FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 S
For Quarter Ended February 28, 1998 Commission File Number 0-14449
BeautiControl Cosmetics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2036343
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
2121 Midway, Carrollton, TX 75006
(Address including zip code of principal executive offices)
972/458-0601
(Registrant's telephone number including area code)
Indicated below is the number of shares outstanding of each class of the
registrant's common stock, as of April 6, 1998.
Title of Each Class of Common Stock Number of Shares Outstanding
Common Stock, $0.10 par value 6,018,398 shares
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
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statement
Index to BeautiControl Cosmetics, Inc. Consolidated Financial Statement
Page
Balance Sheet 3-4
Statements of Income 5
Statements of Cash Flows 6
Notes to Financial Statements 7
2
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
February 28, November 30,
1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 73,441 $ 720,087
Short-term investments - -
Accounts receivable-net of
allowance for doubtful accounts
of $424,200 and $658,400 at
February 28, 1998 and
November 30, 1997, respectively 2,584,629 702,502
Inventories
Raw materials 4,773,606 4,854,267
Finished goods 9,420,376 7,945,044
14,193,982 12,799,311
Deferred income taxes 1,529,760 1,529,760
Prepaid expenses 876,030 621,785
Income tax receivables - 726,962 -
Other current assets 122,256 124,802
Total current assets 19,380,098 17,225,209
PROPERTY AND EQUIPMENT, AT COST 23,776,392 23,359,187
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION 14,136,226 13,731,649
9,640,166 9,627,538
OTHER ASSETS
Cost in excess of net tangible
assets, acquired, net of
amortization of $845,100 and
$828,500 at February 28, 1998 and
November 30, 1997, respectively 1,806,209 1,822,780
Investments - -
Other, net of amortization of
$561,900 and $556,700 at February
28, 1998 and November 30, 1997,
respectively 771,263 680,811
Total assets $31,597,736 $29,356,338
<FN>
The accompanying notes are an integral part of these statements.
3
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, November 30,
1998 1997
CURRENT LIABILITIES
Accounts payable - trade $ 3,657,725 $ 3,935,748
Sales tax payable 715,338 748,907
Accrued commissions and awards 1,515,205 1,784,307
Accrued compensation 384,297 544,575
Accrued other taxes 622,680 1,097,612
Other accrued liabilities 450,893 659,850
Deferred income 95,287 1,063,201
Total current liabilities 7,441,425 9,834,200
DEFERRED INCOME TAXES 440,605 440,605
LONG TERM BORROWINGS 5,100,000 1,200,000
COMMITMENTS & CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock
Authorized - 1,000,000 shares,
$.10 par value
Issued and outstanding - none - -
Common stock
Authorized - 20,000,000 shares,
$.10 par value
Issued - 9,727,198 and
9,637,198 shares at February 28,
1998 and November 30, 1997,
respectively 972,720 963,720
Capital in excess of par value 14,030,735 13,584,650
Retained earnings 34,517,445 34,238,357
49,520,900 48,786,727
Less cost of 3,708,800 common shares
held in treasury at February 28, 1998
and November 30, 1997 30,905,194 30,905,194
18,615,706 17,881,533
Total liabilities and
stockholders' equity $31,597,736 $29,356,338
<FN>
The accompanying notes are an integral part of these statements.
4
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
February 28, February 28,
1998 1997
Sales $16,540,035 $16,051,680
Cost of goods sold 3,800,361 3,905,430
Gross profit 12,739,674 12,146,250
Selling expenses 7,769,061 6,508,817
General and administrative expenses 3,496,588 4,162,184
11,265,649 10,671,001
Income from operations 1,474,025 1,475,249
Other income and expenses
Interest income 12,746 30,037
Other, net 48,933 42,349
61,679 72,386
Income before income taxes 1,535,704 1,547,635
Income taxes 541,909 568,994
Net income $ 993,795 $ 978,641
Net income per common share $.17 $.17
Weighted average common shares 5,940,648 5,847,368
Net income per common share - assuming
dilution $.17 $.16
Weighted average common and common equivalent
shares 6,016,992 6,309,942
<FN>
The accompanying notes are an integral part of these statements.
