<PAGE>
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 June 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 August 11, 1995.
<PAGE>
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
----------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1995 1
(unaudited) and December 31,1994
Consolidated Statements of Income - Three and 2
six months ended June 30, 1995 and 1994
(unaudited)
Consolidated Statements of Cash Flows - 3
six months ended June 30, 1995 and 1994
Notes to Consolidated Financial Statements - 4
June 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
----------
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 612,312 $ 3,962,195
Accounts receivable, less allowance
of $282,000 and $125,000 2,105,721 2,356,001
Current portion of notes receivable,
less allowance of $59,000 and $15,000 466,404 433,543
Inventories 3,581,348 6,550,357
Prepaid expenses and other current assets 777,632 888,586
Deferred income taxes -- 300,000
------------- -------------
Total current assets 7,543,417 14,490,682
Cost in excess of net assets acquired, net 525,418 550,438
Notes receivable, less current portion 936,950 941,608
Property, plant and equipment, net 3,454,649 7,451,779
Other assets 716,983 477,982
Deferred income taxes 178,519 470,000
------------- -------------
Total assets $ 13,355,936 $ 24,382,489
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Notes payable, banks $ 1,152,000 $ 4,385,000
Current maturities of long-term debt 927,032 2,803,398
Accounts payable 484,599 1,058,390
Accrued expenses 1,394,501 764,845
Accrued compensation and benefits 62,626 113,019
Current portion, deferred franchise fee revenue 104,544 114,031
------------- -------------
Total current liabilities 4,125,302 9,238,683
Deferred income taxes 290,519 882,000
Long-term debt, less current maturities 2,009,458 2,676,495
Deferred franchise fee revenue, less
current portion 43,750 58,879
------------- -------------
Total liabilities 6,469,029 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 June 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 (983,844) (1,119,249)
Retained earnings 9,281,632 14,056,562
Less: Common stock in treasury, at cost,
805,881 shares (8,761,126) (8,761,126)
------------- -------------
Total shareholders' equity 6,886,907 11,526,432
------------- -------------
Total liabilities and shareholders' equity $ 13,355,936 $ 24,382,489
============= =============
</TABLE>
See accompanying notes
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $2,988,304 $3,457,088 $6,101,188 $6,681,698
Revenue from franchise operations 483,029 533,135 920,669 1,001,278
Sales of franchises 20,352 46,728 35,305 79,232
---------- ---------- ---------- ----------
3,491,685 4,036,951 7,057,162 7,762,208
Cost and expenses:
Cost of product sales 2,183,018 2,339,229 4,433,793 4,583,037
Selling, general and administrative 1,593,597 1,858,361 3,404,843 3,365,982
Loss on sale of manufacturing
operations 50,000 - 3,800,000 -
Sales of franchises 10,647 10,000 9,066 11,699
---------- ---------- ---------- ----------
3,837,262 4,207,590 11,647,702 7,960,718
Operating (loss) income (345,577) (170,639) (4,590,540) (198,510)
Other (expense), net (69,434) (96,219) (184,390) (152,208)
---------- ---------- ---------- ----------
(Loss) before income taxes (415,011) (266,858) (4,774,930) (350,718)
(Benefit) for income taxes - (94,436) - (126,155)
---------- ---------- ----------- ----------
Net (loss) $ (415,011) $ (172,422) $(4,774,930) $ (224,563)
========== ========== =========== ==========
-----------------------------------------------------------------------------------------------------------------------
Per share data:
Net (loss) $ ( .19) $ ( .08) $ ( 2.21) $ ( .10)
========== ========== ========== ==========
Dividends - - - -
========== ========== ========== ==========
Weighted average shares outstanding 2,157,253 2,157,253 2,157,253 2,157,253
========== ========== ========== ==========
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
------------- --------------
<S> <C> <C>
Cash flow from operating activities:
Net (loss) $ (4,774,930) $ (224,563)
Adjustments to reconcile net income to cash (used in) operating activities:
Depreciation & amortization 357,079 453,896
Provision for doubtful accounts and notes receivable 233,173 165,527
(Gain) on sale of plant, property and equipment (32,440) --
Franchise fee revenue (25,306) (37,624)
