<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, 1996
[ ] 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 13, 1996.
<PAGE>
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1996 1
(unaudited) and December 31,1995
Consolidated Statements of Income - Three and six 2
months ended June 30, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - 3
six months ended June 30, 1996 and 1995
(unaudited)
Notes to Consolidated Financial Statements - 4
June 30, 1996
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
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain "forward-looking" statements. The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor with
respect to all such forward-looking statements. Examples of forward-looking
statements contained herein include statements with respect to (i) the eventual
sale of one of the Company's repurchased Canadian franchise territories and (ii)
an expected slight increase in North American retail sales. The Company's
ability to predict any such occurrences or the effect of other events on the
Company's operations is inherently uncertain. Therefore, the Company wishes to
caution each reader of this report to carefully consider the specific factors
discussed with such forward-looking statements, as such factors could affect the
ability of the Company to achieve its objectives and may cause actual results to
differ materially from those expressed herein.
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,033,090 $ 1,024,114
Accounts receivable, less allowance
of $164,000 and $110,000, respectively 970,774 1,089,368
Current portion of notes receivable,
less allowance of $135,000 and $270,000, 324,284 316,657
respectively
Inventories 3,423,601 3,672,249
Prepaid expenses and other current assets 526,519 588,665
Deferred income taxes 292,100 291,000
----------- -----------
Total current assets 7,570,368 6,982,053
Cost in excess of net assets acquired, net 475,378 500,398
Notes receivable, less current portion 545,710 564,836
Property, plant and equipment, net 2,888,454 3,261,940
Other assets 460,424 514,280
Deferred income taxes 370,000 370,000
----------- -----------
Total assets $12,310,334 $12,193,507
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 630,561 $ 902,361
Accounts payable 315,703 539,008
Accrued expenses 772,123 881,834
Accrued compensation and benefits 75,009 53,853
Current portion, deferred franchise fee revenue 123,743 116,798
----------- -----------
Total current liabilities 1,917,139 2,493,854
Deferred interest 393,888 --
Deferred income taxes 184,403 189,000
Long-term debt, less current maturities 1,855,720 1,968,371
Deferred franchise fee revenue, less current portion 88,287 66,844
----------- -----------
Total liabilities 4,439,437 4,718,069
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized, 2,963,134 shares issued and
outstanding as of June 30, 1996 and December 31, 1995 25,000 25,000
Additional paid-in capital 7,489,735 7,489,735
Unearned ESOP shares (142,500) (142,500)
Cumulative currency translation adjustments (1,122,687) (1,066,118)
Retained earnings 10,382,475 9,930,447
Less: Common stock in treasury, at cost,
805,881 shares (8,761,126) (8,761,126)
----------- -----------
Total shareholders' equity 7,870,897 7,475,438
----------- -----------
Total liabilities and shareholders' equity $12,310,334 $12,193,507
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $2,663,878 $2,988,304 $5,056,005 $6,101,188
Revenue from franchise operations 472,359 483,029 896,435 920,669
Sales of franchises 34,284 20,352 39,549 35,305
---------- ---------- ---------- ----------
3,170,521 3,491,685 5,991,989 7,057,162
---------- ---------- ---------- ----------
Cost and expenses:
Cost of product sales 1,625,721 2,183,018 3,060,843 4,433,793
Selling, general and administrative 1,085,694 1,593,597 2,228,191 3,404,843
Loss on sale of manufacturing
operations - 50,000 - 3,800,000
Sales of franchises 71,719 10,647 110,886 9,066
---------- ---------- ---------- ----------
2,783,134 3,837,262 5,399,920 11,647,702
---------- ---------- ---------- ----------
Operating income (loss) 387,387 (345,577) 592,069 (4,590,540)
Other income (expense), net (103) (69,434) (60,041) (184,390)
---------- ---------- ---------- ----------
Income (loss) before income taxes 387,284 (415,011) 532,028 (4,774,930)
Provision for income taxes 95,000 - 80,000 -
---------- ---------- ---------- ----------
Net income (loss) $ 292,284 $ (415,011) $ 452,028 $(4,774,930)
========== ========== ========== ===========
