SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15414
For the transition period from to
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ALOETTE COSMETICS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2056003
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 Wright's Lane East, West Chester, PA 19380
(Address of principal executive office) (Zip Code)
(610) - 692-0600
(Registrant's telephone number, including area code)
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Former name, former address and former fiscal year,
if changed since last report.
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 .
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, no par value - 2,157,253 shares as of November 7, 1996.
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996 1
(unaudited) and December 31, 1995
Consolidated Statements of Income -three and nine 2
months ended September 30, 1996 and 1995
(unaudited)
Consolidated Statements of Cash Flows - 3
nine months ended September 30, 1996 and 1995
(unaudited)
Notes to Consolidated Financial Statements - 4
September 30, 1996
Item 2. Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
Part II. OTHER INFORMATION
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Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of 8
Security Holders
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain "forward-looking" statements. The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor with
respect to all such forward-looking statements. Examples of forward-looking
statements contained herein include statements with respect to (i) the eventual
sale of one of the Company's repurchased Canadian franchise territories and (ii)
relatively flat fourth quarter retail sales in North America. The Company's
ability to predict any such occurrences or the effect of other events on the
Company's operations is inherently uncertain. Therefore, the Company wishes to
caution each reader of this report to carefully consider the specific factors
discussed with such forward-looking statements, as such factors could affect the
ability of the Company to achieve its objectives and may cause actual results to
differ materially from those expressed herein.
9
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
ASSETS ------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents ............................ $ 2,812,678 $ 1,024,114
Accounts receivable, less allowance
of $163,000 and $110,000, respectively ............. 946,047 1,089,368
Current portion of notes receivable,
less allowance of $126,000 and $270,000, .......... 212,155 316,657
respectively
Inventories .......................................... 3,004,696 3,672,249
Prepaid expenses and other current assets ............ 701,543 588,665
Deferred income taxes ................................ 278,000 291,000
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Total current assets .......................... 7,955,119 6,982,053
Cost in excess of net assets acquired, net ............. 462,868 500,398
Notes receivable, less current portion ................. 484,761 564,836
Property, plant and equipment, net ..................... 2,809,413 3,261,940
Other assets ........................................... 420,390 514,280
Deferred income taxes .................................. 370,000 370,000
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Total assets .................................. $ 12,502,551 $ 12,193,507
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Current maturities of long-term debt ................. $ 603,804 $ 902,361
Accounts payable ..................................... 304,865 539,008
Accrued expenses ..................................... 751,853 881,834
Accrued compensation and benefits .................... 205,504 53,853
Current portion, deferred franchise fee revenue ...... 86,681 116,798
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Total current liabilities ..................... 1,952,707 2,493,854
Deferred interest ...................................... 435,377 --
Deferred income taxes .................................. 194,691 189,000
Long-term debt, less current maturities ................ 1,705,720 1,968,371
Deferred franchise fee revenue, less current portion ... 80,767 66,844
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Total liabilities ............................. 4,369,262 4,718,069
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SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized, 2,963,134 shares issued and
outstanding as of Sept. 30, 1996 and December 31, 1995 25,000 25,000
Additional paid-in capital ............................. 7,489,735 7,489,735
Unearned ESOP shares ................................... (142,500) (142,500)
Cumulative currency translation adjustments ............ (1,068,983) (1,066,118)
Retained earnings ...................................... 10,591,163 9,930,447
Less: Common stock in treasury, at cost,
805,881 shares ....................................... (8,761,126) (8,761,126)
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Total shareholders' equity .................... 8,133,289 7,475,438
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Total liabilities and shareholders' equity..... $ 12,502,551 $ 12,193,507
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See accompanying notes to consolidated financial statements.
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
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Revenues:
Net product sales $2,311,725 $2,451,155 $7,367,730 $8,552,344
Revenue from franchise operations 386,001 429,295 1,282,436 1,349,964
Sales of franchises 4,047 6,667 43,596 41,972
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2,701,773 2,887,117 8,693,762 9,944,280
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Cost and expenses:
Cost of product sales 1,391,566 1,603,419 4,452,409 6,037,212
Selling, general and administrative 1,087,092 1,185,200 3,315,283 4,590,043
Loss on sale of manufacturing
operations - - - 3,800,000
Sales of franchises 22,137 14,982 133,023 24,048
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2,500,795 2,803,601 7,900,715 14,451,303
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Operating income (loss) 200,978 83,516 793,047 (4,507,023)
Other income (expense), net 61,710 (59,423) 1,669 (243,814)
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Income (loss) before income taxes 262,688 24,093 794,716 (4,750,837)
Provision for income taxes 54,000 - 134,000 -
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Net income (loss) $ 208,688 $ 24,093 $ 660,716 $(4,750,837)
========== ========== ========== ===========
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Per share data:
Net income (loss) $ .10 $ .01 $ .31 $ (2.20)
========== ========== ========== ==========
Dividends $ - $ - $ - $ -
========== ========== ========== ==========
Weighted average shares outstanding 2,157,253 2,157,253 2,157,253 2,157,253
========== ========== ========== ==========
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See accompanying notes to consolidated financial statements.
