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
For Quarter Ended May 31, 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 July 6, 1998.
Title of Each Class of Common Stock Number of Shares Outstanding
Common Stock, $0.10 par value 6,020,198 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 7-9
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
May 31, November 30,
1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 1,480,925 $ 720,087
Short-term investments - -
Accounts receivable-net of
allowance for doubtful accounts
of $454,000 and $658,400 at
May 31, 1998 and
November 30, 1997, respectively 785,972 702,502
Inventories
Raw materials 4,238,881 4,854,267
Finished goods 7,682,338 7,945,044
11,921,219 12,799,311
Deferred income taxes 1,529,760 1,529,760
Prepaid expenses 954,489 621,785
Income tax receivables - 726,962
Other current assets 192,617 124,802
Total current assets 16,864,982 17,225,209
PROPERTY AND EQUIPMENT, AT COST 24,191,737 23,359,187
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION 14,549,748 13,731,649
9,641,989 9,627,538
OTHER ASSETS
Cost in excess of net tangible
assets, acquired, net of
amortization of $861,700 and
$828,500 at May 31, 1998 and
November 30, 1997, respectively 1,789,639 1,822,780
Investments - -
Other, net of amortization of
$565,200 and $556,700 at May
31, 1998 and November 30, 1997,
respectively 1,095,878 680,811
Total assets $29,392,488 $29,356,338
<FN>
The accompanying notes are an integral part of these statements.
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, November 30,
1998 1997
CURRENT LIABILITIES
Accounts payable - trade $ 3,693,093 $ 3,935,748
Sales tax payable 763,565 748,907
Accrued commissions and awards 1,883,529 1,784,307
Accrued compensation 348,829 544,575
Accrued other taxes 537,061 462,196
Other accrued liabilities 829,389 1,295,266
Deferred income 683,144 1,063,201
Total current liabilities 8,738,610 9,834,200
DEFERRED INCOME TAXES 440,605 440,605
LONG TERM BORROWINGS 2,200,000 1,200,000
OTHER LONG TERM OBLIGATIONS 28,833 -
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 - 9,728,998 and
9,637,198 shares at May 31,
1998 and November 30, 1997,
respectively 972,900 963,720
Capital in excess of par value 14,039,555 13,584,650
Retained earnings 33,877,179 34,238,357
48,889,634 48,786,727
Less cost of 3,708,800 common
shares held in treasury at May
31, 1998 and November 30, 1997 30,905,194 30,905,194
17,984,440 17,881,533
Total liabilities and
stockholders' equity $29,392,488 $29,356,338
<FN>
The accompanying notes are an integral part of these statements.
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
Sales $21,603,454 $19,908,470 $38,143,489 $35,960,150
Cost of goods sold 6,698,383 5,242,059 10,498,744 9,147,489
Gross profit 14,905,071 14,666,411 27,644,745 26,812,661
Selling expenses 10,248,210 8,201,178 17,377,339 14,709,995
General and administrative
expenses 4,630,592 4,878,042 8,767,112 9,040,226
14,878,802 13,079,220 26,144,451 23,750,221
Income from operations 26,269 1,587,191 1,500,294 3,062,440
Other income and expenses
Interest income 35,215 34,821 47,961 64,858
Other, net (1,800) 49,993 47,133 92,342
33,415 84,814 95,094 157,200
Income before income
taxes 59,684 1,672,005 1,595,388 3,219,640
Income taxes 50,655 611,076 592,564 1,180,070
Net income $ 9,029 $ 1,060,929 $ 1,002,824 $ 2,039,570
Net income per common $0.00 $0.18 $0.17 $0.35
share
Weighted average common
shares 6,019,298 5,920,589 5,980,405 5,884,381
Net income per common
share - assuming
dilution $0.00 $0.17 $0.16 $0.33
Weighted average common
and common equivalent
shares 6,138,043 6,158,032 6,077,950 6,234,390
<FN>
The accompanying notes are an integral part of these statements.
