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 August 31, 1999 Commission File Number 0-14449
BeautiControl, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2036343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
2121 Midway, Carrollton, TX 75006
(Address including zip code of principal executive offices)
972/458-0601
(Registrant's telephone number including area code)
BeautiControl Cosmetics, Inc.
(Former name)
Indicated below is the number of shares outstanding of each class
of the registrant's common stock, as of October 4, 1999.
Title of Each Class of Common Stock Number of Shares Outstanding
Common Stock, $0.10 par value 7,231,448 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
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statement
Index to BeautiControl, Inc. Consolidated Financial Statement
Page
Balance Sheet 3-4
Statements of Income 5
Statements of Cash Flows 6
Notes to Financial Statements 7-9
<PAGE>
<TABLE>
BEAUTICONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, November 30,
1999 1998
(Unaudited)
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 568,042 $ 3,164,573
Short-term investments 5,553,706 6,068,358
Accounts receivable-net of
allowance for doubtful accounts
of $878,100 and $758,900 at
August 31, 1999 and
November 30, 1998, respectively 1,768,669 738,147
Inventories
Raw materials 4,701,375 4,508,549
Finished goods 8,258,270 7,110,630
----------- ----------
12,959,645 11,619,179
Deferred income taxes 2,229,350 2,229,350
Prepaid expenses 637,750 735,080
Income tax receivables 1,779,645 1,980,566
Other current assets 526,514 442,232
----------- ----------
Total current assets 26,023,321 26,977,485
PROPERTY AND EQUIPMENT, AT COST 28,153,736 25,683,215
LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION 17,236,552 15,464,683
----------- ----------
10,917,184 10,218,532
OTHER ASSETS
Cost in excess of net tangible
Assets, acquired, net of
Amortization of $944,500 and
$894,800 at August 31, 1999 and
November 30, 1998, respectively 1,706,785 1,756,497
Investments - 2,264,381
Other, net of amortization of
$581,600 and $571,800 at August
31, 1999 and November 30, 1998,
respectively 1,834,858 798,933
----------- ----------
Total assets $ 40,482,148 $42,015,828
=========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
BEAUTICONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
August 31, November 30,
1999 1998
(Unaudited)
----------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable-trade $2,959,008 $3,668,942
Short term borrowings 3,012,145 7,600,000
Current portion of long-term debt 679,206 179,283
Sales tax payable 787,556 601,588
Accrued commissions and awards 2,845,980 2,201,224
Accrued compensation 610,027 373,981
Accrued property taxes 645,576 689,991
Accrued other taxes 171,522 144,033
Other accrued liabilities 932,011 875,417
Deferred income 1,339,518 986,876
----------- ----------
Total current liabilities 13,982,549 17,321,335
DEFERRED INCOME TAXES 791,647 791,647
LONG TERM BORROWINGS 9,260,850 1,220,717
OTHER LONG TERM OBLIGATIONS 190,435 243,553
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 - 10,940,248
and 10,928,998 shares at August 31,
1999 and November 30, 1998,
respectively 1,094,025 1,092,900
Capital in excess of par value 23,901,320 23,831,555
Retained earnings 22,218,263 28,413,712
Accumulated other comprehensive income (51,747) 5,603
----------- ----------
47,161,861 53,343,770
Less cost of 3,708,800 common
shares held in treasury at August
31, 1999 and November 30, 1998 30,905,194 30,905,194
----------- ----------
16,256,667 22,438,576
----------- ----------
Total liabilities and
Stockholders' equity $ 40,482,148 $42,015,828
=========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
BEAUTICONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $16,410,545 $16,610,951 $50,692,540 $54,754,440
Cost of goods sold 3,982,126 5,557,115 11,928,586 16,055,859
---------- ---------- ---------- ----------
Gross profit 12,428,419 11,053,836 38,763,954 38,698,581
Selling expenses 8,044,652 9,764,028 25,564,538 27,141,367
General and administrative
expenses 6,737,176 4,979,863 18,781,483 13,640,288
---------- ---------- ---------- ----------
14,781,828 14,743,891 44,346,021 40,781,655
---------- ---------- ---------- ----------
Income (loss) from
operations (2,353,409) (3,690,055) (5,582,067) (2,083,074)
Other income and expenses
