-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tw7pJn6jgqPmsQmyg+bT9eayDTo9u03zdtiuTi/PqVVjo2o4Koi6Q+t7wElKuoPf tqZ6ZNWypElQt4mFdKtyng== 0000890566-98-001903.txt : 19981208 0000890566-98-001903.hdr.sgml : 19981208 ACCESSION NUMBER: 0000890566-98-001903 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980829 FILED AS OF DATE: 19981207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRISTAR CORP CENTRAL INDEX KEY: 0000737203 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 133129318 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13099 FILM NUMBER: 98764892 BUSINESS ADDRESS: STREET 1: 12500 SAN PEDRO AVE STE 500 CITY: SAN ANTONIO STATE: TX ZIP: 78216 BUSINESS PHONE: 2104022200 MAIL ADDRESS: STREET 1: 12500 SAN PEDRO AVE, STE 500 STREET 2: 12500 SAN PEDRO AVE, STE 500 CITY: SAN ANTONIO STATE: TX ZIP: 78216 FORMER COMPANY: FORMER CONFORMED NAME: ROSS COSMETICS DISTRIBUTION CENTERS INC DATE OF NAME CHANGE: 19930422 10-K 1 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 29, 1998 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.) 12500 SAN PEDRO AVENUE, SUITE 500, SAN ANTONIO, TEXAS 78216 (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 23, 1998, as reported on the NASDAQ National Market System, was $6 5/8. As of November 23, 1998, the Registrant had outstanding 16,761,493 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement relating to the 1999 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. 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 captions "Management's Discussion and Analysis of Financial Condition and Results of Operations", and elsewhere in this document. Actual results and trends in the future may differ materially depending on a variety of factors including, but not limited to, the timing and extent of changes in fragrance components, fragrance and cosmetic prices and underlying demand and availability of fragrance components; changes in the cost or availability of means of transporting products; execution of planned capital projects; adverse changes in the credit ratings assigned to the Company's trade credit; the extent of the Company's success in developing and marketing new product lines; state and federal environmental, economic, safety and other policies and regulations, and changes therein, and any legal or regulatory delays or other factors beyond the Company's control; adverse rulings, judgments, or settlements in litigation or other legal matters; actions of customers and competitors; economic conditions affecting the areas in which the Company's products are marketed; political developments in foreign countries; 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 other of the Company's filings with the Commission. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing. The Company undertakes no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 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's fragrances are sold under the Designer Classic Alternatives ("DCA"), Euro Collections ("Euro"), Royal Selections ("Royal"), Regal Collections ("Regal"), Club Exclusif ("Club"), and Premiere Editions ("Premiere") brands. They 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 and distributes value oriented complementary cosmetic products, including high quality lipsticks that are alternatives to major brands sold in department stores, again at significantly lower prices than original designer brands. Cosmetics are primarily marketed under the DCA, Gina Cosmetics and Apple pencil lines. The Company currently conducts business utilizing its sales and distribution facilities in San Antonio, Texas and Mexico City, Mexico, its state of the art manufacturing facility in Pleasanton, Texas, and its corporate offices, design studio, and laboratory 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. 2 The Company's major shareholder, the Core Sheth Families ("Sheth Group"), beneficially holds 73% of the Company's outstanding common stock. The Company believes that through their various worldwide vertically integrated companies, the Sheth Group is the world's largest manufacturer (based on number of units produced) of value priced oriented fragrances. It is also a significant manufacturer of lower priced, value oriented 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 fragrance manufacturing capability of the Company was acquired in August 1995, as a result of a merger with Eurostar Perfumes, Inc., ("Eurostar"), an affiliate of the Sheth Group and the manufacturer of substantially all of the Company's products prior to the merger. The merger was accounted for in a manner similar to a pooling of interests. PRODUCTS The Company's principal product category is fragrances with the balance consisting of cosmetics, cosmetic pencils 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 1998 FISCAL 1997 FISCAL 1996 - -------------------------------------------------------------------------------- FRAGRANCES 88% 83% 80% - -------------------------------------------------------------------------------- OTHER PRODUCTS 12% 17% 20% - -------------------------------------------------------------------------------- Fragrance sales grew in fiscal 1998 as a percentage of total sales but declined slightly in dollars when compared to fiscal 1997. During fiscal 1998, the Company continued the expansion of its distribution base to retail chains by focusing on a new value priced fragrance line introduced in August 1997, Regal, while aggressively placing renewed focus on expanding distribution of the restaged Euro fragrance line into the retail market in the United States, Canada and Latin America. Concurrently, the Company expanded the market leading Royal brand (introduced in September 1996) to serve the needs of other trade classes. The Company also expanded its distribution of the budget priced Premiere fragrance and toiletry line and introduced (in July 1998) a new brand exclusively for the Latin America market called Club Exclusif. The Company intends to continue to transition to a broader based distribution strategy. The Company implemented this strategy primarily as a result of increased opportunities in the retail sector and in the wholesale, specialty store, and dollar store channels in the U.S., Canada and Latin America. The Company is also building brand equity by devoting increased resources to strengthen marketing support programs and value added services. Due to the minimal growth rate exhibited in the total fragrance category during fiscal 1998, continued consolidation of customers in the retail and wholesale trade classes, the disposition of its Brazilian subsidiary and difficult economic conditions in certain international markets, the Company experienced a decrease in its revenue base by 2% over the previous year. The Company believes, however, that opportunities exist to enhance its market share in the key areas in which it competes. FRAGRANCES The Company's marketing strategy for designer alternative fragrances addresses six distinct segments of the fragrance market with six 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 both in the United States and Canada as well as 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 in the wholesale market. (The Company's Royal brand, as discussed below, is now targeted to the wholesale market replacing Euro). 3 A major re-stage of Euro was introduced to the market place in April 1998 featuring new state-of-the-art bottle design, increased size and value for the consumer, new alternative designer fragrances, line extensions including the new Euro Garden (botanical) fragrances, exciting contemporary packaging and enhanced merchandising support. o In the fourth quarter of fiscal 1996, the Company developed a new line called Royal Selections, designed to recapture a significant part of the wholesale trade class. Within one year of introduction, 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. In August 1997 a significant line extension, Royal Nature, was introduced with seven new original fragrances emulating "mother nature." Fragrances such as Peach, Pear, and Very Berry attract a younger teen audience, a new market segment for the Company. Generally these younger consumers find nature-type fragrances more appealing than traditional designer alternative fragrances. Royal is competitively priced and couples that with quality packaging and merchandising support. o In the fourth quarter of fiscal 1997, the Company developed a new fragrance brand called Regal Collections, focusing on new opportunities in retail channels of distribution. Shipments commenced August 1997. Regal has a limited number of designer alternative fragrance "best sellers". In 1998 a line extension called Regal Country Scents was introduced offering botanical fragrances to the youth market. Distribution has continued to expand. 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. This line of designer alternative fragrances was newly re-staged at the end of fiscal 1996 by increasing the bottle size and redesigning all packaging. Sales of the redesigned product together with companion body sprays and deodorant sticks began in early fiscal 1997 at the same price points as they were previously sold, providing increased value in comparison to competition. o The premium DCA line, which was developed and introduced in fiscal 1996, enables the Company to compete in mass market retail chains and specialty accounts which look to promote higher price point and higher profit brands. o In late July 1998, the Company introduced a new line of contemporary alternative designer fragrances called Club Exclusif. It is positioned as a value oriented, quality brand for the Latin American market, where opportunities exist to take advantage of local preferences for certain types of fragrances. 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 fragrance lines feature quality glass bottles, caps and collars designed in various unique shapes and styles. The Company's fragrances are packaged in colorful cartons designed with the latest technology to appear attractive to the consumer. All fragrances are developed by the Company's expert perfumers as alternatives to the most popular, nationally branded, designer fragrances. They 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 also develops, markets and distributes a limited number of its own original fragrances (non-designer alternative fragrances) in the U.S. and Latin America. 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 market place 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". 4 During fiscal 1999 the Company plans to distribute other fragrance lines manufactured outside the U.S. by Sheth Group affiliates into Latin America, primarily to the retail sector. These entries are anticipated to expand the Company's market share by offering distinctive original (non-designer alternative) brands into those markets with value benefits not presently offered by leading competitors. OTHER PRODUCTS The Company markets numerous complementary products within each fragrance line such as deodorant sticks, body sprays, dusting powders, shaker talcs, trial/travel sizes, roll-on perfumes, body glitter and gift sets. In most 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 names of DCA and Gina Cosmetics, proprietary lines of cosmetics including nail, lip color, eye products, and other cosmetic items, all of which are manufactured by related parties. Cosmetics sold under the DCA brand are premium quality lipstick products designed as alternatives to original 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. Cosmetic products under the Gina Cosmetics line are geared to price conscious consumers and are primarily marketed in the wholesale class of trade. The Apple line of lip and eye liner cosmetic pencils that the Company manufactures is marketed and distributed in assorted colors and sizes. Private label cosmetic eye and lip liner pencils are also produced for selected customers, including an affiliate of the Sheth Group. 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. The Company believes that revenues from the complementary products to both the fragrance lines and cosmetics will increase in fiscal 1999. Such growth is expected to result from increases within the existing lines, the addition of new products, consumer promotions, and further strengthening of our distribution network. CUSTOMERS The Company distributes its products to more than 1,000 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 38,000 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. The Company has invested heavily in developing the mature U.S. retail markets and in starting to develop the emerging mass markets in Latin America. The Company believes that the customer base in the mass Latin America markets fits the Company's target customer profile and presents an opportunity for future growth. The Company has focused the expansion of the customer base in the U.S. on creating and repositioning products to better meet the needs of its existing channels of distribution and in gaining entrance into certain new channels. A major focus of investment in fiscal 1998 has been on developing customer bases in Mexico and other most populous countries in Latin America. The Company services Latin America through regional and national distributors within the various countries. Two affiliates of the Sheth Group are the national distributors in Argentina and Brazil. These distributors are primarily supplied by the Company's Texas distribution center which also services the United States and Canadian markets. 5 Sales to customers in the United States were $37,993,000, $41,905,000, and $37,196,000 for fiscal years 1998, 1997 and 1996, respectively. For those same fiscal years, $29,690,000 (44% of net sales) $27,054,000 (39% of net sales) and $14,524,000 (28% 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 Brazilian subsidiary- discussed more fully in Note 6 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 (Potential Adverse Effects on Results of Operations for Future Periods)" for a specific discussion of those risks. The North and South America markets will continue to be the focus of the Company's marketing strategy as other Sheth Group affiliates distribute similar products throughout the rest of the world. The Company anticipates a minor increase in sales outside North and South America in fiscal 1999, primarily in the newer Royal and Euro product lines, and principally to Sheth Group affiliates. The Company is not dependent upon a single or a few customers and the loss of a single or a few customers would not have a material adverse effect on the Company's business. In fiscal 1998, one customer accounted for slightly more than ten percent of the Company's net sales while in 1997 and 1996, no single customer accounted for more than ten percent. SUPPLIERS At present, the Company purchases the glass containers for its fragrances from European glass manufacturers. If these products were unavailable from one of these suppliers, the Company believes that it could purchase such products from other suppliers without any significant delays. 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's ability to satisfy sales orders for its fragrance products is directly dependent on its ability to manufacture these products. If the Company were physically unable to manufacture its products, and inventory and demand levels were normal, the effect on the Company would in general be minimal as Sheth Group affiliates and others have similar manufacturing facilities available to support the Company. However, in instances where demand for fragrances was strong and the Company had inadequate inventory levels, the Company would be adversely impacted. The inability to manufacture cosmetic pencils at its Texas facility until a secondary source is located could have an adverse effect on the Company. The Company is dependent on the supply of cosmetics, other than cosmetic pencils, 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 could have an adverse effect on the Company until secondary suppliers could be located. PATENTS AND TRADEMARKS The Company and a Sheth Group affiliate own or have applied for substantially all of the product name trademarks for the fragrance and cosmetic 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 of the Sheth Group affiliate would not have a materially adverse effect on the Company's business. BACKLOG OF ORDERS 6 The Company had no substantial backlog of orders at the end of each of fiscal years 1998, 1997 and 1996. 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 Sheth Group affiliate or 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. The Company has reformulated certain of its products to meet the requirements of the California Air Resources Board. See "Legal Proceedings" for additional details. COMPETITION IN THE FRAGRANCE AND COSMETICS INDUSTRY The fragrance and cosmetics industry is characterized by intense competition, particularly in the U.S. While pricing and terms are the principal factors in competition, product quality, presentation, merchandising and advertising programs and customer service (incorporating available inventories and prompt delivery) are also very important additional competitive features in the overall industry. Principal competitors in designer alternative fragrances include Jean Philippe Fragrances, 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 of the other companies in the industry, including virtually all large mass-advertised brand manufacturers such as Unilever, Revlon, L'Oreal, Benckiser, and Renaissance Cosmetics, Inc. are well established and have been in existence for a significantly longer period of time than the Company. Such companies have higher leverage and resources including financial, marketing, research, manufacturing and personnel, substantially greater than the Company has or will have available in the foreseeable future. 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 Texas and Mexico warehouse facilities 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, which has resulted in increased net sales in the first and fourth quarters of the Company's fiscal year. The Company believes that with its range of products, distribution channels, and promotional activity, it should over time be able to reduce some of the differences between quarters, however, the nature of the fragrance market will result in a continuation of the pattern. EMPLOYEES 7 The Company employs approximately 390 full-time employees and during peak production periods the Company utilizes temporary or seasonal employees to augment its workforce. During the past two peak production periods the Company has utilized up to 400 seasonal employees. None of the Company's employees are covered by a collective bargaining agreement and management believes that the Company's relationship with its employees is satisfactory. ITEM 2. PROPERTIES The Company owns a manufacturing plant that consists of a 132,000 square-foot facility on a 14-acre site in Pleasanton, Texas. That facility has approximately 12,000 square feet of office space. The Company is currently subleasing approximately 30,000 square feet of storage space in Pleasanton, Texas. The sublease has an annual rate of approximately $50,400 and expires July 1999. 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 rate of $269,000, subject to adjustments, and expires in February 2001. The San Antonio corporate offices, design studio and laboratory occupy approximately 23,000 square feet of office space. The leases have a current annual rate of $315,000, subject to adjustments and expire in January 1999. The Company also leases approximately 4,100 square feet of office and distribution space in Mexico City, Mexico. ITEM 3. LEGAL PROCEEDINGS FREITAS AND KENNER In October 1994, a suit was filed in Florida state court against the Company and two of its directors by Ross Freitas, Carolyn Kenner, Rose Freitas and Melissa Freitas. The complaint alleged causes of action by two plaintiffs for libel and seeks indemnification of legal costs allegedly incurred by those plaintiffs in suits and proceedings arising from the facts which were the subject of the investigation conducted by the Special Committee of the Board of Directors in 1992. The complaint also alleged, on behalf of all four plaintiffs, that the Company's disclosures relating to the Sheth Group's holding of Company stock and other matters were fraudulent or negligently misrepresented. In April 1995, the court dismissed the complaint without prejudice, in part due to the plaintiffs' failure to state a claim for relief. In May 1995 the plaintiffs refiled the complaint, asserting many of the same claims, and in June 1996, amended their complaint yet again, naming only the Company and one of its directors as defendants. In October 1998, the Court dismissed the claim against the one director. The Company intends to dispute these allegations vigorously and believes that ultimate disposition of the case will not have a material adverse effect on its business, financial condition or results of operations. 8 INSURANCE POLICY REIMBURSEMENT In November 1994 and June 1995, the United States District Court for the District of South Carolina approved the disbursement of $1,250,000 and $750,000 , respectively, to the Company from the proceeds of an executive liability and indemnification policy owned by the Company. Two other claimants under the policy, Ross Freitas ("Freitas") and Carolyn Kenner ("Kenner"), have sought reconsideration of the latter court-approved disbursement. Pursuant to a settlement agreement approved by the Court on December 18, 1997, Freitas and Kenner withdrew their motion for reconsideration. As part of the settlement, the Company was required to make payments totaling $175,000 to Freitas and Kenner. The proceedings regarding the policy before the United States District Court for the District of South Carolina have been dismissed. CALIFORNIA AIR RESOURCES BOARD After not being in compliance with the regulations of the California Air Resources Board (the "CARB") with respect to volatile organic compounds ("VOC's), since January 1, 1995 the Company achieved compliance by September 30, 1996. Under a temporary variance granted by the State of California, the Company was allowed to sell until September 30, 1997, non-complying product manufactured prior to September 30, 1996. 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. The Company anticipates that it may incur expenses related to ongoing litigation involving the non-settling defendants from previously settled stockholder class action litigation against the Company and from a related lawsuit against the Company's former auditors. Any expenses incurred are not expected to be material to the Company's financial results. 9 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 1998 FISCAL 1997 ------------------- ------------------- HIGH LOW HIGH LOW -------- -------- -------- -------- FIRST QUARTER ...................... $ 10 7/8 $ 10 3/8 $ 7 3/8 $ 7 -------- -------- -------- -------- SECOND QUARTER ..................... $ 10 7/8 $ 10 $9 11/16 $ 6 7/8 -------- -------- -------- -------- THIRD QUARTER ...................... $ 10 3/4 $ 10 1/4 $ 9 5/8 $9 11/32 -------- -------- -------- -------- FOURTH QUARTER ..................... $ 10 3/4 $ 9 $ 10 7/8 $ 9 3/8 -------- -------- -------- -------- On November 23, 1998 the closing bid price for the Company's Common Stock, as reported by NASDAQ, was $6 5/8. (B) HOLDERS As of November 23, 1998, the number of holders of the Company's Common Stock was approximately 1,000. (C) DIVIDENDS The Company has paid no cash dividends on the 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 5 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. 10 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:
YEARS ENDED , --------------------------------------------------------------------------- AUGUST 29, AUGUST 30, AUGUST 31, AUGUST 31, AUGUST 31, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ----------- REVENUES ......................... $ 67,683,000 $ 68,959,000 $ 51,720,000 $ 44,728,000 $51,244,000 ------------ ------------ ------------ ------------ ----------- NET (LOSS) INCOME ................ $ (1,491,000) $ 1,083,000 $(12,053,000) $ (932,000) $ 1,390,000 ------------ ------------ ------------ ------------ ----------- NET (LOSS) INCOME APPLICABLE TO COMMON STOCK ..................... $ (1,944,000) $ (454,000) $(12,053,000) $ (932,000) $ 1,390,000 ------------ ------------ ------------ ------------ ----------- NET (LOSS) INCOME PER COMMON SHARE: BASIC ............................ $ (.12) $ (.03) $ (.72) $ (.06) $ .08 ------------ ------------ ------------ ------------ ----------- DILUTED .......................... $ (.12) $ (.03) $ (.72) $ (.06) $ .08 ------------ ------------ ------------ ------------ ----------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC ............................ 16,748,798 16,709,690 16,641,218 16,625,315 16,609,764 ------------ ------------ ------------ ------------ ----------- DILUTED .......................... -- -- -- -- 16,847,455 ------------ ------------ ------------ ------------ ----------- TOTAL ASSETS ..................... $ 38,708,000 $ 41,084,000 $ 33,767,000 $ 36,828,000 $40,902,000 ------------ ------------ ------------ ------------ ----------- REVOLVING CREDIT AGREEMENT BORROWINGS ..................... $ 7,612,000 $ 10,205,000 $ 9,319,000 $ 5,383,000 $ 4,511,000 ------------ ------------ ------------ ------------ ----------- LONG TERM DEBT & CAPITAL LEASES .. $ 3,877,000 $ 2,581,000 $ 3,234,000 $ 3,719,000 $ 4,861,000 ------------ ------------ ------------ ------------ ----------- SUBORDINATED LONG TERM DEBT ...... $ 1,700,000 $ 4,500,000 $ 12,666,000 $ 12,666,000 $11,216,000 ------------ ------------ ------------ ------------ ----------- CASH DIVIDENDS DECLARED PER COMMON SHARE .......................... $ -0- $ -0- $ -0- $ -0- $ -0- ------------ ------------ ------------ ------------ -----------
The Company has significant related party transactions. SEE Note 8 of the Notes to Consolidated Financial Statements. The Company has recorded legal and professional expenses of $230,000, $72,000, $162,000, $269,000 and $208,000 in fiscal 1998, 1997, 1996, 1995 and 1994, respectively, associated with the stockholder litigation and other events that were the subject of an internal investigation by the Special Committee of the Board. SEE Note 18 of the Notes to the Consolidated Financial Statements. The Company recorded other income of $2,065,000 in connection with receipt of insurance proceeds in fiscal 1995. See Note 21 of the Notes to the Consolidated Financial Statements. The Company recorded amortization expense of $36,000, $63,000, $83,000, $986,000 and $367,000 in fiscal 1998, 1997, 1996, 1995 and 1994, respectively, associated with the value assigned to the granting of new common stock purchase warrants related to the settlement of the prior stockholder class action litigation and to the extension of the exercise date on existing warrants. The Company recorded merger related expenses of $76,000 in fiscal 1996 and $686,000 in fiscal 1995. 11 During the third quarter of fiscal 1998, the Company sold all of the capital stock and distribution rights of its Brazilian subsidiary to a wholly owned affiliate of the Sheth Group for $2,800,000. SEE Note 6 of the Notes to the Consolidated Financial Statements. 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. SEE Note 11 of the Notes to the 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. SEE Note 12 of the Notes to the Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - FISCAL 1998 COMPARED TO FISCAL 1997 Tristar markets and distributes products to wholesalers, distributors, chain stores, specialty stores, mass merchandisers and independent retail stores in various markets throughout North and South America. Net sales for the fiscal year ended August 29, 1998 were $67,683,000, a decrease of 2% compared to net sales of $68,959,000 in fiscal year ended August 30, 1997. The decrease is primarily attributable to a reduced level of sales of Euro caused by the delayed relaunch of the restaged brand (until April 1998) and reduced DCA sales to the U.S. retail channel. Offsetting these reductions somewhat were significant sales growth of Royal Selections coupled with volume increases in the Premiere fragrance and Apple pencil lines in the U.S. wholesale and Latin America channels and Regal in the U.S. retail channel. While not quantifiable, the Company also experienced lost sales opportunity during the first half of fiscal 1998 due to its inability to increase fragrance production capacity in order to meet market demand during that period, brought about by the surge in demand for Royal. Overall, the Company's direct exports increased to $29,690,000 (44% of net sales) in fiscal 1998 compared to $27,054,000 (39% of net sales) in fiscal 1997. The increase in direct exports is largely due to the success of the Royal fragrance line, the continued sales expansion of Apple pencils in this channel and sales to affiliate companies. While the Company continues to aggressively pursue the strategically important Latin America channel, it was determined that the Brazilian market would continue to 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 6 of the Notes to the Consolidated Financial Statements). The Company's strategy to formalize the distribution of the Euro line in Mexico, by servicing retail outlets through the Company's warehouse in Mexico City resulted in lower sales than anticipated in this important market, due to the delayed relaunch of the Euro line in April, 1998. Included in export sales were sales of $6,557,000 in fiscal 1998 and $3,866,000 in fiscal 1997 to Sheth Group affiliates. See "Business (Suppliers)" and Note 8 of the Notes to Consolidated Financial Statements. The overall volume decline was largely attributable to a decrease in fragrance sales. Increased sales volume for Royal, Regal and Premiere were entirely offset by a decline in Euro relating to the delayed relaunch of the restaged line. The Company experienced sales growth outside the fragrance lines relating principally to increased cosmetic pencil sales. Of the net sales in fiscal 1998, approximately 4%, or $2,833,000, resulted from the sale of products purchased from related parties as finished goods. For fiscal 1997, comparable numbers were 6%, or $4,427,000. 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 6% of cost of sales in fiscal 1998 and 7% of cost of sales in fiscal 1997. See Note 8 of the Notes to the Consolidated Financial Statements for additional information. 12 Gross profit decreased from $20,518,000 (30% of net sales) in fiscal 1997 to $17,251,000 (25% of net sales) in fiscal 1998. The decline related primarily to an inventory reduction program that the Company implemented which was designed to sell slower rotating finished goods at reduced margins as well as excess raw materials at prices slightly above cost. Selling, general and administrative expenses ("SG&A") decreased by 4% from $17,093,000 (25% of net sales) in fiscal 1997 to $16,424,000 (24% of net sales) in fiscal 1998. The decline was mainly attributable to overall lower marketing costs and cost reductions related to the disposition of the Brazilian subsidiary in May 1998, partially offset by higher bank fees in fiscal 1998 and increased compensation expense relating to extending the term of certain stock options to a former employee. Interest expense decreased by 8% in fiscal 1998 from $1,940,000 in fiscal 1997 to $1,786,000 in fiscal 1998. This reduction related primarily to the conversion of certain subordinated debt into preferred stock and to a lesser degree, by lower interest costs relating to revolving credit line borrowings. Fiscal 1998 other expenses included $60,000 of costs related to the amortization of a warrant valuation asset arising from issuance of warrants to an investment banker and previously recorded warrant valuation assets relating to the subordinated debt and $230,000 of litigation expenses arising from events related to the shareholder litigation. These respective expenses in fiscal 1997 were $63,000 and $72,000. The Company recorded a net loss of $1,491,000 for fiscal 1998. After giving effect to preferred stock dividends, the Company recorded a fiscal 1998 net loss applicable to common stock of $1,944,000 or $.12 per share. In fiscal 1997, the Company recorded a net loss of $454,000 or $0.03 per share, after giving effect to the beneficial conversion feature of a preferred stock issue, the related warrant valuation adjustment and preferred stock dividends described in the following paragraph. 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. 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 per share of Common Stock. 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. 13 RESULTS OF OPERATIONS -- FISCAL 1997 COMPARED TO FISCAL 1996 Net sales for the fiscal year ended August 30, 1997 were $68,959,000, an increase of 33% compared to net sales of $51,720,000 in the fiscal year ended August 31, 1996. The increase is primarily attributable to the success of the Royal line of fragrances which was introduced in early fiscal 1997. The Royal line was developed for the wholesale market and reversed the prior years' trend in that market channel, achieving success in both the U.S. and Latin America. Somewhat offsetting this increase was a loss of sales in the Euro line and the DCA line. Overall, the Company's direct exports increased to $27,054,000 (39% of net sales) in fiscal 1997 compared to $14,524,000 (28% of net sales) in fiscal 1996. The increase in direct exports was largely due to the success of the Royal fragrance line. In Brazil, the Company continued the development of formal channels of distribution after establishing sales and warehouse facilities in early fiscal 1996. While the growth of the Brazilian market continues to be slower than anticipated, the Company believes that the market presents a strategic opportunity for sales growth in the future. During fiscal 1997, sales in Mexico returned to levels that were in existence prior to the Nuevo Peso devaluation in fiscal 1995. The success of the Royal fragrance line combined with the Company's strategy to formalize distribution of the Euro line in Mexico by servicing retail outlets through the Company's warehouse in Mexico City resulted in the improved sales. Included in export sales were sales of $3,866,000 in fiscal 1997 and $1,997,000 in fiscal 1996 to Sheth Group affiliates. See "Business (Suppliers)" and Note 8 of the Notes to Consolidated Financial Statements. Approximately 92% of the growth in sales resulted from increased sales in the fragrance lines. The new Royal fragrance line along with higher sales in the redesigned Premiere line and the newly introduced Regal line accounted for this growth. Sales growth outside the fragrance lines was principally realized in increased cosmetic pencil sales. Of the net sales in fiscal 1997, approximately 6%, or $4,427,000, resulted from the sale of products purchased from related parties as finished goods. For fiscal 1996, comparable numbers were 12%, or $6,165,000. 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 1997 and 8% of cost of sales in fiscal 1996. See Note 8 of the Notes to the Consolidated Financial Statements for additional information. Tristar's gross profit both in dollar terms and as a percentage of sales increased in fiscal 1997 as compared to fiscal 1996. Comparable numbers were $20,518,000, or 29.8%, in fiscal 1997 and $10,919,000, or 21.1%, in fiscal 1996. Factors which contributed to this improvement were the increased sales, lower level of low margin sales of discontinued product and product lines in fiscal 1997, a change in the product mix [moving to higher margin products] and lower costs associated with the introduction and manufacturing of a new product line. Selling, general and administrative expenses ("SG&A") increased in fiscal 1997 to $17,093,000 from the fiscal 1996 level of $16,285,000. The increase was primarily attributed to expenses associated with the development of the chain market in the United States and the introduction and marketing of the Royal product line. As a percentage of sales, SG&A was 24.8% in fiscal 1997 compared to 31.5% in fiscal 1996. Interest expense decreased by $419,000 in fiscal 1997 from the fiscal 1996 level of $2,359,000. This decrease was primarily attributable to the conversion of certain subordinated debt into preferred stock. The decrease was partially offset by increased average revolving credit agreement borrowings. Fiscal 1997 other expenses included $63,000 of expenses related to the amortization of the warrant valuation asset and $72,000 of litigation expenses arising from events related to the shareholder litigation. These respective expenses in fiscal 1996 were $83,000 and $162,000. 14 The Company recorded income tax expense of $78,000 in fiscal 1997 which compared to an expense of $3,732,000 in fiscal 1996. The fiscal 1996 amount includes $3,881,000 of deferred tax expense as a result of management's reassessment of the realizability of its deferred tax assets under the guidelines of Statement Financial Accounting Standards No. 109, "Accounting for Income Taxes". A valuation allowance has been recorded to reduce the net deferred tax asset to zero due to the uncertainty of realizing the benefits of these deductible differences. The Company recorded net income of $1,083,000 for fiscal 1997. After giving effect to the beneficial conversion feature of a preferred stock issue, the related warrant valuation adjustment and preferred stock dividends described in the following paragraph, the Company recorded a fiscal 1997 net loss applicable to common stock of $454,000 or $0.03 per share. In fiscal 1996, the Company recorded net loss of $12,053,000 or $0.72 per share. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Operating activities in fiscal 1998 provided $3,216,000 in cash. The cash provided was primarily the result of earnings adjusted for non-cash items, an increase in accounts payable offset by an increase in accounts receivable, and a reduction in inventory during fiscal 1998. Accounts receivable grew primarily as a result of increased sales to related parties. Inventory decreased primarily due to an inventory reduction program implemented by the Company to sell slower rotating finished goods as well as excess raw materials at prices slightly above cost. Accounts payable increased as the Company delayed payments to certain vendors and increased its purchases of inventory and expanded manufacturing capability. INVESTING ACTIVITIES Capital expenditures during fiscal 1998 amounted to $1,599,000, relating mainly to production related machinery and equipment, facilities related items and computer equipment. Capital expenditures in fiscal 1997 and 1996 were $1,274,000 and $1,108,000, respectively. FINANCING ACTIVITIES During Fiscal 1998, the Company refinanced its former credit facility. Net cash used in financing activities during this period was primarily a result of related deferred loan costs. Remaining availability based on the borrowing formulas as of August 29, 1998 approximated $236,000. On December 19, 1997, the Company entered into a $22,000,000 credit agreement with a new lender (the "Credit Agreement"). The Credit Agreement includes a revolving credit facility (the "Revolving Credit") which provides for $15,100,000 of maximum borrowings bearing interest, at the Company's election, at the Alternate Base Rate (the higher of the prime rate or the Federal Funds Rate plus .50%) plus 1.50% or the London Interbank Offered Rate (LIBOR) plus 3.50%. At August 29, 1998, the Revolving Credit bore interest at a rate of 10.0%. Borrowings under the Revolving Credit are limited by a formula based on Eligible Accounts Receivable and Inventory, as defined. 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 (8.5% at August 29, 1998) plus 2.00%. Principal payments on the Term Loan consist of equal monthly principal payments in the amount of $56,667 for 35 months beginning in January 1998 with a $1,416,655 balloon 15 payment due in December 2001. Additionally, 50% of annual excess cash flow, as defined, must be applied to the Term Loan installments in the inverse order of maturity. Borrowings under the Cap Ex Facility are limited to 80% of the cost of new machinery and equipment, limited to annual utilization of $1,500,000. These borrowings also bear interest, payable monthly, at the Alternate Base Rate plus 2.00%. Principal payments on the Cap Ex Facility commence one month after the take down in an amount based on a 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 29, 1998 the Company had outstanding borrowings under the Cap Ex Facility totalling $643,000 in capital expenditures. Principal payments are due at the rate of $11,800 per month. Borrowings under the Credit Agreement are collateralized by all of the Company's present and future assets. Additional collateral in the form of a $1,500,000 standby letter of credit has been provided by the Sheth Group for the benefit of the new lender. The Credit Agreement contains restrictive financial covenants including Minimum Tangible Net Worth, Minimum EBITDA, Maximum Loss, Minimum Fixed Charge Coverage, Maximum Leverage and Maximum Capital Expenditures. Additional covenants limit borrowings, asset sales and dividends. On October 4, 1998, the Company negotiated an amendment of all restrictive financial covenants. The company was in violation of certain covenants as of May 30, 1998 and August 29, 1998 and was extended waivers to such covenants by the lender. The new Credit Agreement, together with cash generated by operations and the continued ability to delay payments to vendors as necessary 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 commercial lender, bore interest at the rate of 4.5% per annum. On December 11, 1996, the $4.7 million of subordinated debt was converted into the Company's Series A convertible preferred stock (SEE Note 12 of the Notes to the Consolidated Financial Statements). The Company remains indebted to the affiliate for delinquent interest payments $567,000 on the converted debt. The settlement of the stockholder class action litigation recorded in May 1993 ($9.5 million) resulted in a material change to the Company's long-term debt to equity ratio. The Company at August 31, 1996 had outstanding subordinated long-term debt to Sheth Group affiliate of $8.0 million related to that settlement. On February 21, 1997, $3.5 million of this debt was converted into the Company's Series B convertible preferred stock (See Note 12 of the Notes to the Consolidated Financial Statements). 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 from TDC in the form of a $2,800,000 reduction of the subordinated debt to Nevell Investments, S.A., ("Nevell") another affiliated company within the Sheth Group (described more fully in Note 6.) 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. Repayments on the remaining $1,700,000 debt will begin in the year 2001. As of August 29, 1998, the Company's financial statements reflect accrued interest of $1,164,000 due on this related party debt including the delinquent 16 amounts due on debt converted to preferred stock. In March 1998, the Company negotiated an agreement with Nevell Investments, S.A., ("Nevell") to eliminate any future accrual of interest on the outstanding debt to Nevell. The Company also purchases certain equipment, primarily manufacturing equipment, office furniture, computer equipment and software, under long-term purchase agreements. These purchases are not material to the Company's cash flow. The Company does not have any plans to pay any cash dividends on the Common Stock or the Preferred Series A and B Stock in the foreseeable future. Further, payments of such dividends are subject to restrictions imposed by the Company's commercial lender in connection with the existing revolving lines of credit. Effective September 3, 1998, the Company sold 78,333 shares of Series C Senior Convertible Preferred Stock ("Series C Preferred Stock") to a private investor for $60 per share. Each share of Series C Preferred Stock is convertible into common shares at a conversion price of $5.44 per share. In addition, the Company issued 125,000 warrants which are convertible into common shares at a conversion price of between $4.00 to $6.28 per share. The Company received proceeds of approximately $4,700,000 and expects to receive an additional $1,300,000 in fiscal 1999 upon issuance of an additional 21,667 shares of Series C Senior Convertible Preferred Stock. The Series C Preferred Stock holders are entitled to receive a cummulative cash dividend of $4.80 per share annually. The dividend is payable quarterly in arrears ($1.20 per quarter). See Note 23 of the Notes to the Consolidated Financial Statements for further discussion. 17 IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS: REPORTING COMPREHENSIVE INCOME (SFAS 130) In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components. The Company plans to adopt SFAS No. 130 in fiscal 1999. DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS 131) In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public companies report information about segments in annual and interim financial statements. The Company plans to adopt SFAS No. 131 in fiscal 1999. The adoption of these recently issued financial accounting standards is not expected to have a significant effect on the Company's consolidated financial statements. INFLATION During fiscal year ended 1998, and consistent with the Company's 1997 and 1996 fiscal years, inflation did not have a material adverse impact either on the Company's net sales or income from continuing operations. However, the devaluation of the Mexican Nuevo Peso in December 1994 had an impact on the Company's sales with lower direct exports into Mexico. See Note 19 of the Notes to the Consolidated Financial Statements for further discussion. POTENTIAL ADVERSE EFFECTS ON RESULTS OF OPERATIONS FOR FUTURE PERIODS The results for fiscal 1999 could be adversely affected by each or all of the following factors: 1. LATIN AMERICA ECONOMIES. Growth in sales, or even the maintenance of existing sales levels, as well as the collection of accounts receivable in certain Latin American countries (including Mexico) depend to a large extent on the economic health and political stability of those countries. Any deterioration in the economic or political stability in such countries could adversely affect sales and the collectability of accounts receivable. 2. NEW MARKETS. The Company continues to develop and expand sales and marketing operations in Latin America. In the process, the Company incurs significant expenses in order to establish a marketing presence and an economically viable amount of sales. There is no assurance that the Company will be successful in those endeavors nor that it will recover its initial expenses and start up costs. In addition, certain countries from time to time impose strict import restrictions and high levels of taxes on imports, all of which could affect the success of sales and marketing activities and also affect the profitability of such activities. 3. MEXICAN MARKET. The Company believes that some of its customers based in the United States sell the Company's products (as well as the products of other companies) to purchasers who, in turn, may attempt to import goods into Mexico without full payment of applicable Mexican taxes and customs duties. Enhanced enforcement efforts by Mexican authorities may have an adverse effect on the Company's sales to such customers. 18 4. SUPPLY OF PRODUCTS. The Company's ability to manufacture and to satisfy consumer demand for fragrances is dependent on the supply of certain components from single sources which include related parties. Any inability of these vendors to meet the Company's requirements could have an adverse effect on the Company's results until an alternative source could be found and/or developed. In addition, the Company is dependent on the supply of cosmetic products, other than cosmetic pencils, from Sheth Group affiliates. If such affiliates were to cease or be unable to supply these cosmetic products, the lack of these products would have an adverse effect on the Company until a secondary supplier could be located. 5. INTERNAL REVENUE SERVICE. In February 1997, the Internal Revenue Service ("the IRS") concluded its examination of the Company's tax returns submitted for fiscal years 1993, 1994 and 1995. The IRS proposed adjustments disallowing the deductions of payments made in the settlement of the class action litigation and certain related legal and professional fees. The Company is in discussions with the IRS on these issues and will appeal the proposed adjustments if necessary. If the Company is unsuccessful in its discussions or ultimately in an appeal, it could be required to pay taxes from prior years and related interest thereon exceeding $1,800,000, and it could lose a significant amount of its existing net operating loss carry-forward benefits. No accrual for the impact of the proposed IRS adjustment has been recorded in the accompanying financial statements as the Company does not believe it is probable that the IRS will prevail in this matter. YEAR 2000 COMPLIANCE As a result of certain computer programs being written using two digits rather than four digits to define the applicable year, any of the Company's computer programs that have a date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions and engage in normal business activities. As part of the Company's Year 2000 readiness program ("Y2K Plan"), management has evaluated its Programs and Systems. The Company's Y2K Plan's focus is on assessing and assuring compliancy in the following areas: hardware, operating systems, legacy applications and data, external linkages and non-information systems areas. o Tristar's operating systems are centered around Hewlett Packard Unix, Microsoft NT and Windows 95. The Company operates these systems under licenses and maintenance agreements which provide for service upgrades in early 1999 to remedy the Year 2000 compliance issues. The principal legacy applications consist of Manufacturing Total Management Sytem ("MTMS") which is licensed from LK Global (United Kingdom) who has informed Tristar that they plan to have upgraded software to their customers by Spring 1999. o With respect to hardware, compliancy testing has been completed. Certain computers and equipment with non-compliant code and real-time clocks have been identified and will be upgraded or replaced during the first six months of 1999 or manually reset on January 1, 2000. Phone switches and voice mail systems will be certified by vendors by June 1999. o The non-information systems areas include such equipment as air conditioning/heating units, security systems, laboratory equipment and time and attendance clocks. The Company is in process of assessing these items and plans to complete its prognosis and implement solutions by the end of the third calendar quarter of 1999. Additionally, Tristar is reviewing electronic communications with its trading partners such as customers, vendors, financial institutions and other external relationships, each of whom will be asked to certify Year 2000 compliancy and/or recommend upgrades or solutions by July 1999. o The Company has allocated human resources as appropriate within its Information Systems group to coordinate the activities required to obtain compliance. Although the ultimate cost of attaining Year 2000 compliance is not fully known at this time, management anticipates that its external costs will not exceed $200,000. These costs will be funded from operations or additional borrowings under the revolving credit facility. The costs of Year 2000 compliance and the expected completion dates are the best estimates of Company management and are believed to be reasonably accurate. In the event the Company's Y2K Plan is not successfully 19 or timely implemented, the Company may need to devote more resources to the process and additional costs may be incurred, which could have a material adverse effect on the Company's financial condition and results of operations. Problems encountered by the Company's vendors, customers and other third parties also may have a materal adverse effect on the Company's financial condition and results of operations. In summary, if the Company does not successfully obtain a Year 2000 compliant software product from LK Global in a timely manner, the Company could be adversely affected. However, the Company believes that it will successfully handle the Year 2000 date change and that the problem will not have a material effect on consolidated financial position, results of operations or cash flows, but no assurances can be given in this regard. In the event the Company determines following the Year 2000 date change that its Programs and Systems are not Year 2000 complaint, the Company will likely experience considerable delays in processing and compiling data, processing customer orders and invoices, compiling information required for financial reporting and performing various administrative functions. In the event of such occurrence, the Company's contingency plans call for it to switch vendors to obtain hardware and/or software that is Year 2000 complaint, and until such hardware and/or software can be obtained, the Company will plan to use non-computer systems for its business, including data compilation, information management services and financial reporting, as well as its various administrative functions. The above Year 2000 disclosure constitutes a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act (the "Act"), which was signed into law on October 19, 1998. The Act provides added protection from liability for certain public and private statements concerning a company's Year 2000 readiness. The Act also potentially provides added protection from liability for certain types of Year 2000 disclosures made after January 1, 1996 and before October 19, 1998. As such, to the extent permitted by applicable law, previously disclosed statements of or by the Company and its management concerning the Company's Year 2000 readiness are intended to constitute "Year 2000 Readiness Disclosures," as defined in the Act. At this time, it is not known whether, or to what degree, the above factors will have a material adverse impact on the Company's fiscal 1999 results. 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 cashflow of the Company. The Company's short term and long term debt at August 29, 1998 bears interest at variable rates (SEE Note 5 of the Notes to the consolidated Financial Statements). A one percentage point increase in the effective interest rate on the debt would result in an approximate $114,000 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 August 29, 1998. As discussed in Note 19 of the Notes to the Consolidated Financial Statements, the Company's direct exports comprise approximately 44% of net sales for the fiscal year ended August 29, 1998. 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. 20 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 21 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 1999 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 1999 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 1999 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 1999 Annual Meeting, which is incorporated herein by reference. 22 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 29, 1998, August 30, 1997, and August 31, 1996 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 29, 1998, August 30, 1997, and August 31, 1996, 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 Company filed a report on form 8-K dated July 22, 1997 reporting the change of the Company's accountants for fiscal 1998 to Coopers & Lybrand L.L.P., who had been the Company's auditors prior to fiscal 1995. 2. The Company filed a report on July 29, 1998 reporting the sale of its Brazilian subsidiary for $2,800,000 to a Sheth Group affiliate, Transvit Distribution Corporation. (C) EXHIBITS EXHIBIT INDEX *3.1 Certificate of Incorporation of the Registrant, as amended. 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 certificate. 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. 10.1 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. 10.9 Lease Agreement Re: Corporate Headquarters in San Antonio dated January 13, 1993, between Northwestern Mutual Life Insurance Co. and Registrant. Incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended August 31, 1993. 10.12 Distribution Agreement (the "Distribution Agreement") with Eurostar Perfumes, Inc. and S&J Perfume, Ltd. dated October 28, 1992. Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended August 31, 1992. 23 10.13 Letter Agreement Amendment dated August 30, 1993 to the Distribution Agreement. Incorporated by reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K for the year ended August 31, 1993. 10.14 Agreement and First Amendment to Distribution Agreement dated October 8, 1993 with Eurostar Perfumes, Inc. and S&J Perfume, Ltd. Incorporated by reference to Exhibit 10.29 of the Company's Annual Report on Form 10-K for the year ended August 31, 1993. 10.15 Agreement dated August 31, 1995, among the Company, Eurostar Perfumes, Inc. and Starion International, Ltd., terminating the Distribution Agreement. Incorporated by reference to Exhibit 10.3 of the Company's Report on Form 8-K dated August 31, 1995. 10.16 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. 10.17 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. 10.18 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. 10.23 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. 10.29 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. 10.30 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. 10.33 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. 10.35 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. 24 10.38 Employment Agreement between the Company and Richard Howard dated November 26, 1997, incorporated by reference to Exhibit 10.38 of the Company's Annual Report on Form 10-K for the year ended August 30, 1997. 10.39 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. *10.40 Stock purchase agreement between the Company and Transvit Distribution Corporation dated May 30, 1998. *10.41 Letter agreement between the Company and Nevell Investments, S.A. ("Nevell")dated March 1, 1998. *10.42 Investment agreement between the Company and Pioneer Ventures Associates Limited Partnership, dated September 3, 1998. *10.43 Warrant to purchase shares of common stock of the Company granted to Pioneer Ventures Associates Limited Partnership, dated September 3, 1998. *10.44 Trademark agreement between the Company and S&J Perfume Company, dated September 3, 1998. *10.45 Voting and shareholders agreement, dated September 3, 1998. 16 Letter from KPMG Peat Marwick LLP to the Securities and Exchange Commission pursuant to Item 304(a)(3) of Regulation S-K. Incorporated by reference to Exhibit 16 of the Current Report on Form 8-K dated July 22, 1997. 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. *24.2 Consent by KPMG Peat Marwick LLP. *27 Financial Data Schedule. --------------------------- * Filed herewith. 25 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: _________________ TRISTAR CORPORATION By: /s/ VIREN S. SHETH VIREN S. SHETH, Chief Executive Officer (Principal Executive Officer) By/s/ RICHARD R. HOWARD RICHARD R. HOWARD President and Chief Operations Officer By: /s/ROBERT M. VIOLA ROBERT M. VIOLA 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: ________________ /s/RICHARD P. RIFENBURGH RICHARD P. RIFENBURGH, Director Date: ________________ /s/ROBERT R. SPARACINO ROBERT R. SPARACINO, Director Date: ________________ /s/VIREN S. SHETH VIREN S. SHETH, Director Date: ________________ /s/AARON ZUTLER AARON ZUTLER, Director Date: ________________ /s/JAY J. SHETH JAY J. SHETH, Director Date: ________________ /s/B. J. HARID B. J. Harid, Director Date: ________________ /s/ROBERT A. LERMAN Robert Lerman, Director 26 TRISTAR CORPORATION SAN ANTONIO, TEXAS ANNUAL REPORT ON FORM 10-K YEAR ENDED AUGUST 29, 1998 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 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 Independent Auditors' Reports F1 and F2 Consolidated Financial Statements: Balance sheets as of August 29, 1998 and August 30, 1997 F3 and F4 Statements of operations for each of the three years in the period ended August 29, 1998 F5 Statements of shareholders' equity for each of the three years in the period ended August 29, 1998 F6 Statements of cash flows for each of the three years in the period ended August 29, 1998 F7 - F8 Notes to consolidated financial statements F9 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. REPORT OF INDEPENDENT ACCOUNTANTS December 4, 1998 To the Board of Directors and Shareholders of Tristar Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cashflows present fairly, in all material respects, the financial position of Tristar Corporation and its subsidiaries as of August 29, 1998 and August 30, 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. 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 as of August 29, 1998 and August 30, 1997 and for the years then ended, 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 generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mistatement. 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 the opinion expressed above. PricewaterhouseCoopers LLP F-1 Independent Auditors' Report The Board of Directors and Shareholders Tristar Corporation: We have audited the consolidated statements of operations, shareholders' equity and cash flows of Tristar Corporation and Subsidiaries for the year ended August 31, 1996. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for the year ended August 31, 1996. These consolidated 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 audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Tristar Corporation and subsidiaries for the year ended August 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule for the year ended August 31, 1996, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP San Antonio, Texas December 11, 1996 F-2 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