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(Unaudited)
1996 1995
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Cash flows from operating activities:
Net income (loss) $ 660,716 $(4,750,837)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation & amortization 408,757 482,033
Provision for doubtful accounts and notes receivable 102,913 314,616
Loss (gain) on sale of plant, property and equipment 43,085 (32,440)
Franchise fee revenue (23,596) (31,972)
Loss on sale of manufacturing operations -- 3,800,000
Deferred interest 134,380 --
Other 4,741 4,807
Changes in operating assets and liabilities:
Decrease in receivables 23,360 272,003
Decrease in inventories 660,978 659,656
(Increase) in prepaid and other current assets (114,197) (55,424)
Increase (decrease) in accounts payable and accrued expenses 59,511 (543,798)
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Net cash provided by operating activities 1,960,648 118,644
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Cash flows from investing activities:
Proceeds from sale of manufacturing operations -- 2,097,210
Proceeds from repayment of franchise notes 156,460 213,844
Purchase of property, plant and equipment (42,993) (21,884)
Proceeds from sale of plant, property and equipment, net 186,488 281,262
Decrease (increase) in other assets 33,127 (16,496)
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Net cash provided by investing activities 333,082 2,553,936
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Cash flows from financing activities:
Repayment of note payable, net -- (3,533,000)
Payments of long-term debt (565,012) (2,569,293)
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Net cash (used in) financing activities (565,012) (6,102,293)
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Effect of exchange rate on cash 59,846 (21,938)
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Net increase (decrease) in cash and cash equivalents 1,788,564 (3,451,651)
Cash and cash equivalents at beginning of year 1,024,114 3,962,195
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Cash and cash equivalents at end of period $ 2,812,678 $ 510,544
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See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996
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 the instructions to Form 10-QSB 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.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in the consolidation.
2. Inventories
At September 30, 1996 and December 31, 1995, inventories consisted of
the following:
1996 1995
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Finished goods $2,041,479 $2,114,743
Work in process 7,190 6,972
Raw materials 956,027 1,550,534
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$3,004,696 $3,672,249
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3. Supplemental Cash Flow Information
Noncash investing and financing activities:
During the first nine months ended September 30, 1996, the Company
reacquired a franchise in satisfaction of a net note receivable in the amount of
approximately $160,000. In addition, seven (7) franchises were sold or
refinanced for notes receivable of approximately $364,000 in 1996, compared to
four (4) new franchises for notes receivable of $75,000 during the first nine
months of 1995.
During the second quarter, the Company reclassified approximately
$300,000 of interest accrued as of December 31, 1995 as deferred interest in
accordance with the Subordinated Note (see Note 6).
During the first nine months of 1996, the Company utilized $93,000 of
barter credits, which are included in other assets, for inventory purchases
compared to zero for the same period in 1995.
4. Sale of Assets of Manufacturing Operations
On June 15, 1995, the Company finalized the sale of certain assets of
its manufacturing operations in Texas for cash of approximately $2.1 million. As
a result of the sale of these assets, the Company recorded a charge of $3.8
million during the first nine months of 1995.
Sales from the manufacturing operation were $1.2 million for the nine
months ended September 30, 1995. The net loss from operations for the
corresponding period, excluding the aforementioned $3.8 million charge, was
$478,000.
5. Franchise Repurchase
In March 1996, the Company repurchased one of its Canadian franchises,
consisting of three potential franchise territories, as satisfaction of a net
note receivable of approximately $160,000. One franchise territory is being
operated by the Company; one territory was resold for a note receivable and cash
of approximately $110,000; and the Company expects that the third territory will
eventually be sold. For the period from its acquisition through September 30,
1996, the Company operated franchise's net product sales and net earnings did
not significantly affect consolidated results from operations.
6. Notes Payable
In April 1996, the Company reached an agreement with a director,
shareholder and former officer to restructure the payment terms of a
Subordinated Note held by such person. The new terms provide for interest to
accrue on the unpaid principal balance at the rate of 7%, with an initial
payment of $200,000 and monthly principal payments of $50,000 which began in
May, 1996. Interest payments will be deferred until all principal has been paid
in full. Upon repayment of principal, monthly payments of $50,000 will continue
until all deferred interest has been paid in full. Due to the deferral of
interest, the effective annual interest rate based on the agreed upon terms
without any consideration for prepayments of principal or interest, is estimated
to be approximately 5%.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
Cash and cash equivalents increased to approximately $2.8 million at
September 30, 1996, from approximately $1.0 million at December 31, 1995,
primarily due to the Company's improved cash flows from operations and
reductions in inventories.
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current maturities of long term debt decreased approximately $300,000
in the first nine months of 1996, primarily as a result of a new agreement
reached in April 1996 restructuring the terms of a Subordinated Note, in the
principal amount of approximately $2.8 million, (the "Subordinated Note"), See
"Notes to Financial Statements, Note 6." Pursuant to such restructured terms,
the Company made an initial payment of $200,000 in May 1996 and monthly
principal payments of $50,000 commencing May 15, 1996. Interest will accrue at a
rate of 7% per annum on the outstanding principal balance. As of September 30,
1996, deferred interest on the Subordinated Note was approximately $435,000, or
10% of total liabilities.
