<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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)
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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 .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, no par value - 2,157,253 shares as of May 22, 1995
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INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1995
(unaudited) and December 31, 1994 1
Consolidated Statements of Operations - Three
months ended March 31, 1995 and 1994 (unaudited) 2
Consolidated Statements of Cash Flows -
Three months ended March 31, 1995 and 1994
(unaudited) 3
Notes to Consolidated Financial Statements -
March 31, 1995 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
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
Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
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ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995 1994
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 328,650 $ 3,962,195
Accounts receivable, less allowance
of $340,000 and $125,000 1,837,711 2,356,001
Current portion of notes receivable,
less allowance of $25,000 and $15,000 408,399 433,543
Inventories 4,960,583 6,550,357
Prepaid expenses and other current assets 828,375 888,586
Deferred income taxes 300,000 300,000
----------- -----------
Total current assets 8,663,718 14,490,682
Cost in excess of net assets acquired, net 537,928 550,438
Notes receivable, less current portion 897,247 941,608
Property, plant and equipment, net 5,365,291 7,451,779
Other assets 460,673 477,982
Deferred income taxes 470,000 470,000
----------- -----------
Total assets $16,394,857 $24,382,489
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Notes payable, banks 3,152,000 4,385,000
Current maturities of long-term debt 550,447 2,803,398
Accounts payable 769,304 1,058,390
Accrued expenses 952,703 764,845
Accrued compensation and benefits 128,810 113,019
Current portion, deferred franchise fee revenue 110,445 114,031
----------- -----------
Total current liabilities 5,663,709 9,238,683
Deferred income taxes 882,000 882,000
Long-term debt, less current maturities 2,641,595 2,676,495
Deferred franchise fee revenue, less
current portion 47,500 58,879
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Total liabilities 9,234,804 12,856,057
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized, 2,963,134 shares issued and
outstanding as of March 31, 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 (1,125,708) (1,119,249)
Retained earnings 9,696,642 14,056,562
Less: Common stock in treasury, at cost,
805,881 shares (8,761,126) (8,761,126)
----------- -----------
Total shareholders' equity 7,160,053 11,526,432
----------- -----------
Total liabilities and shareholders'
equity $16,394,857 $24,382,489
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
1
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ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1995 1994
---- ----
Revenues:
Net product sales $ 3,112,884 $3,224,610
Revenue from franchise operations 437,640 468,143
Sales of franchises 14,954 32,504
----------- ----------
3,565,478 3,725,257
Costs and expenses:
Cost of product sales 2,250,775 2,243,808
Selling, general and administrative 1,811,256 1,507,621
Loss on sale of manufacturing
operations 3,750,000 --
Sales of franchises -- 1,699
----------- ----------
7,812,031 3,753,128
----------- ----------
Operating (loss) (4,246,553) (27,871)
Other (expense), net (113,367) (55,989)
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(Loss) before income taxes (4,359,920) (83,860)
Benefit for income taxes -- (31,719)
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Net (Loss) $(4,359,920) $ (52,141)
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Per share data:
Net Loss $( 2.02) $( .02)
Dividends -- --
=========== ==========
Weighted average shares outstanding 2,157,253 2,157,253
=========== ==========
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See accompanying notes
2
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ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1995 and 1994
(Unaudited)
1995 1994
---- ----
Cash flow from operating activities:
Net (loss) $(4,359,920) $ (52,141)
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation & amortization 203,585 227,379
Provision for doubtful accounts and notes
receivable 34,701 9,377
Loss on sale of property, plant and equipment 10,997 --
Franchise fee revenue (14,954) (29,838)
Loss on sale of manufacturing operations 3,750,000 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables 283,863 (73,652)
Decrease in inventories 139,240 8,766
(Increase) decrease in prepaid and other
current assets 57,302 (114,599)
(Decrease) in accounts payable and accrued
expenses (271,065) (26,857)
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Net cash (used in) operating activities (166,251) (51,565)
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment 13,432 --
Proceeds from repayment of notes receivable 47,594 46,328
Purchase of property, plant and equipment (2,444) (157,961)
(Increase) in other assets -- (24,803)
---------- ----------
Net cash provided by (used in) investing
activities 58,582 (136,436)
Cash flows from financing activities:
(Repayment) proceeds of note payable, net (1,233,000) 1,100,000
Payment of long-term debt (2,287,853) (224,192
---------- ----------
Net cash provided by (used in) financing
activities (3,520,853) 875,808
Effect of exchange rate on cash (5,023) (173,445)
---------- ----------
Net Increase (decrease) in cash and cash
equivalents (3,633,545) 514,362
Cash and cash equivalents at beginning of year 3,962,195 3,079,353
---------- ----------
Cash and cash equivalents at end of period $ 328,650 $3,593,715
========== ==========
See accompanying notes
3
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
MARCH 31, 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 March 31, 1995 and December 31, 1994, inventories consisted of the following:
1995 1994
---- ----
Finished goods $3,638,342 $3,544,742
Work in process 202,452 437,673
Raw materials 1,119,789 2,567,942
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$4,960,583 $6,550,357
========== ==========
3. Supplemental Cash Flow Information
----------------------------------
Noncash investing and financing activities:
During the first three months of 1994, the Company sold or refinanced three
franchise territories for notes receivable of approximately $130,000. There were
no notes sold or refinanced in 1995.