August 29, August 30, ASSETS 1998 1997 ----------- ----------- Current assets: Cash .................................................... $ 66,000 $ 492,000 Accounts receivable, less allowance for doubtful accounts of $895,000 and $1,052,000, respectively .............. 14,206,000 15,930,000 Accounts receivable - related parties - net ............. 3,607,000 1,820,000 Inventories ............................................. 11,375,000 13,560,000 Prepaid expenses ........................................ 186,000 632,000 Other current assets .................................... 141,000 -- ----------- ----------- Total current assets ............................... 29,581,000 32,434,000 Property, plant and equipment, less accumulated depreciation of $8,805,000 and $7,101,000 ............................ 8,199,000 8,094,000 ----------- ----------- Other assets: Warrant valuation, less accumulated amortization of $1,805,000 and $1,769,000, respectively ............ 103,000 320,000 Other assets ............................................ 825,000 236,000 ----------- ----------- Total other assets ................................. 928,000 556,000 ----------- ----------- Total assets .................................... $38,708,000 $41,084,000 =========== ===========
See accompanying notes to the consolidated financial statements. F-3 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND August 29, August 30, SHAREHOLDERS' EQUITY 1998 1997 ------------ ------------ Current liabilities: Book overdraft ....................................................... $ 334,000 $ -- Revolving credit agreement borrowings, current ....................... 7,612,000 9,732,000 Accounts payable - trade ............................................. 9,289,000 8,139,000 Accounts payable - related parties - net ............................. 5,185,000 4,463,000 Accrued bonuses ...................................................... 164,000 257,000 Accrued interest expense - subordinated debt ......................... 1,731,000 1,582,000 Other accrued expenses ............................................... 1,467,000 2,047,000 Income taxes payable ................................................. -- 11,000 Current portion of capital lease obligations ......................... 144,000 42,000 Current portion of long-term debt .................................... 822,000 28,000 ------------ ------------ Total current liabilities ....................................... 26,748,000 26,301,000 Revolving credit agreement borrowings, noncurrent ......................... -- 473,000 Long-term debt, less current portion ...................................... 2,781,000 2,474,000 Obligations under capital leases, less current portion .................... 130,000 37,000 Subordinated long-term debt - related parties ............................. 1,700,000 4,500,000 ------------ ------------ Total liabilities ............................................... 31,359,000 33,785,000 ------------ ------------ Commitments and contingencies (Note 17) Shareholders' equity: Preferred stock, $.05 par value; authorized 1,000,000 shares: Series A, 666,529 shares issued and outstanding .................... 4,666,000 4,666,000 Series B, 120,690 shares issued and outstanding .................... 4,511,000 4,511,000 Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 16,761,493 shares in 1998 and 16,729,074 shares in 1997 168,000 168,000 Additional paid-in capital ........................................... 12,483,000 10,566,000 Foreign currency translation adjustment .............................. (376,000) -- Accumulated deficit .................................................. (14,103,000) (12,612,000) ------------ ------------ Total shareholders' equity ...................................... 7,349,000 7,299,000 ------------ ------------ Total liabilities and shareholders' equity ................... $ 38,708,000 $ 41,084,000 ============ ============
See accompanying notes to the consolidated financial statements. F-4 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended -------------------------------------------- August 29, August 30, August 31, 1998 1997 1996 ------------ ------------ ------------ Net sales .......................................... $ 67,683,000 $ 68,959,000 $ 51,720,000 Cost of sales ...................................... 50,432,000 48,441,000 40,801,000 ------------ ------------ ------------ Gross profit ....................................... 17,251,000 20,518,000 10,919,000 Selling, general and administrative expenses ....... 16,424,000 17,093,000 16,285,000 ------------ ------------ ------------ Income (loss) from operations ...................... 827,000 3,425,000 (5,366,000) Other income (expense): Interest expense .............................. (1,786,000) (1,940,000) (2,359,000) Other expense ................................. (240,000) (252,000) (434,000) Litigation expenses ........................... (230,000) (72,000) (162,000) ------------ ------------ ------------ Income (loss) before income taxes .................. (1,429,000) 1,161,000 (8,321,000) Income tax expense ................................. 62,000 78,000 3,732,000 ------------ ------------ ------------ Net income (loss) .................................. (1,491,000) 1,083,000 (12,053,000) Less: Cumulative preferred stock dividends in arrears (453,000) (256,000) -- Beneficial conversion feature ................. -- (1,011,000) -- Warrant valuation adjustment .................. -- (270,000) -- ------------ ------------ ------------ Net loss applicable to common stock ................ $ (1,944,000) $ (454,000) $(12,053,000) ============ ============ ============ Loss per Common Share: Basic .............................................. $ (.12) $ (.03) $ (.72) ============ ============ ============ Diluted ............................................ $ (.12) $ (.03) $ (.72) ============ ============ ============
See accompanying notes to the consolidated financial statements. F-5 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED AUGUST 29, 1998, AUGUST 30, 1997 AND AUGUST 31, 1996
PREFERRED STOCK ------------------------------------------- COMMON STOCK SERIES A SERIES B ----------------------- -------------------- -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- -------- ------- ---------- ------- ---------- Balance, August 31, 1995 .............. 16,629,683 $166,000 -- -- -- -- Net loss .............................. Exercise of stock options ............. 10,000 -- -- -- -- -- Contribution to 401(k) Plan ........... 10,493 1,000 -- -- -- -- ----------- -------- ------- ---------- ------- ---------- Balance, August 31, 1996 .............. 16,650,176 167,000 -- -- -- -- Net income ............................ Exercise of stock options ............. 73,500 1,000 -- -- -- -- Contribution to 401(k) Plan ........... 5,398 -- -- -- -- -- Issuance of Series A Preferred Stock ............................ -- -- 666,529 $4,666,000 -- -- Issuance of Series B Preferred Stock ............................ -- -- -- -- 120,690 $4,511,000 Beneficial conversion feature (Note 12) -- -- -- -- -- -- Warrant valuation adjustment (Note 12) -- -- -- -- -- -- ----------- -------- ------- ---------- ------- ---------- 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 -- -- -- -- -- Capital contribution on sale of subsidiary ....................... -- -- -- -- -- -- Issuance of warrants .................. -- -- -- -- -- -- Foreign currency translation adjustment ....................... -- -- -- -- -- -- =========== ======== ======= ========== ======= ========== Balance, August 29, 1998 .............. 16,761,493 $168,000 666,529 $4,666,000 120,690 $4,511,000 =========== ======== ======= ========== ======= ========== FOREIGN ADDITIONAL CURRENCY PAID-IN TRANSLATION ACCUMULATED CAPITAL ADJUSTMENT DEFICIT ----------- ----------- ------------ Balance, August 31, 1995 .............. $10,281,000 -- $ (361,000) Net loss .............................. (12,053,000) Exercise of stock options ............. 5,000 -- -- Contribution to 401(k) Plan ........... 68,000 -- -- ----------- ----------- ------------ Balance, August 31, 1996 .............. 10,354,000 -- (12,414,000) Net income ............................ 1,083,000 Exercise of stock options ............. 180,000 -- -- Contribution to 401(k) Plan ........... 32,000 -- -- Issuance of Series A Preferred Stock ............................ -- -- -- Issuance of Series B Preferred Stock ............................ -- -- -- Beneficial conversion feature (Note 12) -- -- (1,011,000) Warrant valuation adjustment (Note 12) -- -- (270,000) ----------- ----------- ------------ 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 -- -- Capital contribution on sale of subsidiary ....................... 1,506,000 -- -- Issuance of warrants .................. 96,000 -- -- Foreign currency translation adjustment ....................... -- $ (376,000) -- =========== =========== ============ Balance, August 29, 1998 .............. $12,483,000 $ (376,000) $(14,103,000) =========== =========== ============
See accompanying notes to the consolidated financial statements. F-6 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended -------------------------------------------- August 29, August 30, August 31, 1998 1997 1996 ------------ ----------- ------------ Cash flows from operating activities: Net income (loss) ....................................... $ (1,491,000) $ 1,083,000 $(12,053,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ......................... 1,775,000 1,710,000 1,847,000 Provision for losses on accounts receivable ........... 998,000 729,000 1,028,000 Provision for market valuation of inventory ........... 720,000 1,005,000 1,468,000 Provision for (reduction in) LIFO reserve ............ (685,000) (525,000) 198,000 Foreign currency translation adjustment ............... (376,000) -- -- Deferred income tax expense ........................... -- -- 3,881,000 Loss on disposal of assets ............................ -- 2,000 6,000 Compensation expense related to extension of stock options ............................................. 217,000 Issuance of stock in connection with 401K plan ........ 51,000 32,000 69,000 Amortization of deferred loan costs ................... 188,000 Amortization of warrant valuation ..................... 60,000 63,000 83,000 Change in operating assets and liabilities: Accounts receivable ................................ (1,642,000) (7,439,000) (5,368,000) Inventories ........................................ 1,414,000 (1,348,000) 49,000 Prepaid expense .................................... 333,000 (374,000) (5,000) Other current assets ............................... (69,000) -- -- Accounts payable ................................... 1,973,000 4,469,000 5,612,000 Accrued expenses ................................... (239,000) 1,663,000 275,000 Income taxes payable ............................... (11,000) (74,000) (423,000) ------------ ----------- ------------ Net cash provided by (used in) operating activities 3,216,000 996,000 (3,333,000) ------------ ----------- ------------ Cash flows from investing activities: Capital expenditures .................................... (1,599,000) (1,274,000) (1,108,000) Proceeds from sale of fixed assets ...................... -- -- 580,000 Decrease (increase) in other assets ..................... (20,000) 124,000 (170,000) ------------ ----------- ------------ Net cash used in investing activities .............. (1,619,000) (1,150,000) (698,000) ------------ ----------- ------------ Cash flows from financing activities: Book overdraft .......................................... 334,000 -- -- Borrowings under new revolving credit facility .......... 53,948,000 -- -- Repayments under new revolving credit facility .......... (46,336,000) -- -- Net borrowings (repayment) under former revolving credit facility ....................................... (10,205,000) 886,000 3,936,000 Proceeds from long-term debt ............................ 4,258,000 -- 274,000 Principal payments on capital leases .................... (132,000) (18,000) (25,000) Principal payments on long-term debt .................... (3,157,000) (635,000) (732,000) Deferred loan costs relating to revolving credit facility (780,000) -- --
F-7 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Proceeds from issuance of common stock ................. 47,000 180,000 5,000 ----------- ---------- ----------- Net cash provided by (used in) financing activities (2,023,000) 413,000 3,458,000 ----------- ---------- ----------- Net increase (decrease) in cash ............................. (426,000) 259,000 (573,000) Cash at beginning of year ................................... 492,000 233,000 806,000 ----------- ---------- ----------- Cash at end of year ......................................... $ 66,000 $ 492,000 $ 233,000 =========== ========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ............................................. $ 1,637,000 $1,527,000 $ 1,786,000 Income taxes paid, net of refunds .................... $ 131,000 $ 144,000 $ 293,000
Supplemental disclosure of noncash financing and investing activities: 1998 o A non-cash increase in property and equipment and obligations under capital leases of $327,000. o Sale of Brazilian subsidiary to an affiliated company. The result was a non-cash decrease of subordinated debt to Nevell Investments, S.A. of $2,800,000 (See Note 6 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. 1997 o During fiscal year 1997, Nevell Investments, S.A. and Transvit Manufacturing Corporation converted $4,511,000 and $4,666,000, respectively, of subordinated debt into preferred stock. The beneficial conversion feature associated with the conversion of the Nevell Investments, S.A. subordinated debt totaled $1,011,000. Additionally, as a result of this conversion, the Company wrote off $270,000 of warrant valuation costs. Refer to Note 8 for additional discussion. See accompanying notes to the consolidated financial statements. F-8 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 products and selected toiletry products. The Company distributes its products to more than 1,000 customers, including wholesalers, distributors, drug and grocery chains, mass merchandisers and specialty chain stores located primarily in North and South America. One customer accounted for slightly more than ten percent of the Company's net sales in fiscal 1998, while no single customer accounted for more than ten percent of the Company's net sales in fiscal years 1997 and 1996. FISCAL YEAR END The Company changed its fiscal year end in 1996 from one ending on August 31 to a 52-53 week fiscal year ending on the Saturday nearest the last day of the month of August in each year. There was no effect on the accompanying financial statements because the 1996 fiscal year also ended on August 31. The 1998 and 1997 fiscal years ended on August 29 and August 30, 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 6 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 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-9 by dividing income (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income (loss) applicable to common shareholders, as adjusted for the assumed conversion of preferred stock, if applicable, by the sum of the weighted-average number of common shares outstanding, and the number of additional common shares that would have been outstanding if dilutive options, warrants and convertible preferred stock had been exercised or converted. All prior-period EPS amounts presented have been restated to conform to the provisions of SFAS No. 128. 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 29, 1998 and August 30, 1997 have been translated to U.S. dollars utilizing exchange rates in effect at the respective balance sheet dates. Financial statements of foreign subsidiaries have been translated based on the U.S. dollar being the functional currency of the subsidiaries. Monetary assets and liabilities are translated utilizing the appropriate period ending exchange rates. Non-monetary assets are translated utilizing historical exchange rates. Results of operations, with the exception of cost of sales and depreciation, are translated using the average exchange rates prevailing throughout the year. Cost of sales and depreciation are translated at the historic rates of the inventory sold and underlying property, plant and equipment, respectively. Except as discussed below, foreign currency translation gains and losses are reflected in the Statements of Operations. Effective June 1, 1998, the Company classified approximately $3.8 million of intercompany receivable from its Mexican subsidiary as a permanent investment. Accordingly, effective June 1, 1998 all translation gains and losses related to this intercompany balance have been recorded directly to Shareholders' Equity as Foreign Currency Translation Adjustment. The Company believes this classification is appropriate as there is no intent for these amounts to be repaid, there are no repayment terms, and the amounts outstanding are non-interest bearing. The net foreign currency transaction and translation losses reflected in the Statement of Operations for the years ended August 29, 1998, August 30, 1997 and August 31, 1996 were approximately $111,000, $156,000 and $95,000 respectively. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs were approximately $1,860,000, $4,124,000, and $2,859,000 for the year ended August 29, 1998, August 30, 1997 and August 31, 1996, respectively. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS Certain prior period amounts have been reclassified to conform to the current year presentation. 2. 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: F-10
YEAR ENDED -------------------------------------------------- AUGUST 29, AUGUST 30, AUGUST 31, 1998 1997 1996 -------------- -------------- -------------- Basic EPS: Net loss applicable to common stock ................ $ (1,944,000) $ (454,000) $ (12,053,000) Weighted-average number of common shares outstanding 16,748,798 16,709,690 16,641,218 -------------- -------------- -------------- Basic EPS .......................................... $ (.12) $ (.03) $ (.72) ============== ============== ============== Diluted EPS ........................................ $ (.12) $ (.03) $ (.72) ============== ============== ==============
Dilutive EPS equals basic EPS for the years ended August 29, 1998, August 30, 1997 and August 31, 1996 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: August 29, August 30, 1998 1997 ------------ ------------ Raw materials .......................... $ 4,728,000 $ 6,105,000 Work-in-process ........................ 1,209,000 2,101,000 Finished goods ......................... 6,342,000 7,684,000 ------------ ------------ 12,279,000 15,890,000 Reserves for market valuation .......... (640,000) (1,381,000) LIFO valuation allowance ............... (264,000) (949,000) ------------ ------------ $ 11,375,000 $ 13,560,000 ============ ============ During 1998, cost of sales was reduced by approximately $572,000 as a result of a LIFO inventory decrement. 4. PROPERTY, PLANT AND EQUIPMENT: August 29, August 30, 1998 1997 ------------ ------------ Land ................................... $ 43,000 $ 43,000 Building ............................... 3,767,000 3,767,000 Leasehold improvements ................. 221,000 235,000 Machinery and equipment ................ 9,602,000 7,802,000 Computer equipment ..................... 2,676,000 2,403,000 Furniture and equipment ................ 695,000 945,000 ------------ ------------ 17,004,000 15,195,000 Less accumulated depreciation .......... (8,805,000) (7,101,000) ------------ ------------ $ 8,199,000 $ 8,094,000 ============ ============ F-11 During the fiscal years ended August 29, 1998, August 30, 1997 and August 31, 1996, the Company recorded depreciation expense of $1,775,000, $1,710,000 and $1,847,000. 5. REVOLVING CREDIT AGREEMENT BORROWINGS AND LONG-TERM DEBT: August 29, August 30, 1998 1997 ------------ ------------ Revolving credit agreement borrowings, current .. $ 7,612,000 $ 9,732,000 Revolving credit agreement borrowings, noncurrent -- 473,000 ------------ ------------ $ 7,612,000 $ 10,205,000 ============ ============ Term loan ....................................... $ 2,960,000 $ 2,474,000 Capital expenditure loan ........................ 643,000 -- Other ........................................... -- 28,000 ------------ ------------ 3,603,000 2,502,000 Less current portion ............................ (822,000) (28,000) ------------ ------------ Long-term debt, less current portion ............ $ 2,781,000 $ 2,474,000 ============ ============ On December 19, 1997, the Company entered into a $22,000,000 credit agreement with a new lender (the "Credit Agreement"). The Credit Agreement includes a revolving credit facility (the "Revolving Credit") which provides for $15,100,000 of maximum borrowings bearing interest, at the Company's election, at the Alternate Base Rate (the higher of the prime rate or the Federal Funds Rate plus .50%) plus 1.50% or the London Interbank Offered Rate (LIBOR) plus 3.50% (although, borrowings based on LIBOR cannot exceed 60% of the total oustanding borrowings under the Revolving Credit). At August 29, 1998, the Revolving Credit bore interest at a rate of 10.0%. Borrowings under the Revolving Credit are limited by a formula based on Eligible Accounts Receivable and Inventory, as defined. Remaining availability under the line as of August 29, 1998 approximated $236,000 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 clause", 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 (8.5% at August 29, 1998) plus 2.00%. Principal payments on the Term Loan consist of equal monthly principal payments in the amount of $56,667 for 35 months beginning in January, 1998 with a $1,416,655 balloon payment due in December 2001. Additionally, 50% of annual excess cash flow, as defined, must be applied to the Term Loan installments in the inverse order of maturity. Borrowings under the Cap Ex Facility are limited to 80% of the cost of new machinery and equipment, limited to annual utilization of $1,500,000. These borrowings also bear interest, payable monthly, at the Alternate Base Rate plus 2.00%. Principal payments on the Cap Ex Facility commence one month after the take down in an amount based on a 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 29, 1998 the Company had outstanding borrowings under the Cap Ex Facility totalling $643,000 in capital expenditures. Principal payments are due at the rate of $11,800 per month. F-12 Aggregate maturities of amounts outstanding under the Term Loan and Cap Ex Facility are as follows as of August 29, 1998: Fiscal Year Amount - --------------------------- -------------- 1999 $ 822,000 2000 822,000 2001 822,000 2002 1,137,000 -------------- $ 3,603,000 ============== Borrowings under the Credit Agreement are collateralized by all of the Company's present and future assets. The Credit Agreement contains restrictive financial covenants including Minimum Tangible Net Worth, Minimum EBITDA, Maximum Loss, Minimum Fixed Charge Coverage, Maximum Leverage and Maximum Capital Expenditures. Additional covenants limit borrowings, asset sales and dividends. The Company was in violation of certain financial covenants as of May 30, 1998 and August 29, 1998 and was granted waivers to such covenants by the lender. 6. 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 (See Note 7.) 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. 7. SUBORDINATED LONG-TERM DEBT: Subordinated long-term debt totaling $1,700,000 and $4,500,000 as of August 29, 1998 and August 30, 1997, respectively, represents a loan made by the Sheth Group through their affiliate Nevell Investments, S.A., ("Nevell") to finance the Company's payments under the stockholder class action litigation settlement (see Note 18.) The debt has a term of ten years with principal payable 20% at the end of the eighth and ninth years (fiscal 2001 and fiscal 2002, respectively) and the remaining 60% payable at the end of the tenth year (fiscal 2003). In March 1998, the Company negotiated an agreement with Nevell to eliminate any future accrual of interest on the outstanding debt to Nevell. Aggregate maturities of subordinated long-term debt at August 29, 1998 are as follows: Fiscal Year Amount - --------------------------- -------------- 2001 $ 900,000 2002 800,000 -------------- $ 1,700,000 ============== F-13 8. RELATED PARTY TRANSACTIONS: As of August 29, 1998, a majority of the Company's outstanding stock (73%) is owned by companies under control of the Sheth Group. The acquisition of this ownership occurred in several stages beginning in February 1986 and ending in August 1995. 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 1998, 1997 and 1996 the Company purchased approximately $4,227,000, $6,503,000, and $7,037,000, respectively, of such products. The Company sold products to Sheth Group affiliates during fiscal 1998, 1997 and 1996 of approximately $6,557,000, $3,866,000, and $1,997,000, respectively. Gross margins on these sales during fiscal 1998, 1997, and 1996 were 16%, 27%, and 31%, respectively. The fiscal 1998 net sales include approximately $1,535,000 in slow moving finished goods and raw materials inventory which was sold at a gross margin of approximately 6%. In fiscal 1998, 1997 and 1996, the Company incurred fees to directors of approximately $279,000, $260,000, and $229,000, respectively, of which approximately $27,000 and $30,000 were unpaid at August 29, 1998 and August 30, 1997, respectively. Such fees related to the Board of Directors' meetings, other committee meetings and events associated with the investigation performed by the Special Committee of the Board of Directors, formed in October 1992 to conduct a review of matters associated with the Stockholder Class Action Litigation. See Note 18 for further discussion. At August 29, 1998 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. An extension of the expiration date of the 400,000 warrants to 2003 and the grant of the 2,000,000 warrants were made in connection with the settlement of the stockholder class action litigation (see Note 18 for further discussion). In recognition that value was received by the Company in return for the grant of new warrants and the extension of the expiration date for previously issued warrants, the Company utilized the Black Scholes Method to compute the value. The computation resulted in the assignment of a value of $2,089,000 (net of the purchase price of the warrants of $500,000). This net value was recorded as part of "Other assets" and as an addition to "Additional paid-in capital." In fiscal 1998, 1997 and 1996, approximately $36,000, $63,000, and $83,000, respectively, of the $2,089,000 was charged to Other income (expense). Additionally, during 1998 in connection with the sale of the Company's Brazilian subsidiary (See Note 6), approximately $181,000 in warrant valuation costs were written off. In fiscal 1997, $270,000 of warrant valuation costs were charged directly to retained earnings in connection with the conversion of subordinated long-term debt to preferred stock (see Note 12). The remainder of the balance, which is attributable to the favorable terms of the subordinated long-term financing of the shareholder litigation settlement provided by the Sheth Group, will be amortized to expense through fiscal 2003 when the final payment is made on the related subordinated debt. 9. 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 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 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 August 29, 1998 and August 30, 1997. F-14 August 29, August 30, 1998 1997 ----------- ----------- ACCOUNTS RECEIVABLE: Total accounts receivable-related parties ... $ 4,153,000 $ 2,267,000 Offset amount ............................... (546,000) (447,000) ----------- ----------- Net related parties receivables ............. $ 3,607,000 $ 1,820,000 =========== =========== ACCOUNTS PAYABLE: Total accounts payable-related parties ...... $ 5,731,000 $ 4,910,000 Offset amount ............................... (546,000) (447,000) ----------- ----------- Net related parties payables ................ $ 5,185,000 $ 4,463,000 =========== =========== 10. 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 29, 1998 are as follows: Operating Capital Fiscal Year Leases Leases - -------------------------------------------------- -------- --------- 1999 ............................. $447,000 $ 153,000 2000 ............................. 270,000 133,000 2001 ............................. 136,000 4,000 2002 ............................. -- 4,000 2003 ............................. -- 2,000 -------- --------- Total minimum lease payments ..................... $853,000 296,000 ======== Less imputed interest ............................ (22,000) --------- Present value of minimum lease payments .......... 274,000 Less current portion ............................. (144,000) ========= Long term portion ................................ $ 130,000 ========= Certain of the above leases include escalation charges based on increases in real estate taxes, utilities and common maintenance charges. Rental expense for fiscal 1998, 1997 and 1996 amounted to approximately $745,000, $614,000, and $423,000, respectively. 11. INCOME TAXES: The components of income (loss) before income taxes are as follows: Years Ended -------------------------------------------------- August 29, August 30, August 31, 1998 1997 1996 ----------- ----------- ----------- Domestic .............. $ (557,000) $ 3,055,000 $(6,088,000) Foreign ............... (934,000) (1,894,000) (2,233,000) ----------- ----------- ----------- $(1,429,000) $ 1,161,000 $(8,321,000) =========== =========== =========== F-15 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 29, 1998 U.S. Federal ............... $ 62,000 $ -- $ 62,000 State ...................... -- -- ----------- ---------- ---------- $ 62,000 $ -- $ 62,000 =========== ========== ========== Year ended August 30, 1997 U.S. Federal ............... $ 76,000 $ -- $ 76,000 State ...................... 2,000 -- 2,000 ----------- ---------- ---------- $ 78,000 $ -- $ 78,000 =========== ========== ========== Year ended August 31, 1996 U.S. Federal ............... $ (149,000) $3,566,000 $3,417,000 State ...................... -- 315,000 315,000 ----------- ---------- ---------- $ (149,000) $3,881,000 $3,732,000 =========== ========== ========== Income tax expense in fiscal 1998, 1997 and 1996 differed from the amounts computed by applying the U.S. federal income tax rate to income (loss) before income taxes as a result of the following:
Years ended --------------------------------------- August 29, August 30, August 31 1998 1997 1996 --------- ----------- ----------- Computed expected tax expense (benefit) .................. $(522,000) $ 406,000 $(2,829,000) Increase (decrease) in income taxes resulting from: State income tax net operating loss carryforward (generated) utilized ............................ -- -- (250,000) Merger costs not deductible for income tax purposes . -- -- 7,000 Warrant expenses not deductible for income tax purposes ........................................ 22,000 22,000 28,000 Foreign subsidiary loss not deductible for income tax purposes ........................................ 327,000 663,000 475,000 U.S. loss providing no current year benefit ......... 558,000 655,000 -- State income taxes, net of federal income tax benefit -- 2,000 -- Deferred tax asset valuation allowance .............. (287,000) (1,888,000) 6,609,000 Alternative minimum tax ............................. -- 76,000 -- Prior year return to provision adjustments .......... 62,000 -- -- Other, net .......................................... 98,000 142,000 (308,000) --------- ----------- ----------- Total income tax expense ................................. $ 62,000 $ 78,000 $ 3,732,000 ========= =========== ===========
F-16 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at August 29, 1998 and August 30, 1997 are presented below:
August 29, August 30, 1998 1997 ----------- ----------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts and sales returns ................................................. $ 417,000 $ 623,000 Inventories, principally due to allowance for obsolescence and difference in certain costs capitalized for tax purposes ............ 251,000 401,000 Start-up, organizational costs, and packaging design costs ............ 435,000 375,000 Accrued expenses, principally due to accrual of related party interest expense for financial reporting purposes .......................... 773,000 746,000 Net operating loss carryforward ....................................... 3,228,000 3,111,000 Alternative minimum tax credit carryforwards .......................... 300,000 280,000 Other ................................................................. -- 65,000 ----------- ----------- Total deferred tax assets .................................................. 5,404,000 5,601,000 Less valuation allowance ................................................... (4,434,000) (4,721,000) ----------- ----------- 970,000 880,000 ----------- ----------- Deferred tax liabilities: LIFO reserve .......................................................... (218,000) (176,000) Plant and equipment, principally due to differences in depreciation ... (725,000) (704,000) Other ................................................................. (27,000) -- ----------- ----------- Total deferred tax liabilities ............................................. (970,000) (880,000) ----------- ----------- Net deferred tax asset ..................................................... $ -- $ -- =========== ===========
The valuation allowance for deferred taxes decreased during fiscal 1998 and 1997 by $287,000 and $1,888,000, respectively. There was an increase in the valuation allowance during fiscal 1996 of $6,609,000. 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 $4,434,000 has been recorded at August 29, 1998 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 29, 1998, the Company has net operating loss carryforwards for federal income tax purposes of approximately $8,725,000 which are available to offset future federal taxable income, if any, through 2012. The Company also has alternative minimum tax credit carryforwards of approximately $300,000 which are available to reduce future federal regular income taxes, if any, over an indefinite period. 12. 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 F-17 accrued and unpaid dividends. Each share of the Series A preferred stock is convertible, at the option of Transvit, into one share of the Company's common stock. The Company can redeem the shares of Series A preferred stock at any time for cash of $7 per share, plus all accrued and unpaid dividends. The conversion price approximated the closing bid price of the Company's common stock as reported by the NASDAQ on the date of this transaction. At August 29, 1998, cumulative dividends in arrears on the Series A preferred stock approximated $343,000. In a subsequent 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. 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 29, 1998, cumulative dividends in arrears on the Series B preferred stock approximated $366,000. 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. 13. 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 fair value of the subordinated long-term debt could not be determined without incurring excessive cost given the related party nature of the lending arrangement. 14. 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 F-18 Internal Revenue Code of 1986, as amended), nonqualified stock options, and other similar stock-based awards. The stock options granted in fiscal 1998, 1997 and 1996 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. A summary of the status of the Company's stock options as of August 29, 1998, August 30, 1997 and August 31, 1996 and the changes during the years then ended are presented below:
Options Outstanding ---------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- -------------------- Weighted Weighted Weighted Number Average Average Number Average of Exercise Number Exercise of Exercise Shares Price of Shares Price Shares Price ---------- -------- ---------- -------- -------- -------- Outstanding at beginning of the year 1,213,706 $ 8.20 786,626 $ 6.73 266,626 $ 4.84 Granted ............................ 557,500 $ 10.37 670,000 $ 8.82 530,000 $ 7.56 Exercised .......................... (65,706) $ 6.88 (73,500) $ 2.45 (10,000) $ 0.50 Forfeited .......................... (280,500) $ 8.77 (169,420) $ 6.35 -- -- ---------- -------- ---------- -------- -------- -------- Outstanding at end of year ......... 1,425,000 $ 8.99 1,213,706 $ 8.20 786,626 $ 6.73 ========== ======== ========== ======== ======== ======== Exercisable at end of year ......... 588,500 $ 8.35 312,238 $ 7.45 273,486 $ 5.44 ========== ======== ========== ======== ======== ======== Weighted average fair value of options granted......................... $5.14 $4.38 $3.67 ====================== ====================== ====================
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 1998, 1997 and 1996: dividend yield of 0%; risk-free interest rates ranging from 5.81% to 6.56%; an expected life of options of 5 or 6 years; and a volatility ranging from 41.8% to 45.9% for all grants. The following table summarizes information about stock options oustanding at August 29, 1998:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------ Weighted Weighted Average Average Weighted Number Remaining Exercise Number Average Range of Exercise Price Outstanding Contractual Life Price Exercisable Exercise Price - ---------------------------- ------------- ------------------ -------------- ------------- --------------- $1.4375 5,000 2.08 $ 1.4375 5,000 $ 1.4375 $6.875 to $7.5625 555,000 7.48 $ 7.47 370,000 $ 7.47 $9.375 to $10.50 865,000 9.01 $ 10.01 213,500 $ 10.04 - ---------------------------- ------------- ------------------ -------------- ------------- --------------- $1.4375 to $10.50 1,425,000 6.23 $ 8.99 588,500 $ 8.35 ============================ ============= ================== ============== ============= ===============
SFAS 123 establishes a fair value of accounting for stock-based compensation plans. Had the compensation cost F-19 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:
August 29, 1998 August 30, 1997 -------------------------- -------------------------- As Reported Pro Forma As Reported Pro Forma ----------- ----------- ----------- ----------- SFAS 123 Charge ................... -- $ 2,002,000 -- $ 1,188,000 APB 25 Charge ..................... -- -- -- $ -- Net income (loss) ................. $(1,491,000) $(3,493,000) $ 1,083,000 $ (105,000) Net loss applicable to common stock $(1,944,000) $(3,946,000) $ (454,000) $(1,642,000) Net loss per common share ......... $ (.12) $ (.24) $ (.03) $ (.10)
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 offer a repricing alternative to all holders of outstanding options as of a date expected to occur in late November or early December 1998. 15. WARRANTS The Company issued warrants to an investment banker in June 1998 to purchase 50,000 shares of the Company's common stock at $10.47 per share as compensation for various due diligence and investment banking services. The warrants have been valued at $96,000 using the Black Scholes method and have been credited to additional paid-in capital and recorded as prepaid consulting costs. The warrants expire on September 1, 2003. The prepaid consulting costs will be amortized on a straight-line basis over twelve months. 16. 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 1998, 1997 and 1996, a total of 4,924, 5,398, and 10,493, respectively, of such shares were issued to the Plan. Contributions including the issuance of Common Stock to the Plan were $106,000 in 1998, $80,000 in 1997, and $137,000 in 1996. 17. COMMITMENTS AND CONTINGENCIES: FREITAS AND KENNER In October 1994, a suit was filed in Florida state court against the Company and two of its directors by Ross Freitas, Carolyn Kenner, Rose Freitas and Melissa Freitas. The complaint alleged causes of action by two plaintiffs for libel and seeks indemnification of legal costs allegedly incurred by those plaintiffs in suits and proceedings arising from the facts which were the subject of the investigation conducted by the Special Committee of the Board of Directors in 1992. The complaint also alleged, on behalf of all four plaintiffs, that the Company's disclosures relating to the Sheth Group's holding of Company stock and other matters were fraudulent or negligently misrepresented. In April 1995, the court dismissed the complaint without prejudice, in part due to the plaintiffs' failure to state a claim for relief. In May 1995 the plaintiffs refiled the complaint, asserting many of the same claims and in June 1996, amended their complaint yet again, naming only the Company and one of its directors as defendants. In October 1998, the Court dismissed the claim against the one director. The Company intends to dispute these allegations vigorously and believes that ultimate disposition of the case will not have a material adverse effect on its financial condition. CALIFORNIA AIR RESOURCES BOARD Since the effective date (January 1, 1995) of regulations of the California Air Resources Board ( the "CARB") with respect to volatile organic compounds "(VOC's"), the Company has not been in compliance with those regulations. The Company was granted a temporary variance from VOC regulations under which the Company F-20 was allowed to continue to manufacture noncomplying product until September 30, 1996. The variance also allowed the Company to continue to sell its remaining inventory of noncomplying products in California until June 30, 1997. The Company had as of September 30, 1996, reformulated all of its fragrance products to achieve compliance with the VOC regulations. INTERNAL REVENUE SERVICE In February, 1997, the Internal Revenue Service ("the IRS") concluded their examination of the Company's tax returns submitted for fiscal years 1993, 1994 and 1995. The IRS proposed adjustments disallowing the deductions of payments made in the settlement of the class action litigation and certain related legal and professional fees. In April 1998, the Company filed a protest letter with the IRS. In a letter dated August 17, 1998, the IRS rejected the Company's response. The Company will now raise this issue to the Appeals Court. If the Company is unsuccessful in its discussions or ultimately in an appeal, it could be required to pay taxes from prior years and related interest thereon exceeding $1,800,000, and it could lose a significant amount of its existing net operating loss carryforward benefits. No accrual for the impact of the proposed IRS adjustments has been recorded in the accompanying financial statements as the Company does not believe it is probable that the IRS will prevail in this matter. OTHER The Company is subject to ordinary and routine litigation arising out of the conduct of its business. Management believes that the ultimate disposition of any of these proceedings will not have a material adverse effect on the Company's financial condition. YEAR 2000 COMPLIANCE As a result of certain computer programs being written using two digits rather than four digits to define the applicable year, any of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions and engage in normal business activities. As part of the Company's Year 2000 readiness program, management has evaluated its infrastructure including hardware, operating systems, legacy applications and data, and other non-financial systems and determined the steps that need to be taken to ensure these systems are Year 2000 compliant. While the Company believes that remediation of its infrastructure will be complete in all material respects during 1999, if some or all of the Company's remediated or replaced internal computer systems fail to correctly distinguish between years before and after Year 2000, or if any software applications critical to the Company's operations are overlooked in the Company's assessment of its Year 2000 compliance, there could be a material adverse effect on the Company's business, financial condition, results of operations and liquidity of a magnitude which the Company presently is unable to predict. 18. 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. In connection with the settlement, common stock purchase warrants to purchase 2,000,000 shares of the Company's common stock at a per share price of $5.34 were granted to the Sheth Group. The warrants are exercisable for a period of ten years from their issuance. The per share price of the common stock under the warrants will increase by ten percent per year after the first seven years. As part of the settlement, the Company also extended to August 31, 2003, the exercise date of warrants held by a Sheth Group affiliate to purchase 400,000 shares of the Company's common stock. F-21 In recognition that value was received by the Company in return for extending the expiration date of the warrants to purchase 400,000 shares and the granting of the new warrants to purchase 2,000,000 shares as described above, the Company utilized the Black Scholes Method to compute the value. The computation resulted in the assignment of a value of $2,089,000 (net of the purchase price of the warrants of $500,000). This net value was recorded as part of "Other assets" and as an addition to "Additional paid-in capital" in fiscal 1994. The class action settlement included a provision that protects the Company and other settling defendants against further liability to the class for damages in connection with related ongoing litigation. The Company anticipates that it will continue to incur litigation expenses related to ongoing litigation involving the defendants not covered under the class action litigation settlement and related to a lawsuit against the Company's former auditors separate from, but related to, the stockholder class action against the Company. Any expenses incurred are not expected to be material to the Company's financial results. 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 $230,000, $72,000, and $162,000 in fiscal 1998, 1997, and 1996, respectively. 19. FOREIGN SALES: The Company exports a significant portion of its sales directly or through its Mexican and Brazilian subsidiaries (prior to the Company's disposition of its Brazilian subsidiary in May 1998. See Note 6 for additional details). For the years ended August 29, 1998, August 30, 1997 and August 31, 1996, these sales were $29,690,000 (44% of net sales), $27,054,000 (39% of net sales), and $14,524,000 (28% 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. 20. QUARTERLY RESULTS (UNAUDITED): Summarized quarterly results for 1998 and 1997(in thousands except for per share amounts) are as follows:
1998 Quarter Ended ---------------------------------------------------------- Nov 29 Feb. 28 May. 30 Aug. 29 ----------- ------------ ------------ ------------ Net Sales ........................ $20,865,000 $ 14,843,000 $ 17,185,000 $ 14,790,000 Gross Profit ..................... 5,938,000 4,878,000 3,935,000 2,500,000 Net Income (Loss) ................ 1,355,000 (37,000) (812,000) (1,997,000) Net Income (Loss) Applicable to Common Stock ............... 1,242,000 (150,000) (925,000) (2,111,000) Net Income (Loss) Per Common Share Basic ...................... .07 (.01) (.06) (.13) Diluted .................... .07 (.01) (.06) (.13) 1997 Quarter Ended ---------------------------------------------------------- Nov. 30 Mar. 1 May 31 Aug 30 ----------- ------------ ------------ ------------ Net Sales ........................ $17,489,000 $ 15,577,000 $ 18,117,000 $ 17,776,000 Gross Profit ..................... 5,227,000 4,348,000 5,328,000 5,615,000 Net Income (Loss) ................ 786,000 (344,000) 288,000 353,000 Net Income (Loss) Applicable to Common Stock ............... 786,000 (1,654,000) 174,000 240,000 Net Income (Loss) Per Common Share Basic ...................... $ .05 $ (.10) $ .01 $ .01 Diluted .................... $ .05 $ (.10) $ .01 $ .01
F-22 The second quarter of fiscal 1997 includes $1,011,000 and $270,000, respectively, of charges to retained earnings for the beneficial conversion feature and warrant valuation adjustment attributable to the Company's conversion of subordinated long-term debt to Series B convertible preferred stock. These charges reduced net income applicable to common stock in this period. The $270,000 warrant valuation adjustment was previously reflected as a charge to other expense in the Company's Form 10-Q for the period ended March 1, 1997. 21. PROCEEDS OF AN EXECUTIVE LIABILITY AND INDEMNIFICATION POLICY: In November 1994, the United States District Court for the District of South Carolina approved the disbursement of $1,250,000 to the Company from the original proceeds of an executive liability and indemnification policy for $2,000,000 owed by the Company. In June 1995, the Company received the balance ($750,000) of the proceeds of the policy as well as approximately $65,000 of interest earned during the period the court held the proceeds. This court approved distribution was appealed by two other claimants under the policy. Pursuant to a settlement agreement approved by the Court on December 18, 1997, the Company made payments totalling $175,000 to the two claimants who withdrew their motion. 22. IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS: REPORTING COMPREHENSIVE INCOME (SFAS 130) In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components. The Company plans to adopt SFAS No. 130 in fiscal 1999. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS 131) In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public companies report information about segments in annual and interim financial statements. The Company plans to adopt SFAS No. 131 in fiscal 1999. The adoption of these recently issued financial accounting standards is not expected to have a significant effect on the Company's consolidated financial statements. 23. SUBSEQUENT EVENTS (UNAUDITED): Effective September 3, 1998, the Company sold 78,333 shares of Series C Senior Convertible Preferred Stock ("Series C Preferred Stock") to a private investor for $60 per share. Each share of Series C Preferred Stock is convertible into common shares at a conversion price of $5.44 per share. In addition, the Company issued 125,000 warrants which are convertible into common shares at a conversion price of between $4.00 to $6.28 per share. The Company received proceeds of approximately $4,700,000 and expects to receive an additional $1,300,000 in fiscal 1999 upon issuance of an additional 21,667 shares of Series C Senior Covertible Preferred Stock, in accordance with the stated closing schedule. The Series C Preferred Stock holders are entitled to receive a cummulative cash dividend of $4.80 per share annually. The dividend is payable quarterly in arrears ($1.20 per quarter). The dividends may be paid by issuance of additional shares of Series C Preferred Stock except such shares bear a cummulative cash dividend of $7.80 per share annually. The Series C Preferred Stock holders 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-23 SCHEDULE II TRISTAR CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------- 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 - -------------------------------- ---------- ---------- -------------- ---------- ---------- Allowance for doubtful accounts: Year ended August 31, 1998 .... $1,052,000 $ 998,000 -- $1,155,000 $ 895,000 Year ended August 31, 1997 .... 850,000 729,000 -- 527,000 1,052,000 Year ended August 31, 1996 .... 419,000 1,028,000 -- 597,000 850,000 - -----------------------------------------------------------------------------------------------------
* Uncollectible accounts written off, net of recoveries.
