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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 March 31, 1997
[ ] 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
(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 May 9, 1997
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997 1
(unaudited) and December 31, 1996
Consolidated Statements of Operations - Three 2
months ended March 31, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows - 3
Three months ended March 31, 1997 and 1996
(unaudited)
Notes to Consolidated Financial Statements - 4
March 31, 1997 (unaudited)
Item 2. Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
Part II. OTHER INFORMATION
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
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) a change in
trend of retail sales and (ii) that revenues will be slow to recover. 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.
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,813,536 $ 4,238,182
Accounts receivable, less allowance
of $137,000 and $142,000, respectively 932,360 814,000
Current portion of notes receivable,
less allowance of $167,000 and $170,000, 202,464 197,759
respectively
Inventories 2,903,660 2,723,916
Prepaid expenses and other current assets 442,509 567,543
Deferred income taxes 234,500 229,500
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Total current assets 8,529,029 8,770,900
Cost in excess of net assets acquired, net 437,848 450,358
Notes receivable, less current portion 411,902 460,089
Property, plant and equipment, net 2,565,159 2,627,868
Other assets 336,524 366,126
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Total assets $12,280,462 $12,675,341
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 604,117 $ 604,261
Accounts payable 415,826 357,404
Accrued expenses 405,333 792,189
Accrued compensation and benefits 149,055 187,021
Current portion, deferred franchise fee revenue 85,992 85,981
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Total current liabilities 1,660,323 2,026,856
Deferred interest 509,653 474,216
Deferred income taxes 106,000 152,000
Long-term debt, less current maturities 1,406,707 1,556,707
Deferred franchise fee revenue, less current portion 83,617 87,773
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Total liabilities 3,766,300 4,297,552
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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 March 31, 1997 and December 31, 1996 25,000 25,000
Additional paid-in capital 7,457,292 7,457,292
Unearned ESOP shares (71,250) (71,250)
Cumulative currency translation adjustments (1,125,861) (1,122,944)
Retained earnings 10,990,107 10,850,817
Less: Common stock in treasury, at cost,
805,881 shares (8,761,126) (8,761,126)
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Total shareholders' equity 8,514,162 8,377,789
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Total liabilities and shareholders'
equity $12,280,462 $12,675,341
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See accompanying notes to consolidated financial statements.
1
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1997 1996
Revenues:
Net product sales $2,129,486 $2,392,127
Revenue from franchise operations 352,629 424,076
Sales of franchises 3,004 5,265
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2,485,119 2,821,468
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Cost and expenses:
Cost of product sales 1,251,739 1,435,121
Selling, general and administrative 1,079,431 1,142,497
Sales of franchises 10,305 39,167
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2,341,475 2,616,785
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Operating income 143,644 204,683
Other income (expense), net 22,646 (59,939)
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Income before income taxes 166,290 144,744
Provision (benefit) for income taxes 27,000 (15,000)
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Net income $ 139,290 $ 159,744
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Per share data:
Net income $ .06 $ .07
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Dividends - -
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Weighted average shares
outstanding 2,157,253 2,157,253
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See accompanying notes to consolidated financial statements.
2
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
Cash flow from operating activities:
Net income $ 139,290 $ 159,744
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation & amortization 120,048 137,792
Provision for doubtful accounts and notes receivable 19,361 21,133
Loss on sale of property, plant and equipment - 41,573
Franchise fee revenue (3,004) (5,265)
Deferred interest 35,437 -
Other (874) -
Changes in operating assets and liabilities:
(Increase) in receivables (157,340) (177,456)
(Increase) in inventories (190,226) (181,939)
(Increase) decrease in prepaid and other current assets (118,240) 16,783
Increase (decrease) in accounts payable and accrued expenses (162,113) 278,962
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Net cash provided by (used in) operating activities (317,661) 291,327
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Cash flows from investing activities:
Proceeds of notes receivable, net 38,631 30,369
Purchase of property, plant and equipment (12,935) (613)
Decrease in other assets 10,245 29,636
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Net cash provided by investing activities 35,941 59,392
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Cash flows from financing activities:
Payment of long-term debt (150,144) (65,758)
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Net cash (used in) financing activities (150,144) (65,758)
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Effect of exchange rate changes on cash 7,218 19,300
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Net increase (decrease) in cash and cash equivalents (424,646) 304,261
Cash and cash equivalents at beginning of year 4,238,182 1,024,114
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Cash and cash equivalents at end of period $3,813,536 $1,328,375
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See accompanying notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
MARCH 31, 1997
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 March 31, 1997 and December 31, 1996, inventories consisted of the
following:
1997 1996
Finished goods $2,101,450 $1,930,947
Work in process - 4,645
Raw materials 802,210 788,324
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$2,903,660 $2,723,916
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3. Supplemental Cash Flow Information
Non cash investing and financing activities:
In March 1996, the Company reacquired a franchise in satisfaction of
net notes receivable of approximately $160,000. No franchises were reacquired in
the first quarter of 1997. There were no franchises sold or refinanced in either
first quarter.
During the first quarter of 1997, the Company utilized approximately
$1,500 of barter credits for inventory purchases compared to $53,000 in the
first quarter of 1996.
4. Subsequent Events
The Board of Directors of the Company approved an increase in the
number of shares available for repurchase under a previously announced stock
repurchase program to 500,000 shares of the Company's common stock. The stock
may be purchased in the open market from time to time.
4
5. New Accounting Standard - Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
will replace the current rules for earnings per share computations, presentation
and disclosure. Under the new standard, basic earnings per share excludes
dilution and is computed by dividing income available to common shareowners by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Statement No. 128 requires a dual presentation of basic and
diluted earnings per share on the face of the statement of operations.
