facility totaling $2,228,000. Principal payments are currently set at the rate
of $93,000 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, are set annually and have
been agreed upon by the Company's lender for fiscal 2001. Additional covenants
limit borrowings, asset sales and dividends. As of November 25, 2000, the
Company was in compliance with respect to each restrictive financial covenant.
NOTE 5: 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
these proceedings will not have a material adverse effect on the Company's
financial condition.
NOTE 6: RELATED PARTY TRANSACTIONS
Certain suppliers of fragrance product components and the primary suppliers of
cosmetic products are affiliates of the Sheth Group who beneficially own 73% of
the Company's outstanding common stock. Related party accounts payable result
from the purchase of products from those vendors. Related party accounts
receivable result from the sale of products to those and other affiliates of the
Sheth Group. The payables and receivables balances for individual parties are
offset for presentation purposes and the net balance of accounts receivable or
accounts payable is presented on the balance sheet. Related party payables also
include payables due members of the Company's Board of Directors which result,
in the normal course of business, from expenses associated with Board and
related committee meetings. The following summarizes the presentations at
November 25, 2000 and August 26, 2000.
November 25, August 26,
2000 2000
------------ ------------
ACCOUNTS RECEIVABLE:
Total accounts receivable-related parties ....... $ 2,414,000 $ 2,330,000
Offset amount ................................... -- (19,000)
------------ ------------
Net related parties receivables ................. $ 2,414,000 $ 2,311,000
============ ============
10
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ACCOUNTS PAYABLE:
Total accounts payable-related parties .......... $ 1,167,000 $ 1,828,000
Offset amount ................................... -- (19,000)
------------ ------------
Net related parties payables .................... $ 1,167,000 $ 1,809,000
============ ============
The Company purchases finished goods and fragrance product components from Sheth
Group affiliates and other related parties. During the thirteen week period
ended November 25, 2000, and for the comparable period in fiscal 2000, the
Company purchased approximately $817,000 and $816,000, respectively.
During the thirteen week period ended November 25, 2000, and for the comparable
period in fiscal 2000, the Company sold products to Sheth Group affiliates in
the amounts of approximately $453,000 and $661,000, respectively.
NOTE 7: PURCHASE OF FRAGRANCE IMPRESSIONS LIMITED
On November 15, 1999, the Company and its newly formed wholly owned subsidiary,
Tristar USA, Inc., 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 November 25, 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 November 25, 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. 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 8 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.
11
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The following represents supplemental consolidated pro-forma information for the
thirteen weeks ended November 27, 1999 assuming the FIL acquisition had occurred
at the beginning of such period:
2000
(UNAUDITED)
------------
Net Sales .............. $ 14,029,000
Net loss applicable
to common stock ........ $ (1,013,000)
Loss per share ......... $ (.06)
NOTE 8: PREFERRED STOCK
The holders of the Company's Series A and B Preferred Stock are entitled to
receive cumulative dividends of $.315 per share and $2.03 per share,
respectively. To date, no dividends have been paid on the Series A and B
Preferred Stock except those paid in connection with the sale of the Company's
wholly owned Mexican subsidiary and settlement of outstanding receivable
balances due from related parties, both of which resulted in the redemption of a
portion of such Series A and B Preferred shares and payment of the applicable
dividends in arrears. Dividends accumulated on the Series A and B Preferred
Stock for the thirteen week period ended November 25, 2000, totaling
approximately $58,000 have been reflected as a reduction in net loss applicable
to common stock. Cumulative dividends in arrears on the Series A and B Preferred
Stock totaled approximately $895,000 at November 25, 2000. The Company does not
have any plans to pay any cash dividends on the Common or the Series A and B
Preferred Stock in the foreseeable future. Further, payments of such dividends
are subject to restrictions imposed by the Company's lender in connection with
the existing Credit Agreement.
The holders of the Series C Preferred Stock are entitled to receive a
liquidation preference equal to $60 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. Dividends of $120,000 were paid on the Series C Preferred
Stock during the thirteen week period ended November 25, 2000.
NOTE 9: 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 has adopted SFAS No. 133, as amended by SFAS No. 138, in the first
quarter of fiscal 2001, as required. The Company has completed assessing the
impact adoption of this standard will have and has concluded that there is no
material effect on its financial presentation and results of operations as a
result of this standard.
In December 1999, the Securities and Exchange 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.