- ----------------------------------------------------------------------------------------------------------------- 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 31, 1998 $ 1,381,000 $ 720,000 $ 0 $ 1,611,000 $ 490,000 Year ended August 31, 1997 612,000 1,005,000 0 236,000 1,381,000 Year ended August 31, 1996 621,000 1,666,000 (198,000) 1,477,000 612,000 - -----------------------------------------------------------------------------------------------------------------
** Transfer to LIFO Valuation *** Write-offs against the reserve F-24 EX-3.1 2 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF ROSS COSMETICS DISTRIBUTION CENTERS, INC. ARTICLE I NAME The name of the corporation is Ross Cosmetics Distribution Centers, Inc. ARTICLE II REGISTERED OFFICE AND AGENT The registered office of the Corporation in the State of Delaware is located at 410 South State Street in the City of Dover, County of Kent. The name of its registered agent at that address is Corporate Filing Services, Inc. ARTICLE III PURPOSE The conduct, carry on and engage in the wholesale distribution of cosmetic products, perfumes, colognes, beauty aids and health care products; and in connection therewith to manufacture, buy, sell, job, import, export and otherwise deal in and with cosmetics, chemicals and pharmaceutical products, lipsticks, rouges, powders, soaps, colognes, perfumes, toilet waters, hair bleaches, henna, hair rinses and washes, hair dressings, lotions, fresheners, shadow and eyebrow pencils, massage creams, cold cream, vanishing cream, balms, ointments, drugs, medicines, pharmaceutical and chemical products, preparations and compounds, sanitary and hygienic goods and products nail polishes, bleaches, cuticle removers, baby oils, deodorants, depilatories, witch hazel, rubbing alcohol, astringents, dentifrices, mouth washes, gargles, shaving creams, shaving stocks, shaving soaps, mineral oils, smelling salts, tooth brushes, combs, brushes, vanities, nail files, cuticle scissors, paper towels and tissues, jars, bottles, tubes, perfume bases, oils, extracts, flavors and other cosmetics, perfumes, toilet preparations, beauty preparations, chemicals and pharmaceuticals of every kind and description; and all products, by-products, materials, supplies, machinery, tools, packaging materials, applicators and devices used or useful in connection with or resulting from the manufacture, sale, marketing, distribution or use thereof. To purchase, lease, copyright, produce, construct and otherwise acquire, and to use, operate, repair, maintain, develop and improve and to sell, trade, exchange, rent, lease, create security interests in and otherwise dispose of any and all materials, facilities, appliances, articles, products, equipment or supplies proper for or adapted to be used in connection with or incidental to the business and affairs of the corporation as the same pertain to the conduct and operation of the corporation's principal or ancillary business activities and to do any and all things incidental thereto, or necessary to expedient or proper to be done in connection with the matters set out herein. To take, buy, sell, exchange, rent, lease, sublease or otherwise acquire, and to erect, construct, maintain, improve, rebuild, enlarge, alter, manage, control, develop, assign, transfer, convey, pledge, alienate or otherwise dispose and to mortgage or otherwise encumber, and to generally deal in real and personal property wherever situated, either directly or through ownership of shares in any corporation, and to acquire, buy, hold, sell, assign, transfer, mortgage, pledge, exchange or otherwise encumber of dispose of the securities of any corporation, domestic or foreign, including but not limited to shares, scrip, bonds, notes, evidences of indebtedness, debentures, commercial paper, whether such corporation be public or private, and to do any other lawful acts necessary, incidental or proper thereto, not prohibited by law, and while the holder of any securities, to exercise all rights and privileges of ownership, and to collect all dividends, and interest payable thereon, and to do all things not prohibited by law, to protest, conserve, or increase the value of all property and of all securities held by it. To have as part of the corporate purposes, all of the powers conferred upon corporations organized under the General Corporation Law subject to any limitations thereof contained in the Certificates of Incorporation or in the laws of the State of Delaware. ARTICLE IV CAPITAL STOCK SECTION 1. CLASSES AND SHARES AUTHORIZED. The authorized capital stock of the Corporation shall consist of 10,000,000 shares of Common Stock, $.01 par value per share (hereinafter referred to as either the "Common Shares" or "Common Stock") and 1,000,000 shares of Preferred Stock, $.05 par value per share (hereinafter referred to as either the "Preferred Shares" or "Preferred Stock"). SECTION 2. PREFERRED STOCK. The shares of Preferred Stock shall be issuable from time to time in one or more series, with respect to each of which series the Board of Directors shall be authorized, without further approval from the shareholders of the Corporation, to fix: (a) the designation of the series; -2- (b) the number of shares of each series, which number the Board of Directors may increase or decrease (but not below the number of shares thereof then outstanding); (c) the annual dividend rate of the series; (d) the dates at which dividends, if declared, shall be payable, and the dates from which the dividends shall be cumulative; (e) the redemption rights, if any, for shares of the series; (f) the terms and amount of any sinking fund provided for the purchase or redemption of shares of the series; (g) the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (h) whether the shares of the series shall be convertible into Common Stock or other securities, and, if so, the conversion price or prices, any adjustments thereof, and all other terms and conditions upon which such conversion may be made; (i) restrictions on the issuance of the shares of the same series or of any other class or series; and (j) the voting rights, if any, exercisable by the holders of the shares of such series. Shareholders shall have no pre-emptive rights. ARTICLE V PRE-EMPTIVE RIGHTS Stockholders of the Corporation shall not have pre-emptive rights to acquire unissued or treasury shares of the Corporation or securities convertible into such shares of carrying a right to subscribe to or acquire such shares. ARTICLE VI PLACE OF BUSINESS Part or all of the business of the Corporation may be conducted in the City of Dover, County of Kent, or any place in the State of Delaware or outside of the State of Delaware, in other states or territories of the United States and in foreign countries. -3- ARTICLE VII BOARD OF DIRECTORS SECTION 1. BOARD OF DIRECTORS: NUMBER. The governing board of the Corporation shall be known as the Board of Directors, shall consist of a minimum of three and a maximum of nine members, subject, however, to the number being from time to time increased or decreased in such manner as shall be provided in the By-laws of the Corporation, provided that the number of directors shall not be reduced to less than three except that there need be only as many directors as there are stockholders in the event that the outstanding shares are held of record by fewer than three stockholders. SECTION 2. CLASSIFICATION OF DIRECTORS. The Board of Directors may, but need not be divided into three classes, Class 1, Class 2 and Class 3, each class to be as nearly equal in number as possible. In the event the Corporation elects to adopt a "staggered" Board, the term of office of Class 1 directors shall expire at the first annual meeting of stockholders after their election, that of Class 2 directors shall expire at the second annual meeting after their election, and that of Class 3 directors shall expire at the third annual meeting after their election. At each annual meeting after such classification, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting. No classification of directors shall be effective prior to the first annual meeting of stockholders or at any time when the Board of Directors consists of less than six members. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders. SECTION 3. NOMINATION OF DIRECTORS. (a) Nominations for the election of directors may be made by the Board of Directors, by a committee of the Board of Directors or by any stockholder entitled to vote for the election of directors. Nominatings by stockholders shall be made by notice, in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for the election of directors; PROVIDED, HOWEVER, that if less than 21 days notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders. (b) Each notice under subsection (a) shall set forth: (i) the name, age, business address and, if known, residence address after each nominee proposed in such notice; (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee. (c) The chairman of the stockholders' meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, -4- and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 4. CERTAIN POWERS OF THE BOARD OF DIRECTORS. In furtherance and not in limitation of the powers conferred by statute, and subject to the rights of the holders of the Corporation's Preferred Stock as specified in Section 5 of Article IV, the Board of Directors is expressly authorized: (a) to manage and govern the Corporation by majority vote of members present at any regular or special meeting at which a quorum shall be present, to make, alter, or amend the By-laws of the Corporation at any regular or special meeting, to fix the amount to be reserved as working capital over and above its capital stock paid in, to authorize and cause to be executed mortgages and liens upon the real and personal property of this Corporation, and to designate one or more of committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in the resolution or in the By-laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation (such committee or committees shall have such name or names as may be stated in the By-laws of the Corporation or as may be determined from time to time by resolution adopted by the Board of Directors); (b) to sell, lease, exchange, or otherwise dispose of all of or substantially all of the property and assets of the Corporation in the ordinary course of its business upon such terms and conditions as the Board of Directors may determine without vote or consent of the stockholders; (c) to sell, pledge, lease, exchange, liquidate, or otherwise dispose of all or substantially all the property or assets of the Corporation, including its goodwill, if not in the ordinary course of its business, upon such terms and conditions as the Board of Directors may determine; PROVIDED, HOWEVER, that such transaction is authorized or ratified by the affirmative vote of the holders of at least a majority to the shares entitled to vote thereon at a stockholders' meeting duly called for such purpose, or is authorized or ratified by the written consent of the holders of all of the shares entitled to vote thereon; and PROVIDED, FURTHER, that any such transaction with any substantial stockholder or affiliate of the corporation shall be authorized or ratified by the affirmative vote of the holders of at least two-thirds of shares entitled to vote thereon at a stockholders' meeting duly called for that purpose, unless such transaction is with any subsidiary of the Corporation or is approved by the affirmative vote of a majority of the continuing directors of the Corporation, or is authorized or ratified by the written consent of the holders of all the shares entitled to vote thereon; (d) to merge, consolidate, or exchange all of the issued and outstanding shares of one or more classes of the Corporation upon such terms and conditions as the Board of Directors may authorize; PROVIDED, HOWEVER, that such merger, consolidation, or exchange is approved or ratified by the affirmative vote of the holders of at least a majority of the shares entitled to vote thereon at a stockholders' meeting duly called for that purpose, or is authorized or ratified by the written consent of the holders of all of the shares entitled to vote thereon; and PROVIDED, FURTHER, that any such merger, consolidation or exchange with any substantial stockholder or affiliate of the Corporation shall be authorized or ratified by the vote of the holders of at least two-thirds of the shares entitled to vote thereon at a stockholders' meeting duly called for that purpose, unless such merger, -5- consolidation or exchange is with any subsidiary of the Corporation or is approved by the affirmative vote of a majority of the continuing directors of the Corporation, or is authorized or ratified by the written consent of the holders of all the shares entitled to vote thereon; and (e) to distribute to the stockholders of the Corporation, without the approval of the stockholders, in partial liquidation, out of stated capital or capital surplus of the Corporation, a portion of its assets, in cash or in property, so long as the partial liquidation is in compliance with the Delaware General Corporation Law. (f) as used in this Section 5, the following terms shall have the following meanings: (i) an "affiliate" shall mean any person or entity which is an affiliate within the meaning of Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended; (ii) a "continuing director" shall mean a director who was elected before the substantial stockholder or affiliate of the Corporation which is to be a party to a proposed transaction within the scope of subsections (c) and (d) of this Section 5 became such a substantial stockholder or affiliate of the Corporation, as the case may be, or is designated at or prior to his first election or appointment to the Board of Directors by the affirmative vote of a majority of the Board of Directors who are continuing directors; (iii) a "subsidiary" shall mean any corporation in which the Corporation owns the majority of each class of equity security; and (iv) a "subsidiary stockholder" shall mean any person or entity which is the beneficial owner, within the meaning of Rule 1 3d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, of 10% or more of the outstanding capital stock of the Corporation. ARTICLE VIII CONFLICTS OF INTEREST SECTION 1. RELATED PARTY TRANSACTIONS. No contract or other transaction of the Corporation with any other person, firm or corporation, or in which the corporation is interested, shall be affected or invalidated by (a) the fact that any one or more of the directors or officers of this Corporation is interested in or is a director or officer of such other firm or corporation; or (b) the fact that any director or officer of this Corporation, individually or jointly with others, may be a party to or may be interested in any such contract or transaction, so long as the contract or transaction is authorized, approved or ratified at a meeting of the Board of Directors by sufficient vote thereon by directors not interested therein, to which such fact of relationship or interest has been disclosed, or the contract or transaction has been approved or ratified by vote or written consent of the stockholders entitled to vote, to whom such fact of relationship or interest has been disclosed, or so long as the contract or transaction is fair and reasonable to the Corporation. Each person who may become a director or -6- officer of the Corporation is hereby relieved from any liability that might otherwise arise by reason of his contracting with the Corporation for the benefit of himself or any firm or corporation in which he may be in any way interested. SECTION 2. CORPORATE OPPORTUNITIES. The officers, directors and other members of management of the Corporation shall be subject to the doctrine of corporate opportunities only insofar as it applies to business opportunities in which the Corporation has expressed an interested as determined from time to time by resolution of the Board of Directors. When such areas of interest are delineated, all such business opportunities within such areas of interest which come to the attention of the officers, directors and other members of management of the Corporation shall be disclosed promptly to the Corporation and made available to it. The Board of Directors may reject any business opportunity presented to it, and thereafter any officer, director, or other member of management may avail himself of such opportunity. Until such time as the Corporation, through its Board of Directors, has designated an area of interest, the officers, directors, and other members of management of the Corporation shall be free to engage in such areas of interest on their own and the provisions hereof shall not limit the rights of any officer, director, or other member of management of the Corporation to continue a business existing prior to the time that such area of interest is designated by the Corporation. This provision shall not be construed to release any employee of the Corporation (other than an officer, director or member of management) from any duties which such employee may have to the Corporation. ARTICLE IX INDEMNIFICATION SECTION 1. LIABILITY OF DIRECTORS. No Director shall be personally liable to the Corporation or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter is respect of which such director shall be liable under Section 174 of Title 8 of the Delaware Code (relating to the Delaware General Corporation Law) or any amendment thereto or successor provision thereto as shall be liable for reason that, in addition to any and all other requirements for such liability, he: (i) shall have breached his duty of loyalty to the Corporation or its stockholders; (ii) shall not have acted in good faith, or in failing to act, shall not have acted in good faith; (iii) shall have acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law; or (iv) shall have derived an improper personal benefit. Neither the amendment nor repeal of this Article IX, nor the adoption of any provision of the Certificate of Incorporation inconsistent with this Article IX, shall eliminate or reduce the effect of this Article IX in respect to any matter occurring, or any cause of action, suit or claim that, but for this Article IX would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. SECTION 2. INSURANCE. The Board of Directors may exercise the Corporation's power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted -7- against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under this Article X. SECTION 3 MISCELLANEOUS. The indemnification provided by this Article X shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under these Articles of Incorporation, the By-laws, agreements, vote of the stockholders or disinterested directors, or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, fiduciary or agent and shall inure to the benefit of the heirs and personal representatives of such person. ARTICLE X ARRANGEMENTS WITH CREDITORS Whenever a compromise or arrangement is proposed by the Corporation between it and its creditors or any class of them, and/or between the Corporation and its stockholders or any class of the, any court of equitable jurisdiction may, on summary application by the Corporation, or by a majority of its stockholders, or on the application of any receiver or receivers appointed for the Corporation, or on the application of trustees in dissolution, order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be notified in such manner as the court decides. If a majority in number representing at least three-fourths in amount of the creditors or class or creditors, and/or the holders of the majority of the stock or class of stock of the Corporation, as the case may be, agree to any compromise or arrangement and/or to any reorganization of the Corporation, as a consequence of such compromise or arrangement and/or said reorganization shall, if sanctioned by the court to which the application has been made, be binding upon all the creditors or class of creditors and/or on all the stockholders or class of stockholders of the Corporation, as the case may be, and also on the Corporation. ARTICLE XII SHAREHOLDERS' MEETINGS Stockholders' meetings may be held at such time and place as may be stated or fixed in accordance with the By-laws. At all stockholders' meetings one-third of all shares entitled to vote shall constitute a quorum. ARTICLE XII AMENDMENT These Articles of Incorporation may be amended by resolution of the Board of Directors if no shares have been issued, and if shares have been issued, by the affirmative vote of the holders of -8- at least a majority of the shares entitled to vote thereon at a meeting duly called for that purpose, or, when authorized, when such action is ratified by the written consent of all the stockholders entitled to vote thereon. ARTICLE XIII SHAREHOLDER VOTE Whenever the laws of the State of Delaware require the vote or concurrence of the holders of two-thirds of the outstanding shares entitled to vote thereon, with respect to any action to be taken by the stockholders of the Corporation, such action may be taken by the vote or concurrence of the holders of at least a majority of the shares entitled to vote thereon. ARTICLE XIV DISSOLUTION SECTION 1. PROCEDURE. The Corporation shall be dissolved upon the affirmative vote of the holders of at least a majority of the shares entitled to vote thereon at a meeting duly called for that purpose, or when authorized or ratified by the written consent of the holders of all of the shares entitled to vote thereon. SECTION 2. REVOCATION. The corporation shall revoke voluntary dissolution proceedings upon the affirmative vote of the holders of at least a majority of the shares entitled to vote at a meeting duly called for that purpose, or when authorized or ratified by the written consent of the holders of all of the shares entitled to vote thereon. ARTICLE XV The names and addresses of each Incorporator are: Ross A. Freitas 135 Canal Street Staten Island, New York 10305 Carolyn Safer Kenner 135 Canal Street Staten Island, New York 10305 IN WITNESS WHEREOF, the undersigned officers for and on behalf of the Corporation have signed this Certificate of Incorporation this 22nd day of May, 1987. ROSS COSMETICS DISTRIBUTION CENTERS, INC. -9- By:_______________________________________ Ross Freitas, Incorporator By:_______________________________________ Carolyn Safer Kenner, Incorporator -10- CERTIFICATE OF MERGER OF ROSS COSMETICS DISTRIBUTION CENTERS, INC. (a New York Corporation) INTO ROSS COSMETICS DISTRIBUTION CENTERS, INC. (a Delaware Corporation) UNDER SECTION 252 OF THE BUSINESS CORPORATION LAW OF THE STATE OF DELAWARE The undersigned, Ross Freitas, being the President of Ross Cosmetics Distribution Centers, Inc., a domestic corporation duly organized and existing under and by virtue of the laws of the State of Delaware and being, the President of Ross Cosmetics Distribution Centers, Inc., a foreign corporation duly organized and existing by virtue of the laws of the State of New York, do hereby certiy that: 1. The name of each constituent corporation is as follows: (i) Ross Cosmetics Distribution Centers, Inc. (hereinafter "RCDC"), (a New York corporation); and (ii) Ross Cosmetics Distribution Centers, Inc. (the "Surviving Corporation"), (a Delaware corporation). 2. The Agreement of Merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with Section 252. 3. The name of the surviving corporation is Ross Cosmetics Distribution Centers, Inc., a Delaware corporation. 4. An Agreement of Merger has been adopted by the Board of Directors of the Surviving Corporation and thereafter was duly ratified by shareholders of the Surviving Corporation in accordance with Section 252 of the Delaware Corporation Law. 5. The authorized capital stock of RCDC is 10,000,000 shares of Common Stock. 6. The designation and number of outstanding shares of RCDC entitled to vote on the merger is 2,144,231 shares of Common Stock, $.01 par value per share. 7. The merger of RCDC and the Surviving Corporation into the Surviving Corporation was authorized by RCDC at a meeting of shareholders by a vote of the holders of a minimum of sixty-seven (67%) per cent of all outstanding shares of RCDC entitled to vote thereon pursuant to New York Business Corporation Law and Delaware Corporation Law. 8. An executed copy of the Agreement of Merger is on file at the principal place of business of the Surviving Corporation at 135 Canal Street, Staten Island, New York 10304, and shall be furnished to any stockholder of a constituent corporation requesting such without cost. 9. The Certificate of Incorporation of the constituent Delaware corporation shall be the Certificate of Incorporation of the Surviving Corporation and shall not be amended or changed. IN WITNESS WHEREOF, I have executed and subscribed this Certificate of Merger and do affirm the foregoing statements made herein are true under the penalties of perjury this 17th day of September, 1987 ROSS COSMETICS DISTRIBUTION CENTERS, INC., (a New York Corporation) ATTEST: -2- By:__________________________ By____________________________ CAROLYN SAFER KENNER, ROSS FREITAS, President Secretary ROSS COSMETICS DISTRIBUTION CENTERS, INC., (a Delaware Corporation) ATTEST: By:_________________________ By:__________________________ CAROLYN SAFER KENNER, ROSS FREITAS, President Secretary -3- Certificate for Renewal and Revival of Charter Ross Cosmetics Distribution Centers, Inc., a corporation organized under the laws of Delaware, the charter of which was voided for non-payment of taxes, now desires to procure a restoration, renewal and revival of its charter, and hereby certifies as follow: 1. The name of this corporation is Ross Cosmetics Distribution Centers, Inc. 2. Its registered office in the State of Delaware is located at 229 South State Street, City of Dover, Zip Code 19901, County of Dover, the name and address of its registered agent is Corporate Filing Services, Inc. (#9007630). 3. The date of filing of the original Certificate of Incorporation in Delaware was June 5, 1987. 4. The date when restoration, renewal, and revival of the charter of this company is to commence is the 28th day of February, same being prior to the date of the expiration of the charter. This renewal and revival of the charter of this corporation is to be perpetual. 5. This corporation was duly organized and carried on the business authorized by its charter until the 1st day of March, 1989 A.D. 19__ at which time its charter became inoperative and void for non-payment of taxes and this certificate for renewal and revival is filed by authority of the duly elected directors of the corporation in accordance with the laws of the State of Delaware. IN TESTIMONY WHEREOF, and in compliance with the provisions of Section 312 of the General Corporation Law of the State of Delaware, as amended, providing for the renewal, extension and restoration of charters, Ross A. Freitas the last and acting President, and Carolyn S. Kenner, the last and acting Secretary of Ross Cosmetics Distribution Centers, Inc., have hereunto set their hands to this certificate this 28th day of May, 1989. ______________________________ Last and Acting President ATTEST: ______________________________ Last and Acting Secretary Certificate of Restoration and Revival of Certificate of Incorporation of Ross Cosmetics Distribution Centers, Inc. It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is Ross Cosmetic Distribution Centers, Inc. 2. The corporation was organized under the provisions of the General Corporation Law of the State of Delaware. The date of filing of its original certificate of incorporation with the Secretary of State of the State of Delaware is June 5, 1987. 3. The address, including the street, city, and county, of the registered office of the corporation in the State of Delaware and the name of the registered agent at such address as follows: The Prentice-Hall Corporation System, Inc., 32 Loockerman Square, Suite L-l00, Dover, Delaware 19901, County of Kent. 4. The corporation hereby procures a restoration and revival of its certificate of incorporation, which became inoperative by law on March 1, 1991 for failure to file annual reports and non-payment of taxes payable to the State of Delaware. 5. The certificate of incorporation of the corporation, which provides for and will continue to provide for, perpetual duration, shall, upon the filing of this Certificate of Restoration and Revival of the Certificate of Incorporation in the Department of State of the State of Delaware, be restored and revived and shall become fully operative on February 28, 1991. 6. This Certificate of Restoration and Revival of the Certificate of Incorporation is filed by authority of the duly elected directors and prescribed by Section 312 of the General Corporation Law of the State of Delaware. Signed and attested to on April 8, 1991. ______________________________ Vice President Attest: ______________________________ Assistant Secretary CERTIFICATE OF OWNERSHIP AND MERGER (ARTICLES OF MERGER) MERGING ROSS COSMETICS DISTRIBUTION CENTER S.W., INC., A TEXAS CORPORATION INTO ROSS COSMETICS DISTRIBUTION CENTERS, INC. A DELAWARE CORPORATION Pursuant to Section 253 of the General Corporation Law of the State of Delaware and Article 5.16 of the Texas Business Corporation Act. Ross Cosmetics Distribution Centers, Inc. (hereinafter referred to as the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Delaware GCL"), does hereby certify that: 1. The Corporation was incorporated on June 5, 1987, pursuant to the Delaware GCL and is existing under such Law. The address of the Corporation's registered office in Delaware is 32 Loockerman Square, Suite L- 100, Dover, Delaware 19901. 2. Ross Cosmetics Distribution Center S.W., Inc. ("RCDCSW') was incorporated on May 10, 1985, pursuant to the Texas Business Corporation Act and is existing under such Law. 3. RCDCSW has only one class of shares outstanding (Common Stock $ .001 par value per share) and the number of outstanding shares of RCDCSW Common Stock is 1,000, all of which is owned by the Corporation. 4. The Corporation, by the following resolutions of its Board of Directors, duly adopted on the 25th day of January 1993, determined to merge into itself RCDCSW on the conditions set forth in such resolutions WHEREAS the Corporation lawfully owns all the outstanding stock of RCDCSW, a corporation organized and existing under the laws of Texas; and WHEREAS the Corporation desires to merge into itself RCDCSW, and to be processed of all the estate, property, rights, privileges and franchises of said corporation. NOW, THEREFORE, BE IT RESOLVED, that the Corporation merge into itself, and it does hereby merge into itself RCDCSW and assumes all of its liabilities and obligations, and FURTHER RESOLVED, that the president or a vice-president, and the secretary or treasurer of the Corporation be and they hereby are directed to make and execute, under the corporate seal of the Corporation, a certificate of ownership setting forth a copy of the resolution, to merge RCDCSW and assume its liabilities and obligations, and the date of adoption thereof, and to file the same in the offices of the Secretary of the State of Delaware and Texas, and a certified copy thereof in the office ofthe Recorder ofDeeds in Kent County, Delaware, and in such other places as may be proper; and FURTHER RESOLVED, that the officers of the Corporation be and they hereby are authorized and directed to do all acts and things whatsoever, whether within or without the State of Delaware and Texas, which may be in any way necessary or proper to effect said merge. IN WITNESS WHEREOF, the authorized officers of the below named corporations have herewith set their hands and seals this 25th day of January 1993. ROSS COSMETICS DISTRIBUTION CENTERS, INC. ATTEST: _______________________ By:______________________________________ Secretary Title:___________________________________ ROSS COSMETICS DISTRIBUTION CENTER S.W., INC. ATTEST: _______________________ By:______________________________________ Secretary Title:___________________________________ -2- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Ross Cosmetics Distribution Centers, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware. DOES HEREBY CERTIFY: FIRST: That the Board of Directors of said corporation, at a meeting duly held, adopted the following resolution proposing and declaring advisable an amendment to the certificate of Incorporation of said corporation: RESOLVED, that the Board recommends to the shareholders of the Company that, at the Annual Meeting of the Company, they approve the amendment to the Company's Certificate of Incorporation changing the Company's corporate name to TRISTAR CORPORATION; SECOND: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 242 of the General Corporation Law of Delaware. THIRD: Accordingly, Article I of the Company's Certificate of Incorporation is hereby amended to read as follows: "The name of the corporation is TRISTAR CORPORATION." IN WITNESS WHEREOF, said corporation has caused this certificate to be signed by Richard P. Rifenburgh, its Chairman of the Board of Directors, and attested by James M. Shoemaker, Jr., its Secretary, this 16th day of March, 1993. Ross Cosmetics Distribution Centers, Inc. By__________________________ Richard P. Rifenburgh Chairman of the Board of Directors ATTEST: By__________________________________ James M. Shoemaker, Jr. Secretary CERTIFICATE OF MERGER OF EUROSTAR PERFUMES, INC. (a Texas corporation) INTO TRISTAR CORPORATION (a Delaware corporation) Pursuant to Section 252(c) of the State of Delaware General Corporation Law TRISTAR CORPORATION, a Delaware corporation, hereby certifies as follows: FIRST: The names of the constituent corporations to the merger are TRISTAR CORPORATION, whose State of incorporation is Delaware, and Eurostar Perfumes, Inc., whose State of incorporation is Texas. SECOND: An Agreement and Plan of Merger has been approved, adopted, certified, executed and acknowledged by each constituent corporation in accordance with Section 252 of the General Corporation Law of the State of Delaware. THIRD: TRISTAR CORPORATION shall be the surviving corporation. FOURTH: The Certificate of Incorporation of the surviving corporation shall be its Certificate of Incorporation, except that paragraph IV of the Certificate of Incorporation of TRISTAR CORPORATION, as the surviving corporation, which sets forth the authorized capital stock of TRISTAR CORPORATION, is hereby amended to read in its entirety as follows: "ARTICLE IV CAPITAL STOCK SECTION 1. CLASSES AND SHARES AUTHORIZED. The authorized capital stock of the Corporation shall consist of 30,000,000 shares of Common Stock, $.01 par value per share (hereinafter referred to as either the "Common Shares" or "Common Stock") and 1,000,000 shares of Preferred Stock, $.05 par value per share (hereinafter referred to as either the "Preferred Shares" or "Preferred Stock"). SECTION 2. PREFERRED STOCK. The shares of Preferred Stock shall be issuable from time to time in one or more series, with respect to each of which series the Board of Directors shall be authorized, without further approval from the shareholders of the Corporation, to fix: (a) the designation of the series; (b) the number of shares of each series, which number the Board of Directors may increase or decrease (but not below the number of shares thereof then outstanding); (c) the annual dividend rate of the series; (d) the dates at which dividends, if declared, shall be payable, and the dates from which the dividends shall be cumulative; (e) the redemption rights, if any, for shares of the series; (f) the terms and amount of any sinklng fimd provided for the purchase or redemption of shares of the series; (g) the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (h) whether the shares of the series shall be convertible into Common Stock or other securities, and, if so, the conversion price or prices, any adjustments thereof, and all other terms and conditions upon which such conversion may be made; (i) restrictions on the issuance of the shares of the same series or of any other class or series; and 0)the voting rights, if any, exercisable by the holders of the shares of such series. Shareholders shall have no preemptive rights." FIFTH: The executed Agreement and Plan of Merger is on file at the principal place of business of the surviving corporation; the address of said principal place of business is as follows: TRISTAR CORPORATION 12500 San Pedro Avenue, Suite 500 San Antonio, Texas 78216 Attn: Secretary SIXTH: A copy of the Agreement and Plan of Merger will be furnished by the surviving corporation, TRISTAR CORPORATION, on request and without cost, to any stockholder of any constituent corporation. SEVENTH: The authorized capital stock of the non-surviving corporation, which is incorporated under the laws of the State of Texas, is 1,000,000 shares of Common Stock, $.001 par value. EIGHTH: This Certificate of Merger shall become effective at 11:59 P.M Central Daylight Savings Time on August 31, 1995. -2- IN WITNESS WHEREOF, this certificate is hereby executed _____ day of ___________________ 1995. TRISTAR CORPORATION By: Viren S. Sheth, President and Chief Executive Officer ATTEST ________________________ Loren M. Eltiste, Assistant Secretary -3- CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF TRISTAR CORPORATION TRISTAR CORPORATION (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Law"), does hereby certify: A. The Certificate of Incorporation of the Corporation fixes the total number of shares of all classes of capital stock which the Corporation shall have the authority to issue at 31,000,000 shares, of which 1,000,000 shares shall be shares of Preferred Stock, par value $.05 per share ("Preferred Stock"), and 30,000,000 shares shall be shares of Common Stock, par value $.01 per share ("Common Stock"). B. Pursuant to authority expressly conferred upon the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, said Board of Directors (the "Board") has duly authorized and adopted the following resolution providing for an issue of a series of the Preferred Stock to be designated "Series A Convertible Preferred Stock": RESOLVED, that an issue of a series of the Preferred Stock of the Corporation is hereby provided for, the designation of which shall be "Series A Convertible Preferred Stock" (the "Series A Preferred Stock"). The number of shares of Series A Preferred Stock shall be 666,529. FURTHER RESOLVED, that the preferences and relative participating, optional and other special rights, and qualifications, limitations and restrictions thereof of the Series A Preferred Stock are hereby fixed as follows: SECTION 1. DIVIDENDS 1.1 The holders of shares of outstanding Series A Preferred Stock shall be entitled to receive in any fiscal year, when and as declared by the Board, out of assets of the Corporation legally available therefor, distributions (as defined below) on a pro rata basis in cash at the annual rate of $0.315 per share (subject to appropriate adjustment for stock splits, stock combinations, stock dividends, reclassifications and similar other events affecting the Series A Preferred Stock). Such distributions shall accrue from day to day, whether or not earned or declared, and shall be cumulative from December 11, 1996, and shall be payable quarterly or otherwise as the Board may from time to time determine. Distributions may be declared and paid upon Common Stock and other shares of the Corporation ranking junior to the Series A Preferred Stock as to distributions in any fiscal year of the Corporation, only if full cumulative distributions shall have been paid to or declared upon and set apart for all shares of Series A Preferred Stock at such annual rate through the date of distribution. With respect to distributions declared and paid upon Common Stock, the Series A Preferred Stock shall also be entitled to participate in and receive distributions on an "as-if-converted" basis. For purposes of the distributions provided for by this SECTION 1, the Corporation's Series B Convertible Preferred Stock, $.05 par value per share (the "Series B Preferred Stock") shall be considered equal to, and not senior or junior to, the Series A Preferred Stock and shall be entitled to distributions with the Series A Preferred Stock in proportion to the relative amounts of dividends accrued on the Series B Preferred Stock. Any holder of shares of Series A Preferred Stock whose shares of Series A Preferred Stock are converted pursuant to SECTION 3 hereof shall, upon such conversion, forfeit and cease to have any claim to any accrued but unpaid dividends under this SECTION 1 with respect to such converted shares. 1.2 For purposes of this SECTION 1, unless the context otherwise requires, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock on Common Stock, or the purchase or redemption of shares of the Corporation (other than redemptions, retirements, repurchases or acquisitions of capital stock pursuant to terms approved by the Board from employees, advisors, officers, directors and consultants of, and persons performing services for, the Corporation or its subsidiaries upon termination of employment or association) for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Corporation. Notwithstanding the foregoing, the term "distribution" shall not be deemed to include any distribution made in connection with any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. SECTION 2. LIQUIDATION PREFERENCE 2.1 LIQUIDATION. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of each share of Series A Preferred Stock and Series B Preferred Stock, which, for purposes of this SECTION 2, such Series B Preferred Stock shall be considered equal to, and not senior or junior to the Series A Preferred Stock, shall be entitled, before any distribution or payment is made upon any share of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series A Preferred Stock (but after preferential distributions or payments required to be made on any other securities of the Corporation senior to the Series A Preferred Stock), to be paid with respect to each share of Series A Preferred Stock outstanding, an amount per share equal to the sum of $7.00 per share (subject to appropriate adjustment for stock splits, stock combinations, stock dividends, reclassifications and similar other events affecting the Series A Preferred Stock) PLUS any dividends on a share of Series A Preferred Stock provided for by SECTION 1.1 hereof that are accrued but are unpaid through the date of distribution to the holders of the outstanding shares of Series A Preferred Stock in connection with such liquidation, dissolution or winding up (the sum of such amounts payable with respect to one share of Series A Preferred Stock being sometimes referred to as the "Series A Liquidation Preference"). If upon a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of Series A Preferred Stock (and all holders of Series B Preferred Stock and -2- any other preferred stock of the Corporation ranking on parity with the Series A Preferred Stock in the event of a liquidation, dissolution or winding up of the Corporation) shall be insufficient to permit payments in full to the holders of Series A Preferred Stock of the Series A Liquidation Preference, then all assets of the Corporation available for distribution to stockholders after the Corporation has made preferential distributions or payments required to be made on any other securities of the Corporation senior to the Series A Preferred Stock shall be distributed ratably, in accordance with the liquidation preference rights of the Series A Preferred Stock and the Series B Preferred Stock, among the holders of Series A Preferred Stock (and all holders of Series B Preferred Stock and any other preferred stock of the Corporation ranking on parity with the Series A Preferred Stock in the event of a liquidation, dissolution or winding up of the Corporation). 2.2 OTHER DISTRIBUTIONS. Upon any liquidation, dissolution or winding up of the Corporation, immediately after the holders of Series A Preferred Stock and any other series of Preferred Stock shall have been paid in full, any preferred stock liquidation preferences (including the Series A Liquidation Preference and the liquidation preference for the Series B Preferred Stock) that they are respectively entitled to, the remaining assets of the Corporation available for distribution shall be distributed to the holders of Common Stock, the holders of the Series A Preferred Stock and the Series B Preferred Stock in proportion to the number of shares of Common Stock deemed to be held on an "as-if-converted" basis. 2.3 TERMINATION OF SERIES A PREFERRED STOCK. In the event the distributions provided for by this SECTION 2 are made to the holders of Series A Preferred Stock upon any liquidation, dissolution or winding up of the Corporation, the Series A Preferred Stock shall be retired and canceled and the holders thereof shall cease to have any continuing interest in the Corporation in their capacity as holders of Series A Preferred Stock. 2.4 NOTICE. Written notice of any liquidation, dissolution or winding up and any related distribution, stating the payment date and the place where said payments shall be made, shall be given by mail, postage prepaid, or by telecopy to non-U.S. residents, not less than 20 days prior to the payment date stated therein, to the holders of Series A Preferred Stock, such notice to be addressed to each such holder at its address as shown on the records of the Corporation. SECTION 3. CONVERSION The holders of Series A Preferred Stock shall have the following conversion rights (the "Series A Conversion Rights"): 3.1 RIGHT TO CONVERT, AUTOMATIC CONVERSION A. Subject to SECTION 3.3 each share of Series A Preferred Stock shall be convertible at any time before a liquidating or redemption payment is made to the holder of such Series A -3- Preferred Stock pursuant to SECTION 2 or SECTION 5 hereof, at the option of the holder thereof, at the office of the Corporation or any transfer agent for such shares, into the number of fully paid and nonassessable shares of Common Stock provided for below. B. Each share of Series A Preferred Stock shall be convertible into one fully paid and nonassessable share of Common Stock. The Series A Conversion Price shall be $7.00 per share. 3.2 MECHANICS OF CONVERSION. Before any holder of shares of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificates for the shares of Series A Preferred Stock, duly endorsed, at the office of the Corporation or of any transfer agent for such shares (or the holder shall notify the Corporation or its transfer agent that such certificate has been lost, stolen or destroyed and execute an agreement in form and substance reasonably satisfactory to the Corporation to indemnify the Corporation for any loss incurred by the Corporation in connection therewith), and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. (A holder of Series A Preferred Stock may not effect a transfer of shares pursuant to conversion unless all applicable restrictions on transfer are complied with.) The Corporation shall, as soon as practicab]e, issue and deliver at such office to such holder of shares of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as provided above. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificate or certificates (or the indemnification agreement referred to above) representing the shares of Series A Preferred Stock being converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. In case the number of shares of Series A Preferred Stock represented by the certificate or certificates surrendered exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series A Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. 3.3 CONVERSION PRICE ADJUSTMENTS. The Series A Conversion Price shall be subject to adjustment from time to time as follows: A. "Effective Date" with respect to the Series A Preferred Stock means the date on which the Certificate of Designation establishing the Series A Preferred Stock (the "Certificate of Designation") is filed in the office of the Secretary of State of Delaware. B. In the event the Corporation should at any time or from time to time after the Effective Date fix a record date for the effectuation of a split or subdivision of the outstanding -4- shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision, if no record date is fixed), the Series A Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share shall be increased in proportion to such increase of outstanding shares of Common Stock. C. If the number of shares of Common Stock outstanding at any time after the Effective Date is decreased by a combination of the outstanding shares of Common Stock, then, as of the record date of such combination, the Series A Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each such share shall be decreased in proportion to such decrease in outstanding shares of Common Stock. 3.4 OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in SECTION 3.3.B, then, in each such case for the purpose of this SECTION 3.4, the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. 3.5 RECAPITALIZATION. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this SECTION 3), provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive, upon conversion of the Series A Preferred Stock, such shares or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section with respect to the rights of the holders of the Series A Preferred Stock after the recapitalization to the end that the provisions of this Section (including adjustments of the Series A Conversion Price then in effect and the number of shares issuable upon conversion of shares of Series A Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. -5- 3.6 NO IMPAIRMENT. The Corporation shall not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in the carrying out of all the provisions of this Section and in the taking of all such action as may be necessary or appropriate in order to protect the Series A Conversion Rights of the holders of the Series A Preferred Stock against impairment; provided that in any event, any provisions of this Section may be amended with the approval of holders representing not less than 66-2/3% of the outstanding shares of Series A Preferred Stock (in addition to all other approvals required by law). 3.7 FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. A. In lieu of issuing fractional shares upon a conversion of Series A Preferred Stock, the Corporation may (but unless otherwise required by applicable law shall not be obligated to) pay cash equal to the fraction multiplied by the then fair market value of a share of Common Stock, as determined by the Board. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. B. Upon the occurrence of each adjustment of the Series A Conversion Price pursuant to this Section, the Corporation, at its expense, shall promptly compute such adjustment in accordance with the terms hereof and prepare and furnish to each holder of shares of Series A Preferred Stock a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based. 3.8 NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of its stockholders for the purpose of determining stockholders who are entitled to approve or disapprove of any consolidation or merger to which the Corporation is a party or who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of shares of Series A Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, right, merger or consolidation and the amount, character and terms of such dividend, distribution, right, merger or consolidation. 3.9 RESERVATION OF COMMON STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A Preferred Stock; and if at any time the -6- number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series A Preferred Stock, the Corporation shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Before taking any action which would cause an adjustment reducing the Series A Conversion Price below the par value (if any) of the shares of Common Stock deliverable upon conversion of the shares of Series A Preferred Stock, the Corporation shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Series A Conversion Price. 3.10 TRANSFER TAXES, ETC. The Corporation shall pay any and all documentary stamp, issue or transfer taxes, and any similar taxes payable in respect of the issue or delivery of shares of Common Stock upon conversions of shares of Series A Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the shares of Series A Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. 3.11 NOTICES. Any notice required by the provisions of this Section to be given to the holders of shares of Series A Preferred Stock shall be deemed to be delivered when deposited in the United States mail, postage prepaid, registered or certified, and addressed to each holder of record at the address of such holder appearing on the stock transfer books of the Corporation. 3.12 TREASURY SHARES. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition by the Corporation of any such shares shall be considered an issue or sale of Common Stock for purposes of this SECTION 3 and SECTION 4. SECTION 4. VOTING RIGHTS 4.1 GENERAL. Except as provided in SECTION 4.2 and elsewhere in this Certificate of Designation, in the Certificate of Incorporation of the Corporation, or in one or more other Certificates of Designations of the Corporation, and except as otherwise required by law, the holders of the Series A Preferred Stock shall have no voting rights. 4.2. PROTECTIVE PROVISIONS. Beginning as of the date shares of Series A Preferred Stock are first issued and outstanding, for so long as there remain issued and outstanding any shares of Series A Preferred Stock, the Corporation shall not, without the affirmative vote or -7- consent of holders representing at least 66-2/3% of the outstanding shares of Series A Preferred Stock voting together as a single class, and in addition to any vote otherwise required by the Law: A. Amend, alter or repeal the rights, preferences, privileges, or restrictions of such Series A Preferred Stock or effect any reclassification of the Series A Preferred Stock. B. Amend, alter or repeal any provision of, or add any provision to, the Certificate of Incorporation or By-laws of the Corporation if such change could reasonably be expected to adversely affect the holders of the Series A Preferred Stock in any respect, provided the immediately foregoing shall not prohibit the adoption and filing of one or more additional Certificates of Designations for Preferred Stock not otherwise prohibited by SECTION 4.2.C. C. Create, authorize, issue or sell (including but not limited to by way of reclassification or in connection with the creation of any convertible indebtedness) any shares of any other class or series of shares (other than the Series B Preferred Stock) providing for (i) dividends or other distributions on a preferred basis to the Series A Preferred Stock, (ii) redemption rights or (iii) liquidation privileges senior to, or on a parity with, the Series A Preferred Stock, or senior to the Common Stock in excess of the sum of the original purchase price thereof plus accrued dividends. SECTION 5. REDEMPTION 5.1 On or after the Effective Date, the Corporation, at the option of the Board, may redeem all or any of the shares of Series A Preferred Stock then outstanding, upon notice duly given as hereinafter provided, by paying in cash for each share of Series A Preferred Stock so redeemed an amount equal to the Series A Liquidation Preference. 