Interest income 53,319 23,881 240,233 54,786
Other, net (213,298) (68,622) (467,073) (128,948)
---------- ---------- ---------- ----------
(159,979) (44,741) (226,840) (74,162)
---------- ---------- ---------- ----------
Income (loss) before
income taxes (2,513,388) (3,734,796) (5,808,907) (2,157,236)
Income taxes (benefit) (827,246) (1,236,699) (1,922,260) (661,963)
---------- ---------- ---------- ----------
Net income (loss) ($1,686,142) ($2,498,097) ($3,886,647) ($1,495,273)
========== ========== ========== ==========
Net income (loss) per
common share - basic ($0.23) ($0.39) ($0.54) ($0.24)
Weighted average common
shares 7,231,448 6,398,459 7,230,791 6,120,774
Net income (loss) per
common share - assuming
dilution ($0.23) ($0.39) ($0.54) ($0.24)
Weighted average common and
common equivalent shares 7,231,448 6,398,459 7,230,791 6,120,774
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
BEAUTICONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Nine Months Ended
August 31, August 31,
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by (used in)
operating activities ($3,167,931) ($2,014,719)
Cash flows from investing activities:
Proceeds from sale of investments 9,250,000 -
Purchase of property and equipment (2,470,521) (1,174,215)
Purchase of investments (6,631,568) -
Purchase of other assets (141,616) (59,283)
---------- ----------
Net cash provided by (used in)
investing activities 6,295 (1,233,498)
Cash flows from financing activities:
Proceeds from issuance of common
Stock 55,001 10,376,085
Borrowings 10,723,852 5,300,000
Payment on debt (7,850,944) -
Principal payments under capital
lease obligation (84,896) -
Dividends paid (2,277,908) (1,886,536)
---------- ----------
Net cash provided by (used in)
financing activities 565,105 13,789,549
---------- ----------
Net increase (decrease) in cash and
cash equivalents (2,596,531) 10,541,332
Cash and cash equivalents at the
beginning of the period 3,164,573 720,087
---------- ----------
Cash and cash equivalents at the end
of the period 568,042 11,261,419
========== ==========
Supplemental cash flow information:
Income tax refund (2,084,600) (63,500)
Interest paid 599,800 192,600
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
BEAUTICONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED August 31, 1999 AND August 31, 1998
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
August 31, 1999 and November 30, 1998 and the results of operations and
cash flows for the nine months ended August 31, 1999 and August 31,
1998. The results for the nine months ended August 31, 1999 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, 1998.
<PAGE>
Note 2 - Earnings Per Share
Net income per share is accounted for under the provisions of Financial
Accounting Standards No. 128 which requires companies to present basic
earnings per share including weighted average number of common shares
outstanding and, if applicable, diluted earnings per share which
includes common equivalent shares outstanding. The following table
sets forth the computation of basic and diluted earnings (loss) per
share (in thousands, except per share data):
Three Months Ended Nine Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
------ ------ ------ ------
Numerator:
Net income (loss) -
Numerator for
basic and diluted
earnings (loss)
per share --
income available
to common
stockholders ($1,686) ($2,498) ($3,887) ($1,495)
Denominator:
Denominator for
basic earnings
(loss) per share
--weighted-
average shares 7,231 6,398 7,231 6,121
Effect of
dilutive
securities:
Employee stock
options - - - -
Denominator for
diluted earnings
(loss) per share --
adjusted weighted-
average shares and
assumed conversions 7,231 6,398 7,231 6,121
Basic earnings (loss)
per share ($0.23) ($0.39) ($0.54) ($0.24)
Diluted earnings
(loss) per share ($0.23) ($0.39) ($0.54) ($0.24)
Note 3 - Debt
The Company has a secured term loan with outstanding balances of
$2,972,400 and $1,400,000 at August 31, 1999 and November 30, 1998,
respectively. On April 30, 1999, the Company funded $220,000 under
this note. The note has a maximum amount of $3,120,l00 that may be
funded and has a five-year duration bearing a fixed rate of interest
of 7.72% with a twelve year amortization. A balloon payment of
$1,865,200 is due on November 30,2003. This note has two covenants
related to certain financial ratios calculated on a quarterly basis.