12
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This document contains certain statements that are "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this document, including without limitation
statements that use terminology such as "anticipate", "believe," "continue,"
"estimate," "expect," "intend," "may,", "plan," "predict," "should," "will," and
similar expressions, are forward-looking statements. These forward-looking
statements include, among other things, the Company's business strategy and
expectations concerning the Company's market position, future operations,
margins, profitability, liquidity and capital resources, expenditures for
capital projects and attempts to reduce costs. Although the Company believes
that the assumptions upon which the forward-looking statements contained in this
document are based are reasonable, any of the assumptions could prove to be
inaccurate and, as a result, the forward-looking statements based on those
assumptions also could be incorrect. All phases of the operations of the Company
involve risks and uncertainties, many of which are outside the control of the
Company and any one of which, or a combination of which, could materially affect
the results of the Company's operations and whether the forward-looking
statements ultimately prove to be correct. Actual results and trends in the
future may differ materially depending on a variety of factors including, but
not limited to, the timing and extent of changes in fragrance components,
fragrance and cosmetic prices and underlying demand and availability of
fragrance components; changes in the cost or availability of means of
transporting products; execution of planned capital projects; adverse changes in
the credit ratings assigned to the Company's trade credit; the extent of the
Company's success in developing and marketing new product lines; state and
federal environmental, economic, safety and other policies and regulations, and
changes therein, and any legal or regulatory delays or other factors beyond the
Company's control; adverse rulings, judgments, or settlements in litigation or
other legal matters; actions of customers and competitors; economic conditions
affecting the areas in which the Company's products are marketed; political
developments in foreign countries; and the conditions of the capital markets and
equity markets during the periods covered by the forward-looking statements.
Many of the factors are described in greater detail in other of the Company's
filings with the Securities and Exchange Commission. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the foregoing. The
Company undertakes no obligation to publicly release the results of any
revisions to any such forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED NOVEMBER 25, 2000 AND
NOVEMBER 27, 1999
For the thirteen week period ended November 25, 2000, the Company recorded
consolidated net income of $243,000, a decrease of $143,000, compared to
consolidated net income of $386,000 for the thirteen week period ended November
27, 1999. After giving effect to preferred stock dividends and the cost of
accumulated beneficial conversion feature, the Company recorded net income
applicable to common stock of $65,000 and a net loss applicable to common stock
of $166,000 or $.01 per diluted share for the thirteen week periods ended
November 25, 2000 and November 27, 1999, respectively.
NET SALES
Net sales were $13,378,000 for the thirteen week period ended November 25, 2000,
a slight decrease versus net sales of $13,464,000 for the comparable period in
fiscal 2000. The decrease in the thirteen week period ended November 25, 2000
was primarily due to lower volume in the Latin America and U.S. wholesale
markets and lower sales to related parties. This decrease was almost entirely
offset by sales increases in the U.S. chain, specialty chain and mass
merchandise market primarily relating to the acquisition of FIL (See Note 7 of
the Notes to Consolidated Financial Statements).
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NET SALES - CHANNELS OF DISTRIBUTION
The Company markets and distributes products to wholesalers, distributors, chain
stores, mass merchandisers and independent retail channels in various markets
throughout North and South America. For the thirteen week period ended November
25, 2000, the Company experienced a decline mainly in the Latin America and U.S.
wholesale channels. These markets continue to experience significant turmoil
relating to instability in overall financial conditions existing in the world's
emerging markets. This decline was almost entirely offset by sales increases in
the U.S. chain, specialty chain and mass merchandise channel primarily relating
to the acquisition of FIL (See Note 7 of the Notes to Consolidated Financial
Statements).
NET SALES - RELATED PARTIES
In the thirteen week period ended November 25, 2000, sales to affiliates of the
Sheth Group were $453,000 compared with $661,000 for the same period in fiscal
2000.
PRODUCTS PURCHASED FROM RELATED PARTIES
The Company purchases finished goods and fragrance components from Sheth Group
affiliates and other related parties. During the thirteen week period ended
November 25, 2000, and for the comparable period in fiscal 2000, the Company
purchased approximately $817,000 and $816,000, respectively.
GROSS PROFIT
The Company's gross profit for the thirteen week periods ended November 25, 2000
and November 27, 1999 was $4,463,000 or 33.4% of sales and $4,298,000 or 31.9%
of sales, respectively. The improvement in the Company's gross profit related
mainly to a favorable product mix involving increased sales of higher margin
products to the chain, specialty chain and mass merchandise channel of
distribution, particularly to the customer base serviced by FIL, acquired in
November 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the thirteen week
period ended November 25, 2000 was $3,674,000, an increase of 6.2 % versus
$3,458,000 for the comparable period ended November 27, 1999. The increase in
SG&A related primarily to increased direct marketing expenses associated with
the increased sales of the Company's FIL brand as a result of the FIL
acquisition (See Note 7 of the Notes to Consolidated Financial Statements). As a
percentage of sales, SG&A was 27.5% and 25.7% for the thirteen week periods
ended November 25, 2000 and November 27, 1999, respectively.
NON-OPERATING INCOME OR EXPENSE
Interest expense increased when comparing the thirteen week period of fiscal
2001 to the same period of fiscal 2000 as a result of higher revolving credit
balances coupled with higher interest rates in the current fiscal period.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes the lines of credit, together with cash generated by
operations should provide sufficient cash to meet the requirements of the
Company for fiscal 2001.