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Six Months Ended
May 31, May 31,
1998 1997
Net cash provided by (used in)
operating activities $1,618,578 $2,244,801
Cash flows from investing
activities:
Purchase of property and
equipment (832,550) (459,039)
Purchase of other assets (234,860) -
Net cash provided by (used in)
investing activities (1,067,410) (459,039)
Cash flows from financing
activities:
Proceeds from issuance of common
stock 464,085 874,254
Borrowings 1,000,000 (1,400,000)
Dividends paid (1,254,415) (1,237,788)
Net cash provided by (used in)
financing activities 209,670 (1,763,534)
Net increase (decrease) in cash and
cash equivalents 760,838 22,228
Cash and cash equivalents at the
beginning of the period 720,087 884,384
Cash and cash equivalents at the
end of the period $1,480,925 $ 906,612
Supplemental cash flow information:
Income taxes ($709,000) $1,269,000
Interest 126,000 179,000
<FN>
The accompanying notes are an integral part of these statements
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED May 31, 1998 AND May 31, 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 May 31, 1998 and November 30, 1997 and
the results of operations and cash flows for the six months ended
May 31, 1998 and May 31, 1997. The results for the six months
ended May 31, 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 Six Months Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
Numerator:
Net income -
Numerator for basic
and diluted earnings
per share - income
available to common
stockholders $ 9,029 $1,060,929 $1,002,824 $2,039,570
Denominator:
Denominator for basic
earnings per share --
weighted-average shares 6,019,298 5,920,589 5,980,405 5,884,381
Effect of dilutive
securities:
Employee stock options 118,745 237,443 97,545 350,009
Denominator for diluted
earnings per share --
adjusted weighted -
average shares and
assumed conversions 6,138,043 6,158,032 6,077,950 6,234,390
Basic earnings per
share $0.00 $0.18 $0.17 $0.35
Diluted earnings per
share $0.00 $0.17 $0.16 $0.33
Note 3 - Line of Credit
The Company has a $15,000,000 line of credit available to use.
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. Under the line of credit, the Company is
required to meet covenants related to certain financial ratios
and an annual capital expenditures limitation.
Note 4 - Reclassifications
Certain amounts for prior periods may have been reclassified to
conform to current period presentation.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operation
Quarters Ended May 31, 1998 and May 31, 1997. Net sales for the
second quarter increased 9% to $21,603,454 in 1998 compared to
$19,908,470 in 1997. The Taiwan branch that opened in January
1998 provided new sales that accounted for most of the 9% overall
revenue increase for BeautiControl in the second quarter.
Continued growth and expansion in Asia is expected to produce
favorable sales trends, particularly as the Taiwan business
develops. This should result in a positive impact on future
revenues for the Company. Expansion into Hong Kong is currently
underway where operations are planned to begin in early 1999.
Domestically, the Company experienced a slight increase in sales
versus the same quarter last year. This was largely due to the
success of the March and April spring recruiting drive which
added more new Consultants than in any two month period in the
Company's history. However, it required increased expenditures
including discounted cost of entry and prizes and awards for
performance which impacted gross profit margins and selling,
general and administrative expenses. During the second quarter
of 1998 there were no significant new product offerings; in the
second quarter of 1997, the Company introduced one of its most
advanced skin care products, REGENERATION GOLD. For the
remainder of 1998, emphasis on the domestic business will be
primarily focused on training and development of new Consultants
in addition to, motivating them to become active and productive
in selling products. Given that the U.S. is still experiencing a
strong healthy economy, the Company expects that these efforts
will only help maintain or slightly increase sales growth
domestically.
Gross profit margins for the second quarter of 1998 were 69.0%
compared to 73.7% in 1997. As previously mentioned, the Company
experienced a highly successful recruiting drive in March and
April. The impact of this promotion, particularly the increase in
sales of demonstration kits, affected both sales and profit
margins. As part of the recruiting incentive, the Company
offered a lower entry cost to its new recruits. The combined
effect of discounted sales and higher product costs of
demonstration kits impacted gross margin results by almost
$800,000 or 3.6% of sales. Also, additional product discounts
were given during the recruiting promotion, which caused a
decrease in profit margins.