5.2 Notice of each redemption of shares of Series A Preferred Stock shall be given by mailing such notice not less than 30 nor more than 50 days before the date fixed for such redemption to each holder of record of shares of Series A Preferred Stock to be so redeemed, and shall be deemed sufficiently given if the Corporation shall cause a copy thereof to be mailed to such holders of record at their respective addresses, as the same shall appear on the books of the Corporation, by mail, postage prepaid, registered or certified; provided, however, that neither the failure to mail such notice nor the existence of any defect in the notice to one or more of such holders shall affect the validity of such redemption as to the holders to whom proper notice was mailed. If any such notice of redemption shall have been duly given and it, on or before the redemption date specified therein, all funds necessary for such redemption shall be irrevocably deposited or set aside and continue to be available for payment on or after the redemption date upon surrender of the certificates for the shares of the Series A Preferred Stock so called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not -8- have been surrendered to the Corporation for cancellation, from and after the redemption date, all shares so called for redemption shall no longer be deemed to be outstanding, and all rights with respect to such shares shall forthwith cease and terminate, except only for the right for the holders of the certificates therefore, upon surrender thereof, to receive the Series A Liquidation Preference out of the funds so deposited, without interest. Any interest accrued on such funds shall be paid to the Corporation from time to time. 5.3 On or before the date set for redemption in the notice sent to the holders of the Series A Preferred Stock pursuant to SECTION 5.2 above, the holder of such Series A Preferred Stock may, at such holder's option, exercise the conversion rights contained in SECTION 3 herein. The written notice of conversion required in SECTION 3.2 must be received in the office of the Corporation prior to the redemption date set in the redemption notice mailed by the Corporation pursuant to SECTION 5.2, in order to prevent the shares from being redeemed pursuant to this SECTION 5. SECTION 6. REISSUANCES 6.1 NO REISSUANCE OF SERIES A PREFERRED STOCK. No shares of Series A Preferred Stock which have been converted into Common Stock or otherwise cease to be outstanding shall be reissued by the Corporation; provided, however, that each such share, after being retired and canceled, shall be restored to the status of an authorized but unissued share of Preferred Stock without designation as to series and may thereafter be issued as a share of Preferred Stock not designated as Series A Preferred Stock. IN WITNESS WHEREOF I have hereto set my hand this 1st day of April, 1997. TRISTAR CORPORATION By:___________________________________ Loren Eltiste Vice President, Chief Financial Officer -9- CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK OF TRISTAR CORPORATION TRISTAR CORPORATION (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Law"), does hereby certify: A. The Certificate of Incorporation of the Corporation fixes the total number of shares of all classes of capital stock which the Corporation shall have the authority to issue at 31,000,000 shares, of which 1,000,000 shares shall be shares of Preferred Stock, par value $.05 per share ("Preferred Stock"), and 30,000,000 shares shall be shares of Common Stock, par value $.01 per share ("Common Stock"). B. Pursuant to authority expressly conferred upon the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, said Board of Directors (the "Board") has duly authorized and adopted the following resolution providing for an issue of a series of the Preferred Stock to be designated "Series B Convertible Preferred Stock": RESOLVED, that an issue of a series of the Preferred Stock of the Corporation is hereby provided for, the designation of which shall be "Series B Convertible Preferred Stock" (the "Series B Preferred Stock"). The number of shares of Series B Preferred Stock shall be 120,690. FURTHER RESOLVED, that the preferences and relative participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of the Series B Preferred Stock are hereby fixed as follows: SECTION 1. DIVIDENDS 1.1 The holders of shares of outstanding Series B Preferred Stock shall be entitled to receive in any fiscal year, when and as declared by the Board, out of assets of the Corporation legally available therefor, distributions (as defined below) on a pro rata basis in cash at the annual rate of $2.03 per share (subject to appropriate adjustment for stock splits, stock combinations, stock dividends, reclassifications and similar other events affecting the Series B Preferred Stock). Such distributions shall accrue from day to day, whether or not earned or declared, and shall be cumulative from February 21, 1997, and shall be payable quarterly or otherwise as the Board may from time to time determine. Distributions may be declared and paid upon Common Stock and other shares of the Corporation ranking junior to the Series B Preferred Stock as to distributions in any fiscal year of the Corporation, bnly if full cumulative distributions shall have been paid to or declared upon and set apart for all shares of Series B Preferred Stock at such annual rate through the date of distribution. With respect to distributions declared and paid upon Common Stock, the Series B Preferred Stock shall also be entitled to participate in and receive distributions on an "as- if-converted" basis. For purposes of the distributions provided for by this Section 1, the Corporation's Series A Convertible Preferred Stock, $.05 par value per share (the "Series A Preferred Stock") shall be considered equal to, and not senior or junior to, the Series B Preferred Stock and shall be entitled to distributions with the Series B Preferred Stock in proportion to the relative amounts of dividends accrued on the Series A Preferred Stock. Any holder of shares of Series B Preferred Stock whose shares of Series B Preferred Stock are converted pursuant to Section 3 hereof shall, upon such conversion, forfeit and cease to have any claim to any accrued but unpaid dividends under this Section 1 with respect to such converted shares. 1.2 For purposes of this Section 1, unless the context otherwise requires, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than in Common Stock on Common Stock, or the purchase or redemption of shares of the Corporation (other than redemptions, retirements, repurchases or acquisitions of capital stock pursuant to terms approved by the Board from employees, advisors, officers, directors and consultants of; and persons performing services for, the Corporation or its subsidiaries upon termination of employment or association) for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Corporation. Notwithstanding the foregoing, the term "distribution" shall not be deemed to include any distribution made in connection with any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. SECTION 2. LIQUIDATION PREFERENCE 2.1 LIQUIDATION. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of each share of Series B Preferred Stock and Series A Preferred Stock, which, for purposes of this SECTION 2, such Series A Preferred Stock shall be considered equal to, and not senior or junior to the Series B Preferred Stock, shall be entitled, before any distribution or payment is made upon any share of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series B Preferred Stock (but after preferential distributions or payments required to be made on any other securities of the Corporation senior to the Series B Preferred Stock), to be paid with respect to each share of Series B Preferred Stock outstanding, an amount per share equal to the sum of $29.00 per share (subject to appropriate adjustment for stock splits, stock combinations, stock dividends, reclassifications and similar other events affecting the Series B Preferred Stock) Plus any dividends on a share of Series B Preferred Stock provided for by Section 1.1 hereof that are accrued but are unpaid through the date of distribution to the holders of the outstanding shares of Series B Preferred Stock in connection with such liquidation, dissolution or winding up (the sum of such amounts payable with respect to one share of Series B Preferred Stock being sometimes referred to as the "Series B Liquidation Preference"). If upon a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of Series B Preferred Stock (and all holders of Series A Preferred Stock and any other preferred stock of the Corporation ranking on parity with the Series B Preferred Stock -2- in the event of a liquidation, dissolution or winding up of the Corporation) shall be insufficient to permit payments in full to the holders of Series B Preferred Stock of the Series B Liquidation Preference, then all assets of the Corporation available for distribution to stockholders after the Corporation has made preferential distributions or payments required to be made on any other securities of the Corporation senior to the Series B Preferred Stock shall be distributed ratably, in accordance with the liquidation preference rights of the Series B Preferred Stock and the Series A Preferred Stock, among the holders of Series B Preferred Stock (and all holders of Series A Preferred Stock and any other preferred stock of the Corporation ranking on parity with the Series B Preferred Stock in the event of a liquidation, dissolution or winding up of the Corporation). 2.2 OTHER DISTRIBUTIONS. Upon any liquidation, dissolution or winding up of the Corporation, immediately after the holders of Series B Preferred Stock and any other series of Preferred Stock shall have been paid in full, any preferred stock liquidation preferences (including the Series B Liquidation Preference and the liquidation preference for the Series A Preferred Stock) that they are respectively entitled to, the remaining assets of the Corporation available for distribution shall be distributed to the holders of Common Stock, the holders of the Series B Preferred Stock and the Series A Preferred Stock in proportion to the number of shares of Common Stock deemed to be held on an "as-if-converted" basis. 2.3 TERMINATION OF SERIES B PREFERRED STOCK. In the event the distributions provided for by this Section 2 are made to the holders of Series B Preferred Stock upon any liquidation, dissolution or winding up of the Corporation, the Series B Preferred Stock shall be retired and canceled and the holders thereof shall cease to have any continuing interest in the Corporation in their capacity as holders of Series B Preferred Stock. 2.4 NOTICE. Written notice of any liquidation, dissolution or winding up and any related distribution, stating the payment date and the place where said payments shall be made, shall be given by mail, postage prepaid, or by telecopy to non-U.S. residents, not less than 20 days prior to the payment date stated therein, to the holders of Series B Preferred Stock, such notice to be addressed to each such holder at its address as shown on the records of the Corporation. SECTION 3. CONVERSION The holders of Series B Preferred Stock shall have the following conversion rights (the "Series B Conversion Rights"): 3.1 RIGHT TO CONVERT; AUTOMATIC CONVERSION A. Subject to Section 3.3, each share of Series B Preferred Stock shall be convertible at any time before a liquidating or redemption payment is made to the holder of such Series B Preferred Stock pursuant to Section 2 or Section 5 hereof; at the option of the holder thereof; at -3- the office of the Corporation or any transfer agent for such shares, into the number of fully paid and nonassessable shares of Common Stock provided for below. B. Each share of Series B Preferred Stock shall be convertible into four fully paid and nonassessable shares of Common Stock. The Series B Conversion Price shall be $7.25 per share of Common Stock. 3.2 MECHANICS OF CONVERSION. Before any holder of shares of Series B Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificates for the shares of Series B Preferred Stock, duly endorsed, at the office of the Corporation or of any transfer agent for such shares (or the holder shall notify the Corporation or its transfer agent that such certificate has been lost, stolen or destroyed and execute an agreement in form and substance reasonably satisfactory to the Corporation to indemnify the Corporation for any loss incurred by the Corporation in connection therewith), and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. (A holder of Series B Preferred Stock may not effect a transfer of shares pursuant to conversion unless all applicable restrictions on transfer are complied with.) The Corporation shall, as soon as practicable, issue and deliver at such office to such holder of shares of Series B Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as provided above. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificate or certificates (or the indemnification agreement referred to above) representing the shares of Series B Preferred Stock being converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. In case the number of shares of Series B Preferred Stock represented by the certificate or certificates surrendered exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series B Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. 3.3 CONVERSION PRICE ADJUSTMENTS. The Series B Conversion Price shall be subject to adjustment from time to time as follows: A. "Effective Date" with respect to the Series B Preferred Stock means the date on which the Certificate of Designation establishing the Series B Preferred Stock (the "Certificate of Designation") is filed in the office of the Secretary of State of Delaware. B. In the event the Corporation should at any time or from time to time after the Effective Date fix a record date for the effectuation of a split or subdivision of the outstanding -4- shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision, if no record date is fixed), the Series B Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share shall be increased in proportion to such increase of outstanding shares of Common Stock. C. If the number of shares of Common Stock outstanding at any time after the Effective Date is decreased by a combination of the outstanding shares of Common Stock, then, as of the record date of such combination, the Series B Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each such share shall be decreased in proportion to such decrease in outstanding shares of Common Stock. 3.4 OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in SECTION 3.3.B, then, in each such case for the purpose of this Section 3.4, the holders of the Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series B Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. 3.5 RECAPITALIZATION. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this SECTION 3), provision shall be made so that the holders of the Series B Preferred Stock shall thereafter be entitled to receive, upon conversion of the Series B Preferred Stock, such shares or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section with respect to the rights of the holders of the Series B Preferred Stock after the recapitalization to the end that the provisions of this Section (including adjustments of the Series B Conversion Price then in effect and the number of shares issuable upon conversion of shares of Series B Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. -5- 3.6 NO IMPAIRMENT. The Corporation shall not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in the carrying out of all the provisions of this Section and in the taking of all such action as may be necessary or appropriate in order to protect the Series B Conversion Rights of the holders of the Series B Preferred Stock against impairment; provided that in any event, any provisions of this Section may be amended with the approval of holders representing not less than 66-2/3% of the outstanding shares of Series B Preferred Stock (in addition to all other approvals required by law). 3.7 FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. A. In lieu of issuing fractional shares upon a conversion of Series B Preferred Stock, the Corporation may (but unless otherwise required by applicable law shall not be obligated to) pay cash equal to the fraction multiplied by the then fair market value of a share of Common Stock, as determined by the Board. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series B Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. B. Upon the occurrence of each adjustment of the Series B Conversion Price pursuant to this Section, the Corporation, at its expense, shall promptly compute such adjustment in accordance with the terms hereof and prepare and furnish to each holder of shares of Series B Preferred Stock a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based. 3.8 NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of its stockholders for the purpose of determining stockholders who are entitled to approve or disapprove of any consolidation or merger to which the Corporation is a party or who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of shares of Series B Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, right, merger or consolidation and the amount, character and terms of such dividend, distribution, right, merger or consolidation. 3.9 RESERVATION OF COMMON STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series B Preferred Stock; and if at any time the -6- number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock, the Corporation shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Before taking any action which would cause an adjustment reducing the Series B Conversion Price below the par value (if any) of the shares of Common Stock deliverable upon conversion of the shares of Series B Preferred Stock, the Corporation shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Series B Conversion Price. 3.10 TRANSFER TAXES, ETC. The Corporation shall pay any and all documentary stamp, issue or transfer taxes, and any similar taxes payable in respect of the issue or delivery of shares of Common Stock upon conversions of shares of Series B Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the shares of Series B Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. 3.11 NOTICES. Any notice required by the provisions of this Section to be given to the holders of shares of Series B Preferred Stock shall be deemed to be delivered when deposited in the United States mail, postage prepaid, registered or certified, and addressed to each holder of record at the address of such holder appearing on the stock transfer books of the Corporation. 3.12 TREASURY SHARES. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition by the Corporation of any such shares shall be considered an issue or sale of Common Stock for purposes of this Section 3 and Section 4. SECTION 4. VOTING RIGHTS 4.1 GENERAL. Except as provided in SECTION 4.2 and elsewhere in this Certificate of Designation, in the Certificate of Incorporation of the Corporation, or in one or more other Certificates of Designations of the Corporation, and except as otherwise required by law, the holders of the Series B Preferred Stock shall have no voting rights. 4.2. PROTECTIVE PROVISIONS. Beginning as of the date shares of Series B Preferred Stock are first issued and outstanding, for so long as there remain issued and outstanding any shares of Series B Preferred Stock, the Corporation shall not, without the affirmative vote or consent of -7- holders representing at least 66-2/3% of the outstanding shares of Series B Preferred Stock voting together as a single class, and in addition to any vote otherwise required by the Law: A. Amend, alter or repeal the rights, preferences, privileges, or restrictions of such Series B Preferred Stock or effect any reclassification of the Series B Preferred Stock. B. Amend, alter or repeal any provision of; or add any provision to, the Certificate of Incorporation or By-laws of the Corporation if such change could reasonably be expected to adversely affect the holders of the Series B Preferred Stock in any respect, provided the immediately foregoing shall not prohibit the adoption and filing of one or more additional Certificates of Designations for Preferred Stock not otherwise prohibited by Section 4.2.C. C. Create, authorize, issue or sell (including but not limited to by way of reclassification or in connection with the creation of any convertible indebtedness) any shares of any other class or series of shares (other than the Series A Preferred Stock) providing for (i) dividends or other distributions on a preferred basis to the Series B Preferred Stock, (ii) redemption rights or (iii) liquidation privileges senior to, or on a parity with, the Series B Preferred Stock, or senior to the Common Stock in excess of the sum of the original purchase price thereof plus accrued dividends. SECTION 5. REDEMPTION 5.1 On or after the Effective Date, the Corporation, at the option of the Board, may redeem all or any of the shares of Series B Preferred Stock then outstanding, upon notice duly given as hereinafter provided, by paying in cash for each share of Series B Preferred Stock so redeemed an amount equal to the Series B Liquidation Preference. 5.2 Notice of each redemption of shares of Series B Preferred Stock shall be given by mailing such notice not less than 30 nor more than 50 days before the date fixed for such redemption to each holder of record of shares of Series B Preferred Stock to be so redeemed, and shall be deemed sufficiently given if the Corporation shall cause a copy thereof to be mailed to such holders of record at their respective addresses, as the same shall appear on the books of the Corporation, by mail, postage prepaid, registered or certified; provided, however, that neither the failure to mail such notice nor the existence of any defect in the notice to one or more of such holders shall affect the validity of such redemption as to the holders to whom proper notice was mailed. If any such notice of redemption shall have been duly given and if; on or before the redemption date specified therein, all funds necessary for such redemption shall be irrevocably deposited or set aside and continue to be available for payment on or after the redemption date upon surrender of the certificates for the shares of the Series B Preferred Stock so called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not -8- have been surrendered to the Corporation for cancellation, from and after the redemption date, all shares so called for redemption shall no longer be deemed to be outstanding, and all rights with respect to such shares shall forthwith cease and terminate, except only for the right for the holders of the certificates therefore, upon surrender thereof, to receive the Series B Liquidation Preference out of the funds so deposited, without interest. Any interest accrued on such funds shall be paid to the Corporation from time to time. 5.3 On or before the date set for redemption in the notice sent to the holders of the Series B Preferred Stock pursuant to Section 5.2 above, the holder of such Series B Preferred Stock may, at such holder's option, exercise the conversion rights contained in Section 3 herein. The written notice of conversion required in Section 3.2 must be received in the office of the Corporation prior to the redemption date set in the redemption notice mailed by the Corporation pursuant to Section 5.2, in order to prevent the shares from being redeemed pursuant to this Section 5. SECTION 6. REISSUANCES 6.1 NO REISSUANCE OF SERIES B PREFERRED STOCK. No shares of Series B Preferred Stock which have been converted into Common Stock or otherwise cease to be outstanding shall be reissued by the Corporation; provided, however, that each such share, after being retired and canceled, shall be restored to the status of an authorized but unissued share of Preferred Stock without designation as to series and may thereafter be issued as a share of Preferred Stock not designated as Series B Preferred Stock. IN WITNESS WHEREOF, I have hereto set my hand this 1st day of April, 1997. TRISTAR CORPORATION By:______________________________ Loren Eltiste Vice President, Chief Financial Officer -9- TRISTAR CORPORATION Certificate of Designation of Series C Senior Convertible Preferred Stock Setting Forth the Powers, Preferences, Rights, Qualifications, Limitations And Restrictions of Such Series of Preferred Stock Pursuant to Section 151 of the Delaware General Corporation Law, Tristar Corporation, a Delaware corporation (the "Company"), does hereby certify that: Pursuant to the authority conferred upon the Board of Directors of the Company by the Certificate of Incorporation of the Company, the Board of Directors of the Company on the 25th and 26th of August, 1998, adopted the following resolution creating a series of preferred stock designated as Series C Senior Convertible Preferred Stock, and such resolution has not been modified and is in full force and effect on the date hereof: RESOLVED that, (pursuant to the affirmative vote of a majority of stockholders, and) pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of the Certificate of Incorporation, a series of the class of authorized preferred stock, par value $0.05 per share, of the Company is hereby created and that the designation and number of shares thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof are as follows: SECTION 1. DESIGNATION. NUMBER AND RANK. (a) The shares of the series shall be designated as "Series C Senior Convertible Preferred Stock" (the "SERIES C PREFERRED STOCK"). The number of shares initially constituting the Series C Preferred Stock shall be *two hundred thousand* (*200,000*). (b) The Series C Preferred Stock shall, with respect to dividends and distributions and with respect to rights on liquidation, dissolution and winding up, rank (i) higher and prior to the Junior Stock, (ii) on a parity with all shares of Parity Stock and (iii) shall not be junior, lower or subsequent to any shares or class of stock of the Company. SECTION 2. DIVIDENDS AND DISTRIBUTIONS. (a) In preference to the holders of shares of Common Stock and of any shares of other capital stock of the Company other than Parity Stock and Senior Stock, the holders of shares of Series C Preferred Stock shall automatically and immediately be entitled to receive, Out of the assets of the Company legally available therefor, cumulative cash dividends equal to $4.80 per share annually. Such dividends shall accrue and be payable in immediately available funds in four (4) equal quarterly installments of $1.20 per share on the first (1st) Business Day of April, July, October and January in each year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE") commencing on the first Quarterly Dividend Payment Date occurring after the Issue Date, PROVIDED HOWEVER that with respect to the first Quarterly Dividend Payment Date to occur with respect to any shares of Series C Preferred Stock, the holders of such shares of Series C Preferred Stock shall be entitled to receive the dividend payable upon such shares on A PER DIEM basis, out of the assets of the Company legally available therefor, a cumulative cash dividend in respect of each such share of Series C Preferred Stock. (b) If as of any Quarterly Dividend Payment Date there is a Dividend Arrearage (as hereinafter defined), an additional dividend (the "ADDITIONAL DIVIDEND") shall accrue on each share of the Series C Preferred Stock for the period from such Quarterly Dividend Payment Date through the earlier of (i) the date on which such Dividend Arrearage is paid in full and (ii) the next succeeding Quarterly Dividend Payment Date, in an amount equal to the product of (x) the Dividend Rate (calculated for such period in accordance with Section 2(a)) and (y) the amount of such Dividend Arrearage as of such Quarterly Dividend Payment Date. For purposes of this Section 2(b), "DIVIDEND ARREARAGE" shall mean, with respect to each share of Series C Preferred Stock, as of any Quarterly Dividend Payment Date, the excess, if any of(x) the sum of all dividends theretofore accrued on such share in accordance with Section 2(a) hereof (including those accrued as of and including such Quarterly Dividend Payment Date) plus all Additional Dividends, if any, theretofore accrued on such share in accordance with this Section 2(b) (including those accrued as of and including such Quarterly Dividend Payment Date), over (y) all dividends actually paid with respect to such share on or before such Quarterly Dividend Payment Date (including stock dividends paid pursuant to Section 2(c), valuing each share of Series C Preferred Stock paid as a dividend on the Series C Preferred Stock as set forth in section 2(c). (c) I. At the Company's option, but with notice to the holders of the issued and outstanding shares of Series C Preferred Stock, the cumulative dividends payable pursuant to Sections 2(a) and (b) may be paid, in whole or in part, by the issuance of additional shares of Series C Preferred Stock upon the same terms as cash dividends payable pursuant to Sections 2(a) and (b); PROVIDED that, such dividends shall (i) equal $7.80 per share annually, (ii) dividends, if paid in shares of Series C Preferred Stock, shall be paid at a valuation rate equal to the closing price of the Common Stock as published in the WALL STREET JOURNAL for such class of stock on the Quarterly Dividend Payment Date for which the dividend is due (the "WSJ PRICE/COMMON STOCK") and the number of shares of Preferred Stock to be issued shall be calculated by the following formula: (A) 100,000 shares of Series C Preferred Stock divided by the aggregate number of shares of (B) Common Stock that shall be issued upon conversion of each share of Preferred Stock, which fraction shall then be multiplied by the fraction of (C) the quarterly amount of the Alternative Dividend divided by (D) the WSJ Price/Common Share; and (iii) accrue and be payable by the immediate delivery at the address of each such holder as shown in the stock books of the Company of (x) a certificate or certificates representing the shares of Series C Preferred Stock to which such holder is entitled and (y) a check made payable to such holder for an amount corresponding to any fractional interest in a share of Series C Preferred Stock as provided in this Section 2(c). (c) II. With respect to the first Quarterly Dividend Payment Date to occur with respect to any shares of Series C Preferred Stock upon which a stock dividend shall be paid pursuant to this Section 2(c), the holders of such shares of Series C Preferred Stock shall be entitled to receive as the dividend payable upon such shares, out of the assets of the Company legally available therefor, a cumulative stock dividend in accordance with this Section 2(c) in respect of each such share of Series C Preferred Stock equal to the number of shares as determined by Section 2(c) multiplied by a fraction (not to exceed one), the numerator of which is the number of days from (and including) the Issue Date with respect to such shares to (but excluding) such Quarterly Dividend Payment Date, and the denominator of which is ninety (90). (d) The Company shall pay all documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of shares of Series C Preferred Stock pursuant to this Section 2. All shares of Series C Preferred Stock issued and delivered pursuant to this Section 2 will upon issuance by the Company and delivery be duly authorized and issued and fully paid and non-assessable and not subject to any purchase option or right of first refusal or preemptive, subscription or similar rights. (e) Dividends payable pursuant to Sections 2(a), (b) and (c) above with respect to any shares shall begin to accrue and be cumulative from the Issue Date, and shall accrue on a daily basis, in each case whether or not declared. If the Company makes a dividend payment on the shares of Series C Preferred Stock in an amount that is less than the total amount of accrued and payable dividends on such shares at such time, then the dividends paid shall be allocated PRO RATA among all such shares of Series C Preferred Stock at the time outstanding on a share-by-share basis. (f) Accumulated but unpaid dividends for any past quarterly dividend periods may be declared and paid at any time, without reference to any regular Quarterly Dividend Payment Date. The Board of Directors may fix a record date for the determination of holders of shares of Series C Preferred Stock entitled to receive payment of a dividend or distribution declared thereon pursuant to this Section 2, which record date shall be not more than 20 days nor less than 5 days prior to the date fixed herein for the payment thereof. (g) No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the shares of the Series A or Series B Preferred Stock or any other preferred stock, unless the dividends due under the Series C Preferred Stock have been paid and are current. SECTION 3. VOTING RIGHTS. (a) In addition to any voting rights provided by law, each share of Series C Preferred Stock shall be entitled to the number of votes as if such shares of Series C Preferred Stock had been converted into shares of Common Stock on the appropriate record date. (b) The shares of Senior Preferred Stock and the shares of Common Stock (and any other shares of capital stock of the Company at the time entitled thereto) shall vote together as one class on all matters submitted to a vote of stockholders of the Company. SECTION 4. CONVERSION. The conversion shall be $5.4375 per Share of Common Stock (the "CONVERSION PRICE"). Each share of Preferred Stock shall be convertible at the option of the holder into eleven and 34483/1,000,000ths (11.034483) shares of the Common Stock of the Company, $.01 par value (the "COMMON STOCK") at any time and from time-to-time. The Conversion Price and number of shares of Common Stock issuable upon conversion of the Preferred Stock will be subject to adjustment as set forth in more detail in Section 4 hereof. Shares of Series C Preferred Stock may, at the option of the holder thereof, be converted into shares of Common Stock, on the terms and conditions set forth in this Section 4, at any time and from time to time. Subject to the provisions for adjustment hereinafter set forth, each share of Series C Preferred Stock shall be convertible in the manner hereinafter set forth into eleven and 34483/l,000,000ths (11.034483) fully paid and nonassessable shares of Common Stock. (a) ADJUSTMENTS. The number of shares of Common Stock into which each share of Series C Preferred Stock is convertible, and the number of votes to which the holder of a share of Series C Preferred Stock is entitled pursuant to Section 3, shall be subject to adjustment from time to time as follows: (i) DIVIDENDS AND DISTRIBUTIONS. In case the Company shall at any time or from time to time declare a dividend, or make a distribution, on the outstanding shares of Common Stock in shares of Common Stock or subdivide or reclassify the outstanding shares of Common Stock into a larger number of shares or combine or reclassify the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, and in each such case: (A) the number of shares of Common Stock into which each share of Series C Preferred Stock is convertible shall be adjusted so that the holder of each share thereof shall be entitled to receive, upon the conversion thereof, the number of shares of Common Stock which the holder of a share of Series C Preferred Stock would have been entitled to receive after the happening of any of the events described above had such share been converted immediately prior to the happening of such event or the record date therefor, whichever is earlier; (B) the number of votes to which a holder of a share of Series C Preferred Stock is entitled pursuant to Section 3 shall be adjusted so that, after the happening of any of the events described above, such holder shall be entitled to a number of votes equal to (I) the number of votes to which such holder was entitled pursuant to Section 3 immediately PRIOR to such happening multiplied by (II) a fraction, the numerator of which is the number of shares of Common Stock into which one share of Series C Preferred Stock was convertible immediately AFTER such happening and the denominator of which is the number of shares of Common Stock into which one share of Series C Preferred Stock was convertible immediately prior to such happening; and (C) an adjustment made pursuant to this clause (i) shall become effective (I) in the case of any such dividend or distribution, (1) immediately after the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, for purposes of subclause (A), and (2) immediately after the close of business on the date of payment of such dividend or distribution, for purposes of subclause (B), or (II) in the case of any such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective, for purposes of both subclause (A) and subclause (B). (ii) ISSUANCE BELOW FAIR VALUE. In case the Company shall issue shares of Common Stock (or rights, options or warrants or other securities convertible into or exchangeable for shares of Common Stock) at a price per share (or having an exercise or conversion price per share, together with any consideration paid to the Company to purchase such option, warrant or other convertible or exchangeable security) less than the Fair Value as of the date of issuance of such shares (or of such rights, options, warrants or other convertible securities), then, and in each such case: (A) the number of shares of Common Stock into which each share of Series C Preferred Stock is convertible shall be adjusted so that the holder of each share thereof shall be entitled to receive, upon the conversion thereof, the number of shares of Common Stock determined by multiplying the number of shares of Common Stock into which such share was convertible on the day immediately prior to such date of issuance by a fraction, (I) the numerator of which is the sum of (1) the number of shares of Common Stock outstanding on such date and (2) the number of additional shares of Common Stock issued (or into which the convertible securities may convert), and (II) the denominator of which is the sum of (1) the number of shares of Common Stock outstanding on such date and (2) the number of shares of Common Stock which the aggregate consideration receivable by the Company for the total number of shares of Common Stock so issued (or into which the convertible securities may convert) would purchase at the Fair Value of the Common Stock on such date. For purposes of this subparagraph, the aggregate consideration receivable by the Company in connection with the issuance of shares of Common Stock or of securities convertible into shares of Common Stock shall be deemed to be equal to the sum of the net offering price (which is the amount the Company received from the sale of such securities after deduction of underwriting discounts or commissions and expenses payable to third parties) of all such securities plus the minimum aggregate amount, if any, payable upon conversion of any such convertible securities into shares of Common Stock; (B) the number of votes to which a holder of a share of Series C Preferred Stock is entitled pursuant to Section 3 shall be adjusted so that, after the happening of any of the events described above, such holder shall be entitled to a number of votes equal to (I) the number of votes to which such holder was entitled pursuant to Section 3 immediately prior to such happening multiplied by (II) a fraction, the numerator of which is the number of shares of Common Stock into which one share of Series C Preferred Stock was convertible immediately after such happening and the denominator of which is the number of shares of Common Stock into which one share of Series C Preferred Stock was convertible immediately prior to such happening; and (C) such adjustment shall become effective immediately after the date of such issuance for purposes of subclauses (A) and (B). For purposes hereof, "FAIR VALUE" of any capital stock shall be the higher of (x) the price to be paid by the purchaser of such capital stock and (y) the lowest value in the range of values of the capital stock as determined by the appraisal process, if any, described below. If a holder or holders of Series C Preferred Stock asserting rights under Section 4(a)(ii) (the "OPPOSING STOCKHOLDERS"), on the one hand, and the Company, on the other hand, cannot agree on the Fair Value of the Common Stock, the following appraisal process shall be used to determine the Fair Value. The Company and the Opposing Stockholders shall attempt to agree on one investment banker and if an agreement is reached, the determination shall be conducted by such banker. If the Opposing Stockholders, on the one hand, and the Company, on the other hand, do not so agree, the Opposing Stockholders, on the one hand, and the Company, on the other hand, shall each select one independent investment banker and the two investment bankers so selected shall select a third investment banker. The investment banker or bankers making the determination shall determine a range of values for such capital stock, basing their majority determination on what they believe a willing purchaser would pay for such capital stock in a transaction negotiated on commercial terms at arms'-length. Any determination of such a range of values agreed to by the investment banker (in the case of only one such banker) or two of the three investment bankers (in the case of three such bankers) shall be binding on the Opposing Stockholders and the Company. If two of the three investment bankers are unable to agree on a range of values for such capital stock as provided above, the range of values shall be the middle of the three ranges. If the price to be paid by the purchaser of such stock is within or exceeds the range of values of the capital stock as determined by the appraisal process, the fees and expenses of the investment bankers shall be paid fifty (50%) percent by the Opposing Stockholders and fifty (50%) percent by the Company. If the lowest value in the range of values of the capital stock as determined by the appraisal process constitutes the Fair Value, the fees and expenses of the investment bankers shall be paid by the Company. This Section 4(a)(ii) shall not apply to (I) the issuance of shares of Common Stock upon the conversion of any Parity Stock, (2) the issuance of shares of Common Stock to officers, directors, employees or other agents of the Company of shares of Common Stock (or options, warrants or other rights to acquire any shares of Common Stock) pursuant to the terms of any warrant, stock option, stock purchase or similar plan or arrangement, which issuance or grant is approved by a majority of the directors of the Company nominated by the Investor, (3) the issuance of Series C Preferred Stock as a stock dividend pursuant to Section 2 hereof, or (4) the warrants issued to the Investor pursuant to the Investment Agreement. (iii) MERGER; CONSOLIDATION. In case at any time the Company shall be a party to any transaction (including, without limitation, a merger, consolidation, sale of all or substantially all of the Company's assets, liquidation or recapitalization of the Common Stock and excluding any transaction to which clause (i) or (ii) of this paragraph (a) applies) in which the previously outstanding Common Stock shall be changed into or, pursuant to the operation of law or the terms of the transaction to which the Company is a party, exchanged for different securities of the Company or common stock or other securities of another corporation or interests in a noncorporate entity or other property (including cash) or any combination of any of the foregoing, then, as a condition of the consummation of such transaction, lawful and adequate provision shall be made so that each holder of shares of Series C Preferred Stock shall be entitled, upon conversion, to an amount per share equal to (A) the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged times (B) the number of shares of Common Stock into which a share of Series C Preferred Stock is convertible immediately prior to the consummation of such transaction. (b) ANTI-DILUTION RIGHTS. In order to allow the holders of the Series C Preferred Stock to maintain their PRO RATA share of the Company's capital stock on a fully diluted basis, except as set forth in the next sentence of this section. 4(b) and solely with respect to this section. 4(b), the holders of the Series C Preferred Stock shall be entitled, as of right, to purchase or subscribe for PRO RATA any stock of the Company to be issued by reason of an increase of the issued stock of the Company or the creation a new class of securities, and the issuance of such securities (collectively referred to as "NEW SECURITIES"). The anti-dilution rights set forth hereinabove shall not be applicable to and the definition of "New Securities" shall not include the following securities (the "EXEMPT SECURITIES"): (i) securities issued to employees, consultants or directors of the Company pursuant to any stock option plan or stock purchase or stock bonus arrangement approved by the Board of Directors, up to a maximum amount of 13.52% of the outstanding Common Stock on a fully diluted basis, (ii) securities offered to the public pursuant to a registration statement filed pursuant to the Securities Act, and (iii) securities issued pursuant to an acquisition of another corporation by the Company by merger, purchase of all or substantially all of the assets or other reorganization whereby the Company owns not less than fifty-one (51%) percent of the voting stock of such corporation. (i) NOTICE AND EXERCISE OF A ANTI-DILUTION RIGHTS. In the event the Company proposes to issue New Securities, it shall give the holders of the Series C Preferred Stock written notice of its intention, describing the type of New Securities, the price and general terms upon which the Company proposes to issue the same. In exercising such anti-dilutive rights, the holders of the Series C Preferred Stock shall be given thirty (30) days from the receipt of such notice to agree to purchase or subscribe for such New Securities, at the same price and on the same terms, in the proportion that the number of shares of Common Stock that underlies the Series C Preferred Stock, if converted, bears to the sum of(l) the total number of shares of Common Stock issued and outstanding and (2) the number of such underlying shares. (ii)OVER-ALLOTMENT. The holders of the Series C Preferred Stock shall have the right of over-allotment such that, in the event other holders having anti-dilutive rights fail to exercise such right to purchase all of the New Securities, the remaining holders of the Series C Preferred Stock may purchase the non-purchasing holders' New Securities not so purchased, on a PRO RATA basis, based upon the respective fully diluted Common Stock ownership in the Company of each such remaining holder of Series C Preferred Stock, within fifteen (15) days from the date the non-purchasing holders fail to exercise their rights hereunder. The holders of the Series C Preferred Stock shall be required to commit in writing, at the time they exercise their anti-dilution rights, the maximum amount of over-allotment shares they agree to purchase, if any become available. (c) METHOD OF CONVERSION. (i) The holder of any shares of Series C Preferred Stock may exercise its right to convert such shares into shares of Common Stock by surrendering for such purpose to the Company, at its principal office or at the principal office of the transfer agent or at such other office or agency maintained by the Company for that purpose, a certificate or certificates representing the shares of Series C Preferred Stock to be converted accompanied by a written notice stating that such holder elects to convert all or a specified whole number of such shares in accordance with the provisions of this Section 4 and specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. In case such notice shall specifying a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issuance of shares of Common Stock in such name or names. (ii) Promptly after such notification, such notifying holder of Series C Preferred Stock shall surrender for purposes of conversion to the Company, at its principal office or at such other office or agency maintained by the Company for that purpose, the certificate or certificates representing all shares of Series C Preferred Stock held by such holder. (iii) Such conversion shall be deemed to have been made at the close of business on the date of giving of such notice and of such surrender of the certificate or certificates representing the shares of Series C Preferred Stock to be converted so that the rights of the holder thereof as to the shares being converted shall cease, except for the right to receive shares of Common Stock and any Dividend Arrearage in accordance herewith, and the person entitled to receive the shares of Common Stock shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time. (d) ISSUANCE OF COMMON STOCK. Other than taxes payable by the holder of any Series C Preferred Stock in accordance with paragraph (b) of this Section 4, the Company will pay any and all issuance, documentary or stamp taxes and other taxes (other than taxes based on income) that may be payable in respect of any issuance or delivery of shares of Common Stock on conversion of Series C Preferred Stock pursuant hereto. As promptly as practicable, and in any event within five (5) Business Days after the surrender of the certificate or certificates representing such shares of Series C Preferred Stock being converted and, in the case of a conversion by the holder pursuant to paragraph (b), the receipt by the Company of such notice relating thereto and, if applicable, payment of all transfer taxes (or the demonstration to the satisfaction of the Company that such taxes have been paid), the Company shall deliver or cause to be delivered (i) certificates representing the number of validly issued, hilly paid and nonassessable full shares of Common Stock to which the holder of shares of Series C Preferred Stock so converted shall be entitled and (ii) in the case of a conversion at the election of the holder of Series C Preferred Stock, if less than the full number of shares of Series C Preferred Stock evidenced by the surrendered certificate or certificates are being converted, a new certificate or certificates, of like tenor, for the number of shares of Series C Preferred Stock evidenced by such surrendered certificate or certificates less the number of shares converted. (e) RIGHT TO DIVIDENDS. Upon conversion of any shares of Series C Preferred Stock, the holder thereof shall be immediately entitled to receive its Dividend Arrearage (if any) from (i) legally available funds in respect of the shares so converted to the date of conversion, or (ii) in additional shares of Series C Preferred Stock in accordance with the provisions of Section 2. (f) NO FRACTIONAL SHARES. In connection with the conversion of any shares of Series C Preferred Stock, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Company shall adjust such fractional interest by rounding up to the next whole share of Common Stock. (g) RESERVATION OF SHARES. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series C Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of Series C Preferred Stock. The Company shall immediately reserve one million (1,000,000) shares of its Common Stock to be available upon conversion of the Series C Preferred Stock. The Company shall from time to time, subject to and in accordance with the Delaware General Corporation Law, increase the authorized amount of Common Stock if at any time the number of authorized shares of Common Stock remaining unissued shall not be sufficient to permit the conversion at such time of all then outstanding shares of Series C Preferred Stock. The Company shall at all times reserve and keep available out of its authorized and unissued Series C Preferred Stock, solely for the purpose of payment of stock dividends upon shares of Series C Preferred Stock pursuant to Section 2(c), such number of shares of Series C Preferred Stock as shall from time to time be sufficient to effect the payment of such stock dividends upon all then outstanding shares of Series C Preferred Stock. (h) WAIVER OF ADJUSTMENT. Notwithstanding anything to the contrary set forth herein, the operation of; and any adjustment in the number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock pursuant to, this Section 4, may be waived with respect to any specific share or shares of Series C Preferred Stock, either prospectively or retroactively and either generally or in a particular instance, by a writing executed by the registered holder of such share or shares of Series C Preferred Stock Any such waiver shall bind all future holders of such share or shares of Series C Preferred Stock for which such rights have been waived. SECTION 5. REPORTS AS TO ADJUSTMENTS. Whenever the number of shares of Common Stock into which each share of Series C Preferred Stock is convertible (or the number of votes to which each share of Series C Preferred Stock is entitled) is adjusted as provided in Section 4, the Company shall promptly mail by either first class mail (or bulk mail if the number of holders exceeds 500) to the holders of record of the outstanding shares of Series C Preferred Stock at their respective addresses as the same shall appear in the Company's stock records a notice stating that the number of shares of Common Stock into which the shares of Series C Preferred Stock are convertible has been adjusted and setting forth the new number of shares of Common Stock (or describing the new stock, securities, cash or other property) into which each share of Series C Preferred Stock is convertible (and the new number of votes to which each share of Series C Preferred Stock is entitled), as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof; and when such adjustment became effective. SECTION 6. REDEMPTION. (a) The Company and/or the Core Sheth Families shall have the right to compel each holder of the Series C Preferred Stock to redeem any or all of the shares of Series C Preferred Stock held by such holder on any Quarterly Dividend Payment Date (for purposes of this section. 