-----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, HWYz1KMGCkLXrelpYk9SgBPP02YtnLD+2achBWEgD6TRPYJ+6TryAf+jht2rUhCn UUCOtEUHj01uI17TP2aKdA== 0000950134-97-000224.txt : 19970115 0000950134-97-000224.hdr.sgml : 19970115 ACCESSION NUMBER: 0000950134-97-000224 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRISTAR CORP CENTRAL INDEX KEY: 0000737203 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 133129318 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13099 FILM NUMBER: 97505698 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-Q 1 FORM 10-Q PERIOD ENDING NOVEMBER 30, 1996 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended NOVEMBER 30, 1996 ------------------ -OR- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------ Commission File Number 0-13099 TRISTAR CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3129318 ------------------------------- ------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 12500 San Pedro Avenue, Suite 500, San Antonio, Texas 78216 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (210) 402-2200 --------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------ ------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On January 10, 1997, there were outstanding 16,710,176 shares of Common Stock, $.01 par value, of the registrant. Page 1 2 TRISTAR CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (Unaudited) Consolidated balance sheets--November 30, 1996 and August 31, 1996 3 Consolidated statements of operations--thirteen week periods ended November 30, 1996 and December 2, 1995, respectively 5 Consolidated statements of cash flows--thirteen week periods ended November 30, 1996 and December 2, 1995, respectively 6 Notes to consolidated financial statements--November 30, 1996 7 Independent Accountants' Review Report 10 Item 2. Management's Discussion and Analysis of Financial Condition and 11 Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17
Page 2 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
November 30, 1996 August 31, ASSETS (unaudited) 1996 * ------------------ ---------------- Current assets: Cash $ 302,000 $ 233,000 Accounts receivable, less allowance for doubtful accounts of $865,000 and $850,000, respectively 14,588,000 9,522,000 Accounts receivable - related parties - net 1,269,000 1,518,000 Inventories 12,309,000 12,691,000 Prepaid expenses 359,000 258,000 ------------------ ---------------- Total current assets 28,827,000 24,222,000 ------------------ ---------------- Property, plant and equipment, less accumulated depreciation of $5,832,000 and $5,391,000 8,284,000 8,532,000 ------------------ ---------------- Other assets: Warrant valuation, less accumulated amortization of $1,457,000 and $1,436,000, respectively 633,000 653,000 Other assets 368,000 360,000 ------------------ ---------------- Total other assets 1,001,000 1,013,000 ------------------ ---------------- Total assets $ 38,112,000 $ 33,767,000 ================== ================
* Prepared from audited financial statements for the year ended August 31, 1996. See notes to unaudited consolidated financial statements. Page 3 4 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
Pro Forma Shareholders' November 30, Equity 1996 (Note 7) August 31, LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (unaudited) 1996 * ---------------- --------------- ---------------- Current liabilities: Short-term borrowings $ 11,785,000 $ $ 9,319,000 Accounts payable--trade 6,158,000 5,233,000 Accounts payable--related parties - net 2,784,000 2,900,000 Accrued bonuses 225,000 202,000 Accrued interest expense-subordinated debt 1,279,000 1,174,000 Other accrued expenses 1,098,000 847,000 Income taxes payable 29,000 85,000 Current portion of capital lease obligations 34,000 38,000 Current portion of long-term obligations 3,002,000 3,134,000 ---------------- ---------------- Total current liabilities 26,394,000 22,932,000 Long-term debt, less current portion 0 3,000 Obligations under capital leases, less current portion 29,000 59,000 Subordinated long term debt - related parties, less current portion 12,666,000 8,000,000 12,666,000 ---------------- --------------- ---------------- Total liabilities 39,089,000 8,000,000 35,660,000 ---------------- --------------- ---------------- Commitments