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, 1998
[ ] 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 - 2,104,253 shares as of May 14, 1998.
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998 (unaudited) 1
and December 31, 1997
Consolidated Statements of Operations - Three months 2
ended March 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - 3
Three months ended March 31, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements - 4
March 31, 1998 (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 and Use of Proceeds 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 can be identified by the use of forward-looking terminology such as
"believes," "expects," "anticipates," "estimates," "intends" and similar
expressions. In addition, forward-looking statements are identified by
strategies that involve risks and uncertainties. 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,
1998 1997
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,553,102 $ 4,571,344
Accounts receivable, less allowance
of $136,000 and $153,000, respectively 796,860 818,437
Current portion of notes receivable,
less allowance of $37,000 200,645 198,597
Inventories 2,755,604 2,571,754
Prepaid expenses and other current assets 343,335 187,831
Deferred income taxes 346,000 346,000
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Total current assets 8,995,546 8,693,963
Cost in excess of net assets acquired, net 387,807 400,318
Notes receivable, less current portion 160,226 186,840
Property, plant and equipment, net 2,246,400 2,284,608
Other assets 295,191 314,146
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Total assets $12,085,170 $11,879,875
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LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 600,000 $ 600,000
Accounts payable 350,290 139,390
Accrued expenses 467,720 426,588
Accrued compensation and benefits 40,382 47,990
Current portion, deferred franchise fee revenue 108,887 95,726
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Total current liabilities 1,567,279 1,309,694
Deferred interest 627,545 602,371
Deferred income taxes 145,000 145,000
Long-term debt, less current maturities 805,720 955,720
Deferred franchise fee revenue, less current portion 35,617 52,689
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Total liabilities 3,181,161 3,065,474
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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, 1998 and December 31, 1997 25,000 25,000
Additional paid-in capital 7,415,808 7,415,808
Cumulative currency translation adjustments (1,238,013) (1,289,947)
Retained earnings 11,626,002 11,588,328
Less: Common stock in treasury, at cost,
858,881 shares (8,924,788) (8,924,788)
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Total shareholders' equity 8,904,009 8,814,401
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Total liabilities and shareholders'
equity $12,085,170 $11,879,875
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See accompanying notes to consolidated financial statements.
1
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
1998 1997
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Revenues:
Net product sales $ 1,591,455 $ 2,129,486
Revenue from franchise operations 296,567 352,629
Sales of franchises 4,181 3,004
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1,892,203 2,485,119
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Cost and expenses:
Cost of product sales 932,627 1,251,739
Selling, general and administrative 938,208 1,079,431
Sales of franchises 5,023 10,305
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1,875,858 2,341,475
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Operating income 16,345 143,644
Other income, net 32,327 22,646
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Income before income taxes 48,672 166,290
Provision for income taxes 11,000 27,000
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Net income $ 37,672 $ 139,290
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Other comprehensive income, net of tax:
Foreign currency translation adjustments $ 40,434 $ (2,917)
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Other comprehensive income 40,434 (2,917)
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Comprehensive income $ 78,106 $ 136,373
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Net Income Per share data:
Basic Earnings $ .02 $ .06
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Earnings assuming dilutions $ .02 $ .06
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Dividends -- --
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Weighted average shares
outstanding 2,104,253 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, 1998 and 1997
(Unaudited)
1998 1997
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Cash flow from operating activities:
Net income $ 37,672 $ 139,290
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation & amortization 84,790 120,048
Provision for doubtful accounts and notes receivable 9,000 19,361
Franchise fee revenue (4,181) (3,004)
Deferred interest 25,174 35,437
Other 1,056 (874)
Changes in operating assets and liabilities:
(Increase) in receivables (23,532) (157,340)
(Increase) in inventories (174,015) (190,226)
(Increase) in prepaid and other current assets (143,310) (118,240)