Loss on sale of manufacturing operations 3,800,000 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables (223,245) (493,766)
(Increase) decrease in inventories 710,248 (88,350)
(Increase) decrease in prepaid and other current assets 103,813 (68,763)
Increase (decrease) in accounts payable and accrued expenses (189,333) 169,463
------------- -------------
Net cash (used in) operating activities (40,941) (124,180)
Cash flows from investing activities:
Proceeds from sale of manufacturing operations 2,097,210 --
Proceeds from repayment of franchise notes 96,275 126,273
Purchase of property, plant and equipment (7,681) (310,378)
(Increase) decrease in other assets 4,809 (102,160)
Proceeds from sale of plant, property and equipment, net 281,262 --
------------- -------------
Net cash provided by (used in) investing activities 2,471,875 (286,265)
Cash flows from financing activities:
Proceeds of note payable, net (3,233,000) 1,893,000
Payments of long-term debt (2,536,413) (807,429)
------------- -------------
Net cash provided (used in) by financing activities (5,769,413) 1,085,571
Effect of exchange rate on cash (11,404) (192,251)
------------- -------------
Net increase (decrease) in cash and cash equivalents (3,349,883) 482,875
Cash and cash equivalents at beginning of year 3,962,195 3,079,353
------------- -------------
Cash and cash equivalents at end of period $ 612,312 $ 3,562,228
============= =============
</TABLE>
See accompanying notes
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
JUNE 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 June 30, 1995 and December 31, 1994, inventories consisted of the following:
1995 1994
----------- -----------
Finished goods $ 2,495,769 $ 3,544,742
Work in process -- 437,673
Raw materials 1,085,579 2,567,942
----------- -----------
$ 3,581,348 $ 6,550,357
=========== ===========
3. Supplemental Cash Flow Information
Noncash investing and financing activities:
During the first six months of 1994, the Company sold or refinanced
five (5) franchise territory for notes receivable of approximately $220,000.
There were no franchises sold or refinanced in 1995.
Net cash paid during the six months ended June 30, 1995 and 1994 for
interest and income taxes were as follows:
1995 1994
-------- ---------
Interest $184,100 $361,597
Income taxes 126,330 10,000
<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 operation, the Company recorded a charge of $3.8 million.
Sales from the manufacturing operations were approximately $1.2 million
and $1 million for the six months ended June 30, 1995 and 1994, respectively.
The net losses from normal operations for the corresponding periods were
$478,000 and $404,000. 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 six month periods ended June 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.
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
Revenue $ 3,045,354 $ 3,540,775 $ 5,872,359 $ 6,764,205
Net Income (loss) $ (12,298) $ (13,613) $ (396,529) $ 245,674
Income (loss)
per share $ (.01) $ (.01) $ (.18) $ .11
6. Other Expense
Other expense for the second quarter of 1995 included approximately
$43,000 resulting from a gain on the sale of the Georgia warehouse.
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
Cash and cash equivalents decreased approximately $3.35 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 $3.2 million. Accounts Receivable, Inventories and Property,
Plant and Equipment were adjusted to reflect the sale of the manufacturing
operations.
LIABILITIES AND SHAREHOLDERS' EQUITY:
The decrease in current liabilities of $5.1 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 $4.8 million, or $
2.21 per share, for the six months ending June 30, 1995 compared to a net loss
of $225,000, or $.10 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, and does not include a tax benefit. This tax
benefit can have a positive impact on earnings in the future. The net loss
resulting from normal operations was $975,000 for the first six months of 1995.
The loss at the manufacturing operations accounted for almost half of the
year-to-date loss and approximately $400,000 could be attributed to one-time
charges.
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
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 charge of $3.8 million.
Sales from the manufacturing operations were approximately $1.2 million
and $1 million for the six months ended June 30, 1995 and 1994, respectively.