and contingencies Shareholders' equity (deficit): Preferred stock, $.05 par value; authorized 1,000,000 shares; 666,529 shares issued and outstanding proforma -- 4,666,000 -- Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 16,710,176 shares and 16,650,176 shares, respectively 167,000 167,000 167,000 Additional paid-in-capital 10,484,000 10,484,000 10,354,000 Accumulated deficit (11,628,000) (11,628,000) (12,414,000) ---------------- --------------- ---------------- Total shareholders' equity (deficit) (977,000) $ 3,689,000 (1,893,000) ---------------- =============== ================ Total liabilities and shareholders' equity $ 38,112,000 $ 33,767,000 ================ ================
* Prepared from audited financial statements for the year ended August 31, 1996. See notes to unaudited consolidated financial statements. Page 4 5 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Thirteen Weeks Ended November 30, December 2, 1996 1995 --------------- ---------------- Net sales $ 17,489,000 $ 17,403,000 Cost of sales 12,262,000 12,825,000 --------------- ---------------- Gross profit 5,227,000 4,578,000 Selling, general and administrative expenses 3,768,000 3,399,000 --------------- ---------------- Income from operations 1,459,000 1,179,000 Other income (expense): Interest expense (604,000) (536,000) Other expense (39,000) (319,000) --------------- ---------------- Income before provision for income taxes 816,000 324,000 Provision for income taxes 30,000 120,000 --------------- ---------------- Net income $ 786,000 $ 204,000 =============== ================ Net income per common share $ 0.04 $ 0.01 =============== ================ Weighted average shares outstanding 17,497,919 17,310,295 =============== ================
See notes to unaudited consolidated financial statements. Page 5 6 TRISTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Thirteen Weeks Ended November 30, December 2, 1996 1995 ------------------ --------------- Cash flows from (used in) operating activities Net income $ 786,000 $ 204,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 441,000 642,000 Provision for losses on accounts receivable 282,000 171,000 Provision for inventory allowances 136,000 192,000 Deferred income tax expense 0 120,000 Issuance of stock in connection with 401K plan 10,000 30,000 Amortization of warrant valuations 20,000 21,000 Change in operating assets and liabilities: Accounts receivable (4,863,000) (5,101,000) Inventories 10,000 135,000 Prepaid expense (101,000) (139,000) Income taxes payable (56,000) (118,000) Accounts payable 809,000 451,000 Accrued expenses 379,000 401,000 ------------------ --------------- Net cash used in operating activities (2,147,000) (2,991,000) ------------------ --------------- Cash flows (used in) from investing activities: Capital expenditures (193,000) (211,000) (Increase) decrease in other assets (8,000) 11,000 ------------------ --------------- Net cash used in investing activities (201,000) (200,000) ------------------ --------------- Cash flows from (used in) financing activities: Net increase in short term borrowings 2,466,000 3,488,000 Principal payments under debt obligations (169,000) (164,000) Proceeds from exercise of stock options 120,000 -- ------------------ --------------- Net cash provided by (used in) financing activities 2,417,000 3,324,000 ------------------ --------------- Net (decrease) increase in cash 69,000 133,000 Cash at beginning of period 233,000 806,000 ------------------ --------------- Cash at end of period $ 302,000 $ 939,000 ================== ===============
See notes to unaudited consolidated financial statements. Page 6 7 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRISTAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOVEMBER 30, 1996 NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen week period ended November 30, 1996, are not necessarily indicative of the results that may be expected for the year ending August 30, 1997. NOTE 2: NET INCOME PER SHARE Net income per share amounts were computed based upon the weighted average number of common shares outstanding and common equivalents of dilutive stock options and warrants. NOTE 3: INVENTORIES Inventory is stated at the lower of cost or market.