Increase (decrease) in accounts payable and accrued expenses 280,991 (162,113)
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Net cash provided by (used in) operating activities 93,645 (317,661)
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Cash flows from investing activities:
Proceeds of notes receivable, net 25,129 38,631
Purchase of property, plant and equipment (3,512) (12,935)
(Increase) decrease in other assets (7,278) 10,245
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Net cash provided by investing activities 14,339 35,941
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Cash flows from financing activities:
Payment of long-term debt (150,000) (150,144)
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Net cash (used in) financing activities (150,000) (150,144)
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Effect of exchange rate changes on cash 23,774 7,218
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Net (decrease) in cash and cash equivalents (18,242) (424,646)
Cash and cash equivalents at beginning of year 4,571,344 4,238,182
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Cash and cash equivalents at end of period $ 4,553,102 $ 3,813,536
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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, 1998
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, 1998 and December 31, 1997, inventories consisted of the
following:
1998 1997
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Finished goods $2,026,471 $1,888,930
Work in process -- --
Raw materials 729,133 682,824
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$2,755,604 $2,571,754
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3. Earnings Per Share Information
March 31, 1998 March 31, 1997
Basic Diluted Basic Diluted
---------- ---------- ---------- ----------
Net Earnings Available to Common
Shareholders $ 37,672 $ 37,672 $ 139,290 $ 139,290
Average equivalent shares:
Shares of Aloette common
stock outstanding 2,104,253 2,104,253 2,157,253 2,157,253
Employee compensation-related shares,
including warrants and options -- 17,223 -- 12,286
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Total average equivalent shares 2,104,253 2,121,476 2,157,253 2,169,539
Net earnings per share $ .02 $ .02 $ .06 $ .06
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4. New Accounting Standards
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income" (SFAS 130). This statement establishes standards for the reporting and
display of comprehensive income and its components. Comprehensive income is
defined to include all changes in equity during a period except those resulting
from investments by owners and distributions to owners. During the first quarter
of 1998 the Company was subject to foreign currency rate fluctuations resulting
in an unrealized gain of approximately $52,000 before tax or approximately
$40,000 after tax.
4
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), which is effective for years beginning after December 15, 1997. This
statement establishes standards for the reporting and display of financial and
descriptive information about the Company's reportable operating segments.
Operating segments are defined as the components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company has adopted SFAS 131 and will begin segment
reporting in the second year of application.
5. Subsequent Events
Effective April 14, 1998, the Company entered into an agreement and
Plan of Merger with ACI Acquisition Partners, Inc. ("ACIA"), whereby ACIA will
acquire, through merger, all of the outstanding capital stock of Aloette in
exchange for cash in the amount of $5.25 per share (the "Merger"), for an
aggregate consideration to Aloette's shareholders, option and warrant holders of
approximately $11.8 million. ACIA also will assume approximately $2.0 million of
Aloette debt. The closing of the Merger is subject to the approval of Aloette's
shareholders at a meeting expected to be held by the end of July 1998 and other
customary terms and conditions.
5
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
Cash and cash equivalents were approximately $4.6 million, or 38% of
total assets, at March 31, 1998. Inventories increased to $2.8 million as of
March 31, 1998 from $2.6 million at December 31, 1997. The increase in
inventories was attributable to several new products introduced in the first
quarter and second quarters of 1998, an 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 increased $116,000 to approximately $3.2 million as
of March 31, 1998. The increase was attributable to an increase in (i) accounts
payable at March 31, 1998 primarily relating to inventory purchases and (ii)
accrued expenses relating to accrued legal expenses associated with the merger
(the "Merger") transaction with ACI Acquisition Partners, Inc. ("ACIA") which
were offset by a decrease in long term debt.
RESULTS OF OPERATIONS:
Net Income
The Company reported net income of approximately $38,000, or $.02 basic
earnings per share, compared to $139,000, or $.06 basic earnings per share, for
the three months ended March 31, 1998 and 1997, respectively. Operating income
for the first quarter of 1998 was $16,000 compared to $144,000 for the first
quarter of 1997. Operating income was negatively impacted by the decline in
revenues discussed below and expenses related to the merger transaction with
ACIA.