5
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Three Months Ended
February 28, February 28,
1998 1997
Net cash provided by (used in)
operating activities ($3,918,768) ($3,023,592)
Cash flows from investing activities:
Purchase of property and equipment (417,205) (148,694)
Purchase of other assets (43,276) -
Net cash provided by (used in)
investing activities (460,481) (148,694)
Cash flows from financing activities:
Proceeds from issuance of common
stock 455,085 698,749
Borrowings 3,900,000 2,600,000
Dividends paid (622,482) (614,514)
Net cash provided by (used in)
financing activities 3,732,603 2,684,235
Net increase (decrease) in cash and
cash equivalents (646,646) (488,051)
Cash and cash equivalents at the
beginning of the period 720,087 884,384
Cash and cash equivalents at the end
of the period $ 73,441 $ 396,333
Supplemental cash flow information:
Income taxes $ 779,000 $ 625,000
Interest $ 57,000 $ 93,000
<FN>
The accompanying notes are an integral part of these statements.
6
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1997
Note 1 - Basis of Presentation
In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the
financial position as of February 28, 1998 and November 30, 1997
and the results of operations and cash flows for the three months
ended February 28, 1998 and February 28, 1997. The results for
the three months ended February 28, 1998 are not necessarily
indicative of the results for the year.
While the Company believes that the disclosures presented are
adequate to make the information not misleading, it is suggested
that these financial statements be read in conjunction with the
consolidated financial statements and notes included in the
Company's annual report on Form 10-K for the year ended November
30, 1997.
Note 2 - Earnings Per Share
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128)
Earnings per Share. This statement requires companies to present
basic earnings per share and, if applicable, diluted earnings per
share. The Company adopted SFAS 128 on December 1, 1997. The
following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
February 28, February 28,
1998 1997
Numerator:
Net income -
Numerator for basic and
diluted earnings per share ---
income available to common
stockholders $993,795 $978,641
Denominator:
Denominator for basic earnings
per share---weighted-average
shares 5,940,648 5,847,368
Effect of dilutive securities:
Employee stock options 76,344 462,574
Denominator for diluted
earnings per share---adjusted
weighted-average shares and
assumed conversions 6,016,992 6,309,942
Basic earnings per share $ 0.17 $ 0.17
Diluted earnings per share $ 0.17 $ 0.16
7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operation
Quarters Ended February 28, 1998 and February 28, 1997. Net sales
for the first quarter increased 3% to $16,540,000 in 1998
compared to $16,052,000 in 1997. Contributing to this increase
were improved sales results of core product lines, exclusive of
specialty kits offered in the first quarter of 1997 during the
Company's Wellness recruiting promotion. Also affecting sales
was the successful opening of the Taiwan branch on January 8,
1998. For the second quarter, a strong recruiting drive is
planned in the U.S. that includes both reduced cost of entry in
addition to prize and award incentives. The momentum of this
recruiting campaign combined with the continued growth of the
Taiwan business is expected to improve sales trends throughout
the year.
Gross profit margins for the first quarter of 1998 were 77.0%
compared to 75.7% in 1997. The increase is a direct result of
decreases in overall product costs and shifts in product group
sales. In 1998, first quarter sales increased in the skin care
and beauty categories due to the combination of a skin care
promotion introducing updated skin care packaging and
REGENERATION sales, including REGENERATION GOLD which was not
introduced until the second quarter of 1997. In 1997, first
quarter sales and margins were affected inversely by the Wellness
recruiting campaign that caused sales to increase in both
demonstration kits and sales aids, which carry higher costs and
lower profit margins.
Overall, domestic spending in selling, general and administrative
expenses went down in 1998. However, costs were incurred for the
start up and opening of the Taiwan branch causing total selling,
general and administrative to increase for the quarter. A
majority of these expenses were incurred in Taiwan, where
operations did not begin until January. As a result, total
selling, general and administrative costs as a percent of sales
increased.