------------------------------------------------------------ November 30, August 31, 1996 1996 ------------------------------------------------------------ Raw materials $ 7,047,000 $ 6,598,000 Work-in-process 285,000 469,000 Finished goods 6,964,000 7,710,000 ------------------ ------------------ 14,296,000 14,777,000 Inventory allowances (1,987,000) (2,086,000) ------------------ ------------------ $ 12,309,000 $ 12,691,000 =================== ================== ------------------------------------------------------------
NOTE 4: SHORT-TERM BORROWING The Company's line of credit provides for maximum borrowings of $15,500,000 at prime rate (8.25%) plus two percentage points per annum, with additional fees approximating a percentage point per annum. Borrowing capability is based on eligible domestic and foreign accounts receivable, and on eligible finished goods and manufacturing inventories, within limits established under the agreement. Page 7 8 The line of credit expires July 1997, subject to certain conditions which include the Company continuing to meet projected results of operations for the year ending August 31, 1997. While there can be no assurances, management believes that the Company will continue to meet projected results of operations. In the event that renewal or further extension does not occur, the Company has initiated an effort to locate an alternative lender to replace the existing lender. This facility is secured by substantially all of the assets of the Company. The agreement contains material adverse change provisions, as well as certain restrictions and conditions among which are limitations on cash dividends, capital expenditures, maximum levels of accounts receivable from related parties, and repayments of a prior financing arrangement with a related party. Remaining availability under the line as of November 30, 1996, was $224,000, based on the borrowing formulas. NOTE 5: LITIGATION AND CONTINGENCIES FREITAS AND KENNER In October 1994, a suit was filed in Florida state court against the Company, and two of its directors by Ross Freitas, Carolyn Kenner, Rose Freitas and Melissa Freitas. The complaint alleges causes of action by two plaintiffs for libel and seeks indemnification in connection with the work of the Special Committee of the Board of Directors that investigated, among other things, a prior failure to disclose the Core Sheth Families' holdings of Company stock. The complaint also alleges, on behalf of all four plaintiffs, that the Company's disclosures relating to these 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. 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. PROCEEDS OF AN EXECUTIVE LIABILITY AND INDEMNIFICATION POLICY In November 1994 and June 1995, the United States District Court for the District of South Carolina approved the disbursement of $1.25 and $0.75 million, respectively, to the Company from the proceeds of an executive liability and indemnification policy owned by the Company. The latter court approved distribution has been appealed by two other claimants under the policy. The Company is subject to ordinary and routine litigation arising out of the conduct of its business. Management believes that the ultimate disposition of these proceedings will not have a material adverse effect on the Company's financial condition. NOTE 6: RELATED PARTY TRANSACTIONS: Certain suppliers of fragrance product components and the primary suppliers of cosmetic products are affiliates of the Core Sheth families who beneficially own 78% of the Company's outstanding common stock. Related party accounts payable result from the purchase of products from those vendors. Related party accounts receivable result from the sale of products to those affiliates. The payables and receivables balances are offset for presentation purposes and the net balance of accounts receivable or accounts payable is presented on the balance sheet. Related party payables also include payables due members of the Company's Board of Directors which result, in the normal course of business, from expenses associated Page 8 9 with Board and related committee meetings. The following summarizes the presentations at November 30, 1996 and August 31, 1996.
- ----------------------------------------------------------------------------------------------------- November 30, August 31, 1996 1996 ------------------------------------ ACCOUNTS RECEIVABLE: Total accounts receivable-related parties $ 1,803,000 1,679,000 Offset amount (534,000) (161,000) ------------------------------------ Net related parties receivables $ 1,269,000 1,518,000 ===================================== ACCOUNTS PAYABLE: Total accounts payable-related parties $ 3,318,000 3,061,,000 Offset amount (534,000) (161,000) ------------------------------------ Net related parties payables $ 2,784,000 2,900,000 ===================================== - -----------------------------------------------------------------------------------------------------