Revenues
For the current quarter, total revenues decreased approximately
$593,000, or 24%, to $1.9 million from $2.5 million in the first quarter of
1997. Net product sales were $1.6 million in the first quarter of 1998 versus
$2.1 million in the comparable period in 1997. 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 12% to $3.8 million at March 31, 1998 from
$4.3 million for the first quarter of 1997. Similarly, the Canadian subsidiary
experienced a 16% decrease in retail sales to approximately $2.6 million at
March 31, 1998 from $3.2 million for the first quarter of 1997. The decline was
attributable to a reduction in the Company's independent sales force, consisting
of Beauty Consultants and Managers, and the resulting loss of productivity at
the franchises.
In order to attempt to reverse the current trend in revenues the
Company plans to continue to expand its product line as well as introduce
enhanced recruiting materials and incentives and modify the commission structure
in an effort to promote recruiting of new Beauty Consultants and Managers, and
thus improve productivity. In addition, the Company is continuing to promote
franchise opportunities in open territories, as well as explore other methods to
accelerate the development of specific geographic areas. The Company cannot
provide any assurances that it will be successful in altering the trend in
retail sales, and thus revenues.
Due to the continuing revenue decline during the fourth quarter of
1997, the Company engaged a financial advisor to assist it in exploring
strategic alternatives available to the Company. Based on its assessment, the
Board of Directors entered into an agreement and plan of merger effective April
14, 1998, whereby ACIA will acquire, through the Merger, all of the outstanding
capital stock of Aloette in exchange for cash in the amount of $5.25 per share,
for an aggregate consideration to Aloette's shareholders, option and warrant
holders of approximately $11.8 million. ACIA also will assume approximately $2.0
million of Aloette debt. The closing of the Merger is subject to the approval of
Aloette's shareholders at a meeting expected to be held by the end of July 1998
and other customary terms and conditions.
6
Cost of Product Sales
Cost of product sales decreased 25% to $933,000 for the first quarter
of 1998 from $1.3 million for the first quarter of 1997. The decrease was a
result of lower net product sales. The cost of product sales as a percentage of
net product sales was 59% for each of the quarters ended March 31, 1998 and
1997. 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 1998 as compared to 1997.
Expenses
Total selling, general and administrative expenses decreased
approximately $141,000, or 13%, to $938,000 for the quarter ended March 31, 1998
compared to the quarter ended March 31, 1997. The decrease resulted from (i)
reduced legal expenses resulting from lawsuit expenses incurred in 1997; (ii)
lower depreciation expense; and (iii) limited use of consultants. However, the
full benefit of these reductions totaling approximately $160,000 were offset by
expenses of approximately $75,000 associated with the Merger. Although
management will continue to evaluate additional areas for expense reductions,
further expenditures and investments to alter the current revenue trend are
being considered. Additional costs related to the Merger are expected in the
second quarter.
Other Income (Expense), Net
For the first quarter of 1998 the Company recorded net other income of
$32,000 compared to net other income of $23,000 for the first quarter of 1997.
This $9,000 positive change is attributable to a decrease in interest expense
due to the lower outstanding debt balance in 1998 and an increase in interest
income resulting from the increase in cash and cash equivalents.
Income Taxes
The Company recorded an $11,000 provision for income taxes for the
three months ended March 31, 1998 compared to a $27,000 provision for income
taxes for the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1998, the Company held approximately $4.6 million in cash
and cash equivalents and had no outstanding borrowings under its $1.0 million
line of credit. Working capital increased slightly to over $7.4 million as of
March 31, 1998. 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, 1998.
Management believes that its working capital 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
(a) Exhibits
Agreement and Plan Of Merger between ACIA and Aloette Cosmetics, Inc.
dated April 10, 1998 (incorporated by reference herein to Appendix A
to the Company's preliminary proxy materials filed on May 8, 1998;
file no. 0-15414).
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
On May 5, 1998, the Company filed on Form 8-K certain information with
respect to an agreement and Plan of Merger effective as of April 14,
1998.
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 14, 1998 /s/ Patricia J. Defibaugh
-------------------------
Patricia J. Defibaugh,
Chairman of the Board, President,
Chief Executive and Operating Officer
Date: May 14, 1998 /s/ Jean M. Lewis
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Jean M. Lewis,
Vice President of Finance
(Principal Financial Officer)
9