RESULTS OF OPERATIONS:
Net Income
The Company reported net income of approximately $661,000, or $.31 per
share, for the first nine months of 1996 compared to a net loss of approximately
$4.8 million, or $2.20 per share, for the corresponding period of 1995. The
increase in net income was largely attributable to improved product margins and
lower administrative expenses, combined with the elimination of losses incurred
by the manufacturing operations which was sold by the Company in June 1995. For
the third quarter of 1996, the Company reported net income of $209,000, or $.10
per share, versus $24,000, or $.01 per share, for the same period in 1995. The
increase in net income of $185,000 was largely attributable to the
aforementioned improved product margins and lower administrative expenses.
Operating income of approximately $793,000 for the nine months ended
September 30, 1996 represents an increase of $1.5 million (exclusive of the $3.8
million charge associated with the sale of the manufacturing operations).
Operating income for the three months ended September 30, 1996 increased 139%,
or $117,000, to $201,000.
Revenues
Total revenues of $8.7 million for the nine months ended September 30,
1996 remained relatively flat compared to the same period in 1995 (exclusive of
the sales generated by the manufacturing operations which totaled $1.2 million
in 1995). Similarly, net product sales for the same periods were approximately
$7.4 million excluding the aforementioned sales by the manufacturing operations.
For the quarter ended September 30, 1996, net product sales were $2.3
million compared to $2.5 million for the third quarter of 1995; a decrease of
6%. Wholesale sales at the Company's Canadian subsidiary continued to increase
slightly during the quarter. Wholesale sales at the Company's domestic
subsidiary, which had remained at 1995 levels in the first two quarters of 1996,
declined 12% in the third quarter.
Reduced sales in all the markets contributed to a 7% decline in
worldwide retail sales -- sales by franchises to their customers -- to $28.0
million as of September 30, 1996, compared to $30.0 million during the first
nine months of 1995. Although there can be no assurances, the Company expects
that retail sales in North America will be relatively constant for the fourth
quarter of 1996 in comparison to the fourth quarter of 1995, as a result of
additional sales of franchises, new incentive programs for Beauty Consultants,
and a continued focus on guidance to franchises.
Cost of Product Sales
For the nine months ended September 30, 1996, cost of product sales as
a percentage of net product sales decreased to 60% for the nine months ended
September 30, 1996 from 71% for the first nine months of 1995. This decrease was
primarily due to an elimination of the overhead costs of the Company's
manufacturing operations. The Company also negotiated discounts with certain
suppliers and increased controls in purchasing which resulted in improved
margins at its domestic and Canadian subsidiaries. As a result, for the third
quarter, the cost of product sales as a percentage of net product sales
decreased to 60% in 1996 from 65% in 1995. Although no assurances can be given,
management expects this percentage to remain relatively constant through the
fourth quarter.
Expenses
Year-to-date selling, general and administrative expenses were $3.3
million and $4.6 million in 1996 and 1995, respectively; a decrease of $1.3
million, or 28%. The decrease resulted from the continued success of the cost
reduction initiatives implemented in prior periods, the elimination of expenses
at the manufacturing operation, and the non-recurrence of several one time
charges incurred against earnings in 1995. Cost reduction initiatives included
more efficient staff levels, consolidation of facilities, and limited use of
consultants. Total selling, general and administrative expenses for the third
quarter of 1996 decreased $98,000, or 8%, to $1.1 million from approximately
$1.2 million in the third quarter of 1995. Although management will continue to
evaluate additional areas for expense reductions, these expenses are expected to
be relatively flat through the fourth quarter of 1996 as compared with 1995.
Other Income (Expense)
The increase in other income (expense), net was due primarily to the
reduction in interest expense in the first nine months of 1996 as a result of
the Company's reduced outstanding debt balance. In the third quarter of 1996,
the Company recorded interest income associated with tax refunds of
approximately $80,000.
Income Taxes
The Company recorded a $134,000 provision for income taxes during the
nine months ended September 30, 1996. For the same period in 1995 the Company
did not recognize any potential tax benefit or provision.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1996, the Company had approximately $2.8 million in
cash and cash equivalents and had no outstanding borrowings under its $1.0
million line of credit. Working capital increased approximately $1.5 million to
$6.0 million as of September 30, 1996.
Management believes that its working capital, current financing
alternatives, and available line of credit will be sufficient to cover normal
and expected cash flow needs, including planned capital spending, for at least
the next two years.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 Schedule of Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Report on Form 8-K:
On October 15, 1996, the Company filed on Form 8-K certain information
with respect to the resignation of a senior officer and the appointment of
replacements.
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.
ALOETTE COSMETICS, INC.
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(Registrant)
Date: November 7, 1996 /s/ Patricia J. Defibaugh
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Patricia J. Defibaugh
Chairman of the Board
Chief Operating Officer
Date: November 7, 1996 /s/ Jean M. Lewis
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Jean M. Lewis
Vice President of Finance
(Principal Financial Officer)