The Company will be required to adopt Statement No. 128 in the fourth
quarter of 1997 and, as required by the standard, will restate all prior period
earnings per share data. The new earnings per share amounts are not expected to
be materially different from those computed under the present accounting
standard.
5
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
Cash and cash equivalents were $3.8 million, or 31% of total assets.
Cash and cash equivalents decreased approximately $425,000 from approximately
$4.2 million at December 31, 1996 primarily due to an increase in inventories
and a reduction in accrued expenses. Inventories increased to $2.9 million as of
March 31, 1997 from $2.7 million at December 31, 1996. The increase in
inventories was attributable to an increase in skin care finished goods in
anticipation of seasonally higher sales levels typically experienced during the
second quarter and associated purchases made to take advantage of certain volume
discounts.
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total liabilities decreased $500,000 to approximately $3.8 million as
of March 31, 1997 from approximately $4.3 million as of December 31, 1996. The
decrease was attributable to payments made (i) to reduce outstanding debt; (ii)
as part of lawsuit settlements; and (iii) as foreign tax payments.
RESULTS OF OPERATIONS:
Net Income
The Company reported net income of approximately $139,000, or $.06 per
share, compared to $160,000, or $.07 per share, for the three months ended March
31, 1997 and 1996, respectively. Income before taxes of $166,000 for the first
quarter of 1997 represented an increase of $21,000, or 15%, compared to $145,000
for the first quarter of 1996. While income before taxes increased slightly in
1997, net income on a comparative basis was affected by an increase in the tax
provision, resulting from the non-recurring impact associated with the
utilization of a net operating loss carryforward in 1996. Operating income for
the first quarter of 1997 was $144,000 compared to $205,000 for the first
quarter of 1996. While the Company continued to benefit from reductions in costs
and expenses, operating income was negatively impacted by the decline in
revenues discussed below.
Revenues
For the current quarter, total revenues decreased approximately
$340,000, or 12%, to $2.5 million from $2.8 million in the first quarter of
1996. Net product sales were $2.1 million in the first quarter of 1997 versus
$2.4 million in the comparable period in 1996. The decrease in revenues was
related to the decrease in retail sales, sales by franchises to their customers.
In the U.S., retail sales declined 14% to $4.3 million at March 31, 1997 from
$5.0 million for the first quarter of 1996. Similarly, the Canadian subsidiary
experienced an 18% decrease to approximately $3.2 million at March 31, 1997 from
$3.9 million for the first quarter of 1996. The decline was attributable to a
reduction in the Company's independent sales force, consisting of Beauty
Consultants and Managers, and the termination in prior quarters of certain
franchises in the U.S. which were not in compliance with the Company's franchise
agreements or operating procedures.
In order to reverse the current trend in revenues the Company is
continuing to promote the franchise opportunities in open territories as well as
explore other methods to accelerate the development of specific geographic
areas, to introduce enhanced recruiting materials and incentives and to expand
its new product introductions. While the Company cannot provide any assurances
that it will be successful in altering the trend in retail sales, and thus
revenues, management does expect, however, that revenues will be slow to
recover.
6
Cost of Product Sales
Cost of product sales as a percentage of net product sales decreased to
59% for the first quarter of 1997 from 60% for the first quarter of 1996. The
decrease was primarily attributable to improved margins at the Canadian
subsidiary resulting from lower expenses related to custom duty and improved
internal controls. Although management will continue to explore methods to
improve margins by continuing to negotiate discounts with certain suppliers and
increase controls in purchasing, it is expected that this percentage will remain
relatively constant in 1997 as compared to 1996.
Expenses
Total selling, general and administrative expenses decreased
approximately $60,000, or 6%, to $1.1 million for the quarter ended March 31,
1997 compared to the quarter ended March 31, 1996. The decrease resulted from
continued cost reduction initiatives implemented in prior periods. The cost
reduction initiatives included more efficient staff levels, reduced maintenance
costs and limited use of consultants. Although management will continue to
evaluate additional areas for expense reductions, further expenditures and
investments to alter the current revenue trend are being considered.
Other Income (Expense), Net
For the first quarter of 1997 the Company recorded net other income of
$23,000 compared to net other expense of $60,000 for the first quarter of 1996.
This $83,000 positive change is attributable to a decrease in interest expense
due to the lower outstanding debt balance in 1997 and an increase in interest
income resulting from the increase in cash and cash equivalents.
Income Taxes
The Company recorded a $27,000 provision for income taxes for the three
months ended March 31, 1997 compared to a $15,000 benefit for income taxes for
the three months ended March 31, 1996. The tax benefit recorded in 1996 was
primarily attributable to the utilization of a net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1997, the Company held over $3.8 million in cash and cash
equivalents and had no outstanding borrowings under its $1.0 million line of
credit. Working capital increased approximately $100,000 to over $6.8 million as
of March 31, 1997. Under its current financing arrangements, the Company is
subject to certain covenants including maintaining certain financial ratios,
restricting the payment of dividends and imposing restrictions on additional
indebtedness and capital expenditures. The Company was in compliance with all
such covenants at March 31, 1997.
In April 1997, the Company announced an increase in the number of
shares available for repurchase under a previously announced stock repurchase
program to 500,000 shares of the Company's common stock. The stock may be
purchased in the open market from time to time.
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.
7
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
Exhibit 11 - Schedule of Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
8
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: May 15, 1997 /s/ Patricia J. Defibaugh
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Patricia J. Defibaugh,
Chairman of the Board, President,
Chief Executive and Operating Officer
Date: May 15, 1997 /s/ Jean M. Lewis
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Jean M. Lewis,
Vice President of Finance
(Principal Financial Officer)
9