SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995
[ ] 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 ___________________
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)
-----------------------------------------------------------------
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 ___ .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, no par value -- 2,157,253 shares as of November 10, 1995.
<PAGE>
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
- - ---------------------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1995 1
(unaudited) and December 31,1994
Consolidated Statements of Income -- Three and 2
nine months ended September 30, 1995 and 1994
(unaudited)
Consolidated Statements of Cash Flows -- 3
nine months ended September 30, 1995 and 1994
(unaudited)
Notes to Consolidated Financial Statements -- 4
September 30, 1995
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
- - ----------
</TABLE>
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 510,544 $ 3,962,195
Accounts receivable, less allowance
of $143,000 and $125,000 1,776,041 2,356,001
Current portion of notes receivable,
less allowance of $216,000 and $15,000 450,845 433,543
Inventories 3,691,124 6,550,357
Prepaid expenses and other current assets 939,181 888,586
Deferred income taxes -- 300,000
----------- -----------
Total current assets 7,367,735 14,490,682
Cost in excess of net assets acquired, net 512,908 550,438
Notes receivable, less current portion 769,008 941,608
Property, plant and equipment, net 3,387,045 7,451,779
Other assets 709,567 477,982
Deferred income taxes 178,519 470,000
----------- -----------
Total assets $12,924,782 $24,382,489
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Notes payable, banks $ 852,000 $ 4,385,000
Current maturities of long-term debt 927,032 2,803,398
Accounts payable 402,994 1,058,390
Accrued expenses 1,150,955 764,845
Accrued compensation and benefits 45,177 113,019
Current portion, deferred franchise fee revenue 126,389 114,031
----------- -----------
Total current liabilities 3,504,547 9,238,683
Deferred income taxes 290,519 882,000
Long-term debt, less current maturities 1,976,579 2,676,495
Deferred franchise fee revenue, less
current portion 91,000 58,879
----------- -----------
Total liabilities 5,862,645 12,856,057
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized, 2,963,134 shares issued and outstanding
as of September 30, 1995 and December 31, 1994 25,000 25,000
Additional paid-in capital 7,538,995 7,538,995
Unearned ESOP shares (213,750) (213,750)
Cumulative currency translation adjustments (832,707) (1,119,249)
Retained earnings 9,305,725 14,056,562
Less: Common stock in treasury, at cost,
805,881 shares (8,761,126) (8,761,126)
----------- -----------
Total shareholders' equity 7,062,137 11,526,432
----------- -----------
Total liabilities and shareholders' equity $12,924,782 $24,382,489
=========== ===========
</TABLE>
See accompanying notes
1
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1995 1994 1995 1994
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $2,451,155 $4,084,871 $8,552,344 $10,766,569
Revenue from franchise operations 429,295 458,206 1,349,964 1,459,484
Sales of franchises 6,667 104,595 41,972 183,827
--------- ---------- ---------- -----------
2,887,117 4,647,672 9,944,280 12,409,880
Cost and expenses:
Cost of product sales 1,603,419 2,956,108 6,037,212 7,539,146
Selling, general and administrative 1,185,200 1,853,212 4,590,043 5,219,194
Loss on sale of manufacturing
operations -- -- 3,800,000 --
Sales of franchises 14,982 -- 24,048 11,699
---------- ---------- ---------- -----------
2,803,601 4,809,320 14,451,303 12,770,039
Operating income (loss) 83,516 (161,648) (4,507,023) (360,159)
Other (expense), net (59,423) (104,295) (243,814) (256,504)
---------- ---------- ---------- ----------
Income (loss) before income taxes 24,093 (265,943) (4,750,837) (616,663)
(Benefit) for income taxes -- (64,705) -- (190,861)
---------- ---------- ---------- -----------
Net income (loss) $24,093 $(201,238) $(4,750,837) $ (425,802)
=========== =========== ============ ===========
- - ----------------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income (loss) $ .01 $ ( .09) $ ( 2.20) $ ( .20)
=========== =========== ============ ===========
Dividends -- -- -- --
=========== =========== ============ ===========
Weighted average shares outstanding
2,157,253 2,157,253 2,157,253 2,157,253
=========== =========== ============ ===========
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
2
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net (loss) $(4,750,837) $ (425,802)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation & amortization 482,033 681,495
Provision for doubtful accounts and notes receivable 314,616 215,009
(Gain) loss on sale of plant, property and equipment (32,440) 1,173
Franchise fee revenue (31,972) (105,288)
Loss on sale of manufacturing operations 3,800,000 --
Other 4,807 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables 272,003 (551,403)