1.17 such date shall be the "REDEMPTION DATE"), provided written demand as set forth below is given. The redemption price for each share to be redeemed shall be paid by the Company and/or the Core Sheth Families in cash in an amount equal to (i) the price in the first (1st) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $12 per share of Common Stock, on a post-conversion basis; (ii) the price in the second (2nd) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $14 per share of Common Stock, on a post-conversion basis; (iii) the price in the third (3rd) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $16 per share of Common Stock, on a post-conversion basis; (iv) the price in the fourth (4th) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $18 per share of Common Stock, on a post-conversion basis; and (v) the price in the fifth (5th) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $20 per share of Common Stock, on a post-conversion basis; (all subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) (the "REDEMPTION PRICE"). (b) Thirty (30) days prior to the Redemption Date, the Company and/or the Core Sheth Families, as applicable, shall provide each holder of Series C Preferred Stock with a written demand ("REDEMPTION NOTICE") (addressed to the holder at its address as it appears on the stock transfer books of the Company) to redeem shares of Series C Preferred Stock as provided above, which notice shall specify the Redemption Price and the number of shares to be redeemed. All Redemption Notices hereunder shall be sent by certified mail, returned receipt requested, and shall be deemed to have been provided when received. (c) On or prior to the Redemption Date, each holder of Series C Preferred Stock shall surrender his or its certificate or certificates representing the shares to be redeemed, in the manner and at the place designated in the Redemption Notice. If less than all shares represented by such certificate or certificates are redeemed, the Company shall issue a new certificate for the unredeemed shares. From and after the Redemption Date, unless there shall be a default in payment of the Redemption Price, all rights of each holder with respect to shares of Series C Preferred Stock redeemed on the Redemption Date shall cease (except the right to receive the Redemption Price and interest at the rate of 13% in the event payment is not made within 20 days after the Redemption Date), and such shares shall not be deemed to be outstanding for any purpose whatsoever. Such shares of Series C Preferred Stock shall not be reissued. SECTION 7. RESTRICTIVE COVENANTS. Unless approved in writing by a majority-in-interest of the holders of the Series C Preferred Stock, the Company shall not: (a) (i) Authorize, adopt or approve an amendment to the Certificate of Incorporation that would increase or decrease the par value of the shares of Series C Preferred Stock, or alter or change the powers, preferences or special rights of the shares of Series C Preferred Stock, or alter or change the powers, preferences or special rights of the shares of Series C Preferred Stock or any other capital stock of the Company, (ii) amend, alter or repeal the Certificate of Incorporation so as to adversely affect the shares of Series C Preferred Stock including, without limitation, by granting any voting right to any holder of notes, bonds, debentures or other debt obligations of the Company, (iii) reclassify any shares of the Company's capital stock into Senior Stock or Parity Stock, (iv) issue any Senior Stock or Parity Stock, (v) effect a voluntary redemption of any Parity Stock, Junior Stock or Common Stock, or (vi) agree to take any of the foregoing actions; PROVIDED, HOWEVER,; that nothing set forth in this clause 7(a) shall prohibit the Company from repurchasing shares of Common Stock held by an employee of the Company upon the termination of the Company's employment of such employee pursuant to an agreement providing the terms of such repurchase that has been approved by Company's Board of Directors (an "APPROVED REPURCHASE"); (b) Upon the occurrence, and during the continuation, of a Noncompliance Event (as defined below), (i) declare or pay dividends, or make any other distributions, on any shares of Common Stock or other Junior Stock; or (ii) declare or pay dividends, or make any other distributions, on any shares of Parity Stock, except, with respect to clause (ii) of this subparagraph (b), dividends or distributions paid ratably on the Series C Preferred Stock and all Parity Stock on which dividends are payable or in arrears, in proportion to the total amounts to which the holders of all shares of the Series C Preferred Stock and such Parity Stock are then entitled. A "NONCOMPLIANCE EVENT'" shall be deemed to have occurred and be continuing whenever quarterly dividends payable on shares of Series C Preferred Stock as provided in Section 2 are not paid in full (whether such failure is a result of the Company not having sufficient legally available funds or for any other reason) at such time and thereafter until all unpaid dividends payable, whether or not declared, on the outstanding shares of Series C Preferred Stock shall have been paid in full; and (c) Either on its own or through any Subsidiary, purchase or otherwise acquire for consideration any outstanding shares of capital stock of the Company, provided, however that nothing set forth in this Section 7(c) shall prohibit an Approved Repurchase. SECTION 8. LIQUIDATION. DISSOLUTION OR WINDING UP. (a) If the Company shall commence a voluntary case under the United States Bankruptcy Code or any applicable bankruptcy, insolvency or similar law of any other country, or consent to the entry of an order for relief in an involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Company shall be entered by a court having jurisdiction in an involuntary case under the United States Bankruptcy Code or any applicable bankruptcy, insolvency or similar law of any other country, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and on account of any such event the Company shall liquidate, dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or wind up, no distribution shall be made to (i) the holders of shares of Junior Stock unless, prior thereto, the holders of shares of Series C Preferred Stock shall have received the Liquidation Preference, plus all accrued and unpaid dividends, whether or not declared or currently payable, to the date of distribution, with respect to each share, or (ii) the holders of shares of Parity Stock, except distributions made ratably on the Series C Preferred Stock and all other Parity Stock in proportion to the total amounts to which the holders of all shares of Series C Preferred Stock and other Parity Stock are entitled upon such liquidation, dissolution or winding up. (b) Neither the consolidation or merger of the Company with or into any other Person nor the sale or other distribution to another Person of all or substantially all the assets, property or business of the Company shall be deemed to be a liquidation, dissolution or winding up of the Company for purposes of this Section 8. SECTION 9. CERTAIN REMEDIES. To the extent permitted by applicable law, the holders of twenty (20%) percent or more of the outstanding shares of Series C Preferred Stock shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Certificate of Designation and to enforce specifically the terms and provisions of this Certificate of Designation in the United States District Court for either the District of Connecticut or the District of Delaware or any court within the States of Connecticut or Delaware, this being in addition to any other remedy to which such holder may be entitled at law or equity. SECTION 10. REACQUIRED SHARES. Any shares of Series C Preferred Stock exchanged, redeemed, purchased or otherwise acquired by the Company or any of its Subsidiaries in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares of Series C Preferred Stock shall upon their cancellation become authorized but unissued shares of preferred stock, $.01 par value, of the Company and, upon the filing of an appropriate certificate with the Secretary of State of the State of Delaware, may be reissued as part of another series of preferred stock, par value $.01 per share, of the Company subject to the conditions or restrictions on issuance set forth herein, but in any event may not be reissued as shares of Series C Preferred Stock unless all of the shares of Series C Preferred Stock shall have already been redeemed. Section 11. DEFINITIONS. For the purposes of this Certificate of Designation of Series C Preferred Stock, the following terms shall have the meanings indicated: o "Additional Dividends" shall have the meaning assigned to such term in Section 2(b). o "Affiliate" shall have the meaning assigned to such term in the Securities Exchange Act of 1934, as amended. o "Alternative Dividend" shall be $7.80 per share annually. o "Approved Repurchase" shall have the meaning assigned to such term in Section 7. o "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law or executive order to close. o "Certificate of Incorporation" shall mean the Certificate of Incorporation of the Company, as amended from time to time. o "Common Stock" shall mean the Common Stock, par value $.01 per share, of the Company. o "Core Sheth Families" shall mean, collectively, Manhendra Sheth, Shashikant S. Sheth, Jammadas Sheth, Kirit Sheth, Jay J. Sheth, and Viren Sheth. o "Company" shall have the meaning ascribed to such term in the Preamble. o "Current Market Price" per share shall mean, on any date specified herein for the determination thereof; (a) if the Common Stock is then listed on a national securities exchange, designated for quotation on the National Market System or the Small Cap Market of the Nasdaq Stock Market, quoted in the over-the-counter-market by a member firm of the NYSE, or the NASD OTC Bulletin Board, the average daily Market Price of the Common Stock for those days during the period of fifteen (15) days, ending on such date, on which the national securities exchanges were open for trading, and (b) if the Common Stock is not then so listed, designated or quoted, the Market Price on such date. o "Dividend Rate" shall mean a rate of interest equal to 8% per annum. o "Dividend Arrearage" shall have the meaning assigned to such term in Section 2(b). o "Fair Value" shall have the meaning assigned to such term in Section 4. o "Investor" shall mean Pioneer Ventures Associates Limited Partnership, a Connecticut limited partnership and any one or more parallel limited partnerships which have been or shall be organized by Ventures Management Partners LLC as the general partner to invest in parallel with Pioneer Ventures Associates Limited Partnership on the same economic terms and PRO RATA based upon their aggregate subscriptions. o "Investment Agreement" shall mean the Investment Agreement, dated as of a date in September, 1998, by and between the Company and the Investor. o "Issue Date", with respect to any shares of Series C Preferred Stock shall mean the first date on which such shares of Series C Preferred Stock are deemed to have been issued or were actually issued, whichever is earlier. o "Junior Preferred Stock" shall mean any series of preferred stock of the Company issued subsequent and in conformity with the filing of this Certificate of Designation. o "Junior Stock" shall mean any capital stock of the Company ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock, including, without limitation, the Common Stock, the Series A Preferred Stock, and the Series B Preferred Stock. o "Liquidation Preference" with respect to each share of Series C Preferred Stock shall mean US $60 per share plus interest thereon from the Issue Date until redemption or conversion at the compounded rate of 20% per annum, but in no event more than an aggregate of $175.00 per share. o "Noncompliance Event" shall have the meaning assigned to such term in Section 7(b). o "Parity Stock" shall mean any capital stock of the Company ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Preferred Stock. o "Person" means an individual, a limited liability company, a limited liability partnership, a corporation, a partnership, an association, a joint stock company, a trust, joint venture, an unincorporated organization or any other entity or organization, domestic or foreign. o "Quarterly Dividend Payment Date" shall have the meaning assigned to such term in Section 2(a). o "Senior Preferred Stock" shall mean all shares of Series C Preferred Stock. o "Senior Stock" shall mean any capital stock of the Company ranking senior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock. There shall be no stock senior to the Series C Preferred Stock. o "Series A Preferred Stock" shall mean the Series A Convertible Preferred Stock, $0.05 par value per share, of the Company. o "Series B Preferred Stock" shall mean the Series B Convertible Preferred Stock, $0.05 par value per share, of the Company. o "Series C Preferred Stock" shall have the meaning assigned to such term in Section 1(a). o "Subsidiary" of any Person shall mean with respect to any Person, a corporation or other entity of which fifty (50%) percent or more of the voting power of the voting equity securities or equity interest, is owned, directly or indirectly, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" herein shall refer to a Subsidiary or Subsidiaries of the Company. SECTION 12. SECTION REFERENCES. All references herein to sections or subsections shall be to sections or subsections of this Certificate of Designation unless otherwise expressly provided. IN WITNESS WHEREOF, Tristar Corporation through its designated officer has caused this Certificate to be duly executed in its corporate name on September 3, 1998. TRISTAR CORPORATION BY:_____________________ Richard Howard, President SCRAP [IF REQUIRED: Pursuant to the affirmative vote of a majority of the stockholders of the Company at a meeting on June 1998 duly called, with a quorum present in person or by proxy and duly qualified, the stockholders of the Company adopted the following resolution creating a class and series of preferred stock designated as Series C Senior Convertible Preferred Stock, and on June 1998 the Board of Directors of the Company adopted the same resolution, and such resolution has not been modified and is in full force and effect on the date hereof:] EX-10.40 3 EXHIBIT 10.40 STOCK PURCHASE AGREEMENT DATED MAY 30, 1998 BY AND AMONG TRISTAR CORPORATION AND TRANSVIT DISTRIBUTION CORPORATION COVERING THE PURCHASE OF ALL OF THE CORPORATE CAPITAL OF TRISTAR DO BRASIL COSMETICOS, LTDA. TABLE OF CONTENTS 1. General Definitions.................................................. 1 1.1 Affiliate...................................................... 1 1.2 Governmental Authority......................................... 2 1.3 Governmental Requirement....................................... 2 1.4 Person......................................................... 2 1.5 Section........................................................ 2 1.6 Taxes.......................................................... 2 2. Purchase and Sale of the Stock; Closing Date......................... 2 2.1 Purchase and Sale.............................................. 2 2.2 Delivery and Endorsement of Certificates....................... 2 2.3 Closing Date................................................... 2 4. Representations and Warranties of Seller. .......................... 3 4.1 Incorporation.................................................. 3 4.2 Share Capital.................................................. 3 4.3 Subsidiaries................................................... 3 4.4 Effect of Agreement............................................ 3 4.5 Authorization.................................................. 3 4.6 Brokers and Finders............................................ 3 4.7 Debt of Target................................................. 3 5. Representations and Warranties of Purchaser.......................... 3 5.1 Incorporation.................................................. 4 5.2 Authorization.................................................. 4 5.3 Brokers and Finders............................................ 4 6. Conditions to Obligations of Purchaser............................... 4 6.1 Accuracy of Representations and Warranties and Fulfillment of Covenants................................................... 4 6.2 No Governmental Actions........................................ 4 6.3 Approval of Counsel............................................ 4 6.4 Transfer and Assignment Documents.............................. 4 7. Conditions Precedent to Obligations of Seller........................ 4 7.1 Accuracy of Representations and Warranties and Fulfillment of Covenants................................................... 4 7.2 Delivery of Purchase Price..................................... 5 7.3 Approval of Counsel............................................ 5 8. Expenses............................................................. 5 9. Further Actions...................................................... 5 10. Arbitration.......................................................... 5 11. Option to Repurchase; Exercise Price; Repurchase Closing Date........ 5 12. Notices.............................................................. 5 -i- 13. General Provisions................................................... 6 13.1 Governing Law; Interpretation; Section Headings................ 6 13.2 Severability................................................... 6 13.3 Entire Agreement............................................... 7 13.4 Binding Effect................................................. 7 13.5 Assignment..................................................... 7 13.6 Amendment; Waiver.............................................. 7 13.7 Counterparts................................................... 7 13.8 Telecopy Execution and Delivery................................ 7 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into as of the 30th day of May, 1998, by and among TRISTAR CORPORATION, a Delaware corporation ("SELLER") and TRANSVIT DISTRIBUTION CORPORATION, a Panamanian corporation ("PURCHASER"). W I T N E S S E T H : WHEREAS, Seller holds all of the corporate capital of Tristar do Brasil Cosmeticos, Ltda., a limited liability quota company organized under the laws of the Federative Republic of Brazil ("TARGET"), being 163,636 quotas (the "STOCK"), and desires to sell the Stock to Purchaser pursuant to this Agreement as hereinafter provided; and WHEREAS, Purchaser desires to acquire the Stock from Seller pursuant to this Agreement as hereinafter provided; and WHEREAS, in addition to the Stock, Seller (a) owns certain distribution rights with respect to its products to Chile, Argentina, Brazil, Paraguay and Uruguay (collectively, the "MERCOSUR") and (b) desires to assign such distribution rights to Purchaser as provided in this Agreement; and WHEREAS, in addition to the Stock, Purchaser desires to acquire from Seller Seller's distribution rights with respect to Seller's products in the Mercosur (the "DISTRIBUTION RIGHTS") as provided in this Agreement; and WHEREAS, Purchaser desires to grant to Seller an option to repurchase the Stock and Seller's Distribution Rights in accordance with the terms and provisions set forth herein; and WHEREAS, Seller wishes to obtain from Purchaser an option to repurchase the Stock and Seller's Distribution Rights in accordance with the terms and provisions set forth herein; and WHEREAS, Purchaser desires to obtain Seller's agreement (a) not to distribute any products in the Mercosur (the "NON-COMPETITION AGREEMENTS") and (b) to continue to sell its products to Target until May 31, 2001, under the same pricing structure as is in effect immediately prior to the date of this Agreement (the "SUPPLY AGREEMENTS"); and WHEREAS, the parties hereto desire to set forth certain representations, warranties and covenants made by each to the other as an inducement to the execution and delivery of this Agreement, and to set forth certain additional agreements related to the transactions contemplated hereby. NOW, THEREFORE, for and in consideration of the premises, the mutual representations, warranties and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 2. General Definitions. For purposes of this Agreement, the following terms shall have the respective meanings set forth below: 2.1. AFFILIATE. "AFFILIATE" of any Person shall mean any Person Controlling, Controlled by or under common Control with such Person. -1- 2.2. GOVERNMENTAL AUTHORITY. "GOVERNMENTAL AUTHORITY" shall mean any and all foreign, federal, state or local governments, governmental institutions, public authorities and governmental entities of any nature whatsoever, and any subdivisions or instrumentalities thereof, including, but not limited to, departments, boards, bureaus, commissions, agencies, courts, administrations and panels, and any divisions or instrumentalities thereof, whether permanent or ad hoc and whether now or hereafter constituted or existing. 2.3. GOVERNMENTAL REQUIREMENT. "GOVERNMENTAL REQUIREMENT" shall mean any and all laws (including, but not limited to, applicable common law principles), statutes, ordinances, codes, rules, regulations, interpretations, guidelines, directions, orders, judgments, writs, injunctions, decrees, decisions or similar items or pronouncements, promulgated, issued, passed or set forth by any Governmental Authority. 2.4. PERSON. "PERSON" shall mean any natural person, any Governmental Authority and any entity the separate existence of which is recognized by any Governmental Authority or Governmental Requirement, including, but not limited to, corporations, partnerships, joint ventures, joint stock companies, trusts, estates, companies and associations, whether organized for profit or otherwise. 2.5 SECTION. "SECTION" shall mean the section of this Agreement referred to by number. 2.6. TAX. "TAX" and "TAXES" shall mean any and all income, excise, franchise or other taxes and all other charges or fees imposed or collected by any Governmental Authority or pursuant to any Governmental Requirement, and shall also include any and all penalties, interest, deficiencies, assessments and other charges with respect thereto. 3. PURCHASE AND SALE OF THE STOCK; CLOSING DATE 3.1 "PURCHASE AND SALE". Subject to the terms and conditions herein contained, Seller agrees (a) to sell, assign, transfer and deliver to Purchaser at the Closing (as hereinafter defined) all right, title and interest in and to the Stock, the Stock being all of the issued and outstanding capital stock of Target and the Distribution Rights and (b) to be subject to the Supply Agreement and the Non-Competition Agreements. Subject to the terms and conditions herein contained, Purchaser agrees to purchase from Seller the Stock and the Distribution Rights to pay at the Closing the Purchase Price (as hereinafter defined) pursuant to the provisions of SECTION 3 below. 3.2 "DELIVERY AND ENDORSEMENT OF CERTIFICATES". At the Closing, Seller shall deliver to Purchaser certificates representing the Stock, duly endorsed in blank by Seller, or accompanied by stock powers duly executed in blank by Seller, and with all necessary transfer tax and other revenue stamps, acquired at Seller's expense, affixed and canceled. Seller agrees to cure any deficiencies with respect to the endorsements of the certificates representing the Stock or with respect to the stock powers accompanying any such certificates. 3.3 "Closing Date". Subject to the terms and conditions contained herein, the consummation of transactions referred to above shall take place (the "Closing") on or before May 30, 1998, at the offices of Fulbright & Jaworski, L.L.P. in San in San Antonio, Texas, or at such other time, date and place as Purchaser and Seller shall in writing designate (the "CLOSING DATE"). 4. PURCHASE PRICE AND PAYMENT. The aggregate consideration for the Stock, the Distribution Rights, the Non-Competition Agreements and the Supply Agreements (the "PURCHASE PRICE") an aggregate reduction of $2,800,000 to the principal amounts owed by Seller to Purchaser pursuant to the -2- terms of (a) that one certain promissory note dated August 31, 1993 in the original principal amount of $1,500,000 executed by Seller and payable to the order of Nevell Investment S.A. ("NEVELL"), (b) that one certain promissory note dated April 25, 1994 in the original principal amount of $2,600,000 executed by Seller and payable to the order of Nevell and (c) that one certain promissory note dated December 13, 1994 in the original principal amount of $4,000,000 executed by Seller and payable to the order of Nevell (said promissory notes, collectively, the "TRISTAR INDEBTEDNESS"). 5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Purchaser as follows: 5.1 INCORPORATION. Target is a limited liability quota company organized under the laws of the Federative Republic of Brazil. 5.2 SHARE CAPITAL. The corporate capital of Target consists of 163,636 quotas. There are no outstanding subscriptions, options, warrants, calls, commitments, obligations or agreements relating to any of the corporate capital of Target. Seller owns all of the Stock free and clear of all liabilities, liens, encumbrances, pledges, trusts, voting trusts or stockholders' agreements, equities, charges, options, conditional sale or title retention agreements, covenants, restrictions, reservations, commitments, obligations or other burdens or encumbrances of any nature whatsoever, and the consummation of the purchase and sale contemplated by this Agreement will transfer to Purchaser title to the Stock free and clear of any such items. 5.3 SUBSIDIARIES. Target does not, directly or indirectly, own or control any capital stock, bonds or other securities of, or have any proprietary interest in, any corporation, association, partnership, firm or business organization or enterprise, nor does it directly or indirectly control the management of any such entities, nor does it have any obligation to acquire any such interest in the future. 5.4 EFFECT OF AGREEMENT. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not (a) result in any breach of any of the terms or conditions of the organizational documents of Target or (b) conflict with, or result in a breach of or default under, the terms of any agreement, contract, indenture or other instrument to which the Target is a party or to which any of its property is subject. 5.5 AUTHORIZATION. Seller has full legal right, power and authority to enter into and deliver this Agreement and to consummate the transactions set forth herein and to perform all the terms and conditions hereof to be performed by Seller. This Agreement has been duly executed and delivered by Seller and is a legal, valid and binding obligation of Seller enforceable in accordance with its terms, except as limited by applicable bankruptcy, moratorium, insolvency or other laws affecting generally the rights of creditors or by principles of equity. 5.6 BROKERS AND FINDERS. No broker or finder has acted for Target or Seller in connection with this Agreement or the transactions contemplated by this Agreement and no broker or finder is entitled to any brokerage or finder's fee or to any commission in respect thereof based in any way on agreements, arrangements or understandings made by or on behalf of Seller or Target. 5.7 DEBT OF TARGET. To Seller's knowledge, Target has no material debt or obligations of any kind, fixed or contingent, matured or unmatured, other than those obligations that have ben previously disclosed to Purchase by Seller. 6. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to Seller as follows: -3- 6.1 INCORPORATION. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the British Virgin Islands. 6.2 AUTHORIZATION. Purchaser has full legal right and corporate power to enter into and deliver this Agreement and to consummate the transactions set forth herein and to perform all the terms and conditions hereof to be performed by it. This Agreement has been duly executed and delivered by Purchaser and is a legal, valid and binding obligation of Purchaser enforceable in accordance with its terms, except as limited by applicable bankruptcy, moratorium, insolvency or other laws affecting generally the rights of creditors or by principles of equity. 6.3 BROKERS AND FINDERS. No broker or finder has acted for Purchaser in connection with this Agreement or the transactions contemplated by this Agreement and no broker or finder is entitled to any brokerage or finder's fee or to any commission in respect thereof based in any way on agreements, arrangements or understandings made by or on behalf of Purchaser. 7. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of Purchaser hereunder to proceed to closing are, at the option of Purchaser, subject to the satisfaction, on or prior to the Closing Date, of the following conditions (any of which may be waived by Purchaser in its sole discretion): 7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND FULFILLMENT OF COVENANTS. The representations and warranties of Seller contained in this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date. Each and all of the agreements and covenants of Seller to be performed on or before the Closing Date pursuant to the terms hereof shall have been performed. 7.2 GOVERNMENTAL ACTIONS. No action or proceeding before a Governmental Authority shall have been instituted or threatened to restrain or prohibit the transactions contemplated by this Agreement. No Governmental Authority shall have taken any other action as a result of which the management of Purchaser reasonably deems it inadvisable to proceed with the transactions contemplated by this Agreement. 7.3 APPROVAL OF COUNSEL. All actions, proceedings, instruments and documents required or incidental to carrying out this Agreement and all other related legal matters shall have been approved by Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel to Purchaser. 7.4 TRANSFER AND ASSIGNMENT DOCUMENTS. Seller shall have delivered to Purchaser all documents reasonably necessary or required to effectively transfer and assign the Stock and the Distribution Rights to Purchaser, such transfers and assignments to convey title to the Stock to Purchaser, free and clear of all liens and encumbrances whatsoever, and to be in form and substance reasonably satisfactory to Purchaser and its counsel. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligations of Seller hereunder are, at its option, subject to the satisfaction, on or prior to the Closing Date, of the following conditions (any of which may be waived by Seller, in its sole discretion): 8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND FULFILLMENT OF COVENANTS. The representations and warranties of Purchaser contained in this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date. Each of the agreements and covenants of Purchaser to be performed on or before the Closing Date shall have been performed. -4- 8.2 DELIVERY OF PURCHASE PRICE. Purchaser shall delivered to Seller all documents, in form and substance reasonably acceptable to Seller's counsel, necessary to evidence the aggregate reduction of $2,800,000 in the principal amounts owed by Seller pursuant to the terms of the Tristar Indebtedness. 8.3 APPROVAL OF COUNSEL. All actions, proceedings, instruments and documents required or incidental to carrying out this Agreement and all other related legal matters shall have been approved by Fulbright & Jaworski, L.L.P., counsel to Seller. 9. EXPENSES. Whether or not the transactions contemplated hereby are consummated, each of the parties will pay all costs and expenses of its performance of and compliance with this Agreement. 10. FURTHER ACTIONS. From time to time, at the request of any party hereto, the other parties hereto shall execute and deliver such instruments and take such action as may be reasonably requested to evidence the transactions contemplated hereby. 11. ARBITRATION. The parties agree that any dispute or controversy arising out of or in connection with this Agreement or any alleged breach hereof shall be settled by arbitration in San Antonio, Texas pursuant to the rules of the State of Texas. If Purchaser, on the one hand, and Seller, on the other hand, cannot jointly select a single arbitrator to determine the matter, one arbitrator shall be chosen by Purchaser, on the one hand, and Seller, on the other hand (or, if either fails to make a choice, by a court of competent jurisdiction on behalf of such party), and the two arbitrators so chosen will select a third. The decisions of the single arbitrator jointly selected by the parties, or, if three arbitrators are selected, the decision of any two of them, will be final and binding upon the parties and the judgment of a court of competent jurisdiction may be entered thereon. Each party shall pay the fees and expenses of its chosen arbitrator, and the fees and expenses of the third arbitrator shall be shared equally by the parties. 12. OPTION TO REPURCHASE EXCERSISE PRICE; REPURCHASE CLOSING DATE. Purchaser hereby grants to Seller the option to repurchase the Stock and the Distribution Rights and to terminate the Non-Competition Agreements (the "REPURCHASE OPTION") on the same terms and conditions as Purchaser purchased the same from Seller hereunder; PROVIDED, HOWEVER, the purchase price for the Stock and the Distribution Rights and the termination of the Non-Competition Agreements (the "REPURCHASE PRICE") shall be an amount equal to the sum of (a) the difference between (i) $2,800,000 MINUS (ii) the net book value of Target as of the Closing Date, PLUS (b) interest at the rate of ten percent (10%) per annum on (i) such difference from the Closing Date until the closing of the repurchase of the Stock and Distribution Rights and the termination of the Non-Competition Agreements (the "REPURCHASE CLOSING") and (ii) any additional investment(s) made by Purchaser to Target after the Closing Date from the from date of such investment(s) until the Repurchase Closing PLUS (c) the net book value of Target as of the Repurchase Closing. The Repurchase Option shall be exercisable at any time prior to the fifth anniversary of this Closing Date by written notice from Seller to Purchaser. If Seller exercises the Repurchase Option, the Repurchase Closing shall take place at the offices of Fulbright & Jaworski, L.L.P., 300 Convent, Suite 2200, San Antonio, Texas commencing at 10:00 a.m. local time not later than 60 days following Seller's exercise of the Option (the "REPURCHASE CLOSING DATE"). 13. NOTICES. All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, given by prepaid telex or telegram or by facsimile or other similar instantaneous electronic transmission device or mailed first class, postage prepaid, certified United States mail, return receipt requested, as follows: -5- (a) If to Purchaser, at: Transvit Distribution Corporation P.O. Box 7707 Dubai, U.A.E. Attention: B.J. Harid Facsimile No. (011) 9714 556885 With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 300 Convent, Suite 1500 San Antonio, Texas 78205 Attention: Cecil Schenker Facsimile No. (210) 224-035 (b) If to Seller, at: Tristar Corporation 12500 San Pedro Avenue, Suite 500 San Antonio, TX 78216 Attention: President Facsimile No. (210) 402-2216 With a copy to: Fulbright & Jaworski L.L.P. 300 Convent Street, Suite 2200 San Antonio, Texas 78205 Attention: Phillip M. Renfro Facsimile No. (210) 270-7205 provided that any party may change its address for notice by giving to the other party written notice of such change. Any notice given under this SECTION 15 shall be effective (i) if delivered personally, when delivered, if sent by telex or telegram or by facsimile or other similar instantaneous electronic transmission device, 24 hours after sending and (ii) if mailed, 48 hours after mailing. 14. GENERAL PROVISIONS 14.1 GOVERNING LAW; INTERPRETATION; SECTION. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. The section headings contained herein are for purposes of convenience only, and shall not be deemed to constitute a part of this Agreement or to affect the meaning or interpretation of this Agreement in any way. 14.2 SEVERABILITY. Should any provision of this Agreement be held unenforceable or invalid under the laws of the United States of America or the State of Texas, or under any other applicable laws of any other jurisdiction, then the parties hereto agree that such provision shall be deemed modified for -6- purposes of performance of this Agreement in such jurisdiction to the extent necessary to render it lawful and enforceable, or if such a modification is not possible without materially altering the intentions of the parties hereto, then such provision shall be severed herefrom for purposes of performance of this Agreement in such jurisdiction. The validity of the remaining provisions of this Agreement shall not be affected by any such modification or severance, except that if any severance materially alters the intentions of the parties hereto as expressed herein (a modification being permitted only if there is no material alteration), then the parties hereto shall use commercially reasonable effort to agree to appropriate equitable amendments to this Agreement in light of such severance, and if no such agreement can be reached within a reasonable time, any party hereto may initiate arbitration as provided in SECTION 13 above. 14.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No representation, promise, inducement or statement of intention has been made by any party hereto which is not embodied in this Agreement, and no party hereto shall be bound by or liable for any alleged representation, promise, inducement or statement of intention not so set forth. 14.4 SURVIVABILITY; BINDING EFFECT. The representations and warranties set forth herein shall survive the consummation of this Agreement. All the terms, provisions, covenants and conditions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. 14.5 ASSIGMENT. Except as specifically permitted herein, this Agreement and the rights and obligations of the parties hereto shall not be assigned or delegated by either party hereto without the prior written consent of the other party hereto. 14.6 AMMENDMENT; WAIVER. This Agreement may be amended, modified, superseded or canceled, and any of the terms, provisions, representations, warranties, covenants or conditions hereof may be waived, only by a written instrument executed by all parties hereto, or, in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right to enforce the same. No waiver by any party of any condition contained in this Agreement, or of the breach of any term, provision, representation, warranty or covenant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach, or as a waiver of any other condition or of the breach of any other term, provision, representation, warranty or covenant. 14.7 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of the parties reflected hereon as signatories. 14.8 TELECOPY EXECUTION AND DELIVERY. A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties hereto, and an executed copy of this Agreement may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of either party hereto, all parties hereto agree to execute an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof. -7- [signatures on next page] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PURCHASER: TRANSVIT DISTRIBUTION CORPORATION By:______________________________ Name:____________________________ Title:___________________________ SELLER: TRISTAR CORPORATION By:______________________________ Name:____________________________ Title:___________________________ ACCEPTED AND AGREED TO: NEVELL INVESTMENTS, S.A. By:____________________________ Name:__________________________ Title:_________________________ EX-10.41 4 EXHIBIT 10.41 March 1, 1998 Tristar Corporation 12500 San Pedro Avenue, Suite 500 San Antonio, Texas 78216 Re: Promissory Note dated August 31, 1993, of Tristar Corporation, payable to Nevell Investment S. A. in the original amount of $1,500,000 Promissory Note dated April 25, 1994, of Tristar Corporation, payable to Nevell Investment S. A. in the original principal amount of $2,500,000 Promissory Note dated December 18, 1994, of Tristar Corporation, payable to Nevell Investment S. A. in the original principal amount of $4,000,000 Gentlemen: This is to verify our agreement, in consideration for $10 and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and conferred, that the interest rates on the refinanced Promissory Notes shall be and have been reduced to the extent that an aggregate of $1,163,708 of interest shall be due upon payment in full of such Promissory Notes. Please verify your agreement to the foregoing by executing this letter in the space provided below. NEVELL INVESTMENT S.A. By: ____________________________ AGREED TO this _____ day of July, 1998 TRISTAR CORPORATION By: _____________________________ EX-10.42 5 EXHIBIT 10.42 PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP INVESTMENT AGREEMENT by and between PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP and TRISTAR CORPORATION September 3, 1998 TABLE OF CONTENTS PAGE ---- ARTICLE I. Sale and Transfer of Stock....................................1 1.1 Series C Senior Convertible Preferred Stock............................1 1.2 Purchase Price, and Payment............................................3 1.3 Convertible into Common................................................3 1.4 Cumulative Dividend....................................................4 1.5 Liquidation............................................................5 1.6 Reservation of Shares; Shares to be Fully Paid.........................5 1.7 Anti-Dilution Rights...................................................5 1.8 Percentage of Fully Diluted Shares.....................................7 1.9 Voting Rights and Prohibitive Covenants................................7 1.10 Voting Agreements Concerning Directors...............................8 1.11 Transfer Agent......................................................10 1.12 Use of Proceeds.....................................................10 1.13 Right of First Refusal..............................................12 1.14 Terms of Co-Investment..............................................12 1.15 Terms of Financing..................................................12 1.16 Notice of Intended Acquisitions.....................................13 1.17 Redemption..........................................................13 ARTICLE II. Registration Rights.........................................15 2.1 Demand Registration...................................................15 2.2 Piggyback Registration................................................15 2.3 Registration Covenants................................................16 2.4 Blue Sky Registration.................................................18 2.5 Deregistration........................................................18 2.6 Post-Effective Amendments.............................................18 2.7 Right to Delay........................................................18 2.8 Selection of Underwriters.............................................19 2.9 Principal Shareholders................................................19 2.10 Intentionally Omitted...............................................19 2.11 Indemnification by Company re Registration Rights...................19 2.12 Indemnification by Holder...........................................20 2.13 Notice of Indemnity and Defense.....................................21 ARTICLE III. Co-Sale Provisions..........................................21 3.1 Third-Party Offer and Notice..........................................21 3.2 Co-Sale Right of Participation........................................22 3.4 Notice of Intent to Participate in Co-Sale............................22 ARTICLE IV. Representations and Warranties of the Company...............23 4.1 Organization, Qualification and Corporate Power.......................23 4.2 Subsidiaries..........................................................23 4.3 Authorization of Agreement............................................24 4.4 Validity..............................................................25 4.5 Government Approval...................................................25 4.6 Capitalization........................................................25 Investment Agreement Page ii 4.7 Annual Report and the Financial Statements............................26 4.8 Patents, Trademarks, Etc..............................................27 4.9 Taxes.................................................................28 4.10 Approvals...........................................................28 4.11 Litigation..........................................................29 4.12 Schedule of Documents...............................................29 4.13 No Defaults.........................................................30 4.14 Lack of Felonies....................................................30 4.15 No Judgments........................................................31 4.16 Insurance...........................................................31 4.17 No Brokers..........................................................31 4.18 Loans and Liens.....................................................31 4.19 Solvency............................................................32 4.20 Registration Rights.................................................32 4.21 Compliance with Securities Laws.....................................32 4.22 Transfer Restrictions...............................................32 4.23 Related Party Transactions..........................................33 4.24 Miscellaneous.......................................................33 4.25 Additional Representations..........................................33 4.26 Use of Proceeds.....................................................35 4.27 Industry Specific Regulations.......................................35 4.28 Wages and Salary....................................................36 4.29 ERISA...............................................................36 4.30 Core Sheth Letter of Credit.........................................36 4.31 Protest IRS Claim for Disallowance..................................36 4.32 No Restrictions on Dividends........................................37 4.33 Complete Disclosure.................................................37 ARTICLE V. Representations and Warranties of the Pioneer Partnership....37 5.1 Organization..........................................................37 5.2 No Breach.............................................................37 5.3 Authority for and Binding Nature of Agreement.........................38 5.4 Brokers...............................................................38 5.5 Securities Laws Matters...............................................38 5.6 Additional Matters....................................................41 ARTICLE VI. Covenants...................................................41 6.1 Financial.............................................................41 6.2 Access................................................................42 6.3 Books of Record and Account...........................................42 6.4 Membership on Board...................................................43 6.5 Stock Option Plan.....................................................44 6.6 Rule 144 Compliance...................................................44 6.7 Undertaking to Register its Securities................................45 6.8 Undertaking to File 34 Act Filings and to be Listed on NASDAQ.........45 6.9 Dividend Restriction Waiver...........................................45 6.10 Core Sheth Letter of Credit.........................................45 6.11 Signing Obligations.................................................46 Investment Agreement Page iii 6.12 No Cost Licenses....................................................46 6.13 SEC Filings.........................................................46 6.14 Blue Sky............................................................46 6.15 No Breach...........................................................47 ARTICLE VII. Conditions Precedent to the Obligations of...................47 the Pioneer Partnership to Close............................................47 7.1 Representations and Warranties........................................47 7.2 Covenants.............................................................47 7.3 No Actions............................................................48 7.4 Consents, Licenses and Permits........................................48 7.5 Certificate...........................................................48 7.6 Legal Opinion.........................................................48 7.7 No Material Adverse Change............................................49 7.8 Agreements with Principals............................................49 7.9 Key Person Insurance..................................................49 7.10 Patents.............................................................49 7.11 Approval of Counsel.................................................50 7.12 Consents, Licenses and Permits......................................50 7.13 Additional Documents................................................50 ARTICLE VIII. Conditions Precedent to the Obligations of....................50 the Company to Close........................................................50 8.1 Representations and Warranties........................................50 8.2 Covenants.............................................................51 8.3 No Actions............................................................51 8.4 Additional Documents..................................................51 8.5 Approval of Counsel...................................................51 ARTICLE IX. Closing.....................................................52 9.1 Location..............................................................52 9.2 Items to be Delivered by the Company..................................52 9.3 Items to be Delivered by the Pioneer Partnership......................53 9.4 Items to be Delivered by the Company at Subsequent Closings...........53 9.5 Items to be Delivered by the Pioneer Partnership at Subsequent Closings.............................................................54 ARTICLE X. Survival of Representations; Indemnification; Fees...........54 10.1 Survival............................................................54 10.2 Indemnification.....................................................54 10.3 Defense of Claims...................................................55 10.4 Rights without Prejudice............................................55 ARTICLE XI. Fees...........................................................55 11.1 Investment Banking Fees.............................................55 11.2 Expenses............................................................56 11.3 Legal Fees..........................................................56 11.4 Accounting Fees.....................................................56 11.4 Break-Up Fee........................................................56 ARTICLE XII. Termination and Waiver.....................................56 12.1 Termination.........................................................56 12.2 Waiver..............................................................57 Investment Agreement Page iv ARTICLE XIII. Miscellaneous Provisions..................................58 13.1 Expenses............................................................58 13.2 Modification, Termination or Waiver.................................58 13.3 Notices.............................................................58 13.4 Binding Effect and Assignment.......................................59 13.5 Entire Agreement....................................................59 13.6 Calendar Days.......................................................59 13.7 Exhibits............................................................59 13.8 Governing Law.......................................................60 13.9 Consent to Jurisdiction.............................................60 13.10 Counterparts........................................................60 13.11 Section Headings....................................................60 13.12 Gender..............................................................60 13.13 Controlling Document................................................60 13.14 Use of Term "Pioneer Partnership"...................................60 LIST OF EXHIBITS EXHIBIT* TITLE SECTION ---------- ------- --------- Exhibit 1.1 Series C Senior Convertible Preferred Stock...........1.1 Exhibit 4.7A Annual Report and the Financial Statements............4.7 Exhibit 4.7B Annual Report and the Financial Statements............4.7 Exhibit 4.8 Patents, Trademarks, Etc..............................4.8 Exhibit 4.9 Taxes.................................................4.9 Exhibit 4.11 Litigation...........................................4.11 Exhibit 4.12 Schedule of Documents................................4.12 Exhibit 4.18 Loans and Liens......................................4.18 Exhibit 4.23 Related Party Transactions...........................4.23 Exhibit 4.28 Wages and Salary.....................................4.28 Exhibit 7.7 No Material Adverse Change............................7.7 * Please note that the exhibits referenced within this Agreement utilize the title "Schedule" rather than "Exhibit", but are intended to correspond to the matching reference within the Agreement. INVESTMENT AGREEMENT INVESTMENT AGREEMENT dated September 3, 1998 ("AGREEMENT") by and between PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP, a Connecticut limited partnership with offices at 651 Day Hill Road, Windsor, Connecticut 06095 (the "PIONEER PARTNERSHIP"), AND TRISTAR CORPORATION, a Delaware corporation with offices at 12500 San Pedro Avenue, Suite 500, San Antonio, Texas 78216 (the "COMPANY"). WHEREAS, the Company desires to obtain funds to finance its operations, expand its marketing activities, purchase and install lip and eye pencil and other manufacturing equipment, make payments to vendors, acquire and/or initiate new product brands, acquire other companies which are accretive to its existing business and for, working capital purposes. WHEREAS, the Pioneer Partnership desires to provide funds to the Company for such purposes on the terms and conditions set forth below. NOW THEREFORE, in consideration of the investment to be made, mutual benefits to be derived hereby and the representations, warranties, covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Pioneer Partnership agree as follows: ARTICLE I. SALE AND TRANSFER OF STOCK 1.1 SERIES C SENIOR CONVERTIBLE PREFERRED STOCK. (a1) Upon the terms and subject to the conditions hereinafter set forth, at the various closings (as hereinafter defined and set forth), the Company shall issue, sell, transfer and deliver to the Pioneer Partnership an aggregate of one hundred thousand (*100,000*) shares of the Company's Series C Senior Convertible Preferred Stock, $.01 par value (the "PREFERRED STOCK") at the Purchase Price set forth in Section 1.2 hereof; the Preferred Stock shall have the terms and be issued subject to the conditions as set forth herein and in the Series C Certificate of Designation to be filed and recorded with the Secretary of State of the State of Delaware upon the occurrence of the First Closing as set forth below. Investment Agreement Page 2 (b1) At the first closing ("FIRST CLOSING") on September 3, 1998, the Company shall issue, sell, transfer and deliver to the Pioneer Partnership seventy-eight thousand three hundred thirty-three (*78,333*) shares of Preferred Stock upon payment of the Purchase Price therefor and satisfaction of the conditions contemplated herein. (b2) At one or more subsequent closings ("SUBSEQUENT CLOSINGS"), the Company shall issue, sell, transfer and deliver to the Pioneer Partnership up to an additional twenty-one thousand six hundred sixty-seven (*21,667*) shares of Preferred Stock upon payment of the Purchase Price therefor and satisfaction of the conditions contemplated herein and upon the conditions to be determined in accordance herewith. (b2) At the First Closing, the Company shall issue one hundred twenty-five thousand (125,000) warrants each to purchase one (1) share of Common Stock, as defined in ss.1.3 hereof, at a price four ($4.00) dollars per share, subject to adjustment as stated therein. The warrants shall be immediately detachable and transferable; the warrants shall be exercisable during the sixty (60) month period commencing on the date of the First Closing. (c) At the First Closing, the Company shall reserve twenty-one thousand six hundred sixty-seven (*21,667*) shares to be delivered in whole or in part at the Second Closing. (d) Upon sale and issuance to the Pioneer Partnership each share of Preferred Stock shall be free and clear of all manner of liens, pledges, encumbrances, charges and claims thereon. (e) Certificates evidencing the Preferred Stock shall be delivered by the Company to the Pioneer Partnership at each Closing. Such certificates shall also be accompanied by evidence satisfactory to the Pioneer Partnership of the Company's payment of any applicable transfer and franchise taxes. Said stock will not be issued in a transaction registered with the U.S. Securities and Exchange Commission ("COMMISSION") and shall, therefore, be restricted from resale to the public. The Preferred Stock Certificate shall be in the form annexed hereto as EXHIBIT 1.1. Investment Agreement Page 3 1.2 PURCHASE PRICE, AND PAYMENT. The Purchase Price for the Preferred Stock to be sold to the Pioneer Partnership pursuant to this Investment Agreement shall be sixty ($60) dollars per share, aggregating $6,000,000. Upon the occurrence and consummation of the First Closing, and in consideration therefor, the Pioneer Partnership shall pay the Company at that Closings, by wire transfer or by check, the sum of four million six hundred ninety-nine thousand nine hundred eighty ($4,699,980.00) dollars as full consideration for its subscription therefor; upon the occurrence and consummation of all of the Subsequent Closings, if so consummated, and in consideration therefor, the Pioneer Partnership shall pay the Company at the Subsequent Closings, by wire transfer or by check, the aggregate sum of one million three hundred thousand ($1,300,020.00) dollars as full consideration for its subscription therefor. Each Subsequent Closing shall be in minimum investment amounts of five hundred thousand ($500,000) dollars. The Subsequent Closings shall all occur no later than one year from the date hereof and upon forty-five (45) days of notice by the Company; such notice period may be decreased with the consent of the Pioneer Partnership. No Subsequent Closing shall occur unless the Company has satisfied each and every term of this Agreement. Failure of the Pioneer Partnership to close each Subsequent Closing within such forty-five (45) days shall entitle the Company to bring an action to enforce the remedy of specific performance; the Pioneer Partnership shall have the right to cure without penalty of any kind by completing the Subsequent Closing on or before the date an answer is due in litigation. See also Article VII for the requirements of each Closing. Investment Agreement Page 4 1.3 CONVERTIBLE INTO COMMON. Each share of Preferred Stock shall be convertible at the option of the holder at any time and from time to time. The number of shares of the Company's common stock, $.01 par value (the "COMMON STOCK"), that shall be issued upon conversion of each share of Preferred Stock shall equal $60 divided by the Conversion Price (as defined below). The Conversion Price shall be $5.4375 per share (the "CONVERSION PRICE"). The Conversion Price and number of shares of Common Stock issuable upon conversion of the Preferred Stock will be subject to adjustment in certain circumstances upon any recapitalizations, including but not limited to stock splits, readjustments or reclassifications, to protect against dilution, as set forth in more detail in Sections 1.7 hereof. 