The Company purchases finished goods and fragrance product components from Core Sheth Families affiliates. During the thirteen week period ended November 30, 1996, and for the respective period in fiscal 1996, the Company purchased approximately $1,618,000 and $1,450,000, respectively. During the thirteen week period ended November 30, 1996, and for the respective period in fiscal 1996, the Company sold products to Core Sheth Families affiliates in the amounts of approximately $1,137,000 and $441,000, respectively. NOTE 7: SHAREHOLDERS' EQUITY (DEFICIT) To strengthen the financial position of the Company, effective December 11, 1996, Transvit Manufacturing Corporation, a related party and principal stockholder, agreed to convert a $4,666,000 subordinated note payable outstanding at August 31, 1996, into 666,529 shares of the Company's preferred stock. The conversion is reflected in the accompanying balance sheet on a pro forma basis. The preferred stock has cumulative preferred dividends of $0.315 per share and a preferred distribution of $7.00 per share plus accrued and unpaid dividends. The stock is convertible, at the option of Transvit, into the Company's common stock, at a conversion price of $7.00 per share. The Company can redeem the shares at the same price per share. Page 9 10 Independent Accountants' Review Report The Board of Directors and Shareholders Tristar Corporation: We have reviewed the condensed consolidated balance sheet of Tristar Corporation and subsidiaries as of November 30, 1996, and the related condensed consolidated statements of operations and cash flows for the thirteen week periods ended November 30, 1996 and December 2, 1995. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Tristar Corporation and subsidiaries as of August 31, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated December 11, 1996, which referred to other auditors, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of August 31, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG Peat Marwick LLP San Antonio, Texas January 11, 1997 Page 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED NOVEMBER 30, 1996, AND DECEMBER 2, 1995. For the thirteen week period ended November 30, 1996, the Company recorded a net income of $786,000 or $0.04 per share, compared to a net income of $ 204,000 or $0.01 per share for the thirteen week period ended December 2, 1995. NET SALES Net sales of $17,489,000 for the thirteen weeks ended November 30, 1996, were essentially the same as the net sales of $17,403,000 for the thirteen weeks ended December 2, 1995. NET SALES - CHANNELS OF DISTRIBUTION The Company markets and distributes products to wholesalers, distributors, chain stores, mass merchandisers, and independent retail channels in various markets throughout North and South America. For the thirteen weeks ended November 30, 1996, the Company experienced a small growth in the U.S. wholesale market while experiencing a slight decline in the combined chain, specialty chain and mass merchandising channels in comparison to fiscal 1996. This decline appeared to reflect the shorter Christmas purchasing period in 1996 for consumers. The small growth in the wholesale channel is not indicative of the very successful introduction of the new Royal Selections fragrance line. The very competitive, both in price and presentation, Royal Selections line, designed for the wholesale market, has received significant acceptance in that market to the extent that the Company was unable to completely satisfy the demand for that product in the first quarter as capacity increases. It is anticipated that demand and availability will equalize in the second quarter. The Company continues to devote resources to all channels of distribution in the U.S. with programs including, but not limited to, promotions and limited advertising. Sales made directly to foreign-based customers in North and South America as a group remained relatively constant during the first quarter of fiscal 1996 when compared to the prior year's first quarter. Economic and political conditions continue to restrict growth in some of these markets. However, the Company continues to devote resources to selected channels of distribution in Latin America with similar programs to those in the U.S. NET SALES - RELATED PARTIES In the first quarter of fiscal 1997, sales to affiliates of the Core Sheth Families, the Company's major stockholder, were $1,137,000 as compared to $441,000 for the comparable period ended December 2, 1995. NET SALES - PRODUCTS PURCHASED FROM RELATED PARTIES Of the net sales in the first thirteen weeks of fiscal 1997, approximately 10%, or $1,814,000, resulted from the sale of products purchased from related parties as finished goods. For the same period in fiscal 1996, comparable numbers were 8%, or $1,349,000. In addition, fragrance and other products manufactured and sold by the Company included some components that were purchased from related parties. The cost of those components approximated 5% and 7% of cost of sales in the same periods of fiscal 1997 and 1996, respectively. GROSS PROFIT The Company's gross profit for the thirteen week periods ended November 30, 1996 and December 2, 1995 were $5,227,000, or 30% of sales and $4,578,000 or 26% of sales, respectively. The improvement in gross profit in fiscal 1997 in comparison to fiscal 1996 was primarily due to lower manufacturing variances Page 11 12 and improved product margins in fiscal 1997 versus 1996. The improved product margins reflect a change in the product mix sold in fiscal 1997. Included in the mix were sales of the higher margin premium DCA line, which was not introduced until the second quarter of fiscal 1996. Gross profit margins are expected to remain at the current levels or improve slightly in the remainder of the fiscal year as production efficiency improvements are expected to continue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") for the thirteen week periods ended November 30, 1996 and December 2, 1995, increased 11% to $3,768,000 from $3,399,000 respectively. The increase over the comparable prior fiscal period was due primarily to expenses associated with the development of the chain markets in the United States. NON OPERATING INCOME OR EXPENSE Interest expense increased for the thirteen week period of fiscal 1997 over the previous year's like quarter to $604,000 from $536,000, respectively, as a result of increased borrowings under the Company's lines of credit. However, other non operating expenses were lower in fiscal 1997 in comparison to fiscal 1996 primarily as a result of higher foreign currency translation losses and merger costs incurred in fiscal 1996. POTENTIAL ADVERSE AFFECTS ON RESULTS OF OPERATIONS FOR FUTURE PERIODS The results for the remainder of fiscal 1997 could be adversely affected by each or all of the following factors: 1. Mexican Market. The market for the Company's products continues to be negatively impacted as a result of the devaluation of the Mexican Nuevo Peso in December 1994 and the subsequent economic and political instability. These factors sharply reduced the purchasing power of the Mexican consumer and therefore the demand for the Company's products was adversely affected. Any future significant deterioration of the Peso's value would be expected to further adversely affect the Company's sales in Mexico and also the collectability of accounts receivable. 