Certain assets of the Company secure this note.
<PAGE>
On May 5, 1999, the Company entered into a three-year note and security
agreement secured by certain assets of the Company bearing interest at
the prime rate plus .5%. The agreement provides for a maximum credit
availability of $7,000,000 dependent upon the value of the Company's
inventory. At August 31, 1999, the maximum available credit was
$4,865,000. At August 31, 1999, the outstanding principal under the
note and security agreement was $4,202,900. This amount includes a
$1,190,800 balance on a fixed note with a four year amortization and a
$3,012,100 balance on a revolving loan agreement. The weighted average
interest rate through August 31, 1999 was 8.42%.
On May 24, 1999, the Company obtained asset financing in the amount of
$5,800,000 secured by certain real estate. The note is a ten-year note
amortized over a twenty-two year period bearing a fixed interest rate
of 8.33%. At August 31, 1999, the outstanding balance was $5,776,700.
As part of this arrangement, the Company is required to hold a
restricted escrow balance of $850,000.
Effective May 26, 1999, the Company's existing unsecured line of credit
was paid off. The amount of credit available under the line of credit
through May 26, 1999 had been $6,000,000. The weighted average
interest rate thru May 26, 1999 was 6.55% and for 1998 was 6.99%.
Long-term debt (thousands) consists of the following:
August 31, 1999 November 30, 1998
----- -----
Secured term note 2,972 1,400
Three year note and
security agreement 1,191 -
Mortgage financing 5,777 -
Less current portion 679 179
----- -----
Total Long-term debt 9,261 1,221
Note 4 - Reclassifications
Certain amounts for prior periods may have been reclassified to conform
to current period presentation.
Note 5 - Inventories
Inventories (in thousands) consist of the following:
August 31, 1999 November 30, 1998
------ ------
Finished Goods $10,857 $10,282
Raw Materials 4,933 5,263
Reserve for
Obsolescence (2,830) (3,926)
------ ------
Total $12,960 $11,619
<PAGE>
Note 6 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130). SFAS 130 established standards for the reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. Under existing accounting
standards, other comprehensive income shall be classified separately
into foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. Comprehensive income is defined as the change in equity
(net assets) of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. It includes
all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company adopted
SFAS 130 on December 1, 1998. The components of comprehensive income
and related tax effect (in thousands) for the months ended August 31,
1999 and 1998 are as follows:
Three months ended Nine months ended
August 31, August 31,
1999 1998 1999 1998
Net income (loss) ($1,686) ($2,498) ($3,887) ($1,495)
Other comprehensive
income (loss)
Change in cumulative
Translation adjustment 21 24 (32) (85)
*Change in unrealized
gains and losses on
investments in debt
securities (13) - (56) -
Less:
Reclassification
adjustment for
losses included in
earnings 11 - 11 -
Related tax effect 13 (8) 31 29
Comprehensive
income (loss) ($1,654) ($2,482) ($3,933) ($1,551)
* The Company's investment holdings include some tax exempt debt
securities, therefore there is no tax effect computed on related gains
and losses.
<PAGE>
Note 7 - New Accounting Standards
In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards(SFAS), No. 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the effective
date of FASB Statement No. 133. SFAS 137 defers the effective date of
SFAS 133 Accounting for Derivative Instruments and Hedging Activities
to be for all fiscal years beginning after June 15, 2000. SFAS 133
requires that all derivatives be recognized on the balance sheet at
fair value. Derivatives that do not qualify as hedges must be adjusted
to fair value through income. Depending on the nature of the hedge
transaction, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair
value will be recognized in current period earnings. At the present
time, the Company is not engaged in any derivative activity therefore
there is no impact that the adoption of SFAS 133 would have on earnings
or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131). SFAS 131
established standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company
adopted SFAS 131 effective December 1, 1998. Currently, the Company
anticipates that only the results of its international operations and
subsidiaries, in the event they are material, may be required to be
separately disclosed from U.S. base operations under the reporting
guidelines of SFAS 131.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operation
During the third quarter of 1999, the Company implemented a change to
its management structure. The new structure was made to accommodate
the Company's changing business needs due to expansion and growth. In
August, Sheila O'Connell Cooper was hired as President and Chief
Operating Officer. Ms. O'Connell Cooper was formerly Executive Vice
President of Mary Kay, Inc. She succeeds Richard W. Heath, the
Company's founder, as President. Richard W. Heath will remain as
Chairman of the Executive Committee and Chief Executive Officer.
