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 February 28, 1999 Commission File Number 0-14449
BeautiControl Cosmetics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2036343
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
2121 Midway, Carrollton, TX 75006
(Address including zip code of principal executive offices)
972/458-0601
(Registrant's telephone number including area code)
Indicated below is the number of shares outstanding of each class of the
registrant's common stock, as of April 5, 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 Cosmetics, Inc. Consolidated Financial
Statement
Page
Balance Sheet 3-4
Statements of Income 5
Statements of Cash Flows 6
Notes to Financial Statements 7-10
<PAGE>
<TABLE>
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
February 28, November 30,
1999 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 162,838 $ 3,164,573
Short-term investments 5,613,022 6,068,358
Accounts receivable-net of
allowance for doubtful accounts
of $785,300 and $758,900 at
February 28, 1999 and
November 30, 1998, respectively 1,275,866 738,147
Inventories
Raw materials 5,781,567 4,508,549
Finished goods 6,539,459 7,110,630
12,321,026 11,619,179
Deferred income taxes 2,229,350 2,229,350
Prepaid expenses 986,816 735,080
Income tax receivables 1,716,941 1,980,566
Other current assets 292,890 442,232
Total current assets 24,598,749 26,977,485
PROPERTY AND EQUIPMENT, AT COST 26,896,993 25,683,215
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION 16,008,744 15,464,683
10,888,249 10,218,532
OTHER ASSETS
Cost in excess of net tangible
assets, acquired, net of
amortization of $911,400 and
$894,800 at February 28, 1999 and
November 30, 1998, respectively 1,739,926 1,756,497
Investments 1,823,669 2,264,381
Other, net of amortization of
$575,100 and $571,800 at February
28, 1999 and November 30, 1998,
respectively 750,065 798,933
Total assets $39,800,658 $42,015,828
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, November 30,
1999 1998
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable - trade $ 3,645,886 $ 3,668,942
Current maturities of long-term
debt 6,179,283 7,779,283
Sales tax payable 512,195 601,588
Accrued commissions and awards 2,207,105 2,201,224
Accrued compensation 446,642 373,981
Accrued property taxes 426,098 689,991
Accrued other taxes 162,131 144,033
Other accrued liabilities 1,112,282 875,417
Deferred income 584,527 986,876
Total current liabilities 15,276,149 17,321,335
DEFERRED INCOME TAXES 791,647 791,647
LONG TERM BORROWINGS 2,696,947 1,220,717
OTHER LONG-TERM OBLIGATIONS 219,322 243,553
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
February 28, 1999 and
November 30, 1998, respectively 1,094,025 1,092,900
Capital in excess of par value 23,888,718 23,831,555
Retained earnings 26,794,357 28,413,712
Accumulated other comprehensive
income (55,313) 5,603
51,721,787 53,343,770
Less cost of 3,708,800 common
shares held in treasury at
February 28, 1999 and November
30, 1998 30,905,194 30,905,194
20,816,593 22,438,576
Total liabilities and
stockholders' equity $39,800,658 $42,015,828
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
February 28, February 28,
1999 1998
<S> <C> <C>
Sales $16,808,135 $16,540,035
Cost of goods sold 4,080,027 3,800,361
Gross profit 12,728,108 12,739,674
Selling expenses 8,680,259 7,769,061
General and administrative
expenses 5,238,404 3,447,005
13,918,663 11,216,066
Income (loss) from operations (1,190,555) 1,523,608
Other income and expenses
Interest income 95,252 12,746
Other, net (171,387) (9,564)
(76,135) 3,182
Income (loss)before income
taxes (1,266,690) 1,526,790
Income taxes (417,169) 532,995
Net income (loss) ($849,521) $993,795
Net income (loss) per common
share - basic ($0.12) $0.17
Weighted average common shares 7,229,448 5,940,648
Net income (loss) per common
share - assuming dilution ($0.12) $0.17
Weighted average common and
common equivalent shares 7,229,448 6,016,992
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
<TABLE>
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
<CAPTION>
Three Months Ended
February 28, February 28,
1999 1998
<S> <C> <C>
Net cash provided by (used in)
operating activities ($1,720,497) ($3,918,768)
Cash flows from investing
activities:
Proceeds from sale of
investments 1,500,000 -
Purchase of property and
equipment (1,213,778) (417,205)
Purchase of investments (699,921) -
Increase in other assets (11,481) (43,276)
Net cash provided by (used
in) investing activities (425,180) (460,481)
Cash flows from financing
activities:
Proceeds from issuance of common
stock 55,001 455,085
Long-term borrowings 1,476,230 3,900,000
Payment on long-term debt (1,600,000) -
Principal payments under capital
lease obligation (27,986) -
Dividends paid (759,303) (622,482)
Net cash provided by (used
in) financing activities (856,058) 3,732,603
Net increase (decrease) in cash and
cash equivalents (3,001,735) (646,646)
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 $162,838 $73,441
Supplemental cash flow information:
Income tax refund ($690,000) ($779,000)
Interest paid $127,000 $57,000
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED February 28, 1999 AND February 28, 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 February 28, 1999 and November 30, 1998
and the results of operations and cash flows for the three months
ended February 28, 1999 and February 28, 1998. The results for
the three months ended February 28, 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.