Net cash paid during the three months ended March 31, 1995 and 1994 for interest
and income taxes were as follows:
1995 1994
---- ----
Interest $133,086 $178,470
Income taxes 127,109 10,000
4
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4. Litigation
----------
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. Rather than
------------------------------------------------
pursue this matter in the courts both parties mutually 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
--------------------------------
The Company has reached an agreement in principle to sell its manufacturing
operation in Texas for a cash payment of approximately $2.15 million. The sale
is subject to the satisfaction of certain conditions. In connection with the
sale, the Company will also be entering into a five year supply agreement to
purchase inventory at prices competitive in the industry. The sale includes
the facility, inventory and equipment. Closing of the transaction is expected
to occur in early June, 1995. As a result of the sale of the manufacturing
operation the Company recorded a first quarter charge of $3.75 million to write
down these assets to their estimated net realizable value and to recognize
certain exit costs.
Sales from the manufacturing operation were $738,000 and $502,000 for the
three months ended March 31, 1995 and 1994, respectively. The net losses from
normal operations for the corresponding periods were $176,000 and $278,000.
Sales totaled approximately $2.7 million in 1994 and the net loss for the same
period was $1.1 million.
5
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
Cash and cash equivalents decreased approximately $3.6 million. The
decrease corresponds to the decreases in notes payable of $1,233,000 and current
maturities of long-term debt as cash from operations was used to repay the
Company's bank term loan of $2.25 million and reduce the amount outstanding on
its revolving line of credit. Accounts Receivable, Inventories and Property,
Plant and Equipment were adjusted to their net realizable value due to the
sale of the manufacturing operation.
LIABILITIES AND SHAREHOLDERS' EQUITY:
The decrease in short-term liabilities corresponds to the decrease in cash
and cash equivalents. In order to recognize certain exit costs relating to the
manufacturing operations, accrued expenses increased since December 31, 1994.
RESULTS OF OPERATIONS:
Net Income
- ----------
The Company reported a net loss of approximately $4.4 million, or $ 2.02
per share, for the first quarter of 1995 compared to net loss of $52,000, or
$.02 per share for the first quarter of 1994. The impact of the costs associated
with the sale of the manufacturing operation on net income was $3.75 million for
the first quarter of 1995, and does not include a tax benefit. This tax benefit
can have a significant positive impact on earnings in the future.
Loss on Sale of Manufacturing Operations
- ----------------------------------------
The Company has reached an agreement in principle to sell its manufacturing
operation in Texas for a cash payment of approximately $2.15 million. The sale
is subject to the satisfaction of certain conditions. In connection with the
sale, the Company will also be entering 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 operation the Company recorded a first quarter charge of $3.75
million to write down these assets to their estimated net realizable value and
to recognize certain exit costs.
Sales from the manufacturing operation were $738,000 and $502,000 for the
three months ended March 31, 1995 and 1994, respectively. The net losses from
normal operations for the corresponding periods were $176,000 and $278,000.