Selling, general and administrative expenses as a percent of
sales increased to 68.9% in 1998 from 65.7% in 1997. The
increase in costs is largely due to an increase in commissions
and promotion expenditures. Commissions as a percent of sales
increased by 3.0% over the same period last year due primarily to
the March and April recruiting drive. Also affecting commissions
was the combined effect of shifts in product sales and product
discounts offered. Promotion costs increased significantly over
the same period last year. As a result of the recruiting drive,
the Company incurred initial costs of $780,000 on prizes and
awards for performance recognition, compared to $151,000 for
other promotion activities in 1997.
Net income decreased to $9,029 in 1998 from $1,060,929 in 1997.
This was primarily due to increases in commission costs and the
effects of the recruiting promotion on gross profit margins and
selling, general and administrative expenses. During the
remainder of 1998, earnings are expected to benefit moderately
from some contribution by the Taiwan business in addition to a
reduction in expenses incurred from the recruiting drive.
Six months ended May 31, 1998 and May 31, 1997. Sales increased
$2,183,000 for the first six months of 1998 to $38,143,489
compared to $35,960,150 in 1997. This was primarily due to the
successful opening of the Taiwan branch in January of 1998.
Gross profit margins decreased to 72.5% in 1998 from 74.6% in
1997. This was a result of the March and April recruiting drive
which included discounted cost of entry on demonstration kits
that provide low profit margins.
Selling, general and administrative costs increased for the first
six months of 1998 to 68.5% of sales from 66.0% in 1997 due to
the increase in commissions as a percent of sales and promotion
costs associated with the recruiting drive.
Other income and expenses decreased to $95,094 in 1998 from
$157,200 in 1997. This is attributable to lower investment
related income as a result of the liquidation of investments in
the fourth quarter of 1997.
Net income decreased to $1,002,824 in 1998 from $2,039,570 in
1997. This was caused from the decrease in profit margins and
increase in selling, general and administrative costs mentioned
above.
Liquidity and Capital Resources
Working Capital increased $735,000 to $8,126,000 at May 31, 1998
from $7,391,000 at November 30, 1997. This resulted from
increases in cash and a reduction in deferred income and various
accrued liabilities.
The Company s cash position increased to $1,480,925 at May
31,1998 from $720,087 at November 30, 1997 due to increases in
long-term borrowings and a reduction in inventories.
The Company has a $15,000,000 line of credit available to use for
operating cash when 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. A
commitment fee of .25% is paid quarterly based on the unused
portion of this line of credit. The weighted average interest
rate for the first six months was 6.88%; for 1997 the average was
6.80%. The outstanding balance at May 31, 1998 was $2,200,000
compared to $1,200,000 at November 30, 1997. Under this line of
credit, the Company is required to meet covenants related to
certain financial ratios and an annual capital expenditures
limitation. This line of credit is potentially secured by
certain assets of the Company based on the calculation of one of
the financial ratios.
The Board of Directors recently approved an increase of 755,300
shares of its common stock under the Company's Stock Repurchase
Program. These additional shares, together with 244,700 shares
from a prior authorization, bring the total number of shares
authorized for repurchase to 1,000,000.
Financial Instruments
Due to recent expansions into foreign markets, the Company may
periodically 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 may be
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. During
the second quarter of 1998, the Company settled its existing
forward contracts and currently is not engaged in any derivative
activities.
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
applications 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, foreign exchange rates
and the results of its international subsidiaries.
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: 7/13/98 /s/RICHARD W. HEATH
Richard W. Heath
President, Chief Executive
Officer
Date: 7/13/98 /s/ M. DOUGLAS TUCKER
M. Douglas Tucker
Senior Vice President-Finance
& Principle Financial Officer