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:
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 28,
1999 1998
<S> <C> <C>
Numerator:
Net income -
Numerator for basic
and diluted earnings
(loss) per share -
income available to
common stockholders ($849,521) $993,795
Denominator:
Denominator for basic
earnings (loss) per
share - weighted-
average shares 7,229,448 5,940,648
Effect of dilutive
securities:
Employee stock options - 76,344
Denominator for diluted
earnings (loss) per
share -- adjusted
weighted - average
shares and assumed
conversions 7,229,448 6,016,992
Basic earnings (loss)
per share ($0.12) $0.17
Diluted earnings (loss)
per share ($0.12) $0.17
</TABLE>
Note 3 - Line of Credit
The Company has an unsecured line of credit of $15,000,000
primarily to be used for expansion and for operating cash when
needed for the business. The interest rate is based on LIBOR
plus a spread that adjusts with the debt ratio. The weighted
average interest rates for the first quarter of 1999 and for 1998
were 6.76% and 6.99%, respectively. After a pay down of
$1,600,000 by the Company, the amount of credit currently
available under the line of credit is $6,000,000. Primarily as
a result of the Company's expansion strategy and non-cash
inventory write-downs, the Company did not achieve one of the
financial covenants for the quarters ending August 31, 1998,
November 30, 1998 and February 28, 1999. The Company and the
lender entered into an agreement until May 17, 1999 whereby the
lender has agreed to forbear based upon the Company s
representation that the Company is pursuing alternative
financing.
8
<PAGE>
The Company has a secured term loan with outstanding balances of
$2,900,000 and $1,400,000 at February 28, 1999 and November 30,
1998, respectively. The loan has a maximum borrowing amount of
$2,900,000 and is a five year loan bearing a fixed rate of
interest of 7.72% with a ten year amortization. Monthly payments
are $31,125 including principal and interest for 60 months with a
balloon payment of $2,008,000 due on December 3, 2003. This loan
has two covenants related to certain financial ratios calculated
on a quarterly basis with which the Company was in compliance at
February 28, 1999 and November 30, 1998. Certain assets of the
Company secure this loan.
Note 4 - Reclassifications
Certain amounts for prior periods may have been reclassified to
conform to current period presentation.
Note 5 - Inventories
<TABLE>
Inventories (in thousands) consist of the following:
<CAPTION>
February 28, November 30,
1999 1998
<S> <C> <C>
Finished Goods $ 9,565 $10,282
Raw Materials 6,155 5,263
Reserve for Obsolescence (3,399) (3,926)
Total $12,321 $11,619
</TABLE>
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 establishes 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 for the months ended February 28, 1999 and 1998 are as
follows:
9
<PAGE>
<TABLE>
Three Months ended
February 28,
1999 1998
<S> <C> <C>
Net income (loss) ($849,521) $993,795
Other comprehensive
income (loss)
Change in Cumulative
Translation Adjustment (30,973) (92,223)
* Change in unrealized
gains and losses on
investments in debt
securities (40,474) -
Related tax effect 10,531 31,356
Comprehensive income ($910,437) $932,928
(loss)
<FN>
* The Company's investment holdings include tax exempt debt
securities, therefore there is no tax effect computed on
related gains and losses.
</TABLE>
Note 7 - New Accounting Standards
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 establishes 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 become material, may be
required to be separately disclosed from U.S. base operations
under the reporting guidelines of SFAS 131.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
During the first quarter of 1999, the Company continued its focus
on business expansion. For the base U.S. business and Taiwan
operations, the Fast Track Bonus Plan was introduced to the
Company s Consultants, Directors and Distributors. This new
compensation plan provides immediate income opportunities in
addition to a structured training program that allows Consultants
to participate by compensating them to conduct the training
seminars.
In late January, the Company began operations through its new
subsidiary, Eventus International, Inc. This new subsidiary
will allow the Company to broaden its U.S. business into the
network marketing segment of the direct selling industry.
Eventus International, Inc. offers nutritional supplement
products known as nutraceuticals. Its premier product, Veraloe
Plus , with proprietary Veraloe Complex and patented Manapol
help build the body s immunity. In addition, products and
services provided by this subsidiary will support an
individualized, preventive approach to health care based on an
individual s cultural heritage and specific health needs.
On March 1, the Company's Hong Kong branch began operations.
This new geographic segment represents the Company's second
branch opening in the Asia Pacific market.
Results of Operations
Quarters Ended February 28, 1999 and February 28, 1998. Net
sales for the first quarter increased 1.6% to $16,808,135 in
1999 compared with $16,540,035 in 1998.
Gross profit margins for the first quarter of 1999 were 75.7%
compared with 77.0% in 1998. The decrease in profit margins was
affected by the accounting of factory overhead into cost of goods
sold due to production volumes in the first quarter of 1999
compared with 1998. For the quarter, factory overhead was an
additional 1.7% of net sales in 1999 compared to 1998. Excluding
the impact of these costs, overall profit margins experienced a
modest increase over prior year.