1.4 CUMULATIVE DIVIDEND. Holders of the Preferred Stock shall also be entitled to a cumulative cash dividend of $4.80 per share annually; the dividend shall be payable quarterly in arrears ($1.20 per share) calculated on a 360-day year consisting of twelve 30-day months, and payable immediately out of the assets of the Company legally available therefor. The Preferred Stock dividend shall be paid before any dividend shall be set apart or paid on the Common Stock for such quarter or for any other class of capital stock which has a preference junior to this Preferred Stock. The Series C Preferred Stock shall be senior to all other classes of preferred stock. If less than the full preferential dividend is paid (as a partial payment or if no dividend is paid) to the holders of the Preferred Stock in any quarter, the unpaid amount shall accumulate and be added to the preferential dividends due in any subsequent quarter, in which case such unpaid amounts shall be paid first and the newly accrued dividends of the then current quarter, to the extent are unpaid, shall accumulate until paid. No dividends shall be paid to the holders of the Common Stock if any dividends are unpaid on the Preferred Stock. No class of capital stock shall be paid any dividend unless and until all dividends accrued and unpaid are paid on the Preferred Stock are paid in full. The dividends may be paid, in whole or in part, by the issuance of additional shares of Series C Preferred Stock upon the same terms as cash dividends payable hereunder except such shares shall bear a cumulative cash dividend of $7.80 per share annually. In addition, if there is a Dividend Arrearage (as defined in the Certificate of Designation, as hereinafter defined) an Additional Dividend (as defined in the Certificate of Designation, as hereinafter defined) shall be paid as set forth Company's Certificate of Designation creating the Preferred Stock (the "CERTIFICATE OF DESIGNATION"). Investment Agreement Page 5 1.5 LIQUIDATION. In cases of the voluntary or involuntary liquidation, bankruptcy, receivership, dissolution or winding up of the Company, holders of shares of the Preferred Stock shall be entitled to receive a liquidation preference equal to sixty ($60.00) dollars per share plus interest thereon from the date of date of issue until redemption or conversion at the compounded rate of 20% per annum, but in no event more than an aggregate of $175.00 per share (the "LIQUIDATION PREFERENCE") plus an amount equal to any accrued and unpaid dividends to the payment date, before any payment or distribution is made to the holders of Common Stock or any other securities of the Company. Neither a consolidation or merger of the Company with another corporation nor a sale or transfer of all or part of the Company's assets for cash, securities or other property will be considered a liquidation, dissolution or winding up of the Company, provided that all accrued but unpaid dividends on the Preferred Stock will be due and paid upon the occurrence of such event or upon the closing of a public offering of the Company's securities. 1.6 RESERVATION OF SHARES; SHARES TO BE FULLY PAID. As of the date hereof, the Company has reserved, free from preemptive rights, out of its authorized but unissued shares of Common Stock, or out of shares of Common Stock held in its treasury, sufficient shares to provide for the conversion of the Preferred Stock. Before taking any action which would cause an adjustment reducing the conversion value below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Company shall promptly take all corporate action which may be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted conversion price. The Company covenants that all shares of Common Stock which may be issued upon conversion of the Preferred Stock will upon issue be fully paid and nonassessable. Investment Agreement Page 6 1.7 ANTI-DILUTION RIGHTS. In order to allow the holders of the Preferred Stock to maintain their PRO RATA share of the Company's capital stock on a fully diluted basis, except as set forth in the next sentence of this ss.1.7 and solely with respect to this ss.1.7, the holders of the Preferred Stock shall be entitled, as of right, to purchase or subscribe for PRO RATA any stock of the Company to be issued by reason of an increase of the issued stock of the Company, or the creation a new class of securities, and the issuance of such securities (collectively referred to as "NEW SECURITIES"). The anti-dilution rights set forth hereinabove shall not be applicable to, and the definition of "New Securities" shall not include, the following securities (the "EXEMPT SECURITIES") (i) securities issued to employees, consultants or directors of the Company pursuant to any stock option plan or stock purchase or stock bonus arrangement approved by the Board of Directors, up to a maximum amount as provided in Section 6.5, (ii) securities offered to the public pursuant to a registration statement filed pursuant to the Securities Act, and (iii) securities issued pursuant to an acquisition of another corporation by the Company by merger, purchase of all or substantially all of the assets or other reorganization whereby the Company owns not less than fifty-one (51%) percent of the voting stock of such corporation. (a) NOTICE AND EXERCISE OF ANTI-DILUTION RIGHTS. In the event the Company proposes to issue New Securities, it shall give the holders of the Preferred Stock written notice of its intention, describing the type of New Securities, the price and general terms upon which the Company proposes to issue the same. In exercising such anti-dilutive rights, the holders of the Preferred Stock shall be given thirty (30) days from the receipt of such notice to agree to purchase or subscribe for such New Securities, at the same price and on the same terms, in the proportion that the number of shares of Common Stock that underlies the Preferred Stock, if converted, bears to the sum of (1) the total number of shares of Common Stock issued and outstanding and (2) the number of such underlying shares. Investment Agreement Page 7 (b) OVER-ALLOTMENT. The holders of the Preferred Stock shall have the right of over-allotment such that, in the event other holders having anti-dilutive rights fail to exercise such right to purchase all of the New Securities, the remaining holders of the Preferred Stock may purchase the non-purchasing holders' New Securities not so purchased, on a PRO RATA basis, based upon the respective fully diluted Common Stock ownership in the Company of each such remaining holder of Preferred Stock, within fifteen (15) days from the date the non-purchasing holders fail to exercise their rights hereunder. The holders of the Preferred Stock shall be required to commit in writing, at the time they exercise their anti-dilution rights, the maximum amount of over-allotment shares they agree to purchase, if any become available. 1.8 PERCENTAGE OF FULLY DILUTED SHARES. The 100,000 shares of Preferred Stock to be delivered by the Company to the Pioneer Partnership as set forth above shall, if converted, constitute three and eight-tenths (3.8%) of one percent of the fully diluted issued and outstanding Common Stock of the Company as of the Closing Date, as hereinafter defined, with such percentage including conversion of all of the Preferred Stock issuable hereunder into Common Stock. The term "FULLY DILUTED" as used in this Agreement shall mean the number of shares of the Common Stock of the Company to be outstanding upon the exercise or conversion of all warrants, options or other securities convertible into the Common Stock of the Company. 1.9 VOTING RIGHTS AND PROHIBITIVE COVENANTS. The Preferred Stock shall have full voting rights and shall be voted together with the Common Stock as one class, and the shares of Preferred Stock shall entitle the holder thereof to the number of votes as if the Preferred Stock had been converted into shares of Common Stock on the appropriate record date. So long as an aggregate of 75,000 shares or more of the Common Stock, directly or through the possible conversion of Preferred Stock, all on a fully diluted basis, are owned by the Pioneer Partnership or its limited partners, collectively, the Company shall not without the prior written consent of the Pioneer Partnership or its limited partners (in the event of a distribution of such securities to such limited partners) which consent shall not be unreasonably withheld or unduly delayed (i) amend, alter or repeal any provision of the Certificate of Incorporation or the bylaws of the Company so as to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Preferred Stock, (ii) except for the Exempt Securities, authorize or issue any additional equity securities of the Company or any subsidiaries, (iii) other than the acquisition of Fragrance Impressions, Ltd., approve any merger, consolidation, compulsory share exchange or sale of assets to which the Company is a party, (iv) repurchase or redeem any equity securities or pay dividends or other distributions on any equity securities, except as provided for the Preferred Stock, (v) liquidate, dissolve, recapitalize or reorganize the Company, (vi) guarantee indebtedness, of other persons, directly or indirectly except with respect to any wholly owned subsidiaries, (vii) effect any fundamental changes in the nature of the Company's business, including but not limited to acquiring or investing in another business entity, and (viii) approve the sale or transfer of any material intangible or intellectual property, other than the issuance of licenses in the ordinary course of business. Investment Agreement Page 8 1.10 VOTING AGREEMENTS CONCERNING DIRECTORS. (a) GENERALLY. Effective immediately prior to or concurrently with the First Closing, one (1) nominee of the Pioneer Partnership, Robert A. Lerman or its designee, shall be elected a director of the Company for successive one-year terms. So long as the Pioneer Partnership shall own any Preferred Stock or Common Stock, the Board of Directors of the Company shall nominate and include in the list of candidates for directors recommended by the Board of Directors, and use its best efforts to have elected one nominee of the Pioneer Partnership. The nominee of the Pioneer Partnership shall be reasonably acceptable to the board of directors of the Company to serve as a director. Grounds for rejecting such nominee shall be any matter of record of the nominee which would cause the Company to be in violation of any order issued by the Commission or such nominee is disqualified as a result of Rule 262(b) promulgated under the 1933 Act provided, however, no such nominee shall be an affiliate of any competitor of the Company. Should the Pioneer Partnership nominee decline to be nominated or elected, another of the Pioneer Partnership's designees shall have the right to attend any and all meetings of the board of directors of the Company, and the Company shall be required to deliver notice to such designee as if such designee were a director. In furtherance of the foregoing, the Shashikant S. Sheth, Jammadas Sheth, Kirit Sheth, Mahendra Sheth, Viren S. Sheth, Jay J. Sheth, Transvit Manufacturing Corporation, Starion International Limited, Starion B.V.I., Aron Zutler, Peter Liman, Richard Howard, Robert Viola, Richard P. Rifenburgh, Robert R. Sparacino, Nevell Investments, S.A., or any trusts, or other entities or affiliates (collectively "PRINCIPAL SHAREHOLDERS") holding the voting rights to their shares, shall simultaneously execute and deliver to the Pioneer Partnership a Voting and Shareholders Agreement confirming the terms of Sections 1.10 and 6.4 hereof. Investment Agreement Page 9 (b) ADDITIONAL NOMINEES OF THE PIONEER PARTNERSHIP ON DEFAULT. In the event that the Company shall default in the due and punctual payment of any installment of the cumulative dividends on the Preferred Stock when and as the same shall become due and payable and such default shall continue for 30 days and provided the Pioneer Partnership and/or its limited partners (if such limited partners are holding such shares directly) shall be the holder(s) of an aggregate of 75,000 shares or more of the Common Stock, directly or through the possible conversion of Preferred Stock, all on a fully diluted basis, in addition to the other remedies available to the Pioneer Partnership, the Pioneer Partnership shall nominate, and the Board of Directors of Company shall use its best efforts to have promptly elected or appointed one (1) additional individual to such directorship; the board of directors shall then be comprised of members constituting at least a simple majority of directors who are independent of the Core Sheth Families and the Company, and of which two directors shall be the Pioneer Partnerships' nominees; such election or appointment shall be effective no later than 30 days after and during the continuation of any such defaults. The two directors selected by the Pioneer Partnership together with the other independent outside directors shall form and constitute the Company's Post-Default Executive Committee which shall be granted full executive and operational control over the Company's operations. To facilitate the foregoing, the Company has, concurrently with the execution hereof, amended its by-laws in a manner satisfactory to the Pioneer Partnership. The Company hereby covenants it shall not change such amended provision of its by-laws without the Pioneer Partnership's prior written consent. Failure to obtain such prior written consent to any such change shall constitute an additional Event of Default under the Preferred Stock. Investment Agreement Page 10 1.11 TRANSFER AGENT. The Company shall act as transfer agreement for the Preferred Stock. 1.12 USE OF PROCEEDS. (A) The net proceeds to be received by the Company, after deduction of all applicable expenses of the Closings will be approximately $4,200,000, and the gross proceeds shall be used and applied only as follows: AMOUNT WHICH MAY BE USED FROM CLOSING FUNDS: ----------------------- FIRST SUBSEQUENT USE OF PROCEEDS CLOSING CLOSINGS ---------- ---------- (a) Capital Equipment: lip and eye pencil manufacturing equipment, other major equipment purchases. $ 450,000 $ 300,000 (b) Costs of Closings: i. Finder's Fee $ 200,000 0 ii. Investment Banking Fee $ 100,000 0 iii. Audit, Legal, Other $ 115,000 0 (c) Payments to Vendors: a. Affiliated Companies $ 400,000 0 b. Unaffiliated $ 600,000 0 (d) Working Capital: $ 850,000 $1,000,000 (e) Marketing: $ 500,000 0 (f) Brands/Competitor Acquisition: $1,500,000 0 ---------- ---------- $4,700,000 $1,300,000 ========== ========== Investment Agreement Page 11 The Company shall expend these funds for the purposes indicated. No portion of the gross proceeds will be paid to the principal stockholders, officers, directors, or their affiliates or associates except as provided below. No portion of the net proceeds of any Closing may be paid to those persons, directly or indirectly, as consultant fees, advisor fees, officer salaries or director fees or for the purchase of shares or other payments, or to make loans. However, funds allocated generally to working capital may be used for salaries and wages of the general employee population, and for board approved salaries of its executive officers and board approved consulting, directors and advisors fees. Without the prior approval of the Compensation Committee of the board of directors of the Company, the Company and its officers and directors shall not authorize or implement any material increases in compensation for salaries, wages or fees as compared to those disclosed in either the offering document issued and delivered to the Pioneer Partnership, if any, or in the annual report on Form 10-K or 10-KSB most recently filed with the SEC and delivered to the Pioneer Partnership, whichever is most recent. Material increases for purposes of this section 1.12 shall mean a ten (10%) percent or greater increase. No portion of the proceeds of any Closing will be used to pay cash finder's fees nor will the Company issue securities in payment of finder's fees to the principal stockholders, officers, directors, or their affiliates or associates. (B) No proceeds of any Closing shall be paid to or used for Nevell Investments S.A. or any of its shareholders, officers, directors, subsidiaries or affiliates to pay, directly or indirectly, principal or interest on any loans or advances made by such party to the Company or its Subsidiaries. (C) No proceeds of any Closing shall be paid to or used for the Core Sheth Families, Shashikant S. Sheth, Jammadas Sheth, Kirit Sheth, Mahendra Sheth, Viren S. Sheth, Jay J. Sheth, Transvit Manufacturing Corporation, Starion International Limited, Starion B.V.I., Ibrahhim Ahmed Al-Musbahi, Aron Zutler, Peter Liman, Robert Viola, Richard Howard, or Nevell Investments S.A. or any of their subsidiaries or affiliates to pay, directly or indirectly, principal or interest on any loans or advances made by such party to the Company or its Subsidiaries, unless specifically allocated in this ss.1.12. Investment Agreement Page 12 (D) No proceeds of any Closing shall be paid to or used for Transvit Manufacturing Corporation or any of its shareholders, officers, directors, subsidiaries or affiliates to pay, directly or indirectly, principal or interest on any loans or advances made by such party to the Company or its Subsidiaries. (E) Notwithstanding anything herein to the contrary, proceeds from any Closing may be used to purchase merchandise and other goods from the operating affiliates of the Core Sheth Families in the ordinary course of business. 1.13 RIGHT OF FIRST REFUSAL. For so long as an aggregate of 75,000 shares or more of Common Stock, directly or through the possible conversion of Preferred Stock, all on a fully diluted basis, are owned by the Pioneer Partnership, the Pioneer Partnership, shall have the right to co-invest along with the Company (a) as an equity participant in any acquisitions on mutually acceptable terms, or (b) the right of first refusal to provide financing subject to ss.1.15. for any potential acquisition. All acquisitions which are synergistic with current activities of the Company shall be excluded from the right to co-invest and the right of first refusal. 1.14 TERMS OF CO-INVESTMENT. In the event the Pioneer Partnership co-invests along with the Company as an equity participant in an acquisition, the co-investment shall be on mutually acceptable terms. 1.15 TERMS OF FINANCING. In the event the Company has secured a commitment for the financing of an acquisition, the Pioneer Partnership shall have the right of first refusal to match such financing terms and thereafter to finance the acquisition, to the extent that such acquisition is not funded by BNY Financial Corporation, for so long as an aggregate of 75,000 shares or more of Common Stock, directly or through the possible conversion of Preferred Stock, all on a fully diluted basis, are owned by the Pioneer Partnership or its limited partners. The Pioneer Partnership shall be required to commit to fund either its co-investment right or its right of first refusal, as set forth herein, within thirty (30) days of its receipt of notice given under ss.1.16. Investment Agreement Page 13 1.16 NOTICE OF INTENDED ACQUISITIONS. The Company shall forward to the Pioneer Partnership notice at least 30 days prior to the closing of all acquisitions, for so long as an aggregate of 75,000 shares or more of Common Stock, directly or through the possible conversion of Preferred Stock, all on a fully diluted basis, are owned by the Pioneer Partnership. 1.17 REDEMPTION. (A) The Company, and Manhendra Sheth, Shashikant S. Sheth, Jammadas Sheth, Kirit Sheth, Jay J. Sheth, and Viren S. Sheth (such individuals are herein referred to as collectively the "CORE SHETH FAMILIES") shall have the right to compel each holder of the Series C Preferred Stock to redeem any or all of the shares of Series C Preferred Stock held by such holder on any Quarterly Dividend Payment Date (for purposes of this ss.1.17 such date shall be the "REDEMPTION DATE"), provided written demand as set forth below is given. The redemption price for each share to be redeemed shall be paid by the Company and/or the Core Sheth Families in cash in an amount equal to (i) the price in the first (1st) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $12 per share of Common Stock, on a post-conversion basis; (ii) the price in the second (2nd) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $14 per share of Common Stock, on a post-conversion basis; (iii) the price in the third (3rd) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $16 per share of Common Stock, on a post-conversion basis; (iv) the price in the fourth (4th) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $18 per share of Common Stock, on a post-conversion basis; (v) the price in the fifth (5th) year following the date of this Agreement to be the higher of the closing market price of the Common Stock on the Date of Redemption or $20 per share of Common Stock, on a post-conversion basis; (all subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) (the "REDEMPTION PRICE"). Investment Agreement Page 14 (B) Thirty (30) days prior to the Redemption Date, the Company and/or the Core Sheth Families, as applicable, shall provide each holder of Series C Preferred Stock with a written demand ("REDEMPTION NOTICE") (addressed to the holder at its address as it appears on the stock transfer books of the Company) to redeem shares of Series C Preferred Stock as provided above, which notice shall specify the Redemption Price and the number of shares to be redeemed. All Redemption Notices hereunder shall be sent by certified mail, returned receipt requested, and shall be deemed to have been provided when received. (C) On or prior to the Redemption Date, each holder of Series C Preferred Stock shall surrender his or its certificate or certificates representing the shares to be redeemed, in the manner and at the place designated in the Redemption Notice. If less than all shares represented by such certificate or certificates are redeemed, the Company shall issue a new certificate for the unredeemed shares. From and after the Redemption Date, unless there shall be a default in payment of the Redemption Price, all rights of each holder with respect to shares of Series C Preferred Stock redeemed on the Redemption Date shall cease (except the right to receive the Redemption Price and interest at the rate of 13% in the event payment is not made within 20 days after the Redemption Date), and such shares shall not be deemed to be outstanding for any purpose whatsoever. Such shares of Series C Preferred Stock shall not be reissued. Investment Agreement Page 15 ARTICLE II. REGISTRATION RIGHTS 2.1 DEMAND REGISTRATION. The Company agrees that after January 31, 1999 it shall promptly upon the request of the Pioneer Partnership or its limited partners (each such holder of such securities a "HOLDER" and collectively "HOLDERS") for so long as such Holders in the aggregate, are holders of 75,000 shares or more of the Company's Common Stock, directly or through the possible conversion of Preferred Stock, all on a fully diluted basis, on one (1) occasion, shall, at the Company's sole cost and expense, use its best efforts to cause any or all of the Preferred Stock and/or the underlying securities issuable upon conversion of the Preferred Stock (collectively the "REGISTRABLE SECURITIES"), to be the subject of an appropriate Registration Statement, so as to enable the requesting Holders ("INITIATING HOLDERS") to publicly offer without restriction such securities. Upon receipt of a written request by the Initiating Holders, the Company will promptly give written notice of the proposed registration to all other Holders and as soon as practicable, use its diligent best efforts to effect such registration with the Commission (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification filings under applicable state securities (blue sky) laws and appropriate compliance with applicable regulations issued under the 1933 Act). The Company shall file such registration statement pursuant to the Securities Act of 1933, as amended (the "1933 ACT") to register the Registrable Securities for resale. The Company shall use its best efforts to cause such registration statement to become and remain effective (including the taking of such steps as are reasonably necessary to obtain the removal of any stop order) on a timely basis. 2.2 PIGGYBACK REGISTRATION. (A) So long as the Pioneer Partnership or its limited partners are the holders of 75,000 shares or more of the Company's Common Stock, directly or through the possible conversion of Preferred Stock, all on a fully diluted basis, if the Company shall register any of its securities for sale pursuant to any appropriate Registration Statement under the 1933 Act, the Company shall be required to offer the Holders the opportunity to register any or all the Registrable Securities, without Investment Agreement Page 16 cost to the Holders thereof. In connection with these piggy-back registration rights, the Company shall give all of the Holders notice by certified mail at least thirty (30) business days prior to the filing of such Registration Statement under the Act. The Holders shall then have twenty-five (25) days to elect to include all or a portion of its Registrable Securities for sale in the Registration Statement. (B) The registration requirement shall not apply to a Registration Statement filed by the Company pursuant to Form S-8 or S-4 with the sole and express purpose of registering shares for employees or for stock incentive plans, or any other inappropriate form. (C) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company will so advise the Holders. In such event, these registration rights shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter selected by the Company. In the event that the lead or managing underwriter in its good faith judgment determines that material adverse market factors require a limitation on the number of shares to be underwritten, the underwriter may limit the number of Registrable Securities. In such event, the Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated PRO RATA among all Holders and other participants other than the Company in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other securities which they had requested to be included in such registration statement at the time of filing the registration statement. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter, provided such notice is delivered within 60 days of full disclosure of such terms to such Holder, without thereby affecting the right of such Holder to participate in subsequent offerings hereunder. Investment Agreement Page 17 2.3 REGISTRATION COVENANTS. In the case of each registration effected by the Company pursuant to this Article II, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will: (i) Keep such registration effective for a minimum period of 270 days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; PROVIDED, HOWEVER, that in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 270 day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment, permit, in lieu of filing a post-effective amendment which (1) includes any prospectus required by Section 10(a)(3) of the Securities Act, or (2) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (1) and (2) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (ii) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; and (iii) In connection with any underwritten offering, the Company and the Holders will enter into any underwriting agreement reasonably necessary to effect the offer and sale of Registrable Securities, provided such agreement contains customary underwriting provisions. Investment Agreement Page 18 2.4 BLUE SKY REGISTRATION. The Company will use its best efforts to register or qualify the Registrable Securities covered by any registration statement under the 1933 Act and under such securities or blue sky laws in such jurisdictions within the United States as the Pioneer Partnership may reasonably request; PROVIDED, HOWEVER, that the Company reserves the right, in its sole discretion, not to register or qualify such shares of Common Stock in any jurisdiction in which such shares of Common Stock do not satisfy the requirements of such jurisdiction or in which the Company would be required to qualify as a foreign corporation to do business in such jurisdiction and is not so qualified therein. The Company covenants that notwithstanding the above, that it shall use its best efforts, at a minimum, to register or qualify the Registrable Securities in the States of Connecticut and New York. 2.5 DEREGISTRATION. In the event the Pioneer Partnership has not sold all of the Registrable Securities included in the registration statement or prior to the expiration of the 270 day registration period under section 2.3, the Pioneer Partnership hereby agrees that the Company may deregister by post-effective amendment any Registrable Securities of the Pioneer Partnership covered by the registration statement but not sold on or prior to such date. 2.6 POST-EFFECTIVE AMENDMENTS. The Company agrees that it will notify the Pioneer Partnership of the filing and effective date of each such post-effective amendment. 2.7 RIGHT TO DELAY. The Company shall have the one-time right, after it shall have received written notice pursuant to section 2.1, to elect not to file or to delay any such proposed registration statement by not more than 60 days, or to withdraw the same after the filing but prior to the effective date thereof; such withdrawal shall renew the demand registration rights under section 2.1. In addition, the Company may delay the filing of any registration statement requested pursuant to section 2.1 hereof by not more than 60 days if the Company, prior to the time it would otherwise have been required to file such registration statement, determines in good faith that the filing of the registration statement would require the disclosure of non-public material information that, in its judgment, would be detrimental to the Company if so disclosed or would otherwise adversely affect a financing, acquisition, disposition, merger or other material transaction. Investment Agreement Page 19 2.8 SELECTION OF UNDERWRITERS. If a Demand registration pursuant to section 2.1 hereof involves an underwritten offering, either the Pioneer Partnership or the Company shall have the right to select the investment banker or investment bankers and manager or managers that will serve as the underwriter with respect to the underwritten offering; however the party not selecting such underwriter shall have the right to approve the underwriter and such approval shall not be unreasonably withheld or delayed without a material reason stated in writing. 2.9 PRINCIPAL SHAREHOLDERS. The Company will not file a registration statement on behalf of any Principal Shareholder (as that term is defined in the Voting and Shareholders Agreement between the Pioneer Partnership and certain shareholders of the Company, dated on or about the date hereof) as selling shareholders without the prior written approval of the Pioneer Partnership. 2.10 INTENTIONALLY OMITTED. 2.11 INDEMNIFICATION BY COMPANY RE REGISTRATION RIGHTS. The Company will indemnify each Holder, each of its officers, directors and partners, and each person controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to this Article II, and each underwriter, if any, and each person who controls any underwriter against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering statement, notification or the like incident to any such registration, qualification or compliance, or Investment Agreement Page 20 based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, PROVIDED THAT the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. 2.12 INDEMNIFICATION BY HOLDER. Each Holder will, if Registrable Securities or other securities held by him are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each other such Holder and each of their officers, directors, and partners, and each person controlling such Holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein provided, however, that the obligations of such Holders hereunder shall be limited to an amount equal to the proceeds to each such Holder of securities sold pursuant to this Article II. Investment Agreement Page 21 2.13 NOTICE OF INDEMNITY AND DEFENSE. Each party entitled to indemnification under this Section (the "INDEMNIFIED PARTY") shall give notice to the party requiring to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnified Party of its obligations under this Article II. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. Investment Agreement Page 22 ARTICLE III. CO-SALE PROVISIONS 3.1 THIRD-PARTY OFFER AND NOTICE. Any sale of the capital stock of the Company by any Principal Shareholder will be subject to a participation right of co-sale by the Pioneer Partnership or its limited partners on a PRO RATA fully diluted basis. If any one or more of the Principal Shareholders obtains from a third party ("THIRD PARTY PURCHASER") an offer to purchase any amount of their shares, such Principal Shareholders shall submit a written notice (the "CO-SALE NOTICE") to the Pioneer Partnership disclosing the amount of shares proposed to be sold, the offered purchase price, the proposed closing date, and the total number of shares owned by the Principal Shareholders. 3.2 CO-SALE RIGHT OF PARTICIPATION. Upon receipt of a Co-Sale Notice from any Principal Shareholder, the Pioneer Partnership or its limited partners may elect to participate in such transaction and shall have the right to offer its securities, at the same price and on the same terms. Each participating selling party who elects to participate in such sale shall be entitled to sell his Pro Rata Share (as herein defined) of the number of shares the purchaser is willing to purchase. "PRO RATA SHARE" as used in the preceding sentence means the product of the number of shares owned by such party and a fraction, the numerator of which is the number of fully diluted shares held by such party and the denominator of which is the total number of fully diluted shares held by all shareholders participating in a subject sale. Each participating selling party shall in turn be entitled to receive at the applicable closing the net proceeds of the sale allocable to the securities sold on behalf of each selling shareholder, after deduction of such selling shareholder's proportionate share of the reasonable expenses of the sale. 3.3 EXCLUDED SALES. These co-sale provisions will not apply to any sale of securities pursuant to a distribution to the public, whether pursuant to a registered public offering, Rule 144 or otherwise. 3.4 NOTICE OF INTENT TO PARTICIPATE IN CO-SALE. If the Pioneer Partnership wishes to participate in any sale under this Article III, then the Pioneer Partnership shall notify the selling Principal Shareholders in writing of such intention as soon as practicable after such the Pioneer Partnership's receipt of the Co-Sale Notice made pursuant to Section 3.1, and in any event within fifteen (15) days after the date of such Co-Sale Notice has been received. Such notification shall be delivered in person or by facsimile to the Principal Shareholders at the Company's offices. Investment Agreement Page 23 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company makes the following representations and warranties to the Pioneer Partnership each of which shall be deemed material, and the Pioneer Partnership, in executing, delivering and consummating this Agreement, have relied and will rely upon the correctness and completeness of each of such representations and warranties: 4.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The Company is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware; is duly qualified to transact business as a foreign corporation and in good standing in the state(s) of Texas, New York, and California, being all states in which its activities require qualification and the failure to be so qualified would have a material adverse effect on the business and operations of the Company; and has all corporate power necessary to engage in the business in which it is presently engaged. 4.2 SUBSIDIARIES. The Company has no subsidiaries nor is it the subsidiary of any other corporation or business entity EXCEPT for (a) Tristar de Mexico S.A. de C.V. ("SUBSIDIARY" or "SUBSIDIARIES"). The Subsidiaries are all wholly owned by the Company. The Subsidiary is an entity duly organized and validly existing under the laws of the country of Mexico being all states or jurisdictions in which its activities require qualification and the failure to be so qualified would have a material adverse effect on the business and operations of the Company or Subsidiary and have all corporate power necessary to engage in the business in which it is presently engaged. The Subsidiary is controlled by the Company, as such term is governed by section 20(a) of the 1933 Act. For purposes of this section, the term "SUBSIDIARY" is defined to mean any corporation or other business entity, a majority of whose outstanding voting stock or ownership interests entitled to vote for the election of directors or such other governing body is, at the time, owned by the Company and/or one or more other subsidiaries. Investment Agreement Page 24 4.3 AUTHORIZATION OF AGREEMENT. The execution, delivery and performance by the Company of this Investment Agreement and all other documents and instruments contemplated hereby have been duly authorized by all requisite corporate action. A true, correct and valid copy of the Company's Board of Director's resolution(s) authorizing the transactions and securities to be issued hereunder has been delivered to the Pioneer Partnership. Neither the execution and delivery of this Agreement nor compliance by the Company with any of the provisions hereof nor the consummation of the transactions contemplated hereby, will: (a) violate or conflict with any provision of the Certificate of Incorporation or bylaws of the Company or its Subsidiaries or any contract to which the Company or any of its Subsidiaries is bound; (b) violate or, alone or with notice or the passage of time, result in the material breach or termination of, or otherwise give any contracting party the right to terminate, or declare a material default under, the terms of any material agreement or other document or undertaking, oral or written to which the Company or any of its Subsidiaries is a party or by which it or its properties or assets may be bound (except for such violations, conflicts, breaches or defaults as to which required waivers or consents by other parties have been, or will be obtained, prior to the Closing); (c) result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to the terms of any such agreement or instrument; (d) violate any judgment, order, injunction, decree or award against, or binding upon the Company or any of its Subsidiaries or upon their properties or assets; or Investment Agreement Page 25 (e) violate any law or regulation of any jurisdiction relating to either the Company or any of its respective securities, assets or properties or of any of its Subsidiaries. 4.4 VALIDITY. This Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding obligation of the Company, enforceable in accordance with its terms. 4.5 GOVERNMENT APPROVAL. Except for filing of a Form D with the Securities and Exchange Commission, filing a Form D and a consent to service of process with the Connecticut Department of Banking, and the filing of the Certificate of Designation, no registration or filing with, or consent or approval of, or other action by, any federal, state or other governmental agency or instrumentality is or will be necessary for the valid execution, delivery and performance of this Investment Agreement or any other document contemplated hereby. 4.6 CAPITALIZATION. There are (a) thirty million (30,000,000) shares of Common Stock, $.01 par value, and (b) six hundred sixty-six thousand five hundred twenty-nine (666,529) shares of Series A Preferred Stock, $.05 par value, and (c) one hundred twenty thousand six hundred ninety (120,690) shares of Series B Preferred Stock, $0.05 par value, authorized for issuance under the Company's certificate of incorporation, as amended (delivered along with the Company's bylaws to the Pioneer Partnership). Immediately prior to the First Closing Date, there will be sixteen million seven hundred twenty-nine thousand seventy-four (16,729,074) shares of Common Stock issued and outstanding, six hundred sixty-six thousand five hundred twenty-nine (666,529) shares of Series A Preferred Stock issued and outstanding, and one hundred twenty thousand six hundred ninety (120,690) shares of Series B Preferred Stock issued and outstanding. No shares of Common Stock are issuable pursuant to existing Investment Agreement Page 26 agreements and there are no outstanding warrants, options or other securities convertible into the Common Stock of the Company, EXCEPT the Class A Preferred Stock and the Class B Preferred Stock each share of which is convertible into one (1) share of Common Stock at an exercise price of $7.00 per share and four (4) shares of Common Stock at an exercise price of $7.25 per share of Common Stock, respectively, options to purchase in aggregate of (i) 156,000 shares of Common Stock granted pursuant to the Company's Amended and Restated Stock Option Plan, (ii) 634,000 shares of Common Stock granted pursuant to the Company's 1997 Long Term Incentive Plan and (iii) 605,000 shares of Common Stock granted outside either of the foregoing plans and warrants to purchase (a) 2,000,000 shares of Common Stock at a price per share of $5.34, (b) 50,000 shares of Common Stock and (c) 400,000 shares of Common Stock at a price per share of $2.75. No other shares of Common Stock are issued or outstanding or committed for issuance EXCEPT those committed for issuance upon conversion of the Preferred Stock to be issued to the Pioneer Partnership hereunder. 4.7 ANNUAL REPORT AND THE FINANCIAL STATEMENTS. The Company has heretofore furnished to the Pioneer Partnership copies of (a) the Company's annual report on Form 10-K for fiscal year ended December 31, 1997 including the Company's consolidated audited financial statements for its fiscal year ended December 31, 1997, and (b) the Company's consolidated unaudited interim financial statement for the six months ended June 30, 1998, (hereinafter collectively referred to as the "FINANCIAL STATEMENTS"). Such financial statements are true, correct and complete in all material respects, and accurately set forth, in all material respects, the financial condition of the Company and its Subsidiaries as of their respective dates, and the results of operations for the fiscal periods involved, and were prepared in conformity with generally accepted accounting principles and practices consistently applied and are annexed hereto as EXHIBIT 4.7-A. The financial statements fairly present in all material respects the financial condition and results of operations of the Company and its Subsidiaries at the dates thereof and for the periods covered thereby. Except as set forth in such financial statements, the Company and/or its Subsidiaries had, as of September 3, 1998, no material obligation or liability, whether absolute, accrued, contingent or otherwise. Investment Agreement Page 27 (a) The Company and/or its Subsidiaries have good and marketable title to all of its property and assets subject to no mortgage, pledge, lien or other encumbrance except as disclosed in EXHIBIT 4.7-B annexed hereto and made a part hereof. (b) The Company and/or its Subsidiaries had no obligations, liabilities or commitments, contingent or otherwise, of a material nature which were not provided for except as set forth in EXHIBIT 4.7-A and EXHIBIT 4.7-B and except those incurred in the normal course of business since December 31, 1997 and March 31, 1998. (c) Since December 31, 1997 there has been no materially adverse change in the nature of the business of the Company and/or its Subsidiaries nor in any of their financial condition or property, other than changes in the usual or ordinary course of business, and the Company has incurred no obligations or liabilities nor made any commitments other than in the usual and ordinary course of business or as disclosed in EXHIBIT 4.7-A and EXHIBIT 4.7-B. (d) The Company and/or its Subsidiaries are not a party to any employment contract with any officer, director, or stockholder, or to any lease, agreement or other commitment not in the usual and ordinary course of business, nor to any pension, insurance, profit-sharing or bonus plan, except as disclosed in EXHIBIT 4.7-A and EXHIBIT 4.7-B. 4.8 PATENTS, TRADEMARKS, ETC. All of the officers, directors, principals and the affiliates of the Company have assigned and transferred all of their Patents, as defined below, to the Company. The Company and/or its Subsidiaries own or possess, without any adverse claims with respect thereto, and without known conflict with the rights of Investment Agreement Page 28 others, except as disclosed in EXHIBIT 4.8, the rights to the patents, trademarks, service marks, trade names, copyrights and licenses listed in EXHIBIT 4.8 hereto and the same constitute all of the patents, trademarks, service marks, service names, copyrights, and licenses necessary or used in the conduct of the business of the Company (collectively the "PATENTS"). The Company protects all technical, trade secret and confidential information developed by and belonging to the Company and/or its Subsidiaries, which has not been patented, by maintenance of secrecy relating thereto, and the Company and/or its Subsidiaries will continue to seek to protect all such information, technology and intellectual property by maintenance of secrecy related thereto. 4.9 TAXES. Except as set forth on EXHIBIT 4.9, the Company and each of the Subsidiaries has filed all applicable federal, state, county and local tax and franchise returns and reports required to be filed by it and has paid (or, as to taxes not currently due and payable, has made adequate provision in accordance with generally accepted accounting principles for the payment of) all income and other taxes, assessments, franchise fees and other governmental charges required by law (including, without limitation, withholding, social security, payroll and similar taxes) and all interest and penalties, if any, thereon and all federal, state, local and other taxes accruable since the filing of such returns have been properly accrued. Except as set forth on Exhibit 4.9, no adverse proceedings or other actions are pending or have been taken for the assessment or collection of additional taxes of any kind from the Company and/or its Subsidiaries for any period, and to the Company's knowledge, no investigation by the Internal Revenue Service or any taxing authority affecting the Company and/or its Subsidiaries is now pending. Except as set forth on Exhibit 4.9, all taxes that the Company and/or its Subsidiaries are required by law to withhold or collect have been withheld or collected and have been paid over to the proper governmental authorities or are properly held by the Company for such payment. 4.10 APPROVALS. Except for claiming an exemption from section 5 of the Securities Act of 1993 by filing a Form D or otherwise, and by claiming an exemption from registration from applicable state Blue Sky laws by filing a Form D and a consent to service of process with the Connecticut Department of Banking, no authorization or approval of, or filing with, or compliance with any applicable order, judgment, decree, statute, rule or regulation of, any court or governmental authority, or approval, consent, release or action of any third party, is required in connection with the execution and delivery by the Company of, or the performance or satisfaction of any agreement of the Company contained in or contemplated by, this Agreement. Investment Agreement Page 29 4.11 LITIGATION. Except as set forth in EXHIBIT 4.11, the Company and its Subsidiaries are not a defendant, nor are they a plaintiff against whom a counter-claim has been asserted in any actions, suits, claims, arbitrations, administrative or other proceedings or governmental investigations seeking $10,000 or more in damages, or any equitable relief, pending or, to the best of the Company's knowledge, threatened against, relating to or affecting the Company or any of the Subsidiaries, or their respective business, operations or assets, not covered by insurance, or which question or seek to prevent consummation of the transactions provided for in this Agreement, whether at law or in equity, or before or by any Federal, state, local, foreign or other governmental department, agency or instrumentality, nor to the best of its knowledge is there any basis therefor. Except as set forth in Exhibit 4.11, the Company and the Subsidiaries are not bound or adversely affected by or in default with respect to any judgment, order, writ, injunction or decree of any court or of any governmental department, agency or instrumentality. 4.12 SCHEDULE OF DOCUMENTS. The schedule of contracts including a summary in tabular form of all material terms attached hereto as EXHIBIT 4.12 lists any and all material (material for purposes of this paragraph only shall mean $25,000) contracts or other material commitments or obligations relating to the Company and its Subsidiaries, (a) to which a Principal Shareholder and/or officer or director of the Company or any Subsidiary is a party, (b) all leases of real and/or personal property, (c) union collective bargaining, employment, management and consulting agreements to which the Company or any Subsidiary is a Investment Agreement Page 30 party, (d) compensation plans, bonus plans, deferred compensation arrangements, pension and retirement plans, profit sharing plans, stock purchase and stock option plans, (e) loan agreements and notes, (f) options to purchase property, (g) stockholder agreements, and (h) all other material contracts or commitments to which the Company is a party. Except as listed on EXHIBIT 4.12,, neither the Company nor any of its Subsidiaries are a party to or bound by any material contract or commitment (or group of related contracts or commitments), other than contracts, or agreements in the ordinary course of business; nor is the Company nor any of its Subsidiaries bound by any charter, contractual or other corporate restriction that materially and adversely affect or could affect its business, financial condition or prospects, or which restricts its right or ability to operate its business as conducted or proposed to be conducted. On or prior to the date hereof, the Company has delivered to the Pioneer Partnership or a representative thereof, a true and correct copy or a summary of each of the documents listed in EXHIBIT 4.12. 