In August 1999, the Company introduced BeautiNet [TM] Plus, an online
service provided to U.S. Consultants. It will enable sales Consultants
to place orders and recruit online, increase customer contacts and help
them manage their business more efficiently. Also in August,
the Company held its annual Celebration meeting in Dallas where
approximately 2,500 Consultants attended. During this event new product
introductions were presented that include new Regeneration Retinol PM
Skin Treatment along with a Spa Collection of bath and body products.
<PAGE>
Quarters ended August 31, 1999 and August 31, 1998. Net sales for the
third quarter were $16,410,545 in 1999 compared with $16,610,951 in
1998.
Gross profit margins for the third quarter of 1999 were 75.7% compared
with 66.5% in 1998. The change in profit margins was attributable to a
higher gross margin in the U.S. base business. This was due to a
onetime non-cash write-down of inventory for $1,550,000 in the third
quarter of 1998. Excluding the impact of obsolete inventory expense in
1998, profit margins would have remained comparable to the prior year.
Selling, general and administrative expenses as a percent of sales
increased to 90.1% in 1999 from 88.8% in 1998 primarily as a result of
a decrease in sales. Selling expense decreased to 49.0% of sales during
the third quarter of 1999 versus 58.8% in 1998. This was due to a
reduction in expansion costs incurred as the Company's new subsidiaries
began operations in early 1999. In addition, domestic base business
commissions were lower in 1999 compared to 1998. The decrease in
selling expenses was partially offset by an increase in general and
administrative expenses. General and administrative costs increased to
41.1% of sales in 1999 compared to 30.0% of sales during the same
period last year. This was a result of an increase in domestic base
business operating costs and the addition of the Company's two new
subsidiaries, Eventus International, Inc. and BeautiControl Hong Kong,
Inc.
Other income and expense decreased to ($159,979) in 1999 from ($44,741)
in 1998 as a result of increased interest expense.
Nine months ended August 31, 1999 and August 31, 1998. Sales for the
first nine months of 1999 were $50,692,540 compared to $54,754,440 in
1998. The sales decline was primarily caused by a decrease in domestic
base business sales resulting from a two month recruiting promotion
that occurred during the second quarter of 1998 and not repeated in
1999.
Gross profit margins increased to 76.5% in 1999 from 70.7% in 1998. A
recruiting promotion during March and April of 1998 impacted profit
margins in the second quarter due to a discounted cost of entry offered
on low margin demonstration kits. Also, as mentioned above, an
inventory write-down impacted 1998 third quarter profit margins.
Selling, general and administrative costs increased for the first nine
months of 1999 to 87.5% from 74.5%. This was due to a decrease in
sales and the addition of the Company's two new subsidiaries.
Other income and expense decreased to ($226,840) from ($74,162) in 1998
due to additional interest expense.
<PAGE>
Liquidity and Capital Resources
Working capital increased $2,385,000 to $12,041,000 at August 31, 1999
from $9,656,000 at November 30, 1998. This was mainly due to a
reduction in short-term borrowings. During the second quarter of 1999,
the Company repaid the $6,000,000 outstanding under its line of credit.
This was primarily funded through the Company's new credit facilities
and financing arrangements. Also affecting working capital was an
increase in inventories due to new business expansion and a temporary
increase in net trade receivables due to a credit program offered to
Consultants during the annual Celebration event. Payments on this
credit program will be processed in September. Offsetting increases to
working capital was a reduction in cash and short-term investments used
to fund operating needs and expansion costs.
The Company's cash flows decreased $2,597,000 at August 31, 1999
compared with an increase of $10,541,000 the same period last year.
This was primarily due to a change in financing activity during 1999
compared to 1998. On August 3,1998, the Company received $9,912,000 in
cash in exchange for 1,200,000 shares of common stock offered through a
private equity placement. Also, the Company's net borrowing activity
decreased by $2,427,000 at August 31, 1999 to $2,873,000 compared to
$5,300,000 at August 31, 1998.