Sales totaled approximately $2.7 million in 1994 and net loss for the same
period was $1.1 million. Closing of the transaction is expected to occur in
early June, 1995.
Revenues
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For the current quarter, total revenues decreased approximately $160,000 or
4% to $3.6 million from $3.7 million in 1994. Although domestic net product
sales remained relatively flat and Superior sales increased, product sales in
Canada decreased 24% or $295,000 resulting in a net decrease of $112,000.
Worldwide retail sales -- sales from franchises to their customers -- of $11.3
million in the first quarter of 1995 declined 3% compared to the first quarter
of 1994 resulting in the corresponding decrease in revenues from franchise
operations. However, domestic retail sales increased $107,000 to $5.2 million in
the same period. While the Company is hopeful that domestic retail sales will
continue to increase as a result of its continued focus on sales management,
revenues generated from the Canadian operation are not expected to improve in
the immediate future.
6
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Cost of Product Sales
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Cost of product sales was 72% for the first quarter of 1995 versus 70% for
the first quarter of 1994. The increase was primarily a result of the lower
sales volume in Canada and increased Canadian product costs resulting from the
weakness in the Canadian dollar. The cost of products sales continued to be
negatively impacted by overhead costs at the Company's manufacturing facility.
Management expects the cost of product sales as a percentage of net product
sales to decrease once the sale of the manufacturing operation is completed.
Expenses
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Total selling, general and administrative expenses increased approximately
$300,000 from the first quarter of 1994 primarily as a result of several one
time charges incurred against earnings, including professional fees relating to
the sale of the manufacturing business and the restructuring of the
financing agreement. The cost reduction initiatives taken in 1994 have begun to
positively impact operating results, however these were more than offset by the
above mentioned one time charges and legal fees relating to lawsuits and other
corporate matters.
Other Income
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The decrease in other income of approximately $57,000 is substantially
related to the inclusion of a $50,000 gain on exchange rate in other income in
1994.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1995, the Company held over $328,000 in cash and cash
equivalents and had outstanding borrowings of $3.2 million under its line of
credit. Under its current financing arrangements, 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.
In conjunction with the sale of the manufacturing operation the Company has
requested relief with respect to certain covenants contained in its credit
facility. 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> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
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. Rather than
------------------------------------------------
pursue this matter in the courts both parties have mutually 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
---------------------------------------------------
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 11 - Schedule of Computation of Per Share Earnings
8
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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: /s/ Patricia J. Defibaugh
------------------------- ----------------------------------
Patricia J. Defibaugh,
Chairman of the Board
Chief Operating Officer
Date: /s/ Jean M. Lewis
-------------------------- -----------------------------------
Jean M. Lewis,
Vice President of Finance
(Principal Financial Officer)
9
<PAGE> 12
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
for the three months ending March 31, 1995 and 1994
Three Months
Ended March 31,
1995 1994
---- ----
Net (loss) $(4,359,920) $ (52,141)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253
Net (loss) per common share $(2.02) $(0.02)
PRIMARY (1)
Net (loss) $(4,359,920) $ (52,141)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253
Net (loss) per common share $(2.02) $(0.02)
FULLY DILUTED (1)
Net (loss) $(4,359,920) $ (52,141)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253
Net (loss) per common share $(2.02) $(0.02)
(1) This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion
No. 15 because it results in dilution of less than 3%.
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<NAME> ALOETTE COSMETICS, INC.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 328,650
<SECURITIES> 0
<RECEIVABLES> 2,611,110
<ALLOWANCES> (365,000)
<INVENTORY> 4,960,583
<CURRENT-ASSETS> 8,663,718
<PP&E> 5,365,291
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<TOTAL-ASSETS> 16,394,857
<CURRENT-LIABILITIES> 5,663,709
<BONDS> 0
<COMMON> 25,000
0
0
<OTHER-SE> (8,761,126)
<TOTAL-LIABILITY-AND-EQUITY> 16,394,857
<SALES> 3,112,884
<TOTAL-REVENUES> 3,565,478
<CGS> 2,250,775
<TOTAL-COSTS> 7,812,031
<OTHER-EXPENSES> (113,367)
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<INCOME-PRETAX> (4,359,920)
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<NET-INCOME> (4,359,920)
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