Decrease in inventories 659,656 83,768
(Increase) in prepaid and other current assets (55,424) (90,435)
Increase (decrease) in accounts payable and accrued expenses (543,798) 349,765
------------ ----------
Net cash provided by operating activities 118,644 158,282
Cash flows from investing activities:
Proceeds from sale of manufacturing operations 2,097,210 --
Proceeds from repayment of franchise notes 213,844 140,650
Notes granted to franchises and affiliates -- (76,282)
Purchase of property, plant and equipment (21,884) (383,605)
(Increase) in other assets (16,496) (203,104)
Proceeds from sale of plant, property and equipment, net 281,262 --
------------ ----------
Net cash provided by (used in) investing activities 2,553,936 (522,341)
Cash flows from financing activities:
Proceeds of note payable, net (3,533,000) 1,793,000
Payments of long-term debt (2,569,293) (962,110)
------------ ----------
Net cash provided by (used in) financing activities (6,102,293) 830,890
Effect of exchange rate on cash (21,938) (62,704)
----------- ---------
Net increase (decrease) in cash and cash equivalents (3,451,651) 404,127
Cash and cash equivalents at beginning of year 3,962,195 3,079,353
----------- ----------
Cash and cash equivalents at end of period $ 510,544 $3,483,480
=========== ==========
</TABLE>
See accompanying notes
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
September 30, 1995
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in the consolidation.
2. Inventories
At September 30, 1995, and December 31, 1994, inventories consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Finished goods $2,626,023 $3,544,742
Work in process 6,688 437,673
Raw materials 1,058,413 2,567,942
---------- ----------
$3,691,124 $6,550,357
========== ==========
</TABLE>
3. Supplemental Cash Flow Information
Noncash investing and financing activities:
During the first nine months ended September 30, 1995, the Company
granted or refinanced four (4) new franchise territories for notes receivable of
$75,000. During the first nine months of 1994 the Company granted or refinanced
five (5) franchise territories for notes receivable of approximately $260,000.
Net cash paid during the nine months ended September 30, 1995 and 1994
for interest and income taxes were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Interest $206,900 $538,655
Income taxes 171,100 10,000
</TABLE>
4
<PAGE>
4. Litigation
On or about March 31, 1994, an action was filed against the Company in
the Eastern District of Pennsylvania under the caption Valencia et al. v.
Aloette Cosmetics, Inc. et al. alleging, among other things, breach of contract
and warranty, and fraud against the Company and an officer and seeking
compensatory and punitive damages in excess of $1,000,000 plus court costs and
attorney's fees. The Company settled this matter on August 8, 1995. The
settlement did not have a material effect on the Company's consolidated results
of operation.
On or about February 3,1995, an action was filed against the Company
and certain of its present and former officers in the Superior Court of Arizona
under the caption Mattice et al. v. Aloette Cosmetics, Inc. et al. The Company
settled this matter on May 3, 1995. The settlement did not have a material
effect on the Company's consolidated results of operations.
5. Sale of Manufacturing Operations
On June 15, 1995 the Company consummated the sale of certain assets of
its manufacturing operations in Texas for cash of approximately $2.1 million. In
connection with the sale, the Company entered into a five year supply agreement
to purchase inventory at prices competitive in the industry. The sale includes
the facility, inventory and equipment. As a result of the sale of the
manufacturing operations, the Company recorded a charge of $3.8 million.
Sales from the manufacturing operations were approximately $1.2 million
and $1.8 million for the nine months ended September 30, 1995 and 1994,
respectively. The net losses from normal operations for the corresponding
periods were $478,000 and $612,000. Sales totaled approximately $2.7 million in
1994 and the net loss for the same period was $1.1 million.
The following table presents the unaudited pro forma results of the
operations of the Company for the three and nine month periods ended September
30, 1995 and 1994, as if the sale had occurred on January 1, 1994 and 1995,
respectively, giving effect to certain pro forma adjustments.
The unaudited pro forma financial information is not necessarily
indicative of what the results of operations would have been had the sale
occurred on the date, nor are they necessarily indicative of future results of
the Company.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 2,888,314 $3,873,502 $ 8,760,674 $10,637,707
Net income (loss) $ 24,093 $ 39,289 $ (372,435) $ 284,963
Income (loss) per share $ .01 $ .02 $ (.17) $ .13
</TABLE>
5
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
Cash and cash equivalents decreased approximately $3.5 million.