- - ----------------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income (loss) $ 0.14 $ (0.19) $ 0.21 $ (2.21)
========== ========== ========== ===========
Dividends - - - -
========== ========== ========== ===========
Weighted average shares outstanding 2,157,253 2,157,253 2,157,253 2,157,253
========== ========== ========== ===========
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 452,028 $(4,774,930)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation & amortization 265,183 357,079
Provision for doubtful accounts and notes receivable 47,036 233,173
Loss (gain) on sale of plant, property and equipment 43,085 (32,440)
Franchise fee revenue (19,549) (25,306)
Loss on sale of manufacturing operations - 3,800,000
Deferred interest 92,892 -
Other 3,802 -
Changes in operating assets and liabilities:
(Increase) decrease in receivables 24,436 (223,245)
Decrease in inventories 240,450 710,248
Decrease in prepaid and other current assets 6,476 103,813
(Decrease) in accounts payable and accrued expenses (84,818) (189,333)
---------- ----------
Net cash provided by (used in) operating activities 1,071,021 (40,941)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of manufacturing operations - 2,097,210
Proceeds from repayment of franchise notes 129,278 96,275
Purchase of property, plant and equipment (36,044) (7,681)
Proceeds from sale of plant, property and equipment, net 186,488 281,262
Decrease in other assets 36,883 4,809
---------- ----------
Net cash provided by investing activities 316,605 2,471,875
---------- ----------
Cash flows from financing activities:
Repayment of note payable, net - (3,233,000)
Payments of long-term debt (388,255) (2,536,413)
---------- ----------
Net cash (used in) financing activities (388,255) (5,769,413)
---------- ----------
Effect of exchange rate on cash 9,605 (11,404)
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,008,976 (3,349,883)
Cash and cash equivalents at beginning of year 1,024,114 3,962,195
---------- ----------
Cash and cash equivalents at end of period $2,033,090 $ 612,312
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
JUNE 30, 1996
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, 1996 and December 31, 1995, inventories consisted of the
following:
1996 1995
---------- -----------
Finished goods $2,374,908 $2,114,743
Work in process 18,319 6,972
Raw materials 1,030,374 1,550,534
---------- ----------
$3,423,601 $3,672,249
========== ==========
3. Supplemental Cash Flow Information
Noncash investing and financing activities:
During the first six months of 1996, the Company reacquired a franchise
as satisfaction of a net note receivable of approximately $160,000. In addition,
six franchises were sold or refinanced for notes receivable of approximately
$280,000. No franchises were sold or refinanced during the first six months of
1995.
During the second quarter, the Company reclassified approximately
$300,000 of interest accrued as of December 31, 1995 as deferred interest in
accordance with the Subordinated Note (see Note 7).
During the first six months of 1996, the Company utilized $72,000 of
barter credits, which are included in other assets, for inventory purchases
compared to zero for the same period in 1995.
4
<PAGE>
4. Sale of Assets of Manufacturing Operations
On June 15, 1995, the Company finalized the sale of certain assets of
its manufacturing operations in Texas for cash of approximately $2.1 million. As
a result of the sale of these assets, the Company recorded a charge of $3.8
million in the first half of 1995.
Sales from the manufacturing operation were $1.2 million for the six
months ended June 30, 1995. The net loss from operations for the corresponding
period, excluding the aforementioned $3.8 million charge, was $478,000.
5. Other Income (Expense)
In June 1996, the Company finalized the sale of its office condominiums
for $200,000, which resulted in the Company recording a charge of approximately
$43,000.
6. Franchise Repurchase
In March 1996, the Company repurchased one of its Canadian franchises,
consisting of three potential franchise territories, as satisfaction of a
net note receivable of approximately $160,000. One franchise territory is being
operated by the Company; one territory was resold for note receivable and cash
of approximately $110,000, and the Company expects that the third territory will
eventually be sold. For the period from its acquisition through June 30, 1996,
the Company operated franchise's net product sales and net earnings did not
significantly affect consolidated results from operations.