The Company has a secured term loan with outstanding balances of
$2,972,400 and $1,400,000 at August 31, 1999 and November 30, 1998,
respectively. On April 30, 1999, the Company funded $220,000 under
this note. The note has a maximum borrowing amount of $3,120,000 and
is a five year note bearing a fixed rate of interest of 7.72% with a
twelve year amortization. A balloon payment of $1,865,200 is due on
November 30, 2003. This note has two covenants related to certain
financial ratios calculated on a quarterly basis. Certain assets of
the Company secure this note.
On May 5, 1999, the Company entered into a three-year note and security
agreement secured by certain assets of the Company bearing interest at
the prime rate plus .5%. The agreement provides for a maximum credit
availability of $7,000,000 dependent upon the value of the Company's
inventory. At August 31, 1999, the maximum available credit was
$4,865,000. At August 31, 1999, the outstanding principal under the
note and security agreement was $4,202,900. This amount includes a
$1,190,800 balance on a fixed note with a four year amortization and a
$3,012,100 balance on a revolving loan agreement. The weighted average
interest rate through August 31, 1999 was 8.42%. Total initial note
proceeds were used to pay down $5,000,000 of the Company's unsecured
line of credit on May 19, 1999.
On May 24, 1999, the Company obtained asset financing in the amount of
$5,800,000 secured by certain real estate. The note is a ten-year note
amortized over a twenty-two year period bearing a fixed interest rate
of 8.33%. At August 31, 1999, the outstanding balance was $5,776,700.
As part of this arrangement, the Company is required to hold a
restricted escrow balance of $850,000. On May 26, 1999, $1,000,000 of
the proceeds obtained from the mortgage financing was used to complete
repayment of the amount outstanding under the unsecured line of credit.
<PAGE>
Effective May 26, 1999, the Company's existing unsecured line of credit
was paid off. The amount of credit available under the line of credit
through May 26, 1999 had been $6,000,000. The weighted average
interest rate thru May 26, 1999 on this line of credit was 6.55% and
for 1998 was 6.99%.
Year 2000 Issues
The Company defines the Year 2000 issues as those related to the
inability of some computer hardware or software to interpret a two-
digit year expressed as '00' as the Year 2000. When the Year 2000
begins, these computers may interpret '00' as the Year 1900 and either
stop processing date-related computations or will process them
incorrectly. All software, computer hardware, building facilities and
equipment utilized by the Company require assessment to determine that
they will continue to operate accurately when they encounter a Year
2000 date before and after January 1, 2000.
The Company has initiated a task force committee to address Year 2000
issues. The committee's purpose is to direct the project for
assessment, remediation and implementation of solutions and contingency
plans related to Year 2000 issues. The project plan addresses
information technology systems (IT systems) such as computer software
and hardware and non-information technology systems (Non-IT systems)
such as manufacturing equipment, utilities and facilities. In
addition, the plan addresses Year 2000 issues relating to third parties
with which the Company has a material relationship. The Company has
planned readiness prior to January 1, 2000 due to the possibility of
encountering Year 2000 date processing in 1999.
The Company has completed the assessment of IT systems and software
upgrades related to Year 2000 readiness. The overall project is
estimated to be about 99% complete and on target to be complete by
October of 1999.
Estimated %
Start Date End Date Complete
IT Systems:
Assessment of Software 04/01/1998 06/30/1998 100%
Remediation/Testing of
Software 06/01/1998 03/31/1999 100%
Assessment of Hardware 07/01/1998 08/15/1998 100%
Remediation/Testing of
Hardware 11/01/1998 06/30/1999 100%
Non-IT Systems:
Assessment 06/01/1998 03/31/1999 100%
Remediation/Testing 11/01/1998 10/31/1999 97%
The Company prepared and mailed a Year 2000 readiness survey to
numerous third party suppliers and service providers upon which the
Company relies for various goods and services. As of August 31, 1999,
the Company has received responses from 60% of those mailed. Of those
responding, 85% stated that they are either currently compliant or
anticipate that they will be compliant by December, 1999. The
Company is currently evaluating all non-respondents where contingency
plans are being developed or have been developed for each critical
supplier to either build inventory or use alternative vendors and
suppliers.