4.13 NO DEFAULTS. The Company and the Subsidiaries are not in violation of, breach of or default under, and no event (including, without limitation, execution of and consummation of the transactions provided for in this Agreement) has occurred which with the passage of time or notice from or action by any party thereto or otherwise could result in a violation of or default under, or give any other person the right to terminate, as the case may be, any indenture, mortgage, security, loan, lease or other material agreement to which the Company or any of the Subsidiaries is a party or by which it is bound or result in the creation, imposition or acceleration of any material lien of any nature in favor of any other person. 4.14 LACK OF FELONIES. Except as disclosed in the proxy statement dated January 14, 1998, as filed with the SEC, neither the Company nor its Subsidiaries nor any of their respective principals, directors, or executive officers have been convicted of or pled guilty to any felony under the laws of the United States or any state thereof. No criminal arrests, proceedings or actions are pending, nor have any been threatened in the last thirty-six (36) months against any of such persons. Investment Agreement Page 31 4.15 NO JUDGMENTS. There are no judgments, decrees, binding decisions outstanding against the Company or any of its Subsidiaries which were issued in any legal proceeding of any kind by any court, arbitrator, panel, or other governing or determining authority. 4.16 INSURANCE. The Company and its Subsidiaries are covered by policies of general liability insurance with coverage of at least $2,000,000, and workers' compensation insurance and extended coverage on its property. There does not exist, nor has there been, any lapse in the coverage under such insurance policies. Such policies are carried by a reputable and financially stable insurance company and are sufficient to cover risks as are customarily insured against by similar businesses. The Company represents it has adequate insurance to replace a substantial amount of its assets. 4.17 NO BROKERS. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on directly with the Pioneer Partnership by the Company, without the intervention of any broker, finder, investment banker (except the Pioneer Ventures Corp.), or other third party, and except for Greater Metropolitan who shall receive $200,000 payable by the Company as a finder's fee. The Company has not engaged, consented to, or authorized any broker, finder, investment banker or other third party to act on its or his behalf, directly or indirectly, as a broker or finder in connection with the transactions contemplated by this Agreement. 4.18 LOANS AND LIENS. Attached hereto as EXHIBIT 4.18 is a complete and accurate list of all secured and unsecured loans to which the Company or any of its Subsidiaries is a party as a borrower, debtor, guarantor or as a party obligated thereunder and all other financial obligations or judgments to which they are subject. Such schedule sets forth in tabular form the identity of the borrower, lender, any guarantors, the original principal amount, the principal amount due at a current date within 30 days hereof, the current standing of such obligation, the due date, the interest rate, the amount of interest due with in a recent date, and a summary of any material provisions not requested herein. Investment Agreement Page 32 4.19 SOLVENCY. The Company has not admitted in writing an inability to pay its debts generally as they become due, filed or consented to the filing against it of a petition in bankruptcy or a petition to take advantage of any insolvency act, made an assignment for the benefit of creditors, consented to the appointment of a receiver for itself or for the whole or any substantial part of its property, or had a petition in bankruptcy filed against it, been adjudicated a bankrupt, or filed a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other laws or of the United States or any other jurisdiction. 4.20 REGISTRATION RIGHTS. Except as provided for herein, the Company is not a party to any agreement or commitment that obligates the Company to register under the Securities Act of 1933, as amended (the "1933 ACT"), any of the Company's presently outstanding securities or any of the Company's securities that may hereafter be issued. 4.21 COMPLIANCE WITH SECURITIES LAWS. Assuming the accuracy of the representations contained in ss.5.5 hereof, the offer, grant, sale, and/or issuance of the Shares shall not be in violation of the 1933 Act, the Securities Exchange Act of 1934, as amended, (the "EXCHANGE ACT") any state securities or "blue sky" laws, or the Company's organization documents such as the certificate of incorporation or bylaws, when offered, sold and issued in accordance with this Agreement. 4.22 TRANSFER RESTRICTIONS. There are no restrictions on the transfer of capital stock of the Company imposed by its certificate of incorporation, bylaws, other organization documents, any agreement to which the Company is a party (other than those agreements expressly contemplated by this Agreement), any order of any court or any governmental agency to which the Company is subject, or any statute other than those imposed by relevant state and federal securities laws. Investment Agreement Page 33 4.23 RELATED PARTY TRANSACTIONS. There are no agreements, understandings or proposed transactions between the Company and any of its officers, directors or other "affiliates" (as defined in Rule 405 promulgated under the 1933 Act) which involve transactions exceeding $5,000, EXCEPT as outlined on EXHIBIT 4.23. 4.24 MISCELLANEOUS. Except as set forth in EXHIBIT 4.12, EXHIBIT 4.7-A or EXHIBIT 4.7-B or the Financial Statements or notes thereto, (a) the Company is not a party to or bound by any distribution, sales agency, franchise or similar agreement or understanding that relates to the sale or distribution of its products and services, (b) the Company does not have a sole-source supplier of significant goods and services (other than utilities) with respect to which practical alternative sources are not available on comparable terms and conditions, (c) there are neither pending, nor threatened, any labor negotiations involving or affecting the Company, and no organizing activities involving union representation exists in respect of any of its employees, (d) except in the ordinary course of business the Company is not bound by any warranties relating to its products or services, and (e) there has been no assertion of any breach of product or service warranties that could have a material adverse affect on the business, financial condition or prospects of the Company. Neither the Company nor any of its employees, consultants, officers or directors is prohibited from engaging in any business activity that is currently carried on or contemplated by the Company, by reason of any restrictive covenant or agreement, including but not limited to, a covenant not-to-compete. 4.25 ADDITIONAL REPRESENTATIONS. The Company represents and warrants that: (a) The investment to be consummated by the Pioneer Partnership in the Company is NOT opposed by its board of directors; (b) The Company is NOT engaged as a business in real estate investments, and is not a real estate operating company; (c) The Company is NOT undergoing a bankruptcy liquidation; (d) The securities to be issued upon consummation of the Investment are either exercisable for, or convertible into, equity securities at a pre-determined exercise price or conversion ratio; Investment Agreement Page 34 (e) The Company is NOT offering as an investment or otherwise any uncovered options, or any transaction in which securities are sold short in an uncovered transaction or which would be in violation of Section 16(c) of the Exchange Act as amended, PROVIDED, HOWEVER, that nothing in this subsection (e) shall prevent the Pioneer Partnership from acquiring options or warrants exercisable for, or other securities convertible into, equity securities or assets at a pre-determined exercise price or conversion ratio; (f) The Company and its subsidiaries are NOT domiciled in any country that is, at the time of the closing of the Investment and will ensure that, at the time of the conversion or partial conversion of any of the securities, a participant in an international boycott illegal under United States law or opposed by the United States government; (g) The Company is NOT an investment company registered or required to be registered under the Investment Company Act of 1940, as amended; (h) The Company conducts NO operations in Northern Ireland and will ensure that at the time of the conversion or partial conversion of any of the Debentures that it conducts NO operations in Northern Ireland unless the Company complies with the McBride principles to the satisfaction of the Pioneer Partnership. The McBride principles consist of, but are not limited to, the following: 1) increasing the representation of individuals from under-represented religious groups in the workforce, including managerial, supervisory, administrative, clerical and technical jobs; 2) providing adequate security for the protection of minority employees at the workplace and while traveling to and from work; 3) banning provocative religious or political emblems from the workplace; 4) publicly advertising all job openings and making special recruitment efforts to attract applicants from under-represented religious groups; 5) layoff, recall and termination procedures which do not in practice favor particular religious groupings; 6) abolishing job reservations; apprenticeship restrictions and differential employment criteria, which discriminate on the basis of religion or ethnic origin; Investment Agreement Page 35 7) developing training programs that will prepare substantial numbers of current minority employees for skilled jobs, including the expansion of existing programs and the creation of new programs to train, upgrade and improve the skills of minority employees; 8) establishing procedures to assess, identify and actively recruit minority employees with potential for further advancement; and 9) appointing a senior management staff member to oversee the company's affirmative action efforts and the setting up of timetables to carry out affirmative action principles. For purposes of this ss.4.25, a corporation will be considered to be "conducting operations in Northern Ireland" if it has facilities and employees in Northern Ireland, either directly or through one or more subsidiaries; and (i) The Company is NOT and shall NOT be engaged in any form of business in Iran which could be considered contrary to the foreign policy or national interests of the United States. (j) The Company, if it is an entity organized outside of the United States, covenants that it shall obtain, on or before closing, a written opinion of counsel, which counsel and opinion letter shall be acceptable to the Pioneer Partnership and its Investor Committee, to the effect that as a result of the investment in the Company by the Pioneer Partnership neither the limited partners, the general partner nor the Pioneer Partnership will be liable, either directly or indirectly, for any claim, obligation, or liability of the Company; and (k) The Company covenants it shall obtain a cold comfort written opinion of counsel, which counsel and opinion letter shall be acceptable to the Pioneer Partnership, to confirm the representations within this ss.4.25 and the legality thereof. 4.26 USE OF PROCEEDS. The Company represents it shall use and apply the proceeds from the stock purchase through the First and Second Closings only for such purposes as set forth in Section 1.12 hereof. 4.27 INDUSTRY SPECIFIC REGULATIONS. The Company and the Subsidiaries and their operations do not violate any state or federal laws or regulations with respect to the U.S. Environmental Protection Agency, OSHA, or the U.S. Food and Drug Administration; or their state corollary agencies, or any other laws or regulations to which the Company or its Subsidiaries are subject. No notices of deficiency or notices of any kind which may inhibit the operations of the Company or its Subsidiaries has been received from the U.S. Environmental Protection Agency, OSHA, or the U.S. Food and Drug Administration, or their state corollary agencies, or any other governmental agency or authority. Investment Agreement Page 36 4.28 WAGES AND SALARY. As of the Closing Date the level of wages, salaries and fees payable to the officers and directors of the Company is set forth in EXHIBIT 4.28 hereto. 4.29 ERISA. The Company and all of its employee plans are in full compliance with ERISA and no ERISA plan of the Company is in default. 4.30 CORE SHETH LETTER OF CREDIT. The Core Sheth Families provided a $1.5 million letter of credit for the Company in May 1998. The letter of credit is in good standing and may not be withdrawn without the written approval of the BNY Financial Corporation. The Core Sheth Families and their principals or affiliates received no compensation, directly or indirectly, as a result of entering into the letter of credit arrangement and/or supplying collateral thereunder. 4.31 PROTEST IRS CLAIM FOR DISALLOWANCE. The facts as stated in the June 26, 1998 letter from Coopers & Lybrand addressed to Mr. Edward C. Hernandez of the Internal Revenue Service ("IRS") office in San Antonio, Texas protesting the disallowance of certain deductions for taxable years ending August 31, 1990 through 1995, are true, accurate and correct. The shares alleged by the IRS to have been purchased at artificially inflated prices were NOT sold to the plaintiffs in the Stockholder Class Action Lawsuit by the Company; the sales actually occurred between buyers and sellers in the open marketplace, and not between the Company and the plaintiffs. The entire settlement was paid by the Company because the Company was bound to indemnify and hold the officers and directors as there was joint and several liability. The Company intends to vigorously defend this entire matter. Investment Agreement Page 37 4.32 NO RESTRICTIONS ON DIVIDENDS. There are no restrictions on the payment of dividends if paid in the form of stock of the Company. 4.33 COMPLETE DISCLOSURE. No representation, warranty or statement, written or oral, made by the Company in this Agreement or in any schedule, exhibit, certificate or other document furnished or to be furnished to the Pioneer Partnership, including any and all documents filed with the Commission within the past 12 months, pursuant hereto or otherwise, in connection with the transactions contemplated hereby, has contained, contains or will contain at the closing date any untrue statement of a material fact or has omitted, omits or will omit at the closing date a material fact required to be stated therein or necessary to make the statements contained therein not misleading. Without limiting the generality of the foregoing, the Company is current in all filings required under the Exchange Act. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE PIONEER PARTNERSHIP The Pioneer Partnership represents and warrants as follows: 5.1 ORGANIZATION. The Pioneer Partnership is a limited partnership duly organized and validly existing under the laws of the State of Connecticut. 5.2 NO BREACH. The execution and delivery of this Agreement by the Pioneer Partnership and the consummation of the transactions contemplated hereby will not violate any judgment, order, injunction, decree, or award against, or binding upon, the Pioneer Partnership or upon its properties or assets. Investment Agreement Page 38 5.3 AUTHORITY FOR AND BINDING NATURE OF AGREEMENT. This Agreement and the documents delivered pursuant hereto have been duly executed and delivered by the Pioneer Partnership are valid and binding upon it in accordance with its terms. 5.4 BROKERS. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on directly with the Company by the Pioneer Partnership without the intervention of any broker, finder, investment banker (except Pioneer Ventures Corp.), or other third party, and except for Greater Metropolitan who shall receive $200,000 payable by the Company as a finder's fee. The Pioneer Partnership has not engaged, consented to, or authorized any broker, finder, investment banker (except Pioneer Ventures Corp.), or other third party to act on its behalf, directly or indirectly, as a broker or finder in connection with the transactions contemplated by this Agreement. 5.5 SECURITIES LAWS MATTERS. (a) The Pioneer Partnership recognizes and understands that the Preferred and Common Stock into which the Preferred Stock is convertible to be issued to the Pioneer Partnership pursuant to this Agreement (collectively, the "SECURITIES") will not be registered under the 1933 Act, or under the securities laws of any state (the "SECURITIES LAWS"). The securities are not being so registered in reliance upon exemptions from the 1933 Act and the securities laws which are predicated, in part, on the representations, warranties and agreements of the Pioneer Partnership contained herein. (b) The Pioneer Partnership represents and warrants that (i) Pioneer Partnership has business knowledge and experience, such experience being based on actual participation therein, (ii) Pioneer Partnership is capable of evaluating the merits and risks of an investment in the securities and the suitability thereof as an investment therefor, (iii) the securities to be acquired by the Pioneer Partnership in connection with this Agreement will be acquired solely for investment and not with a view toward resale or redistribution in violation of the securities laws, (iv) in connection with the transactions contemplated hereby, no assurances have been made concerning the future results of the Company and its subsidiaries or as to the value of the securities and (vi) Pioneer Partnership is an "accredited investor" within the meaning of Regulation D promulgated by the Securities and Exchange Commission (the "COMMISSION") pursuant to the 1933 Act. The Pioneer Partnership understands that none of the Company or its subsidiaries or affiliates is under any obligation to file a registration statement or to take any other action under the securities laws with respect to any such securities EXCEPT as expressly set forth in ARTICLE II hereof. Investment Agreement Page 39 (c) The Pioneer Partnership has consulted with Pioneer Partnership's own counsel in regard to the securities laws and is fully aware (i) of the circumstances under which the Pioneer Partnership is required to hold the securities, (ii) of the limitations on the transfer or disposition of the securities, (iii) that the securities must be held indefinitely unless the transfer thereof is registered under the securities laws or an exemption from registration is available and (iv) that no exemption from registration is likely to become available for at least one year from the date of acquisition of the securities. The Pioneer Partnership has been advised by Pioneer Partnership's counsel as to the provisions of Rules 144 and 145 as promulgated by the Commission under the 1933 Act and has been advised of the applicable limitations thereof. The Pioneer Partnership acknowledges that the Company is relying upon the truth and accuracy of the representations and warranties in this SECTION 5.5 by the Pioneer Partnership in consummating the transactions contemplated by this Agreement without registering the securities under the securities laws. (d) The Pioneer Partnership has been furnished with (i) the definitive proxy statement filed with the Commission in connection with the annual meeting of stockholders of the Company held on February 12, 1998 and (ii) copies of the Company's Annual Report on Form 10-K for the year ended August 30, 1997, and Quarterly Reports on Form 10-Q for the quarters ended November 29, 1997, February 28, 1998 and May 30, 1998 filed with the Commission under the Exchange Act (collectively, the "SEC REPORTS"). The Pioneer Partnership has been furnished with the complete financial statements of the Company for the fiscal years ended August 30, 1997, August 31, 1996 and 1995, and the quarters ended November 29, 1997, February 28, 1998 and May 30, 1998, respectively. The Pioneer Partnership has been furnished with a summary description of the terms of the securities and the Company has made available to the Pioneer Partnership the opportunity to ask questions and receive answers concerning the terms and conditions of the transactions contemplated by this Agreement and to obtain any additional information which they possess or could reasonably acquire for the purpose of verifying the accuracy of information furnished to the Pioneer Partnership as set forth herein or for the purpose of considering the transactions contemplated hereby. The Company has offered to make available to the Pioneer Partnership upon request at any time all exhibits filed by the Company with the Commission as part of any of the reports filed therewith. Investment Agreement Page 40 (e) The Pioneer Partnership agrees that the certificates representing the securities to be acquired pursuant to this Agreement will be imprinted with the following legend, the terms of which are specifically agreed to: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. NEITHER THE SHARES NOR ANY INTEREST THEREIN MAY BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COUNSEL FOR THIS CORPORATION, IS AVAILABLE. Investment Agreement Page 41 The Pioneer Partnership understands and agrees that appropriate stop transfer notations will be placed in the records of the Company and with its transfer agent in respect of the securities which are to be issued to the Pioneer Partnership. 5.6 ADDITIONAL MATTERS. The Pioneer Partnership agrees that neither the Pioneer Partnership nor any other holder of any shares of Series C Preferred Stock shall convert or sell any shares of the Common Stock or otherwise engage in short-selling efforts during the 90 days prior to the First Closing Date. ARTICLE VI. COVENANTS The Company hereby warranties and covenants that: 6.1 FINANCIAL. Since December 31, 1997 except as contemplated or disclosed in this Agreement, the Company shall not have (i) paid or declared any dividends on, or made any distributions in respect of, or issued, purchased or redeemed, any of the outstanding shares of its capital stock, or (ii) made or authorized any changes in its Certificate of Incorporation or in any amendment thereto or in its bylaws, or (iii) made any commitments or disbursements or incurred any obligations or liabilities of a substantial nature and which are not in the usual and ordinary course of business, or (iv) mortgaged or pledged or subjected to any lien, charge or other encumbrance any of its assets, tangible or intangible, or (v) sold, leased, or transferred or contracted to sell, lease or transfer any assets, tangible or intangible or entered into any other transactions, except for the sale of Tristar do Brasil and otherwise in the usual and ordinary course of business, or (vi) made any advance to any stockholder, officer or director of the Company or to any other person, firm, or corporation other than in the ordinary course of business or any loan to such persons except as summarized on EXHIBIT 4.12 hereof, or (vii) except for a new employment agreement with Robert Viola and/or an amendment to Richard Howard's employment agreement, made any material change in any existing employment agreement or increased the compensation payable or made any arrangement for the payment of any bonus to any officer, director, employee or agent, except as set forth in EXHIBIT 2.10 hereof. Investment Agreement Page 42 6.2 ACCESS. For so long as either the Pioneer Partnership or its limited partners own 10,000 shares or more of the Company's Common Stock directly or through the possible conversion of its Preferred Stock all on a fully diluted basis, the Company shall afford, at its sole cost and expense, to the officers, attorneys, accountants and other authorized representatives of the Pioneer Partnership and/or its limited partners free and full access, during regular business hours and upon reasonable notice, to the books, records, personnel, accountants, attorneys, and properties of the Company so that the Pioneer Partnership may have full opportunity to make such review, examination and investigation as it may desire of its respective business and affairs. The Company will cause its employees, accountants, and attorneys to cooperate fully with said review, examination and investigation and to make full disclosure to the Pioneer Partnership of all material facts affecting its financial condition and business operation. Nothing herein shall limit the rights of the Pioneer Partnership which are available under or granted by applicable statutes with respect to access, review, examination and investigations. Interference with said rights or delay in accommodating such rights by the Company shall be an event of Default of the terms of the Preferred Stock. 6.3 BOOKS OF RECORD AND ACCOUNT. The Company shall maintain at all times proper books of record and account in accordance with generally accepted accounting principles ("GAAP"), consistently applied. For so long as either the Pioneer Partnership or its limited partners own 10,000 shares or more of the Company's Common Stock directly or through the possible conversion of its Preferred Stock all on a fully diluted basis, it will permit any of the Pioneer Partnership's officers or any of their authorized representatives or accountants to visit, upon reasonable notice, and inspect offices and properties, examine its books of account and other records, and discuss its affairs, finances and accounts with its appropriate officers, accountants and auditors, all at such reasonable times and reasonable frequency as the Pioneer Partnership may request. In addition, the Pioneer Partnership shall be provided with copies of quarterly, within 45 days of the end of each fiscal quarter, and annual, within 90 days of the end of each fiscal year, financial statements consisting of balance sheets, statements of operations, statements of cash flows, statements of changes in stockholders equity and notes thereto all prepared in accordance with GAAP. The annual financial statements shall be audited in accordance with GAAP by an accounting firm acceptable to the Pioneer Partnership. Interference with said rights or delay in accommodating such rights by the Company shall be an event of Default of the terms of the Preferred Stock. No limitation in either ss.6.3 or ss.6.2 shall constitute a waiver of any rights granted under any applicable statute. Investment Agreement Page 43 6.4 MEMBERSHIP ON BOARD. The Company's bylaws shall provide for a maximum of a nine (9) person Board of Directors. Promptly upon the Closing Date and for so long as the Pioneer Partnership owns any Common Stock or Preferred Stock, the Principal Shareholders shall cause one (1) designee from the Pioneer Partnership to be nominated and elected to serve as directors of the Company. The nominee of the Pioneer Partnership shall be reasonably acceptable to the board of directors of the Company to serve as a director. Grounds for rejecting such nominee shall be any matter of record of the nominee which would cause the Company to be in violation of any order issued by the Commission or such nominee is disqualified as a result of Rule 262(b) promulgated under the 1933 Act; provided, however, no such nominee shall be an affiliate of any competitor of the Company. Except as provided for herein, additional membership on the Board shall require majority approval of the remaining members of the Board of Directors or election at a meeting of shareholders. At the next meeting of the Board of Directors, a Compensation Committee of the Board shall be established. The Compensation Committee shall consist of three directors; a designee of the Pioneer Partnership, a designee of the Principal Stockholders, and one other person selected by the Board. The Compensation Committee shall be maintained to consider and recommend to the Board of Directors matters concerning the compensation of executives and employee awards of stock options and other incentive compensation. Investment Agreement Page 44 6.5 STOCK OPTION PLAN. The Company may retain its current stock option, bonus or stock incentive plan(s), or cancel such plan(s) and adopt a new stock incentive plan in order to have the ability to incentivize its key employees, future employees and others. The aggregate stock incentive pool shall consist of that number of shares of the Common Stock of the Company which, without the prior written consent of the Pioneer Partnership, shall not exceed thirteen and fifty-two one hundredths of one percent (13.52%) the Common Stock of the Company immediately following the investment herein. No person beneficially owning five hundred thousand (500,000) shares or more of the Company's stock shall be eligible to participate in such plans. 6.6 RULE 144 COMPLIANCE. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the shares to the public without registration, at all times after ninety (90) days after any registration statement covering a public offering of securities of the Company under the 1933 Act shall have become effective, or at all times after the Company has a class of Securities registered under the Exchange Act, the Company agrees to use its best efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144 under the 1933 Act; (ii) use its best efforts to file with the Commission (as hereinafter defined) in a timely manner all reports and other documents required of the Company under the 1933 Act and the Exchange Act of 1934; (iii) furnish to each holder of Registrable Securities forthwith upon request, a written statement by the Company as to the Company's compliance with the reporting requirements of Rule 144 and of the 1933 Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such holder to sell any Registrable Securities without registration; and (iv) use the Company's best efforts to satisfy the requirements of all such rules and regulations (including the requirements for current public information, registration under the Exchange Act and timely reporting to the Commission) at the earliest possible date after its first registered public offering. Investment Agreement Page 45 6.7 UNDERTAKING TO REGISTER ITS SECURITIES. Not applicable. 6.8 UNDERTAKING TO FILE 34 ACT FILINGS AND TO BE LISTED ON NASDAQ. (A) The Company undertakes to continue filing its proxy statement, its annual reports on Form 10-K and its quarterly reports on Form 10-Q, or on such other appropriate forms, with the SEC for so long as the Pioneer Partnership holds a five (5%) percent or greater equity interest in the Company. (B) The Company undertakes to use its best efforts to maintain its present listing on the NASDAQ Small Cap market for so long as the Pioneer Partnership holds any Preferred Stock, or Common Stock obtained through conversion of the Preferred Stock. Once the Company qualifies for a period of six (6) consecutive months subsequent to the date of the First Closing, the Company undertakes to apply to be listed on the NASDAQ National Market System, the American Stock Exchange or such other national stock exchange. The Company shall take all reasonable action to maintain such listing after it is so approved and listed. 6.9 DIVIDEND RESTRICTION WAIVER. The Company shall obtain prior to the First Closing a signed original waiver (addressed to the Company) from each of its lenders, including BNY Financial Corporation, certifying and agreeing either that (a) there are no restrictions on the declaration and payment of dividends on the Series C Preferred Stock, or (b) the declaration and payment of any and all cash dividends on the Series C Preferred Stock are permitted in accordance with its terms and no such declaration or payment shall constitute an event of default so long as the Company is in compliance with all other provisions (including without limitation the financial covenants) of the loan agreement between the Company and BNY Financial Corporation. It is expressly understood and represented by the Company that there are no restrictions on the payment of dividends if paid in the form of stock of the Company. 6.10 CORE SHETH LETTER OF CREDIT. The Company shall obtain prior to the First Closing a written warranty and covenant (addressed to it and to the Pioneer Partnership) of the Core Sheth Families that the May 1998 letter of credit delivered to the BNY Financial Corporation and the collateral in support thereof shall be renewed by the Core Sheth Families as may be necessary to support the present lending relationship with the BNY Financial Corporation. Investment Agreement Page 46 6.11 SIGNING OBLIGATIONS. The Company covenants that it shall require that: (a) all checks, notes, drafts, wire fund transfers, withdrawals of funds, or other obligations or money transfers in excess of $20,000 shall be manually signed by at least two (2) officers, directors and/or authorized employees; and (b) unless otherwise pre-approved by the board of directors with respect to such specific instrument or agreement, all agreements, notes, indentures, instruments or other documents incurring obligations, liability, responsibility or agreements on the part of the Company valued in excess of $20,000 shall be manually signed by at least two (2) officers, directors and/or authorized employees. A breach of these covenants shall constitute a default under the Preferred Stock. 6.12 NO COST LICENSES. Unless such patents or trademarks are owned by the Company, the Company shall obtain prior to the First Closing no-cost licenses for commercial use of all of the patents and trademarks listed in EXHIBIT 4.8 from each and every patent or trademark owner. Such agreement shall provide that all future patents and trademarks of such owners shall similarly be subject to such no-cost license agreement. 6.13 SEC FILINGS. The Company shall pay all legal fees and filing expenses of all filings made with the Commission on behalf of the director(s) nominated by the Pioneer Partnership pursuant to ss.1.10 and/or ss.6.4 hereof. Such filings shall include but not be limited to those maDE under Sections 13 and 16 of the Exchange Act. 6.14 BLUE SKY. The Company shall file a form D and a consent to service of process with the Connecticut Department of Banking. Investment Agreement Page 47 6.15 NO BREACH. The Company will (i) use its best efforts to assure that all of its representations and warranties contained herein are true in all material respects as of each Closing as if repeated at and as of such time, and that no material breach or default shall occur with respect to any of its covenants, representations or warranties contained herein that has not been cured by each Closing; (ii) not voluntarily take any action or do anything which will cause a breach of or default respecting such covenants, representations or warranties; and (iii) promptly notify the Pioneer Partnership of any event or fact which represents, or is likely to cause such a breach or default. ARTICLE VII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PIONEER PARTNERSHIP TO CLOSE CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PIONEER PARTNERSHIP TO CLOSE. The obligation of the Pioneer Partnership to enter into and complete each Closing is subject to the fulfillment, prior to or on each Closing Date, of each of the following conditions, any one or more of which may be waived by the Pioneer Partnership (except when the fulfillment of such condition is a requirement of law), as well as the satisfactory completion (in the sole opinion of the Pioneer Partnership) of (i) an audit or review of the books, records and accounts of the Company, and (ii) legal and other due diligence. 7.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of the Company contained in this Agreement and in any written statement, exhibit, certificate, schedule or other document delivered pursuant hereto or in connection with the transactions contemplated hereby shall be true and correct in all material respects as at each Closing Date, as if made at each Closing and as of each Closing Date. 7.2 COVENANTS. The Company shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by each of them prior to or at each Closing. Investment Agreement Page 48 7.3 NO ACTIONS. No action, suit, proceeding or investigation shall have been instituted, and be continuing before a court or before or by a governmental body or agency, or shall have been threatened and be unresolved, to restrain or to prevent or to obtain damages in respect of, the carrying out of the transactions contemplated hereby, or which might materially affect (i) the right of the Pioneer Partnership to own the Company's Stock, or (ii) the Company to operate or control the assets, properties and business of the Company after each Closing Date, or which might have a materially adverse effect thereon. 7.4 CONSENTS, LICENSES AND PERMITS. The Company shall have obtained all consents, licenses and permits of third parties necessary for the performance of its obligations under this Agreement, and such other consents, if any, to prevent (i) agreements of the Company from terminating, the termination of which, in the aggregate, would have a material adverse effect on the business, financial condition or assets of the Company, or (ii) any material indebtedness of the Company from becoming due or being subject to becoming due with the passage of time or on notice as a result of the performance of this Agreement, any other provision of this Agreement to the contrary notwithstanding. 7.5 CERTIFICATE. The Pioneer Partnership shall have received a certificate in the form satisfactory to its counsel, dated each Closing Date, signed by an authorized representative of the Company, confirming the substance and effect of the representations and warranties set forth in Article IV hereto, and as to the satisfaction of the conditions contained in sections 7.1 and 7.2. 7.6 LEGAL OPINION. (A) The Pioneer Partnership shall have received the written opinion of the Company's Counsel, dated each Closing Date, in form and substance satisfactory to the Pioneer Partnership and its counsel, confirming the substance and effect of certain of the representations and warranties set forth in Article II hereto, that this Agreement is the valid and binding obligation of the Company, enforceable in accordance with its terms, and as to such other matters as the Pioneer Partnership may request. Investment Agreement Page 49 (B) The Pioneer Partnership shall have received the written opinion of counsel to the Principal Shareholders, dated each Closing Date, in form and substance satisfactory to the Pioneer Partnership and its counsel, confirming the substance and effect of the representations and warranties set forth in the Voting and Shareholders Agreement, and any modification, supplements or subsequent agreements thereto confirming that such agreement is the valid and binding obligation of the Principal Shareholders, enforceable in accordance with its terms, and as to such other matters as the Pioneer Partnership may request. 7.7 NO MATERIAL ADVERSE CHANGE. There shall have been no materially adverse change at each Closing Date in the business, assets, and properties, financial status or prospects of the Company from December 31, 1997, except as disclosed in EXHIBIT 7.7 hereof. 7.8 AGREEMENTS WITH PRINCIPALS. The Company shall have received and delivered to the Pioneer Partnership the Voting and Shareholder Agreement referred to in Section 1.10(a). 7.9 KEY PERSON INSURANCE. The Company shall have applied for Key-Person term life insurance, from a licensed and reputable insurance company in the minimum face amount of $5,000,000 each, insuring the lives of the president, Richard Howard, CEO, Viren Sheth, CFO, Robert Viola. The Company shall be the designated beneficiary and the Pioneer Partnership shall be the designated loss payee. Renewal of the policies after the first year term shall be at the discretion of the Company's Board of Directors. 7.10 PATENTS. All of the officers, directors, principals and the affiliates of the Company shall have assigned and transferred all of the Patents to the Company or provided to the Company for a no-cost license in form and of substance approved by the Pioneer Partnership. Investment Agreement Page 50 7.11 APPROVAL OF COUNSEL. All actions, proceedings, instruments and documents required to carry out this Agreement, or incidental thereto, and all other related legal matters shall have been approved as to form and substance by the Pioneer Partnership's counsel, which approval shall not be unreasonably withheld or delayed. 7.12 CONSENTS, LICENSES AND PERMITS. The Company, shall have obtained all consents, licenses and permits of third parties necessary for the performance of its obligations under this Agreement, and such other consents, if any, to prevent (i) agreements of the Company from terminating, the termination of which, in the aggregate, would have a material adverse effect on the business, financial condition or assets of the Company or (ii) any material indebtedness of the Company from becoming due or being subject to becoming due with the passage of time or on notice as a result of the performance of this Agreement, any other provision of this Agreement to the contrary notwithstanding. 7.13 ADDITIONAL DOCUMENTS. The Company shall have delivered all such other certificates and documents as the Pioneer Partnership or their counsel may have reasonably requested. ARTICLE VIII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY TO CLOSE CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY TO CLOSE. The obligation of the Company to enter into and complete each Closing is subject to the fulfillment, prior to or on each Closing Date, of each of the following conditions, any one or more of which may be waived by the Company (except when the fulfillment of such condition is a requirement of law). 8.1 REPRESENTATIONS AND WARRANTIES. All representations and warranties of the Pioneer Partnership contained in this Agreement and in any written statement, exhibit, certificate, schedule or other document delivered pursuant hereto or in connection with the transactions contemplated hereby shall be true and correct in all material respects as at each Closing Date, as if made at each Closing and as of each Closing Date. Investment Agreement Page 51 8.2 COVENANTS. The Pioneer Partnership shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it prior to or at each Closing. 8.3 NO ACTIONS. No action, suit, proceeding, or investigation shall have been instituted, and be continuing before a court or before a governmental body or agency, or have been threatened and be unresolved, to restrain or prevent, or obtain damages in respect of, the carrying out of the transactions contemplated hereby. 8.4 ADDITIONAL DOCUMENTS. The Pioneer Partnership shall have delivered all such other certificates and documents as the Company or its counsel may have reasonably requested. 8.5 APPROVAL OF COUNSEL. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental thereto, and all other related legal matters, shall have been approved as to form and substance by Company's counsel, which approval shall not be unreasonably withheld or delayed. Investment Agreement Page 52 ARTICLE IX. CLOSING 9.1 LOCATION. Each Closing shall occur the offices of the Pioneer Partnership or at such place and upon such date as the Company and the Pioneer Partnership mutually agree. 9.2 ITEMS TO BE DELIVERED BY THE COMPANY. At the First Closing, the Company will deliver or cause to be delivered to the Pioneer Partnership: (a) duly executed Investment Agreement; (b) duly executed Voting and Shareholders Agreement; (c) duly executed resolutions; (d) duly executed and recorded Certificate of Designation; (e) validly issued original certificates representing the Preferred Stock in accordance with Article I hereof. (f) the certificates required by section 7.5 hereof; (g) the opinion of the Company's counsel, as required by section 7.6 hereof; (h) the agreements required by section 7.8 and 7.11 hereof; (i) the insurance binder and paid receipt required by section 7.9 hereof; Investment Agreement Page 53 (j) Separate checks for $75,000 and $5,000 payable to Ventures Management Partners LLC (the General Partner of the Pioneer Partnership) as required by sections 11.1, 11.2, and 11.4 hereof; (k) a check for $15,000 payable to Kenneth B. Lerman, Esquire as required by section 11.3 hereof; (l) such other certified resolutions, exhibits, instruments, documents and certificates as are required to be delivered by the Company pursuant to the provisions of this Agreement and pursuant to the checklists presented by the Pioneer Partnership or its counsel. 9.3 ITEMS TO BE DELIVERED BY THE PIONEER PARTNERSHIP. At the First Closing, the Pioneer Partnership will deliver or cause to be delivered to the Company: (a) a check or checks or evidence of wire transfer in the aggregate amount of four million six hundred ninety-nine thousand nine hundred eighty ($4,699,980) dollars, as specified in Article I hereof; and 9.4 ITEMS TO BE DELIVERED BY THE COMPANY AT SUBSEQUENT CLOSINGS. At each Subsequent Closing the Company shall deliver or cause to deliver such documents, certificates, funds, or such other items as required to be delivered by the Company pursuant to the provisions of this Agreement and as reasonably requested by the Pioneer Partnership. Requests for materials or updates to materials previously submitted shall be deemed a reasonable request; in addition, previously unrequested materials may be so requested by the Pioneer Partnership as it deems necessary in its business judgment in order to complete its investment in the Company. Investment Agreement Page 54 9.5 ITEMS TO BE DELIVERED BY THE PIONEER PARTNERSHIP AT SUBSEQUENT CLOSINGS. At each Subsequent Closing, the Pioneer Partnership will deliver or cause to be delivered to the Company: (a) a check or checks or evidence of wire transfer in an amount equal to the product of (i) the number of shares of Preferred Stock to be purchased by the Pioneer Partnership at such Subsequent Closing TIMES (ii) $60.00, subject to the provisions of ss.1.2 and ss.1.7; PROVIDED, HOWEVER, the aggregate of all such amounts from aLL Subsequent Closings shall not exceed the amount of one million three hundred thousand twenty ($1,300,020) dollars, as specified in Article I hereof; and (b) such other certified resolutions, documents and certificates as are required to be delivered by the Pioneer Partnership pursuant to the provisions of this Agreement. ARTICLE X. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION; FEES 10.1 SURVIVAL. The parties hereto agree that their respective representations, warranties, covenants and agreements contained in this Agreement shall survive the Closing for a period of six (6) years. 10.2 INDEMNIFICATION. The Company agrees to save, defend and indemnify the Pioneer Partnership and its limited and general partners and their respective officers, directors, managing members and the agents, as well as the attorneys, accountants, or other representatives of such parties (jointly or severally "INDEMNIFIED PARTIES") against, and hold them harmless from any and all liabilities, of every kind, nature and description, fixed or contingent (including, without limitation, reasonable counsel fees, expert witness fees, and expenses in connection with any action, claim or proceeding relating to such liabilities) arising out of a material breach (a "material breach" shall be any breach with a potential liability in excess of $5,000 as estimated by the Pioneer Partnership) of any of the representations and warranties contained herein and/or any transaction or event commencing or occurring on or prior to the Closing Date, which is not fully disclosed or provided for in EXHIBIT 4.7-A, EXHIBIT 4.7-B, and the accounts payable listing dated June 16, 1998 attached thereto, this Agreement or the several exhibits hereto, including, without limitation, any tax liabilities to the extent not so reflected or reserved against in the Balance Sheet. Investment Agreement Page 55 10.3 DEFENSE OF CLAIMS. The Pioneer Partnership agrees to notify the Company with reasonable promptness of any claim asserted against them in respect of which the Company may be liable under this Agreement, which notification shall be accompanied by a written statement setting forth the basis of such claim and the manner of calculation thereof. The Company shall have the right to defend any such claim(s) at its own expense and with counsel of its choice; provided that the Pioneer Partnership may participate in such defense, if it so chooses, with its own counsel and at its expense. The Company agrees that if any of the representations and warranties made by it in this Agreement shall be finally determined not to have been true, correct or complete when made, then the Company shall pay to the Pioneer Partnership at the time of such final determination an amount sufficient to indemnify the Pioneer Partnership and the other indemnified parties hereto to the full extent of its losses and expenses sustained by reason thereof, including attorneys, accountants, expert witnesses, and other professional fees and expenses. 10.4 RIGHTS WITHOUT PREJUDICE. The rights of the Pioneer Partnership under this Article are without prejudice to any other rights or remedies that it may have by reason of this Agreement or as otherwise provided by law. ARTICLE XI. FEES 11.1 INVESTMENT BANKING FEES. The Company shall pay an investment banking fee of $85,000 to the General Partner of the Limited Partnership (Ventures Management Partners LLC) concurrently with its execution and delivery of the this Agreement. The General Partner of the Pioneer Partnership hereby acknowledges receipt from the Company of a check in the amount of $10,000 in payment of the commitment fee and expenses set forth in this Section 11.1. Investment Agreement Page 56 11.2 EXPENSES. The Company shall promptly pay and reimburse the General Partner of the Pioneer Partnership a non-accountable expense allowance of $5,000 for its out-of-pocket expenses incurred in connection with visits to the Company's facilities and other costs and expenses in connection with its due diligence investigation of the Company. 11.3 LEGAL FEES. The Company shall pay at the First Closing the attorneys fees and out-of-pocket expenses of counsel for the Pioneer Partnership in connection with the transactions contemplated hereby; such attorneys fees and out-of-pocket expenses shall equal $25,000. It is acknowledged that $10,000 has been paid prior to Closing. In addition, the Company shall pay its own counsel's fees and all of the expenses of the closing, including all search fees, filing fees, governmental certification fees, third party investigation or other due diligence fees for reports, filings or certifications requested by the Pioneer Partnership to effect the closing. 11.4 ACCOUNTING FEES. Not applicable. 11.4 BREAK-UP FEE. At any time prior to the funding of the investment, the Company may terminate this Agreement by written notice without any obligation or liability other than to forfeit the pre-payment of $10,000 paid as a commitment fee to the General Partner of the Pioneer Partnership as then recharacterized as the non-refundable Break-up fee and the legal fee paid. ARTICLE XII. TERMINATION AND WAIVER Investment Agreement Page 57 12.1 TERMINATION. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated and the transactions provided for herein abandoned at any time prior to the Closing Date: (a) by mutual consent of the Pioneer Partnership and the Company; (b) by the Pioneer Partnership if any of the conditions set forth in Article VII and Sections 1.12 and 1.13 hereof, in its sole opinion, shall not have been fulfilled on or prior to closing, or shall become incapable of fulfillment, and shall not have been waived; (c) by the Company if any of the conditions set forth in Article VIII hereof shall not have been fulfilled on or prior to Closing, or shall have become incapable of fulfillment, and shall not have been waived; (d) by any party if any material legal action or proceeding shall have been instituted or threatened seeking to restrain, prohibit, invalidate or otherwise affect the consummation of the transactions contemplated by this Agreement In the event that this Agreement is terminated as described above, this Agreement shall be void and of no force and effect, without any liability or obligation on the part of any of the parties hereto, except the provisions of Section 11.5 hereof. 12.2 WAIVER. Any condition to the performance of the Company or of the Pioneer Partnership which legally may be waived on or prior to the Closing Date may be waived at any time by the party entitled to the benefit thereof by action taken or authorized by an instrument in writing executed by the relevant party or parties. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. No waiver by any party of the breach of any term, covenant, representation or warranty contained in this Agreement as a condition to such party's obligations hereunder shall release or affect any liability resulting from such breach, and no waiver of any nature, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or of any breach of any other term, covenant, representation or warranty of this Agreement. Investment Agreement Page 58 ARTICLE XIII. MISCELLANEOUS PROVISIONS 13.1 EXPENSES. Except as set forth in Article XI, each of the parties hereto shall bear its own expenses in connection herewith. 13.2 MODIFICATION, TERMINATION OR WAIVER. This Agreement may be amended, modified, superseded or terminated, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, but only by a written instrument executed by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. 13.3 NOTICES. Any notice or other communication required or which may be given hereunder shall be in writing and either be delivered personally or be mailed, certified or registered mail, postage prepaid, and shall be deemed given when so delivered personally, or if mailed, five (5) days after the date of mailing, as follows: If to the Pioneer Partnership, to: Copies to: PIONEER VENTURES ASSOCIATES Kenneth B. Lerman, Esquire LIMITED PARTNERSHIP KENNETH B. LERMAN, P.C. 651 Day Hill Road 651 Day Hill Road P.O. Box 40 Windsor, Connecticut 06095-0040 Windsor, Connecticut 06095 Attention: Robert A. Lerman Managing Director If to the Company, to: Copies to: Investment Agreement Page 59 Office of the Chairman Phillip M. Renfro, Esquire TRISTAR CORPORATION FULLBRIGHT & JAWORSKI L.L.P. 12500 San Pedro Avenue 300 Convent Street, Suite 2200 Suite 500 San Antonio, Texas 78205-3792 San Antonio, Texas 78216 Attention: Mr. Richard Rifenburgh, Chairman The parties may change the persons and addresses to which the notices or other communications are to be sent to it by giving written notice of any such change in the manner provided herein for giving notice. 