The net losses from normal operations for the corresponding periods were
$478,000 and $404,000. Sales 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 $705,000,
or 9%, to $7.1 million from $7.8 million as of June 30, 1994. Total revenues for
the three months ended June 30, 1995 were $3.5 million versus $4.0 million in
1994. This trend on a consolidated level is expected to continue due to the sale
of the manufacturing operations and the loss of its revenues. Revenues excluding
the manufacturing operation were $5.9 million for the period ending June 30,
1995 versus $6.8 million for the same period in 1994. Consolidated net product
sales decreased approximately $580,000, or 8.7%, from June 30, 1995 as compared
to June 30, 1994. This decrease was primarily attributable to a reduction in
Canadian product sales. Worldwide retail sales -- sales from franchises to their
customers -- of $20.3 million in the first half of 1995 declined 7% compared to
the first half of 1994. While the Company is hopeful that domestic retail sales
<PAGE>
will continue to improve as a result of its continued focus on sales management
and anticipated new franchise openings, revenues generated from the Canadian
operation are not expected to improve in the immediate future.
Cost of Product Sales
Cost of product sales was 73% for the first half of 1995 versus 69% for
the first half of 1994. The increase was primarily a result of the lower sales
volume to our Canadian franchises. The cost of products sales through the second
quarter 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 as a result of the sale of the
manufacturing operation.
Expenses
Total selling, general and administrative expenses decreased
approximately $265,000, or 14%, from the second quarter of 1994 primarily as a
result of cost reduction initiatives taken in 1994. Year to date expenses
increased $39,000 to $3.4 million in 1995 primarily as the result 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 offsetting the
positive impact that the cost reduction initiatives have had on the operating
results.
Other Expense
The increase in other expense of approximately $32,000 for the first
six months of 1995 versus 1994 is substantially related to the inclusion of a
gain of $66,000 on exchange rate realized in 1994 being partially offset by a
net gain on the sale of certain assets of $32,000 in 1995. The decrease in other
expense for the three months ended June 30, 1995 is primarily attributable to a
$43,000 gain recorded on the sale of the Georgia facility.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1995, the Company held over $612,000 in cash and cash
equivalents and had outstanding borrowings of $1.2 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.
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.
<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:
On July 3, 1995, the Company filed on Form 8-K certain information with
respect to the sale of its manufacturing operation.
On August 14, 1995, the Company filed on Form 8K/A certain information
with respect to the sale of its manufacturing operation which amends the
Company's Form 8-K dated July 3, 1995.
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: August 14, 1995 /s/ Patricia J. Defibaugh
--------------- -------------------------------
Patricia J. Defibaugh
Chairman of the Board
Chief Operating Officer
Date: August 14, 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 six months ending June 30, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) $ (415,011) $ (172,422) $(4,774,930) $ (224,563)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253 2,157,253
Net (loss) per common share $ (.19) $ (.08) $ (2.21) $ (0.10)
PRIMARY (1)
1995 1994 1995 1994
----------- ----------- ----------- -----------
Net (loss) $ (415,011) $ (172,422) $(4,774,930) $ (224,563)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253 2,157,253
Net (loss) per common share $ (.19) $ (.08) $ (2.21) $ (0.10)
FULLY DILUTED (1)
1995 1994 1995 1994
----------- ----------- ----------- -----------
Net (loss) $ (415,011) $ (172,422) $(4,774,930) $ (224,563)
Weighted average number of common shares
outstanding during the year 2,157,253 2,157,253 2,157,253 2,157,253
Net (loss) per common share $ (.19) $ (.08) $ (2.21) $ (0.10)
</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 diluation of less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 612,312
<SECURITIES> 0
<RECEIVABLES> 2,912,389
<ALLOWANCES> (340,263)
<INVENTORY> 3,581,349
<CURRENT-ASSETS> 7,543,418
<PP&E> 3,454,649
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,355,936
<CURRENT-LIABILITIES> 4,125,302
<BONDS> 0
<COMMON> 25,000
0
0
<OTHER-SE> (8,761,126)
<TOTAL-LIABILITY-AND-EQUITY> 13,355,926
<SALES> 6,101,188
<TOTAL-REVENUES> 7,057,162
<CGS> (4,433,793)
<TOTAL-COSTS> (11,647,702)
<OTHER-EXPENSES> (184,391)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,774,930)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,774,930)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,774,930)
<EPS-PRIMARY> (2.21)
<EPS-DILUTED> (2.21)
</TABLE>