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. 2. Latin America Economies. Growth in sales, or even the maintenance of existing sales levels, in certain Latin American countries depends to a large extent on the economic health and political stability of those countries. Any deterioration in the economic or political stability in such countries could adversely affect sales. 3. Supply of Products. The Company's ability to manufacture and to satisfy consumer demand for fragrances is dependent on the supply of certain components from single sources. 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 Core Sheth Families affiliates. If such affiliates were to cease or be unable to supply these cosmetic products, the lack of these products would have an adverse effect on the Company until a secondary supplier could be located. 4. New and Developing Markets. The Company continues in its attempts to develop and expand sales in Latin America. In the process, the Company incurs significant expenses in order to establish a marketing presence and an economically viable amount of sales. There is no assurance that the Company will be successful in those endeavors 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 Page 12 13 of taxes on imports, all of which could affect the success of sales and marketing activities and also affect the profitability of such activities. 5. Limitations on Working Capital. The Company experienced a limitation of working capital availability in the latter part of fiscal 1996 primarily as a result of (1) investments in foreign markets with benefits of those investments not projected to accrue to the Company in the immediate future, (2) investments in the development and introduction of the new Designer Classic Alternatives (DCA) product line, (3) the cost of entry into the marketing channel where the new DCA product line is currently being sold, and (4) losses incurred on operations unrelated to the new DCA product line. The restricted availability resulted in the maximization of borrowings under the Company's credit facility and in delaying payments to certain vendors (primarily affiliates of the Core Sheth families) beyond customary terms. While management does not anticipate such an event, a severe recurrence in the future could restrict the Company's ability to purchase components. The inability to purchase certain components could reduce the Company's ability to manufacture product with a resultant negative impact on sales and results of operations. At this time, it is not known whether, or to what degree, the above factors will have a material adverse impact on future results. Page 13 14 LIQUIDITY AND CAPITAL RESOURCES The Company currently is obtaining its working capital from three primary sources: a revolving line of credit, cash generated by operations, and from delaying payments to vendors (primarily related parties) beyond customary terms. Operating Activities Operations in the thirteen week period ended November 30, 1996, utilized $2,147,000 in cash primarily due to increased trade accounts receivable ($4,863,000). Offsetting the usage was a net income of $1,675,000 adjusted for non cash items, and an increase in accounts payable ($809,000) and accrued expenses ($379,000). Accounts receivable grew primarily as a result of a seasonal growth in sales and due to varying extended seasonal financing terms given to customers. Such accounts receivable increase is comparable to the same period in the prior fiscal year. Accounts payable increased as the company increased its purchases for the seasonal growth in sales. Investing Activities Capital expenditures during the thirteen week period were $193,000, consisting primarily of investments in production related machinery and equipment, facilities related items, and computer equipment. Capital expenditures for the remainder of the fiscal year are expected to be primarily for manufacturing equipment, and computer equipment and software with lesser amounts being invested in equipment for distribution activities. Financing Activities During the thirteen week period ended November 30, 1996, short term borrowings increased $2,466,000 to $11,785,000 under its revolving line of credit. Remaining availability under the line as of November 30, 1996, was $224,000 based on the borrowing formulas. The Company had at November 30, 1996, a revolving credit agreement, amended as of October 1, 1996, which provided for $15,500,000 of maximum borrowings at the prime rate (8.25% at November 30, 1996) plus two percentage points per annum, with additional fees approximating one percentage point per annum. Borrowings under this credit agreement are limited to 75% of eligible domestic accounts receivable, 60% of eligible foreign accounts receivable, 100% of eligible related party receivables secured by letters of credit, 50% of eligible finished goods inventories, and 40% of eligible manufacturing inventories. Eligibility is as defined in the credit agreement. In December 1996, the