11
<PAGE>
Selling, general and administrative expenses as a percent of
sales increased to 82.8% in 1999 from 67.8% in 1998. The
increase in costs is largely due to the addition of two new
businesses, Eventus International, Inc. and Hong Kong and related
start-up costs. Total expansion costs were $1,849,000 or 11.6%
of sales in 1999, compared to $653,000 or 4.2% of sales in 1998.
In addition, certain overhead expenses incurred during the first
quarter of 1999 caused an increase in selling, general and
administrative expenses by $830,000 compared with 1998.
Other income and expense decreased to ($76,135) in 1999 from
$3,182 in 1998 due to additional interest expense resulting from
investment in new business expansion noted above.
As a result of the above, the net financial result during the
first quarter of 1999 was ($849,521) or ($.12) per common share
compared with net income of $993,795 or $.17 per common share in
1998.
Liquidity and Capital Resources
Working Capital decreased $333,600 to $9,323,000 at February 28,
1999 from $9,656,000 at November 30, 1998. Total cash and short-
term investments combined decreased by $3,457,000 during the
first quarter of 1999 due to funding requirements needed for
domestic and international expansion. In addition, the Company
paid down its line of credit in February by $1,600,000. Net
inventory levels increased during the first quarter of 1999 by
$702,000 due to the start-up Eventus International, Inc. and the
Hong Kong branch. Accounts receivable increased by $538,000
during the first quarter of 1999. This was primarily caused from
deferred payment programs offered to Consultants and Directors
where certain payments were delayed until March and April. In
addition, to support the new Fast Track compensation program
implemented in February, the Company offered a special credit
program to its Directors that extended terms for some February
purchases to March, April and May.
The Company s cash flows at February 28, 1999 compared with the
same period last year decreased with the balance in cash and
equivalents slightly increasing. Cash used in operating
activities improved due to a decline in accounts receivable and
inventory balances this year over last year. This was offset by
financing activities that resulted in a net decrease in cash from
reduced borrowing activity and pay down of debt.
12
<PAGE>
The Company has an unsecured line of credit of $15,000,000.
After payment of $1,600,000 by the Company, the amount of credit
currently available until May 17, 1999 is $6,000,000. The
Company is pursuing alternative financing which it expects to be
in place during the second quarter.
Financial Instruments
Due to 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.
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 and distribution
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.
13
<PAGE>
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 85% complete and scheduled to be
complete by October, 1999.
Estimated
%
Complete
at
Start Date End Date February
28, 1999
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 95%
Non-IT Systems:
Assessment 06/01/1998 03/31/1999 100%
Remediation/Testing 11/01/1998 10/31/1999 80%
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
February 28, 1999, the Company has received written responses
from 49% of those mailed. Of those responding, 62% stated that
they are either currently compliant or anticipate that they will
address all Year 2000 issues by December, 1998. The committee is
currently sending follow-up correspondence and addressing
contingency plans for alternate sources and suppliers.
The committee plans to prepare specific contingency plans, if
necessary, to mitigate the potential risks associated with non-
readiness of key suppliers and vendors, information technology
and non-information technology areas by June, 1999.
Additionally, the Company plans to continue its current operating
policy to maintain 60 to 90 days of finished goods on-hand of key
products as well as on-hand quantities of components. In
addition to this, selected core product s will have extra
ingredients on hand as a result of a contingency buffer stock
that will be brought in this fall. 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.
14
<PAGE>
Costs for implementing the Year 2000 project are expected to be
in the range of $350,000 to $400,000 over the two year fiscal
period of 1998 and 1999 and are not expected to materially affect
results of operations or the financial position of the Company.
Expenditures relating to Year 2000 to date are estimated to be
$193,000 as of February 28, 1999, 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 allocated 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.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
There has not been a material change in the Company s exposure to
interest rate and foreign currency rate changes since November
30, 1998.
For a discussion of the Company s interest rate and foreign
currency related market risks, see Part II Item 7A of the
Company s Form 10K.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BeautiControl Cosmetics, Inc.
(Registrant)
Date: 4/14/99 /s/ RICHARD W.HEATH
Richard W. Heath
President,Chief
Executive Officer
Date: 4/14/99 /s/ M. DOUGLAS TUCKER
M. Douglas Tucker
Senior Vice President-Finance
& Principle Financial Officer
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 162838
<SECURITIES> 5613022
<RECEIVABLES> 2061210
<ALLOWANCES> 785344
<INVENTORY> 12321026
<CURRENT-ASSETS> 24598749
<PP&E> 26896993
<DEPRECIATION> 16008744
<TOTAL-ASSETS> 39800658
<CURRENT-LIABILITIES> 15276149
<BONDS> 0
0
0
<COMMON> 1094025
<OTHER-SE> 19722568
<TOTAL-LIABILITY-AND-EQUITY> 39800658
<SALES> 16808135
<TOTAL-REVENUES> 16808135
<CGS> 4080027
<TOTAL-COSTS> 17998690
<OTHER-EXPENSES> 76135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 187246
<INCOME-PRETAX> (1266690)
<INCOME-TAX> (417169)
<INCOME-CONTINUING> (849521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (849521)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