Net income increased to $994,000 in 1998 from $979,000 in 1997
primarily due to higher gross profit margins and a reduction in
general and administrative expenses.
8
Liquidity and Capital Resources
Working capital at February 28, 1998 was $11,939,000 compared to
$7,391,000 at November 30, 1997. The leading cause of this
change was an increase in net trade accounts receivable due to a
deferred payment program offered in the first quarter of 1998
most of which have subsequently been collected. Also affecting
the change was an increase in inventories to support the Taiwan
business and the March and April recruiting drive and a reduction
in deferred income.
The Company's cash position decreased to $73,000 at February 28,
1998 from $720,000 at November 30, 1997. Decreases in cash are a
result of the deferred payment program and inventory increases
mentioned above and annual property taxes.
The Company has a $15,000,000 line of credit available to use
primarily for share repurchase in the event that the Company
believes its stock is undervalued and if operating cash is needed
for the business. The interest rate is based on a LIBOR rate
plus a spread that adjusts with the debt ratio. The current
expiration date is November 30, 1999; however, this revolving two
year credit line can be extended annually and balances can be
converted to a term loan at anytime during the two years for a
three year amortization. A commitment fee of .25% is paid
quarterly based on the unused portion of this line of credit. The
weighted average interest rate for first quarter 1998 was 6.96%;
for 1997 the first quarter average was 6.74%. The outstanding
balance at February 28, 1998 was $5,100,000 compared to
$1,200,000 at November 30, 1997 primarily to finance receivables
and inventory needs noted above.
For first quarter 1998, the Company used its borrowings primarily
for operations and the Company's expansion into Taiwan.
Management believes that this outstanding balance will be reduced
by cash flow from operations; however, it will continue to use
this line of credit as originally intended, as necessary for the
growth of its business.
Financial Instruments
Due to recent expansions into foreign markets, the Company has
begun to use derivative financial instruments in order to reduce
exposure to adverse effects in foreign currency fluctuations.
The Company does not engage in activities involving derivative
financial instruments for trading or speculative purposes.
Foreign exchange forward contracts are being used to hedge
certain transactions. These forward contracts are marked to
market and form a natural hedge; therefore gains and losses on
derivatives are offset by gains and losses in the carrying
amounts of the corresponding assets or liabilities being hedged.
Net exposure to risk and losses is immaterial.
9
Year 2000 Issues
The Company has initiated a task force committee to address Year
2000 issues. The committee's purpose is to direct the progress
in project planning for software and hardware modifications and
to ensure compliance of third party vendors and suppliers. A
preliminary review of software modifications together with an
interpretation of the business risks associated with each
application has been accomplished. The required modifications
will be addressed with primary focus on applications with the
greatest business risk exposure. External and internal resources
have been dedicated to the project in addition to specific
arrangements for an outside testing environment. Completion
dates for important tasks have been set and will be managed
throughout 1998 and 1999. Costs for implementing the Year 2000
project are expected to be immaterial and should not affect
results of operations or the financial position of the Company.
Although management is addressing the Year 2000 issue and plans
to monitor its progress thru completion, there can be no
assurance that total compliance internally as well as with third
party vendors and suppliers will be achieved.
Certain statements in this Management's Discussion and Analysis
section contain forward-looking information. These statements
are based on current expectations, and actual results could
differ materially. Important factors that could cause actual
results to differ materially from those projected in forward
looking statements include, but are not limited to the following:
Consultants' sales activity levels, the recruiting of new
Consultants, new product introductions and the results of its
international subsidiaries.
10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BeautiControl Cosmetics, Inc.
(Registrant)
Date: 4/13/98 /s/ RICHARD W. HEATH
Richard W. Heath
President, Chief
Executive Officer
Date: 4/13/98 /s/ M. DOUGLAS TUCKER
M. Douglas Tucker
Senior Vice President-Finance &
Principle Financial Officer
11