Existing cash balances and the net proceeds received from the sale of the Texas
manufacturing operations were used to repay the Company's bank term loan of
$2.25 million and reduce the amount outstanding on its revolving line of credit
by approximately $3.5 million. Accounts Receivable, Inventories and Property,
Plant and Equipment were adjusted to reflect the sale of assets of the
manufacturing operations.
LIABILITIES AND SHAREHOLDERS' EQUITY:
The decrease in current liabilities of $5.7 million primarily relates
to the decrease in the bank term loan and amounts outstanding against the
revolving line of credit discussed above. The Company also sold its Georgia
warehouse whereby the associated mortgage note payable was repaid. The decrease
in trade accounts payable and the increase in accrued expenses are primarily
attributed to the sale of the manufacturing operations.
RESULTS OF OPERATIONS:
Net Income
The Company reported a net loss of approximately $4.75 million, or
$2.20 per share, for the nine months ending September 30, 1995 compared to a net
loss of $426,000, or $.20 per share for the corresponding period in 1994. The
impact of the loss associated with the sale of the manufacturing operations on
net income was $3.8 million for 1995. No tax benefit from this net operating
loss was recorded in 1995. Utilization of this net operating loss carryforward
can have a positive impact on earnings in the future. The net loss exclusive of
the sale of the manufacturing operations was approximately $950,000 for the
first nine months of 1995. The operating loss at the manufacturing operations
was $478,000 for the period through the date of sale and approximately $400,000
is attributed to one-time charges.
The Company recorded net income of $24,000 for the quarter ending
September 30, 1995 compared to a net loss of $201,000 for the same quarter of
1994. This is primarily attributable to the improvement in operating income
realized due to the reduction in total costs and expenses as a result of the
sale of the manufacturing operations.
Loss on Sale of Manufacturing Operations
On June 15, 1995 the Company consummated the sale of certain assets of
its manufacturing operations in Texas for cash of approximately $2.1 million. In
connection with the sale, the Company entered into a five year supply agreement
with the buyer to purchase inventory at prices competitive in the industry. The
sale includes the facility, inventory and equipment. As a result of the sale of
the manufacturing operations, the Company recorded a charge of $3.8 million.
Sales from the manufacturing operations were approximately $1.2 million
and $1.8 million for the nine months ended September 30, 1995 and 1994,
respectively. The net losses from normal operations for the corresponding
periods were $478,000 and $612,000. Sales from the manufacturing operations
totaled approximately $2.7 million in 1994 and the net loss for the same period
was $1.1 million.
Revenues
For the current year total revenues decreased approximately $2.5
million, or 20%, to $9.9 million from $12.4 million as of September 30, 1994.
Total revenues for the three months ended September 30, 1995 were $ 2.9 million
versus $4.6 million in 1994. This trend on a consolidated level is expected to
continue due to the sale of the manufacturing operations and the corresponding
loss of its revenues. Revenues excluding the manufacturing operations were $8.8
million for the period ending September 30, 1995 versus $10.6 million for the
same period in 1994. Consolidated net product sales for the periods ending
6
<PAGE>
September 30, 1995 versus September 30, 1994 were $8.6 and $ 10.8 million,
respectfully, or a decrease of 21%. The decrease was substantially due to the
loss of sales from the manufacturing operations in addition to a reduction in
foreign product sales as well as a product launch in 1994. Worldwide retail
sales -- sales from franchises to their customers -- of $30 million in the first
nine months of 1995 declined 8% compared to the comparable period in 1994. While
the Company is hopeful that domestic retail sales will improve as a result of
its continued focus on sales management and anticipated new franchise openings,
retail sales generated from the Canadian operation are not expected to improve
in the immediate future.
Cost of Product Sales
Cost of product sales as a percentage of sales was 71% for 1995 versus
70% year-to-date in 1994. The increase was primarily a result of the lower sales
volume to our Canadian franchises. The cost of products sales for the third
quarter of 1995 decreased 7% from 72% to 65% due to the sale of the
manufacturing operations and the elimination of its associated high overhead
costs. Management expects the cost of product sales as a percentage of net
product sales to continue to decrease through the end of 1995.
Expenses
Total selling, general and administrative expenses decreased
approximately $668,000 or 36%, from the third quarter of 1994. This decrease is
primarily a result of the cost reduction initiatives taken in 1994 and early
1995 as well as the elimination of expenses from the manufacturing operations.