lender agreed to extend the expiration date from March 1997 to July 1997 subject to certain conditions which included a requirement that the Company meet its budgeted operating results. The term loan entered into in July 1995 with the same lender as the short term revolving credit line, provided for borrowings of $3.9 million of which $3,002,000 were outstanding as of November 30, 1996. This loan is subject to the same interest rate, fees, and debt restrictions as listed above for the revolving credit lines. The loan calls for monthly installments assuming a maturity date in 2002, however, for financial statement presentation purposes, the entire loan is considered as current reflecting the July 1997 expiration date of the credit facility with the lender. The credit lines are secured by substantially all of the assets of the Company. The agreements contain material adverse change provisions, as well as certain restrictions and conditions among which are limitations on cash dividends, capital expenditures and repayments of a prior financing arrangement with a related party (See Note 4 of the Notes to the Consolidated Financial Statements). Management believes that the Company's revolving line of credit and term loan (with the same lender) will either be renewed or similar replacement lines of credit will be put in place upon the expiration of the existing line. The expiration date which was in March 1997 has been extended to July 1997 subject to certain conditions which include the Company continuing to meet projected results of operations for the Page 14 15 year ending August 31, 1997. While there can be no assurances, management believes that the Company will continue to meet projected results of operations. The Company has initiated a search for a new lender in the event that the existing line of credit is not renewed. The line of credit, together with cash generated by operations and the continued ability to delay payments as required to related party vendors should provide sufficient cash to meet the requirements of the Company for fiscal 1997. As of November 30, 1996, the Company was indebted in the amount of $4.7 million to a Core Sheth Families 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 convertible preferred stock (See Note 7 of the Notes to the Consolidated Financial Statements). 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 November 30, 1996 had outstanding subordinated long-term debt to a Core Sheth Families affiliate of $8 million related to that settlement. Notes under this debt bear interest at rates of 6.36% to 8.23% per annum. Repayments of this debt will begin in the year 2001. Due to the subordination of the debt to senior lenders and the long-term nature of the debt, the Company does not believe that the increase in the ratio of long-term debt to equity has an adverse effect on the Company. As of November 30, 1996, the Company's financial statements reflect accrued interest of $1,279,000 due on the above related party debt. A payment waiver has been obtained from the related party for delinquent interest payments ($265,000) under the $8 million debt as non-payment would be an event of default under that debt. Additionally, the Company is delinquent in interest payments of $491,000 under the $4.7 million portion which does not contain an event of default clause. The Company also purchases certain equipment, primarily office furniture, computer equipment and software, under long- term purchase agreements. These 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 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. Page 15 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Effective December 11, 1996, Transvit Manufacturing Corporation, a related party and principal stockholder, agreed to convert a $4,666,000 subordinated note payable outstanding at August 31, 1996, into 666,529 shares of the Company's preferred stock. The conversion is reflected in the accompanying balance sheet on a pro forma basis. The preferred stock has cumulative preferred dividends of $0.315 per share and a preferred distribution of $7.00 per share plus accrued and unpaid dividends. The stock is convertible, at the option of Transvit, into the Company's common stock, at a conversion price of $7.00 per share. The Company can redeem the shares at the same price per share. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS 23 Awareness Letter of KPMG Peat Marwick LLP. 27 Financial Data Schedule. b) REPORTS ON FORM 8-K None. Page 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRISTAR CORPORATION (Registrant) Date: January 14, 1997 /s/ Viren S. Sheth ---------------- -------------------------------------------- Viren S. Sheth President and Chief Executive Officer (Principal Executive Officer) Date: January 14, 1997 /s/ Loren M. Eltiste ---------------- -------------------------------------------- Loren M. Eltiste Vice-President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 17 18 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23 Awareness Letter of KPMG Peat Marwick LLP. 27 Financial Data Schedule.
EX-23 2 KPMG PEAT MARWICK AWARENESS LETTER 1 EXHIBIT 23 Tristar Corporation San Antonio, Texas Ladies and Gentlemen: RE: REGISTRATION STATEMENT NO. 33-45396 With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated January 11, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, KPMG Peat Marwick LLP San Antonio, Texas January 11, 1997 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS AUG-30-1997 NOV-30-1996 302,000 0 15,857,000 865,000 12,309,000 28,827,000 8,284,000 5,832,000 38,112,000 26,394,000 0 0 0 167,000 (1,144,000) 38,112,000 17,489,000 17,489,000 12,262,000 16,030,000 643,000 0 604,000 816,000 30,000 786,000 0 0 0 786,000 .04 .04
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