13.4 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. No assignment of any rights or delegation of any obligations provided for herein may be made by any party without the express written consent of the other party. 13.5 ENTIRE AGREEMENT. This Agreement contains the entire Agreement between the parties with respect to the subject matter hereof. 13.6 CALENDAR DAYS. All references to "days" in this agreement with respect to the amount of time allocated for notices, performance or other periods shall mean calendar days, unless otherwise specified. 13.7 EXHIBITS. All Exhibits annexed hereto and the documents and instruments referred to herein or required to be delivered simultaneously herewith or at the Closing are expressly made a part of this Agreement as fully as though completely set forth herein, and all references to this Agreement herein or in any such Exhibits, documents or instruments shall be deemed to refer to and include all such Exhibits, documents and instruments. Any execution of this Agreement is subject to the receipt of current and complete exhibits. Investment Agreement Page 60 13.8 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. 13.9 CONSENT TO JURISDICTION. The parties here to consent to jurisdiction of the Courts of the State of Connecticut and to the U.S. District Court in the District of Connecticut. 13.10 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but which together shall constitute one and the same instrument. 13.11 SECTION HEADINGS. The section headings contained in this Agreement are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. 13.12 GENDER. Whenever the content of this Agreement permits, the masculine, neuter or third person genders shall include the feminine, third person and neuter genders, and reference to singular or plural shall be interchangeable with the other. 13.13 CONTROLLING DOCUMENT. To the extent that any provisions contained in this Agreement are inconsistent with those contained in the Certificate of Designation, the provisions of the Certificate of Designation shall control. 13.14 USE OF TERM "PIONEER PARTNERSHIP". Notwithstanding any provision of this Agreement to the contrary, included in the definition and meaning of the "Pioneer Partnership" shall be any one or more parallel limited partnerships which have been or shall be organized by Ventures Management Partners LLC as the general partner to invest in parallel with Pioneer Ventures Associates Limited Partnership on the same economic terms and PRO RATA based upon their aggregate subscriptions. The limited Investment Agreement Page 61 partners of Pioneer Ventures Associates Limited Partnership and the parallel partnerships shall be referred to herein as the "LIMITED PARTNERS". [Signature Page Follows] Investment Agreement Page 62 WITNESS the execution of this Agreement as of the date first above written. PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP BY: VENTURES MANAGEMENT PARTNERS LLC its General Partner BY: Pioneer Ventures Corp. Its Managing Member BY: /s/ ROBERT A. LERMAN Robert A. Lerman, President TRISTAR CORPORATION BY: /s/ RICHARD HOWARD Name: Richard Howard Title: President and COO ATTEST: (Corporate Seal) BY: /s/ ROBERT VIOLA Name: Robert Viola Title: Vice President and CFO EX-10.43 6 EXHIBIT 10.43 STOCK WARRANT THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS, WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. WARRANT TO PURCHASE SHARES OF COMMON STOCK OF TRISTAR CORPORATION Warrant Certificate No. 1998-1 Date: September 3, 1998 ("Effective Date") This certifies that, for value received, Tristar Corporation, a Delaware corporation (the "COMPANY"), hereby grants to Pioneer Ventures Associates Limited Partnership (the "HOLDER") the right to purchase, subject to adjustment and the other terms and conditions set forth herein, 125,000 shares of common stock, par value $.01 per share (the "Stock"), at the WARRANT EXERCISE PRICE per share (as defined in SECTION 1(D) hereof), subject to adjustment as set forth in SECTION 3 hereof, at any time or from time to time after the date hereof and prior to 5:00 P.M. (Eastern Time) on September 2, 2003 (the "WARRANT EXPIRATION DATE"). This Warrant and all warrants hereafter issued in exchange or substitution of this Warrant, are hereinafter referred to as the "WARRANTS." THIS WARRANT, TO THE EXTENT NOT EXERCISED IN THE MANNER SET FORTH HEREIN, SHALL TERMINATE AND BECOME NULL AND VOID AT 5:00 P.M. (EASTERN TIME) ON THE WARRANT EXPIRATION DATE. This Warrant is subject to the following terms and conditions. 1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT OF SHARES. 2. 3. (a) This Warrant may be exercised, at the option of the Holder, in whole or in part at any time prior to 5:00 P.M. (Eastern Time) on the Warrant Expiration Date, by surrender to the Company of this Warrant Certificate properly endorsed together with the Form of Subscription attached hereto duly filled in, signed and with proper payment of the Warrant Exercise Price multiplied by the number of shares of Stock for which the Warrant is being exercised. Payment shall be in cash, certified check or official bank check or check, subject to collection, payable to the order of the Company. 4. 5. (b) In addition to the method of payment set forth in Section 1(a) above and in lieu of any cash payment required thereunder, unless otherwise prohibited by law, the Holder shall have the right at any time, when exercisable, and from time to time to exercise the Warrants in full or in part by receiving from the Company the number of shares of Stock equal to the number of shares of Stock otherwise issuable upon such exercise less the number of shares of Stock having an aggregate "Fair Market Value" on the date of exercise equal to the Warrant Exercise Price multiplied by the number of shares of Stock for which this Warrant is being exercised. For purposes hereof, the "Fair Market Value" of a share of Stock on a given date shall be equal to the "Closing Sales Price" on such date. The "Closing Sales Price" as of a certain date will mean the closing sales price, in the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System, or if not so reported, as reported by the National Quotation Bureau, Incorporated, or any successor thereof, or if not so reported, the closing sales price as furnished by any member of the National Association of Securities Dealers, Inc., selected from time to time by the Company for that purpose, or, if the Stock is listed or admitted to trading on a national securities exchange, the closing sales price, regular way, on the principal national securities exchange on which the Stock is listed or admitted to trading. 6. 7. (c) The Company agrees that the shares of Stock purchased on the exercise of each Warrant shall be deemed to be issued as of the close of business on the date on which this Warrant Certificate shall have been surrendered and payment made for such shares of Stock. Issuance of the shares of Stock shall be subject to compliance with all provisions of the Securities Act of 1933, as amended (the "SECURITIES ACT"), the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and any relevant state securities law. Subject to the provisions of Section 2 hereof, certificates for the largest whole number of shares of Stock so purchased, together with any other securities or property to which the Holder is entitled upon such exercise, shall be delivered to the Holder by the Company within two business days after this Warrant has been exercised. No fractional shares of Stock shall be issued upon exercise of this Warrant. Each Stock Certificate so delivered shall be registered in the name of the Holder or such other name as shall be designated by the Holder, subject to the provisions of Sections 6 and 8 hereof. If prior to the Warrant Expiration Date, this Warrant is exercised in part, one or more new Warrants substantially in the form of, and on the terms contained in, this Warrant Certificate will be issued for the remaining number of shares of Stock in respect of which this Warrant has not been exercised. 8. 9. (d) If at the time of exercise of all or part of this Warrant, the Fair Market Value of a share of Stock, on the trading day immediately prior to the date of exercise, is less than $5 7/16 (for purposes of this Section 1(d), $5 7/16 shall be referred to as a "Pricing Standard"), then the Warrant Exercise Price shall be $4.00 (for purposes of this Section 1(d), $4.00 shall be referred to as a "Pricing Standard"). If at the time of exercise of all or part of this Warrant, the Fair Market Value of a share of Stock, on the trading day immediately prior to the date of exercise, is $5 7/16 or more, then the Warrant Exercise Price shall be the sum of (a) $4.00 and (b) one-half (50%) of the difference between the Fair Market Value of a share of Stock and $5 7/16; provided, however in no event shall the Warrant Exercise Price be more than $6 9/32 per share (for purposes of this Section 1(d), $6 9/32 shall be referred to as a "Pricing Standard"). In the event the Warrant Exercise Price is adjusted pursuant to Section 3 hereof, then each of the Pricing Standards shall be similarly adjusted. 10. 11. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees that all shares of Stock which may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable. The Company further covenants and agrees that during the period within which this Warrant may be exercised, the Company will at all times have authorized and reserved, and will keep available solely for issuance upon exercise of this Warrant, a sufficient number of shares of Stock or other securities and properties as from time to time shall be receivable upon the exercise of this Warrant. The Company shall provide that any successor corporation will reserve a sufficient number of shares of authorized but unissued stock or other securities or set aside sufficient other property, as the case may be, as provided for in this Section 2. 12. 13. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES; EVENTS REQUIRING NOTICE; CHANGES IN STOCK. 14. 14.1 METHOD OF ADJUSTMENT. The Warrant Exercise Price and the number of shares of Stock purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of the events described in Section 3.2. Upon each adjustment of the Warrant Exercise Price, the Holder shall thereafter be entitled to purchase, at the Warrant Exercise Price resulting from such adjustment, the number of shares of Stock obtained by multiplying the Warrant Exercise price in effect immediately prior to such adjustment by the number of shares of Stock purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Warrant Exercise Price resulting from such adjustment. 14.2 14.3 SUBDIVISION OR COMBINATION OF STOCK AND STOCK DIVIDEND. In case the Company shall at any time subdivide its outstanding shares of Stock into a greater number of shares of Stock or declare a dividend upon its Stock payable solely in shares of Stock, the Warrant Exercise Price in effect immediately prior to such subdivision or dividend shall be proportionately reduced, and conversely, in case the outstanding shares of Stock of the Company shall be combined into a smaller number of shares of Stock, the Warrant Exercise Price in effect immediately prior to such combination shall be proportionately increased. 14.4 14.5 ADJUSTMENTS FOR DIVIDENDS IN SECURITIES OTHER THAN COMPANY Stock. While this Warrant, or any portion hereof, remains outstanding and unexpired, if the Holders of the Stock shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefore, shares of capital stock of a subsidiary of the Company by way of dividend or otherwise, then in such case, this Warrant shall represent the right to acquire, in addition to the number of shares of the Stock receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such capital stock of such subsidiary that the Holder would have received if the Holder had exercised this Warrant prior to any such capital stock distribution; provided, however, no adjustment to the Warrant Exercise Price shall occur as a result of any such dividend of the capital stock of a subsidiary of the Company. 14.6 14.7 NOTICE OF ADJUSTMENT. Upon any adjustment of the Warrant Exercise Price and any increase or decrease in the number of shares of Stock purchasable upon the exercise of this Warrant, the Company promptly shall give written notice thereof to the Holder, which shall state the Warrant Exercise Price resulting from such adjustment and increase or decrease, if any, in the number of shares of Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 14.8 14.9 OTHER NOTICES. If at any time: 14.10 14.11 (a) the Company shall declare a dividend upon its Stock payable in shares of capital stock of one of its subsidiaries; 14.12 14.13 (b) there shall be any consolidation or merger of the Company with another corporation, or a sale of all or substantially all of the Company's assets to another corporation; or 14.14 14.15 (c) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; 14.16 14.7 then, in any one or more of said cases, the Company shall give the Holder (i) at least thirty (30) days' prior written notice of the date on which the books of the Company shall close or a record date shall have occurred for such dividend or distribution or for determining rights to vote in respect of any such consolidation, merger, sale, dissolution, liquidation or winding-up, and (ii) in the case of any such consolidation, merger, sale, dissolution, liquidation or winding-up, at least twelve (12) calendar days' written notice of the date when the same shall take place. Any notice given in accordance with clause (i) above shall also specify, in the case of any such dividend or distribution, the date on which the holders of Stock shall be entitled thereof. Any notice given in accordance with clause (ii) above shall also specify the date on which the holders of Stock shall be entitled to exchange their Stock for securities or other property deliverable upon such consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. Notwithstanding anything contained herein to the contrary, if the Holder does not exercise this Warrant prior to a record date or the occurrence of an event described above, as applicable, except as provided in Section 3.2, the Holder shall not be entitled to receive the benefits accruing to existing holders of the Stock in such event. 14.18 15. ISSUE TAX. The issuance of certificates for shares of Stock upon the exercise of this Warrant shall be made without charge to the Holder or its limited partners for any issue tax in respect thereof; PROVIDED, HOWEVER, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder or its limited partners. 16. 17. NO VOTING OR DIVIDEND RIGHTS. This Warrant does not confer upon the Holder the right to vote or to consent or to receive notice as a stockholder of the Company, in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company prior to the exercise hereof. No cash dividends shall be payable or accrued in respect of this Warrant or the shares of Stock purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. 18. 19. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT. 20. 20.1 RESTRICTIONS ON TRANSFERABILITY. The Holder may transfer or assign this Warrant, except that the Company shall not be obligated to effect any transfer of this Warrant unless a registration statement is in effect with respect thereto under applicable state and Federal securities laws or the Company has received an opinion in substance reasonably satisfactory to it from counsel reasonably satisfactory to it that such registration is not required and this Warrant is surrendered to the Company at its principal office together with the Assignment Form annexed hereto, duly completed and executed, and sufficient funds to pay any transfer tax. 1.1 OWNERSHIP. The Company and any agent of the Company may treat the person in whose name this Warrant Certificate is registered on the register which the Company shall cause to be maintained for such purpose as the owner and holder thereof for all purposes. This Warrant Certificate, if properly assigned, may be exercised by a new holder without first having a new Warrant Certificate issued. 1.2 1.3 LEGEND. A legend setting forth or referring to the above restrictions shall be placed on this Warrant, any replacement hereof or any certificate representing the Stock, and a stop transfer restriction or order shall be placed on the books of the Company and with any transfer agent until such securities may be legally sold or otherwise transferred. 1.4 2. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Party against which enforcement of the same is sought. 3. 4. NOTICES. Any notice, request or other document required or permitted to be given or delivered to the Holder or the Company shall be personally delivered or shall be sent by certified or registered mail, postage prepaid, if to the Holder at 651 Day Hill Road, Windsor, Connecticut 06095, or if to the Company at its principal office at 12500 San Pedro Avenue, Suite 500, San Antonio, Texas 78216. Any notice, request or other document shall be deemed to have been given upon receipt if personally delivered, or on the seventh day after being mailed if mailed, registered or certified mail. Each party shall notify the other party in writing of any change of address of the Company within a reasonable time following such change of address. 5. 6. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The descriptive headings of the several sections and paragraphs of this Warrant Certificate are inserted for convenience only and do not constitute a part of this Warrant Certificate. This Warrant Certificate shall be construed and enforced in accordance with, and the rights of the Parties shall be governed by, the laws of the State of Delaware. 7. 8. LOST WARRANT CERTIFICATES OR STOCK CERTIFICATES. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant Certificate or any stock certificate deliverable upon the exercise hereof and, in the case of any such loss, theft or destruction, upon receipt of an indemnity and, if requested, bond reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of this Warrant Certificate or such stock certificate, the Company at its expense shall make and deliver a new Warrant Certificate or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant Certificate or stock certificate. 9. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be executed by its officer, thereunder duly authorized as of the ___th day of September, 1998. TRISTAR CORPORATION By: Name: Title: FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: TRISTAR CORPORATION The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, _______________ shares of Common Stock of TRISTAR CORPORATION and herewith makes payment of $____________ therefore and requests that the certificates for such shares be issued in the name of, and delivered to, ____________________________, whose address is _____________________________________________. Dated: ______________, _____ ___________________________________ (Signature must conform to name of Holder as specified on the face of the Warrant) ___________________________________ ___________________________________ (Address) FORM OF ASSIGNMENT (To be signed only on transfer of Warrant in accordance with the provisions of Section 6 of the Warrant Certificate) For value received, the undersigned hereby sells, assigns, and transfers unto _____________________ the right represented by the written Warrant to purchase shares of Common Stock of TRISTAR CORPORATION to which the within Warrant relates and appoints Attorney to transfer such rights on the books of TRISTAR CORPORATION with full power of substitution in the premises. Dated: _____________, _____ __________________________________ (Signature must conform to name of Holder as specified on the face of the Warrant) EX-10.44 7 EXHIBIT 10.44 TRADEMARK LICENSE AGREEMENT THIS AGREEMENT is effective as of September 3, 1998 (hereinafter the "EFFECTIVE DATE") by and between: S & J Perfume Company, (hereinafter referred to as "LICENSOR"), and Tristar Corporation, a Delaware corporation (hereinafter referred to as "LICENSEE"); WHEREAS, Licensor is the owner of the trademarks and registrations thereof listed on SCHEDULE A, which Schedule may be amended from time to time by mutual consent of the parties (the "MARKS"); WHEREAS, Licensee desires to obtain a license from Licensor to use the Marks on products produced, marketed, sold and distributed by Licensee (the "PRODUCTS"); and NOW, THEREFORE, in consideration of the foregoing and of the mutual promises hereinafter set forth, the parties agree as follows: 1. DEFINITIONS In this Agreement, the following terms shall have the meanings set forth below: "NET SALES" shall mean the total of all charges invoiced by Licensee for sales of the Products less the following items insofar as they are separately stated but included in the amounts invoiced to customers: usual trade discounts actually taken, returns, allowances, packing costs, insurance, transportation costs, customs duties and sales, use, import, export and excise taxes. "TERRITORY" shall mean North America, Central America and South America excluding, however, Argentina, Chile, Brazil, Uruguay and Paraguay. 2. TERM 2.1 Subject to the provision of ARTICLE 10 herein, this Agreement shall continue with respect to each of the Marks, in force from the Effective Date until the termination, cancellation or expiration of such Mark (the "Term"). 3. GRANT OF LICENSE 3.1 Subject to the provisions of this Agreement, Licensor grants to Licensee, and Licensee accepts, a nonexclusive, nontransferable, personal license (with the right to enter into sublicenses only with producers of the Products and only for the sole purpose of producing the Products for Licensee) to use the Marks in the Territory solely in connection with the production, distribution, sale and advertisement of the Products. 3.2 Licensee shall not use the Marks other than as provided in SECTION 3.1 hereof. 4. PAYMENT 4.1 Licensee shall pay to Licensor an initial payment of one dollar ($1.00) on the Effective Date. 4.2 In addition to the payment set forth in SECTION 4.1 hereof, Licensee also shall pay to Licensor royalties in the amount of five percent (5%) of the Net Sales of the Products. Licensor hereby waives its right to such royalties; provided however, at the sole discretion of Licensor and upon thirty (30) days written notice to Licensee, Licensor has the right to revoke such waiver and to collect royalties for any Net Sales made after such thirty (30) day period. 5. ACCOUNTING AND AUDITING 5.1 After Licensor's revocation of the waiver set forth in SECTION 4.2 hereof, within sixty (60) days following the end of each quarterly period ending three (3) months, six (6) months, nine (9) months, and twelve (12) months after the Effective Date and any anniversary date of the Effective Date, during the Term, Licensee shall provide Licensor with a written statement of Licensee's inventory and Net Sales during such quarterly period showing the number, type and Net Sales of each Product and a calculation of the royalty due based thereon. Within sixty (60) days after any expiration or termination of this Agreement, Licensee shall provide Licensor such a statement for the last whole or partial quarterly period during the Term. Each such statement shall be accompanied by the remittance to Licensor of the royalties shown to be due thereby. 5.2 Upon five (5) days' notice to Licensee, Licensor, at its expense, shall have the right at any time during regular business hours, not more frequently than twice annually, to have a qualified accountant selected by Licensor audit the records of Licensee to the extent necessary to verify Licensee's statements and payments of royalties. Such records shall be made available to Licensor's accountant at Licensee's office located at the address stated below. Licensee shall cooperate with and assist Licensor's accountant for the purpose of facilitating such audit. 5.3 If, as a result of such audit, Licensor's accountant determines that the amount of royalties due was greater than the amount reported by Licensee in a quarterly statement furnished pursuant to SECTION 5.1, Licensor shall promptly furnish to Licensee a copy of the report of its accountant setting forth the amount of the deficiency showing, in reasonable detail, the basis upon which such deficiency was determined. Licensee shall promptly remit to Licensor a sum equal to such deficiency so claimed, together with interest thereon at the rate of the lesser of twelve percent (12%) per annum or the maximum non-usurious rate allowed by law, from the date such royalty was due until the date of such remittance. In addition, if the audit reveals the underpayment by more than ten percent (10%) of the royalties in any quarterly period, Licensee shall pay to Licensor the cost of such audit. -2- 6. USE OF MARKS 6.1 Licensee agrees that the nature and quality of: (i) all services and goods rendered by Licensee in connection with the Marks; (ii) all goods produced, distributed or sold by Licensee under the Marks; and (iii) all related advertising, promotional, and other related uses of the Marks by Licensee shall conform to standards set by Licensor. Any usage not in conformity with standards set by Licensor shall require Licensor's prior written consent. 6.2 Licensee may use its own trademarks and the trademarks of third parties in conjunction with the Marks. 6.3 Licensee agrees to permit reasonable, periodic inspection of Licensee's and/or sublicensees' operations, at reasonable times and with reasonable notice, and to supply Licensor with specimens of all uses of the Marks upon request. Licensee shall comply with all applicable laws and regulations and obtain all appropriate governmental approvals pertaining to the production, distribution, sale and advertising of the Products. 6.4 Licensor shall not use or adopt, during the term of the License nor at any time thereafter, except as expressly permitted by this Agreement, in its business, in its business name, in its trading style, or in any of its services or on any of its products any trademark, service mark, name, style or dress which is so similar to, or so nearly resembles any of the Marks or any other trademark, service mark, trade name, trade dress or label of Licensor as to be likely to cause or as to be calculated to cause deception or confusion, or which is graphically or phonetically similar to or is derived from or based upon any of the Marks. If Licensee adopts or uses, at any time, any trademark, service mark, name, dress or style which Licensor regards as being in breach of this Section, Licensee shall, immediately upon request of Licensor, discontinue such adoption or use. 6.5 Licensee shall not use any of the Marks in Licensee's name or in any trade name, trademark, service mark, or trade dress of Licensee. Nor shall Licensee use any of the Marks in it stationery, letterhead, advertising or otherwise in such a way as may cause any confusion between Licensee and Licensor in respect to third parties. 6.6 Licensee shall include the Marks on or with all Products sold under the Marks and shall include all notices and legends with respect to the Marks as are or may be required by applicable federal, state, and local laws or which may be reasonably requested by Licensor. 7. OWNERSHIP OF MARKS 7.1 Licensee acknowledges the ownership of the Marks by Licensor, agrees that it will do nothing inconsistent with such ownership, and that all use of the Marks by Licensee and all good will developed therefrom shall inure to the benefit of and be on behalf of Licensor. 7.2 Licensee agrees that nothing in this Agreement shall give Licensee any right, title, or interest in the Marks other than the right to use the Marks in accordance with this Agreement, and Licensee agrees that it will not challenge the title of Licensor to the Marks or challenge the validity of this Agreement. -3- 7.3 If notwithstanding the foregoing, Licensee at any time develops, adopts or acquires (including development or acquisition as a matter of law), directly or indirectly, any right, title or interest in or to the use of any of the Marks in any jurisdiction, then Licensee shall, at Licensee's request whether during the Term or thereafter, assign to Licensor or any designee or Licensor all such right, title and interest together with any and all good will incident thereto. 8. INFRINGEMENT 8.1 Licensee shall notify Licensor promptly of any actual or threatened infringements, imitations or unauthorized use of the Marks by third parties of which Licensee becomes aware. Licensor shall have the sole right, at its expense, to bring any action on account of any such infringements, imitations, or unauthorized use, and Licensee shall cooperate with Licensor, as Licensor may reasonably request, in connection with any such action brought by Licensor. Licensor shall retain any and all damages, settlement and/or compensation paid in connection with any such action brought by Licensor. 9. INDEMNIFICATION 9.1 Licensee, at its expense, shall defend and indemnify, and save and hold Licensor harmless from and against any and all liabilities, claims, causes of action, suits, damages, including without limitation, suits for personal injury or death of third parties, and expenses, including reasonable attorneys' fees and expenses, for which Licensor becomes liable, or may incur or be compelled to pay by reason of Licensee's activities or breach of the terms of this Agreement, including but not limited to (i) claims of infringement of any intellectual property right, or (ii) product liability suits by direct or indirect customers of Licensee. 10. TERMINATION 10.1 Licensor shall have the right to terminate this Agreement effective immediately upon (i) Licensee's receipt of written notice from Licensor in the event of any affirmative act of insolvency by Licensee, (ii) the appointment of any receiver or trustee to take possession of the properties of Licensee or upon the winding-up, or any sequestration by governmental authority of Licensee, (iii) any material breach of any of the duties and obligations of Licensee under this Agreement, or (iv) the value or validity of the Marks reasonably being expected to be compromised in any way by Licensee's continued use of the Marks. 10.2 The exercise of any right of termination under this ARTICLE 10 shall not affect any rights which have accrued prior to termination and shall be without prejudice to any other legal or equitable remedies to which Licensor may be entitled by reason of such rights. The obligations and provisions of ARTICLES 5, 7, and 9 shall survive any expiration or termination of this Agreement. 11. EFFECTS OF AND PROCEDURE ON TERMINATION 11.1 Upon the expiration or termination of this Agreement, Licensee agrees immediately to discontinue all use of the Marks and any term confusingly similar thereto, to destroy all printed materials bearing any of the Marks, and that all rights in the Marks and the good will connected therewith shall remain the property of Licensor. -4- 12. RELATIONSHIP OF THE PARTIES 12.1 The relationship of Licensee to Licensor is that of an independent contractor and neither Licensee nor its agents or employees shall be considered employees or agents of Licensor. This Agreement does not constitute and shall not be construed as constituting a partnership or joint venture or grant of a franchise between Licensor and Licensee. Licensee shall not have the right to bind Licensor to any obligations to third parties. 13. ASSIGNMENT 13.1 This Agreement may be assigned by Licensor but shall not be assignable or transferable by Licensee without the prior written consent of Licensor, and any attempted assignment by Licensee without such prior written consent shall be void and shall constitute a breach of the obligations of Licensee hereunder. 14. NOTICES 14.1 Any notice, demand, waiver, consent, approval, or disapproval (collectively referred to as "NOTICE") required or permitted herein shall be in writing and shall be given personally, by messenger, by air courier, by telecopy, or by prepaid registered or certified mail, with return receipt requested, addressed to the parties at their respective addresses set forth below or at such other address as a party may hereafter designate in writing to the other party. 14.2 A notice shall be deemed received on the date of receipt. 15. APPLICABLE LAW 15.1 This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without regard to principles of conflicts of laws. Any case, controversy, suit, action, or proceeding arising out of, in connection with, or related to, this Agreement shall be brought in any Federal or State court located in Bexar County and the State of Texas, and each party hereby consents to the jurisdiction of such Courts. -5- 16. SUBLICENSE 16.1 No sublicense agreement into which Licensee enters pursuant to SECTION 3.1 of this Agreement may extend beyond the Term. Licensee may not enter into any sublicense pursuant to this Agreement without the prior written consent of Licensor, which consent shall not be unreasonably withheld. 17. MODIFICATION, AMENDMENT, SUPPLEMENT OR WAIVER 17.1 This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous agreements, promises, representations, understandings, and negotiations whether written or oral. 17.2 No modification, amendment, supplement to or waiver of this Agreement or any of its provisions shall be binding upon the parties hereto unless made in writing and duly signed by both of the parties to this Agreement. A waiver by either party of any of the terms or conditions of this Agreement in any one instance shall not be deemed a waiver of such terms or conditions in the future. [SIGNATURES ON FOLLOWING PAGE] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the Effective Date. LICENSOR LICENSEE S & J PERFUME COMPANY TRISTAR CORPORATION By: _______________________ By: ________________________ Name: _____________________ Name: ______________________ Title: ____________________ Title: _____________________ Address: __________________ Address: ___________________ SCHEDULE A TRADEMARKS Adroit Lisette Anissa L'Ombre Aria of Love Lovange Aziano Love Dream Beseech Luger Bestow Morning Dream Bianca Natasha Black Lace One Way Blue Mist Oscent Caneta Pasadena Cantata Pink Lady Club Exclusif Precious Diamonds Crimson Premium Cyanese Prize Devoir Red Love Dikaasa Regal Hush Dream Birds Renata Endless Reputation Entranced* Ribbons N'Roses Essensuality Rio Grande Expedition Risky Fiero Rivoli Forever Roxy Gazebo Sandalwood Gina Shardeena Gina Logo Silk Flame Golden Love Simply You Grand Prize Sparkling Solitaire Heavenly Tidal Wave Heavenly Mist Token of Love Hideout Tsunami Hinting Utmost Identity Vibes Indeed Voix Insinuation Whirl Wind Lazoo Wild Wonder Legrand* Winter Love Leopard Zanutti *Copy of registration certificate not available. EX-10.45 8 EXHIBIT 10.45 VOTING AND SHAREHOLDERS AGREEMENT VOTING AND SHAREHOLDERS AGREEMENT dated as of September 3, 1998 by and between PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP, having an office at 651 Day Hill Road, Windsor, Connecticut 06095 (the "PIONEER PARTNERSHIP "), AND, (A) SHASHIKANT S. SHETH, JAMMADAS SHETH, KIRIT SHETH, MAHENDRA SHETH, VIREN S. SHETH, JAY J. SHETH, B.J. HARID, NEVELL INVESTMENTS, S.A.,TRANSVIT MANUFACTURING CORPORATION, STARION INTERNATIONAL LIMITED, STARION B.V.I., AND (B) ARON ZUTLER, PETER LIMAN, ROBERT VIOLA, RICHARD HOWARD, RICHARD P. RIFENBURGH, ROBERT R. SPARCINO, or any trusts, or other entities or affiliates (collectively hereinafter referred to as the "PRINCIPAL SHAREHOLDERS"). Those Principal Shareholders listed in (b) above shall be automatically released from their respective obligations and rights hereunder on the date that such Principal Shareholder ceases to be affiliated with the Company, PROVIDED that the remaining Principal Shareholders shall maintain such 51% ownership as specified below. WHEREAS, the Principal Shareholders have sole or shared voting power over an aggregate of at least 15,237,984 of the shares of the common stock, $.01 par value per share ("COMMON SHARES"), of TRISTAR CORPORATION (the "COMPANY") as more specifically set forth in EXHIBIT A attached hereto; WHEREAS, pursuant to a certain Investment Agreement dated the date hereof (the "INVESTMENT AGREEMENT"), the Pioneer Partnership is investing in the Company through the purchase of Preferred Stock and may make additional investments in the Company through one or more Preferred Stock investments in the future; and WHEREAS, the execution of this Agreement by the parties hereto is a condition precedent to the consummation of the transactions provided for in the Investment. NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties hereto agree as follows: Voting Agreement Page 2 ARTICLE I. VOTING BY PRINCIPAL SHAREHOLDERS. 1.1 AGREEMENT TO VOTE. Each of the Principal Shareholders agrees that, so long as the Pioneer Partnership shall own any Preferred Stock (as defined in the Investment Agreement), or Common Stock (as defined in the Investment Agreement), each of them shall vote all of his, hers or its Common Shares, whether now owned or hereafter acquired, for the election as a director(s) of the Company of the designee(s) of the Pioneer Partnership in accordance with Section 1.10(a) of the Investment Agreement at any meeting of the Company's shareholders at which such designee shall be nominated as a director. Without limiting the generality of the foregoing, the Principal Shareholders agree to execute and deliver any and all documents, agreements and instruments, including, without limitation, proxies, as the Pioneer Partnership shall reasonably request so that at least one (1) designee of the Pioneer Partnership, subject to the qualifications for such designee as set forth in the Investment Agreement, shall be a director of the Company at all times while any Preferred Stock or Common Stock is held by the Pioneer Partnership. 1.2 SPECIAL MEETING UPON DEFAULT. In the event the default under, or a breach of, this Agreement, or the Investment Agreement, or the Certificate of Designation of Preferred Stock at any time while the Pioneer Partnership or its limited partners (in the event of a distribution of such securities to the limited partners) are a holder of 75,000 shares or more of the Common Stock, directly or through the possible conversion of the Preferred Stock, all on a fully diluted basis, the Principal Shareholders agree to call a special meeting of the Shareholders at the sole expense of the Company and they each agree that they shall vote in favor of the nominee to the Board of Directors designated by the Pioneer Partnership under ss.1.1 hereof and for one (1) additional nominee designated by the Pioneer Partnership to be elected as a director. The board of directors shall then be comprised of members constituting at least a simple majority of directors who are independent of the Core Sheth Families (as the term Voting Agreement Page 3 "Core Sheth Families" is defined in the Investment Agreement) and the Company, and of which two directors shall be the Pioneer Partnerships' nominees; such election or appointment shall be effective no later than 30 days after and during the continuation of any such defaults. The nominee of the Pioneer Partnership shall be reasonably acceptable to the board of directors of the Company to serve as a director. Grounds for rejecting such nominee shall be any matter of record of the nominee which would cause the Company to be in violation of any order issued by the Commission or such nominee is disqualified as a result of Rule 262(b) promulgated under the 1933 Act; provided, however, no such nominee shall be an affiliate of a competitor of the Company. The two directors designated by the Pioneer Partnership for nomination and election or appointment together with the other independent outside directors shall form and constitute the Company's Post-Default Executive Committee which shall be granted full executive and operational control over the Company's operations. The Principal Shareholders hereby agree to take no action to contravene, limit or otherwise terminate such the Pioneer Partnership board majority mechanism. The Principal Shareholders agree to vote in favor of such the Pioneer Partnership nominees for as long as any interest or principal remains unpaid under such Preferred Stock. 1.3 PRESERVATION OF BYLAWS. If the directors or the shareholders of the Company amend the Bylaws to permit more than nine (9) directors at any time while the Pioneer Partnership or its limited partners (in the event of a distribution of such securities to the limited partners) are a holder of 75,000 shares or more of the Common Stock, directly or through the possible conversion of the Preferred Stock, all on a fully diluted basis, notice shall be given to the Pioneer Partnership, thereafter, immediately upon the written demand therefor by the Pioneer Partnership, the Principal Shareholders shall call a special meeting of the Shareholders at the sole expense of the Company. The Principal Shareholders each agree that they shall vote all of their Common Shares, whether now owned or hereafter acquired, for the Bylaws to reduce the number of directors to no more than nine (9). Voting Agreement Page 4 ARTICLE II. TRANSFERS 2.1 TRANSFER OF COMMON SHARES TO AFFILIATES. During the term of this Agreement, neither the Principal Shareholders nor any other person who shall become a party to or bound by this Agreement without the prior written consent of the Pioneer Partnership which consent will not be unreasonably withheld, shall transfer any Common Shares, whether now or hereafter acquired, (i) to any person, (ii) to any affiliate, as hereinafter defined, unless the affiliate shall have first delivered a written agreement of such affiliate agreeing to be bound by and subject to the terms and conditions of this Agreement, with the same force and effect as if such person were named as a party to this Agreement or as a Principal Shareholder hereunder, or (iii) pursuant to a registration statement; PROVIDED HOWEVER, the consent of the Pioneer Partnership shall not be required if the aggregate holdings of the Principal Shareholders shall equal fifty-one percent (51%) or more on a fully diluted basis (including all of the issued Series C Preferred Stock) of the issued Common Shares. The term "affiliate" shall have the same meaning as provided in Rule 405 promulgated under the 1933 Act. 2.2 LEGEND ON STOCK CERTIFICATES. The certificates of the Common Stock now owned by the Principal Shareholders shall be subject to and bear a restrictive legend as follows: THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ALL OF THE TERMS OF A CERTAIN VOTING AND SHAREHOLDERS AGREEMENT DATED SEPTEMBER 3, 1998, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE ISSUER. THE SHARES ARE SUBJECT TO CERTAIN VOTING, CO-SALE AND TRANSFER RESTRICTIONS. ANY ACTIONS TAKEN IN CONTRAVENTION TO THAT AGREEMENT SHALL BE NULL AND VOID. The terms of such endorsement and restrictions are hereby expressly consented to and accepted. Voting Agreement Page 5 2.3 PERMISSIBLE PLEDGE TRANSACTIONS. Notwithstanding any legal requirement to the contrary, the Pioneer Partnership agrees that the pledge by the Principal Shareholders of any securities to any third-party lenders is permitted, PROVIDED that the aggregate holdings of all of the Principal Shareholders plus the holdings of the Pioneer Partnership shall not be less than fifty-one (51%) percent of the issued voting stock of the Company on a fully diluted basis including all of the issued Series C Preferred Stock (the "MINIMUM PERCENTAGE"). In the event that any of the Principal Shareholders desire to pledge any securities which decrease the number of such aggregate holdings below the Minimum Percentage, then the Pioneer Partnership's consent to such pledge shall be valid only upon the third-party lenders entering into a Voting and Shareholders Agreement with the Pioneer Partnership on terms and conditions substantially similar to the terms hereof, and such agreement shall be satisfactory in all respects to the Pioneer Partnership. The third-party lenders shall agree therein that in the event that they obtain equitable or legal title, or any voting rights, to any securities of the Company, that they shall perform under the agreement as if they were Principal Shareholders hereunder. ARTICLE III. CO-SALE PROVISIONS 3.1 THIRD-PARTY OFFER AND NOTICE. Any sale of the Common Shares by any Principal Shareholder will be subject to a participation right of co-sale by Pioneer Ventures or its limited partners, in the event of a distribution to such limited partners, on a PRO RATA fully diluted basis. If any one or more of the Principal Shareholders obtains from a third party ("THIRD PARTY PURCHASER") an offer to purchase any amount of his or her Shares, such Principal Shareholders shall submit a written notice (the "CO-SALE NOTICE") to Pioneer Ventures disclosing the number of Common Shares proposed to be sold, the offered purchase price, the proposed closing date, and the total number of Common Shares owned by the Principal Shareholders. Voting Agreement Page 6 3.2 CO-SALE RIGHT OF PARTICIPATION. Upon receipt of a Co-Sale Notice from any Principal Shareholder, Pioneer Ventures or its limited partners, in the event of a distribution to such limited partners, may elect to participate in such transaction and shall have the right to offer its securities, at the same price and on the same terms. Each participating selling party who elects to participate in such sale shall be entitled to sell his Pro Rata Share (as herein defined) of the number of shares the purchaser is willing to purchase. "PRO RATA SHARE" as used in the preceding sentence means the product of the number of shares owned by such party and a fraction, the numerator of which is the number of fully diluted shares held by such party, and the denominator of which is the total number of fully diluted shares held by all shareholders participating in a subject sale. Each participating selling party shall in turn be entitled to receive at the applicable closing the net proceeds of the sale allocable to the securities sold on behalf of each selling shareholder, after deduction of such selling shareholder's proportionate share of the reasonable expenses of the sale. These co-sale provisions will not apply to any sale of securities pursuant to a distribution to the public, whether pursuant to a registered public offering, Rule 144 or otherwise. 3.3 NOTICE OF INTENT TO PARTICIPATE IN CO-SALE. If the Pioneer Partnership wishes to participate in any sale under this Article III, then Pioneer Ventures shall notify the selling Principal Shareholder(s) in writing of such intention as soon as practicable after such Pioneer Partnership's receipt of the Co-Sale Notice made pursuant to Section 3.1, and in any event within fifteen (15) days after the date of such Co-Sale Notice has been delivered. Such notification shall be delivered in person or by facsimile to the Principal Shareholder(s) at the Company's offices. ARTICLE IV. REMEDIES 4.1. VIOLATION OF AGREEMENT; CONSENT TO INJUNCTIVE RELIEF. Each of the Principal Shareholders recognizes and agrees that any violation of any of their obligations set forth in this Agreement would cause irreparable damage which could not be compensated by monetary damages. Such violation shall constitute an event of default under the Investment Agreement. Accordingly, in the event of any breach of a Principal Shareholder's obligations under this Agreement, such Principal Shareholder consents to the entry of injunctive relief, including the remedy of specific performance, by a court of competent jurisdiction restraining any such violation or threatened violation, and/or granting full voting authority to the Pioneer Partnership for purposes of this Agreement, in addition to any other remedies available at law or in equity. Voting Agreement Page 7 ARTICLE V. MISCELLANEOUS 5.1. REPRESENTATIONS. Each of the Principal Shareholders represents and warrants that, at the date hereof, he/she or it is the sole record and beneficial owner of the number of Common Shares set forth opposite his/her name on EXHIBIT A to this Agreement. 5.2 FURTHER ASSURANCES. From and after the date of this Agreement, the parties hereto shall from time to time, at the request of any other party and without further consideration, do, execute and deliver, or cause to be done, executed and delivered, all such further acts, things and instruments as may be reasonably requested or required more effectively to evidence and give effect to the transactions provided for in this Agreement. 5.3. NOTICES. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by first class registered or certified mail return receipt requested, or by first class mail or overnight courier if received, addressed to the parties at their respective addresses set forth on the first page of this Agreement, or to such other person or address as may be designated by like notice hereunder. 5.4 MODIFICATIONS. This Agreement may not be modified or discharged orally, but only in writing duly executed by the party to be charged. 5.5 SUCCESSORS AND ASSIGNS. All the covenants, stipulations, promises and agreements in this Agreement shall bind the parties' respective heirs, successors and assigns, whether so expressed or not; provided, however, the Pioneer Partnership shall not assign this Agreement nor any of its rights or obligations hereunder to any party, except to its limited partners, in the event of a distribution to its limited partners, without the prior written consent of a majority of the Principal Shareholders. Voting Agreement Page 8 5.6 HEADINGS. The headings of the various sections of this Agreement are for convenience of reference only and shall in no way modify any of the terms or provisions of this Agreement. 5.7 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to instruments made and to be performed entirely within such State. 5.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same document. 5.9 GENDER. All pronouns used herein are inserted for convenience only and shall be applied in the masculine, feminine, or third person as appropriate for each party signing hereto. 5.10 USE OF TERM "PIONEER PARTNERSHIP". Notwithstanding any provision of this Agreement to the contrary, included in the definition and meaning of the "Pioneer Partnership" shall be any one or more parallel limited partnerships which have been or shall be organized by Ventures Management Partners LLC as the general partner to invest in parallel with Pioneer Ventures Associates Limited Partnership on the same economic terms and PRO RATA based upon their aggregate subscriptions. The limited partners of Pioneer Ventures Associates Limited Partnership and the parallel partnerships shall be referred to herein as the "LIMITED PARTNERS". 5.12 Facsimile or other electronically delivered signatures may be relied upon as valid, binding and enforceable signatures of the parties delivering such signatures by such means. Voting Agreement Page 9 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date and year first above written. BY THE PIONEER PARTNERSHIP: PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP By: Ventures Management Partners LLC Its General Partner By: Pioneer Ventures Corp., Its Managing Member BY: ROBERT A. LERMAN Robert A. Lerman, President [Signature Pages Continue on following pages] Voting Agreement Page 10 BY THE PRINCIPAL SHAREHOLDERS: /s/ MAHENDRA SHETH /s/ SHASHIKANT S. SHETH MAHENDRA SHETH SHASHIKANT S. SHETH /s/ JAMMADAS SHETH /s/ KIRIT SHETH JAMMADAS SHETH KIRIT SHETH /s/ JAY J. SHETH /s/ VIREN S. SHETH JAY J. SHETH VIREN S. SHETH /s/ B.J. HARID B.J. HARID NEVELL INVESTMENTS, S.A. STARION B.V.I. BY: ____________________ BY:_________________ Its Director Its Director TRANSVIT MANUFACTURING CORPORATION STARION INTERNATIONAL LIMITED BY:_________________ BY:_________________ Its Director Its Director /s/ RICHARD P. RIFENBURGH /s/ ARON ZUTLER RICHARD P. RIFENBURGH ARON ZUTLER /s/ PETER LIMAN /s/ ROBERT R. SPARACINO PETER LIMAN ROBERT R. SPARACINO /s/ ROBERT VIOLA /s/ RICHARD HOWARD ROBERT VIOLA RICHARD HOWARD _____________________________ Voting Agreement Page 9 _____________________________ CONSENTED TO, AND THE OBLIGATION SET FORTH IN ARTICLE I TO PAY FOR SUCH SPECIAL MEETINGS OF THE SHAREHOLDERS IS HEREBY AGREED TO: TRISTAR CORPORATION BY: ___________________________ Name: Title: EXHIBIT A TO VOTING AGREEMENT PRINCIPAL SHAREHOLDERS NO. OF PERCENTAGE NAME AND ADDRESS(1) SHARES OWNERSHIP ------------------------ ---------- --------------- A) CORE SHETH FAMILIES ET AL. SHASHIKANT S. SHETH JAMMADAS SHETH KIRIT SHETH MAHENDRA SHETH VIREN S. SHETH JAY J. SHETH TRANSVIT MANUFACTURING CORPORATION STARION INTERNATIONAL LIMITED STARION B.V.I. NEVELL INVESTMENTS, S.A. B.J. HARID TOTAL RE CORE SHETH FAMILIES ET AL. 14,697,984 73% (B) OTHER OFFICERS AND DIRECTORS ARON ZUTLER 10,000 PETER LIMAN 30,000 ROBERT VIOLA 150,000 RICHARD HOWARD 250,000 RICHARD P. RIFENBURGH 50,000 ROBERT R. SPARACINO 50,000 - ----------------------- (1) The address for these individuals and entities is c/o Tristar Corporation, 12500 San Pedro Avenue, Suite 500, San Antonio, Texas 78216 EX-24.1 9 EXHIBIT 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements (Nos. 33-45396 and 333-26567) on Form S-8 of Ross Cosmetics Distributions Centers, Inc. and Tristar Corporation, respectively, of our report dated December 4, 1998, on our audit of the consolidated financial statements and financial statement schedule of Tristar Corporation and subsidiaries as of August 29, 1998 and August 30, 1997, and for the years then ended, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Dallas, Texas December 4, 1998 EX-24.2 10 EXHIBIT 24.2 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors Tristar Corporation: We consent to incorporation by reference in the registration statements (Nos. 33-45396 and 333-26567) on Form S-8 of Ross Cosmetics Distributions Centers, Inc. and Tristar Corporation, respectively, of our report dated December 11, 1996, relating to the consolidated statements of operations, shareholders' equity, and cash flows for the year ended August 31, 1996, and the related schedule, which report appears in the August 29, 1998, annual report on Form 10-K of Tristar Corporation. KPMG Peat Marwick LLP San Antonio, Texas December 4, 1998 EX-27 11
5 YEAR AUG-29-1998 AUG-29-1998 66,000 0 17,813,000 895,000 11,375,000 29,581,000 8,199,000 8,805,000 38,708,000 26,748,000 0 0 9,177,000 168,000 (1,996,000) 38,708,000 67,683,000 67,683,000 50,432,000 66,856,000 2,256,000 0 1,786,000 (1,429,000) 62,000 (1,491,000) 0 0 0 (1,491,000) (0.12) (0.12)
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