Year-to- date expenses were $4.6 million and $5.2 million as of September 30,
1995, and 1994, respectively. The decrease of $600,000, or 12%, is a result of
the cost reduction initiatives indicated above and the sale of the manufacturing
operations, net of several one-time charges incurred against earnings in the
first quarter, including professional fees and legal fees relating to the
lawsuits, other corporate matters, and the restructuring of the financing
agreement.
Other Expense
Other expenses for the first nine months of 1995 versus 1994 remained
relatively flat decreasing only $13,000. The decrease in other expenses of
$45,000 for the third quarter of 1995 compared to 1994 is primarily a result of
lower interest expense due to the reduction in bank debt.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1995, the Company held over $500,000 in cash and cash
equivalents and had outstanding borrowings of approximately $850,000 under its
line of credit. Under its current financing arrangement, the Company is subject
to certain restrictions and covenants including maintaining certain balances in
cash and cash equivalents and certain restrictions on the payment of dividends
and any subordinated debt.
The Company utilized the proceeds from the sale of the manufacturing
operations to reduce the amount outstanding against the revolving credit
facility with a corresponding permanent reduction of its initial maximum
commitment amount from $3.6 million to $1.45 million. 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 12 months.
7
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about March 31, 1994, an action was filed against the Company in
the Eastern District of Pennsylvania under the caption Valencia et al. v.
Aloette Cosmetics, Inc. et al. alleging, among other things, breach of contract
and warranty, and fraud against the Company and an officer and seeking
compensatory and punitive damages in excess of $1,000,000 plus court costs and
attorney's fees. The Company settled this matter on August 8, 1995. The
settlement did not have a material effect on the Company's consolidated results
of operation.
On or about February 3, 1995, an action was filed against the Company
and certain of its present and former officers in the Superior Court of Arizona
under the caption Mattice et al. v. Aloette Cosmetics, Inc. et al. The Company
settled this matter on May 3, 1995. The settlement did not have a material
effect on the Company's consolidated results of operations.
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
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 Schedule of Computation of Per Share Earnings
(b) Reports on Form 8-K:
None
8
<PAGE>
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.
--------------------------
(Registrant)
Date: November 13, 1995 /s/ Patricia J. Defibaugh
----------------- ---------------------------
Patricia J. Defibaugh
Chairman of the Board
Chief Operating Officer
Date: November 13, 1995 /s/ Jean M. Lewis
----------------- ----------------------------
Jean M. Lewis,
Vice President of Finance
(Principal Financial Officer)
9
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
for the nine months ending September 30, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
<S> <C> <C> <C> <C>
1995 1994 1995 1994
---- ---- ---- ----
Net income (loss) $ 24,093 $ (201,238) $(4,750,837) $ (425,802)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253 2,157,253
Net income (loss) per common share $ .01 $ (.09) $ (2.20) $ (0.20)
PRIMARY (1)
1995 1994 1995 1994
---- ---- ---- ----
Net income (loss) $ 24,093 $ (201,238) $(4,750,837) $ (425,802)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253 2,157,253
Net income (loss) per common share $ .01 $ (.09) $ (2.20) $ (0.20)
FULLY DILUTED (1)
1995 1994 1995 1994
---- ---- ---- ----
Net income (loss) $ 24,093 $ (201,238) $(4,750,837) $ (425,802)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253 2,157,253
Net income (loss) per common share $ .01 $ (.09) $ (2.20) $ (0.20)
</TABLE>
(1) This calculation is submitted in accordance with the regulations of the
Securities and Exchange although not required by APB Opinion No. 15 because
it results in dilution of less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 511
<SECURITIES> 0
<RECEIVABLES> 2,586
<ALLOWANCES> (359)
<INVENTORY> 3,691
<CURRENT-ASSETS> 7,368
<PP&E> 3,387
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,925
<CURRENT-LIABILITIES> 3,505
<BONDS> 0
<COMMON> 25
0
0
<OTHER-SE> 7,037
<TOTAL-LIABILITY-AND-EQUITY> 7,062
<SALES> 8,552
<TOTAL-REVENUES> 9,944
<CGS> 6,037
<TOTAL-COSTS> 14,451
<OTHER-EXPENSES> (244)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,751)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,751)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,751)
<EPS-PRIMARY> $(2.20)
<EPS-DILUTED> $(2.20)
</TABLE>