7. Notes Payable
In April 1996, the Company reached an agreement with a director,
shareholder and former officer to restructure the payment terms of a
Subordinated Note held by such person. The new terms provide for interest to
accrue on the unpaid principal balance at the rate of 7%, with an initial
payment of $200,000 and monthly principal payments of $50,000 which began in
May, 1996. Interest payments will be deferred until all principal has been paid
in full. Upon repayment of principal, monthly payments of $50,000 will continue
until all deferred interest has been paid in full. Due to the deferral of
interest, the effective annual interest rate, based on the agreed upon terms
without any consideration for prepayments of principal or interest, is estimated
to be approximately 5%.
5
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
Cash and cash equivalents increased to approximately $2.0 million at
June 30, 1996, from approximately $1.0 million at December 31, 1995, primarily
due to the Company's improved cash flows from operations. Inventory continues to
be the Company's largest segment of total assets comprising 28%, or $3.4
million, of total assets at June 30, 1996. Property, plant and equipment were
$2.9 million, or 24% of total assets. The decrease in property, plant and
equipment is primarily due to the sale of the office condominium located in
Pennsylvania. Other assets continue to decrease through 1996 as barter credits
are utilized.
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current maturities of long term debt decreased approximately $270,000
in the first six months of 1996. Debt still represents the largest portion of
liabilities totaling $2.5 million, or 56% of total liabilities. As of June 30,
1996, deferred interest on the Subordinated Note was approximately $400,000, or
9% of total liabilities. In April 1996, a new agreement restructuring the terms
of the Subordinated Note was reached between the Company and the holder of the
Subordinated Note, see "Notes to Financial Statements, Note 7." Pursuant to such
restructured terms, the Company made an initial payment of $200,000 in May 1996
and monthly principal payments of $50,000 commenced May 15, 1996. Interest will
accrue at a rate of 7% on the outstanding principal balance.
RESULTS OF OPERATIONS:
Net Income
The Company reported net income of approximately $452,000 or $0.21 per
share for the first six months of 1996, compared to a net loss of approximately
$4.8 million, or $2.21 per share for the corresponding period of 1995. For the
second quarter of 1996, the Company reported net income of $292,000, or $.14 per
share, versus a net loss of $415,000, or $.19 per share, for the same period in
1995. The increase in net income of $707,000 was largely attributable to
improved product margins and lower administrative expenses, combined with the
elimination of losses incurred by the manufacturing operations prior to its sale
in June, 1995.
Operating income for the six months ended June 30, 1996 of
approximately $600,000 represents an increase of $1.4 million, exclusive of the
$3.8 million charge associated with the sale of the assets of the manufacturing
operations. The increase was a result of the aforementioned manufacturing losses
and improvements in operations.
Revenues
Total revenues increased 2% to approximately $6.0 million for the six
months ended June 30, 1996 compared to approximately $5.8 million for the same
period in 1995, exclusive of the 1995 sales generated by the manufacturing
operations totaling $1.2 million. Similarly, net product sales for the same
period increased 3% to approximately $5 million, excluding the sales at the
manufacturing operations in 1995.
For the quarter ended June 30, 1996, net product sales were $2.7
million compared to $3.0 million in the second quarter of 1995. Exclusive of the
sales at the manufacturing operations in 1995, net product sales increased 5%.
As in the first quarter of 1996, wholesale sales at the Company's domestic
subsidiary remained relatively flat, sales at the Canadian subsidiary increased
slightly and sales to the Company's international distributors continued to
decline.
Reduced sales of the international markets contributed significantly
to a 6% decline in worldwide retail sales -- sales by franchises to their
customers -- to $19.2 million in the first six months of 1996. Although there
can be no assurance that sales will increase, the Company expects that retail
6
<PAGE>
sales in North America will increase slightly in the latter part of the year as
a result of additional sales of franchises, new incentive programs for Beauty
Consultants, and a continued focus on guidance to franchises.
Cost of Product Sales
Cost of product sales as a percentage of net product sales decreased to
61% for the six months ended June 30, 1996 from 73% during the first half of
1995. This decrease was primarily a result of the elimination of the overhead
costs of the Company's manufacturing operations. The Company also negotiated
discounts with certain suppliers and increased controls in purchasing which
resulted in improved margins. Although no assurances can be given, management
expects this percentage to remain relatively constant throughout 1996.