<PAGE>
As previously stated, the committee has specific contingency plans,
where necessary, to mitigate the potential risks associated with non-
readiness of key suppliers and vendors, as well as, information
technology and non-information technology areas. Based on an analysis
of vendor responses, location of vendors and individual product profit
importance to the Company, the Company is adding to inventory balances
by December 1999 to add to available supply, which is normally 60-90
days of finished goods. In addition, alternate suppliers have been
identified to alleviate potential problems in procuring critical
suppliers and inventory necessary for ongoing production and
operations. The Company as a part of its normal operating plan
contracts with a third party for backup computer hardware service in
the event of a failure or serious interruptions of its on-site
operations. Additionally, the Company tests manual procedures for
order processing during scheduled system downtime to ensure that they
are current.
The Company's international subsidiaries in Taiwan, Hong Kong and
Canada currently have IT systems that are Year 2000 compliant. The
Company cannot assure that all third party vendors with which its
subsidiaries rely on are in compliance or will be by December, 1999.
Such third party vendors would include local governmental agencies,
utilities, communication systems and miscellaneous supply vendors. The
Company's base U.S. business is the key supplier of inventory products
to all subsidiaries. Specific contingency plans have not been
formalized to address all non-compliant third party vendors and
suppliers. The Company believes its Year 2000 readiness in the U.S.
will be a primary determinant of how effectively and efficiently its
subsidiaries will be able to address non-compliant issues if necessary.
Costs for implementing the Year 2000 project are not expected to exceed
$300,000 over the two year fiscal period of 1998 and 1999 and are not
expected to materially affect results of operations, liquidity, or the
financial position of the Company. Expenditures relating to Year 2000
to date are estimated to be $240,000, due primarily to software
remediation, and were funded through operating cash flows. Other
IT projects and initiatives have not been adversely affected by the
Company's resources allocation to the Year 2000 project. The Company
currently believes that it is addressing Year 2000 issues on a timely
and adequate basis according to suggested methodologies and procedures.
Although the Company is addressing the Year 2000 issue and plans to
monitor its progress through completion, there can be no assurance that
total compliance internally as well as with third party vendors and
suppliers will be achieved.
<PAGE>
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' (or Distributors') sales
activity levels, recruiting of new Consultants and Distributors,
changes in senior management, new product introductions, protection of
intellectual property rights and third party infringement, changes in
U.S. or international economic conditions, results of international
operations including governmental, regulatory, political and foreign
exchange rate impacts, results of operations in new markets, global and
domestic expansion efforts, capital resources and ability to obtain
necessary financing, market risks, and risks and costs related to the
Year 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has not been a material change in the Company's exposure to
interest rate risk on investments and foreign currency rate changes
since November 30, 1998. Changes to market risk as it relates to
interest rate changes on the Company's financing activities has been
minimal. At November 30, 1998, the Company had a $7,600,000
outstanding balance under a line of credit. The interest rate was
based on a LIBOR rate plus a spread that adjusted with the debt ratio.
During the second quarter of 1999, the Company repaid this line of
credit. The Company currently has a three-year note and security
agreement with an outstanding balance of $4,202,900 at August 31, 1999
that may be subject to market risk if there were to be interest rate
changes. The current borrowing under the facility is at 8.75%. If the
rate were to increase to 9.25% and the amount outstanding remained the
same, incremental interest expense would reduce earnings before taxes
by $21,015 annually. At August 31, 1999, the Company also had a five
year term note with a balance of $2,972,400 and a ten year note with a
balance of $5,776,700; both have a fixed interest rate and are thus not
subject to interest rate volatility.
Financial Instruments
Due to recent expansion into foreign markets, the Company may be
exposed to foreign currency fluctuations and other related market risks
as part of its ongoing business operations. The Company may
periodically use foreign exchange derivatives, when appropriate, to
manage these risks. At present, net exposure and risk due to foreign
currency fluctuations is judged to not require any derivative
activities at this time.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
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, Inc.
(Registrant)
Date: 10/15/99 /s/ RICHARD W. HEATH
Richard W. Heath
Chairman, Executive Committee
& Chief Executive Officer
Date: 10/15/99 /s/ M. DOUGLAS TUCKER
M. Douglas Tucker
Senior Vice President-Finance
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