OPERATING ACTIVITIES
Operations in the thirteen week period ended November 25, 2000, provided
$1,293,000 in cash primarily due to net income, decreases in accounts receivable
and increases in accounts payable and accrued expenses, offset by increases in
inventory.
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<PAGE>
Accounts receivable decreased mainly due to collection of balances relating to
the high level of sales in the fourth quarter of fiscal 2000. Inventory
increased mainly due to anticipated higher sales volume in the period. Accounts
payable increased as the Company extended credit terms with certain vendors
mainly in connection with purchases of inventory. The increase in accrued
expenses is attributable mainly to additional provisions for sales returns and
allowances.
INVESTING ACTIVITIES
Capital expenditures during the thirteen week period were $490,000, consisting
primarily of investments in production related machinery and equipment,
facilities related items, computer equipment and costs associated with the
construction of a new distribution facility. Capital expenditures in fiscal 2001
are expected to be significantly higher than fiscal 2000 with the increase
primarily being attributable to the construction of the new distribution
facility. The Company anticipates a cost approximating $2 million for this new
facility. The Company's lender has agreed to finance $1.5 million for the
building construction. Additionally, the Company has expended approximately
$270,000 in land preparation costs in connection with this project and expects
to finance the remaining equipment costs through the Company's Cap Ex Facility
and third party capital leases.
FINANCING ACTIVITIES
During the thirteen week period ended November 25, 2000, net cash used by
financing activities amounted to $633,000, consisting mainly of excess payments
under the revolving credit and long-term debt agreements of $512,000 coupled
with dividends paid in the amount of $120,000 on the Series C Preferred Stock.
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
sub-limit allocated to support the requirements of Tristar USA (See Note 7 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 November 25, 2000, the Revolving
Credit bore interest at rates of 10.50% and 10.125%, 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 November 25, 2000 approximated $663,000 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 2002.
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% at
November 25, 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 November 25, 2000, the Company had outstanding borrowings under
the Term Loan totaling $1,430,000.
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%
at November 25, 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 2002.
As of November 25, 2000 the Company had outstanding borrowings under
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<PAGE>
the Cap Ex Facility totaling $2,228,000. Principal payments are currently set at
the rate of $93,000 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, are set annually and have
been agreed upon by the Company's lender for fiscal 2001. Additional covenants
limit borrowings, asset sales and dividends. As of November 25, 2000, the
Company was in compliance with respect to each restrictive financial covenant.
The holders of the Company's Series A and B Preferred Stock are entitled to
receive cumulative dividends of $.315 per share and $2.03 per share,
respectively. To date, no dividends have been paid on the Series A and B
Preferred Stock except those paid in connection with the sale of the Company's
wholly owned Mexican subsidiary. Dividends accumulated on the Series A and B
Preferred Stock for the thirteen week periods ended November 25, 2000 of
approximately $58,000 have been reflected as a reduction in net loss applicable
to common stock. Cumulative dividends in arrears on the Series A and B Preferred
Stock totaled approximately $895,000 at November 25, 2000. The Company does not
have any plans to pay any cash dividends on the Common or the Series A and B
Preferred Stock in the foreseeable future. Further, payments of such dividends
are subject to restrictions imposed by the Company's lender in connection with
the existing Credit Agreement.
The holders of the Series C Preferred Stock are entitled to receive a
liquidation preference equal to $60 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. Dividends of $120,000 were paid on the Series C Preferred
Stock during the thirteen week period ended November 25, 2000.
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 has adopted SFAS No. 133, as amended by SFAS No. 138, in the first
quarter of fiscal 2001, as required. The Company has completed assessing the
impact adoption of this standard will have and has concluded that there is no
material effect on its financial presentation and results of operations as a
result of this standard.
In December 1999, the Securities and Exchange 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.
ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the risk of loss that may occur due to adverse changes in
financial market prices, including interest rate risk and foreign currency
exchange risk, and the effect they may have on the financial position, results
of operation or cash flow of the Company.
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<PAGE>
The Company's short-term and long-term debt at November 25, 2000 bears interest
at variable rates (See Note 4 of the Notes to Consolidated Financial
Statements). A one percentage point increase in the effective interest rate on
the debt based on amounts outstanding at November 25, 2000 would result in an
approximate $225,000 reduction in annual pretax earnings. This estimate assumes
no change in the volume or composition of the short-term and long-term debt as
of November 25, 2000.
The Company's direct exports comprise approximately 26% of net sales for the
thirteen week period ended November 25, 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.
In the thirteen week period ended November 25, 2000, two customers accounted for
approximately 15% and 14% of the Company's net sales. The loss of a single or a
few customers may have a material adverse effect on the Company's business.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of the Notes to the Consolidated Financial Statement.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
TRISTAR CORPORATION
(Registrant)
<S> <C>
Date: January 9, 2001 By: /s/ Richard R. Howard
------------------ -----------------------------
RICHARD R. HOWARD
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 9, 2001 By: /s/ Robert M. Viola
------------------ ---------------------------
ROBERT M. VIOLA
Senior Executive Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
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