Expenses
Year-to-date selling, general and administrative expenses were $2.2
million and $3.4 million in 1996 and 1995, respectively; a decrease of $1.2
million, or 35%. Total quarterly selling, general and administrative expenses
for the second quarter of 1996 decreased approximately $500,000, or 33%, to $1.1
million from $1.6 million in the second quarter of 1995. These decreases
resulted from the continued success of the cost reduction initiatives
implemented in prior periods, the elimination of expenses at the manufacturing
operation, and the non-recurrence of several one time charges incurred against
earnings in 1995. The cost reduction initiatives included more efficient staff
levels, consolidation of facilities, and limited use of consultants. Although
management will continue to evaluate additional areas for expense reductions,
these expenses are expected to be relatively flat for the the third and fourth
quarters of 1996 on a comparative basis with the same periods in 1995.
Other Income (Expense)
The decrease in other expenses is due primarily to the reduction in
interest expense in the first half of 1996 as a result of the Company's reduced
outstanding debt balance. In June 1996, the Company sold its office condominiums
for $200,000, which resulted in the Company recording a charge of $43,000.
During the second quarter of 1995, a $43,000 gain was recorded as a result of
the sale of the Georgia facility.
Income Taxes
The Company recorded a $80,000 provision for income taxes for the first
six months ended June 30, 1996. For the same period in 1995 the Company did not
recognize any potential tax benefit or provision.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1996, the Company had approximately $2.0 million in cash
and cash equivalents and had no outstanding borrowings under its $1.0 million
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. As of the date hereof, the Company is in compliance
with all such restrictions and covenants. Working capital increased
approximately $1.2 million to $5.7 million as of June 30, 1996.
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 two years.
7
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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
(a) On May 28, 1996, the Company held its Annual Meeting of Shareholders.
As of the record date for such Annual Meeting, there were 2,157,253
shares of Common Stock outstanding and eligible to vote.
(b) Not Applicable.
(c) (i) Election of Directors
Absentions &
Name of Nominee Votes For Votes Withheld Broker Non-Votes
--------------- --------- -------------- ----------------
John E. Defibaugh 1,909,649 33,396 --
(ii) Ratification of Cooper & Lybrand L.L.P. as the Company's
Independent Auditor
For 1,939,740
Against 2,000
Abstain 1,305
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 Schedule of Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1996.
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, 1996 /s/ Patricia J. Defibaugh
------------------------ ----------------------------
Patricia J. Defibaugh
Chairman of the Board
Chief Operating Officer
Date: August 14, 1996 /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, 1996 and 1995
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1995
------ ------
<S> <C> <C>
Net income (loss) $ 452,028 $(4,774,930)
Weighted average number of common shares outstanding
during the year 2,157,253 2,157,253
Net income (loss) per common share $ .21 $ (2.21)
PRIMARY (1)
Net income (loss) $ 452,028 $(4,774,930)
Weighted average number of common shares outstanding
during the year 2,157,253 2,157,253
Net income (loss) per common share $ .21 $ (2.21)
FULLY DILUTED (1)
Net income (loss) $ 452,028 $ (4,774,930)
Weighted average number of common shares outstanding
during the year 2,157,253 2,157,253
Net income (loss) per common share $ .21 $ (2.21)
</TABLE>
(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%.
10
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000792160
<NAME> ALOETTE COSMETICS, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,033,090
<SECURITIES> 0
<RECEIVABLES> 1,594,058
<ALLOWANCES> (299,000)
<INVENTORY> 3,423,601
<CURRENT-ASSETS> 7,570,368
<PP&E> 4,838,017
<DEPRECIATION> (1,949,563)
<TOTAL-ASSETS> 12,310,334
<CURRENT-LIABILITIES> 1,917,139
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 7,870,897
<TOTAL-LIABILITY-AND-EQUITY> 12,310,334
<SALES> 5,056,005
<TOTAL-REVENUES> 5,991,989
<CGS> 3,060,843
<TOTAL-COSTS> 5,399,920
<OTHER-EXPENSES> (60,041)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 532,028
<INCOME-TAX> 80,000
<INCOME-CONTINUING> 452,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 452,028
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
