<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, 1997
[ ] 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 - 2,104,253 shares as of August 13, 1997
<PAGE>
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1997 1
(unaudited) and December 31, 1996
Consolidated Statements of Operations - Three and 2
six months ended June 30, 1997 and 1996
(unaudited)
Consolidated Statements of Cash Flows - 3
Six months ended June 30, 1997 and 1996
(unaudited)
Notes to Consolidated Financial Statements - 4
June 30, 1997 (unaudited)
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) changes in
the trend of retail sales and (ii) the slow recovery of revenues. 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,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,213,393 $ 4,238,182
Accounts receivable, less allowance
of $123,000 and $142,000, respectively 978,474 814,000
Current portion of notes receivable,
less allowance of $167,000 and $170,000,
respectively 212,904 197,759
Inventories 2,934,596 2,723,916
Prepaid expenses and other current assets 414,657 567,543
Deferred income taxes 237,500 229,500
------------ ------------
Total current assets 8,991,524 8,770,900
Cost in excess of net assets acquired, net 425,338 450,358
Notes receivable, less current portion 377,562 460,089
Property, plant and equipment, net 2,486,099 2,627,868
Other assets 299,524 366,126
------------ ------------
Total assets $ 12,580,047 $ 12,675,341
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 604,117 $ 604,261
Accounts payable 460,283 357,404
Accrued expenses 752,685 792,189
Accrued compensation and benefits 107,018 187,021
Current portion, deferred franchise fee revenue 99,931 85,981
------------ ------------
Total current liabilities 2,024,034 2,026,856
Deferred interest 542,940 474,216
Deferred income taxes 116,000 152,000
Long-term debt, less current maturities 1,256,707 1,556,707
Deferred franchise fee revenue, less current portion 85,329 87,773
------------ ------------
Total liabilities 4,025,010 4,297,552
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized, 2,963,134 shares issued and
outstanding as of June 30, 1997 and December 31, 1996 25,000 25,000
Additional paid-in capital 7,457,292 7,457,292
Unearned ESOP shares (71,250) (71,250)
Cumulative currency translation adjustments (1,128,918) (1,122,944)
Retained earnings 11,197,701 10,850,817
Less: Common stock in treasury, at cost, 858,881 shares
and 805,881 shares in 1997 and 1996, respectively (8,924,788) (8,761,126)
------------ ------------
Total shareholders' equity 8,555,037 8,377,789
------------ ------------
Total liabilities and shareholders' equity $ 12,580,047 $ 12,675,341
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 2,298,316 $ 2,663,878 $ 4,427,801 $ 5,056,005
Revenue from franchise operations 405,027 472,359 757,656 896,435
Sales of franchises 20,335 34,284 23,339 39,549
----------- ----------- ----------- -----------
2,723,678 3,170,521 5,208,796 5,991,989
----------- ----------- ----------- -----------
Costs and expenses:
Cost of product sales 1,340,081 1,625,721 2,591,820 3,060,843
Selling, general and administrative 1,108,153 1,085,694 2,187,584 2,228,191
Sales of franchises 8,728 71,719 19,033 110,886
----------- ----------- ----------- -----------
2,456,962 2,783,134 4,798,437 5,399,920
----------- ----------- ----------- -----------
Operating income 266,716 387,387 410,359 592,069
Other income (expense), net 7,880 (103) 30,526 (60,041)
----------- ----------- ----------- -----------
Income before income taxes 274,596 387,284 440,885 532,028
Provision for income taxes 67,000 95,000 94,000 80,000
----------- ----------- ----------- -----------
Net income $ 207,596 $ 292,284 $ 346,885 $ 452,028
=========== =========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income $ .10 $ .14 $ .16 $ .21
=========== =========== =========== ===========
Dividends -- -- -- --
=========== =========== =========== ===========
Weighted average shares outstanding 2,141,769 2,157,253 2,149,468 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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 346,885 $ 452,028
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation & amortization 219,320 265,183
Provision for doubtful accounts and notes receivable 42,309 47,036
(Gain) loss on sale of property, plant and equipment (81) 43,085
Franchise fee revenue (7,339) (19,549)
Deferred interest 68,724 92,892
Other (873) 3,802
Changes in operating assets and liabilities:
(Increase) decrease in receivables (211,385) 24,436
(Increase) decrease in inventories (210,227) 240,450
(Increase) decrease in prepaid and other current assets (82,492) 6,476
Increase (decrease) in accounts payable and accrued expenses 188,373 (84,818)
----------- -----------
Net cash provided by operating activities 353,214 1,071,021
----------- -----------
Cash flows from investing activities:
Proceeds of notes receivable, net 87,012 129,278
Purchase of property, plant and equipment (25,713) (36,044)
Proceeds from sale of property, plant and equipment 1,751 186,488
Decrease in other assets 20,203 36,883
----------- -----------
Net cash provided by investing activities 83,253 316,605
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (163,662) --
Payment of long-term debt (300,144) (388,255)
----------- -----------
Net cash (used in) financing activities (463,806) (388,255)
----------- -----------
Effect of exchange rate changes on cash 2,550 9,605
----------- -----------
Net increase (decrease) in cash and cash equivalents (24,789) 1,008,976
Cash and cash equivalents at beginning of year 4,238,182 1,024,114
----------- -----------
Cash and cash equivalents at end of period $ 4,213,393 $ 2,033,090
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
JUNE 30, 1997
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, 1997 and December 31, 1996 inventories consisted of the
following:
1997 1996
---------- ----------
Finished goods $2,160,565 $1,930,947
Work in process 22,744 4,645
Raw materials 751,287 788,324
---------- ----------
$2,934,596 $2,723,916
========== ==========
3. Supplemental Cash Flow Information
Non cash investing and financing activities:
In March 1996, the Company reacquired a franchise in satisfaction of
net notes receivable of approximately $160,000. No franchises were reacquired in
1997. In addition, in 1996 there were six franchises sold or refinanced for
notes receivable of approximately $280,000 compared to 1997, in which one
franchise was sold for a note receivable of $20,000.
During the first six months of 1997, the Company utilized approximately
$12,000 of barter credits for inventory purchases compared to $72,000 for the
same period in 1996.
4. Stock Repurchase Program
The Board of Directors of the Company approved an increase in the
number of shares available for repurchase under a previously announced stock
repurchase program to 500,000 shares of the Company's common stock. The stock
may be purchased in the open market from time to time. As of June 30, 1997 the
Company had repurchased 53,000 shares of common stock.
4
<PAGE>
5. New Accounting Standard - Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
will replace the current rules for earnings per share computations, presentation
and disclosure. Under the new standard, basic earnings per share excludes
dilution and is computed by dividing income available to common shareowners by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Statement No. 128 requires a dual presentation of basic and
diluted earnings per share on the face of the statement of operations.
The Company will be required to adopt Statement No. 128 in the fourth
quarter of 1997 and, as required by the standard, will restate all prior period
earnings per share data. The new earnings per share amounts are not expected to
be materially different from those computed under the present accounting
standard.
5
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ASSETS:
At June 30, 1997, cash and cash equivalents were approximately $4.2
million, or 34% of total assets. Inventories increased to $2.9 million as of
June 30, 1997 from $2.7 million at December 31, 1996. The increase in
inventories was primarily attributable to an increase in skin care finished
goods and an increase in components required for new product introductions
scheduled for late in the third quarter. The company also increased inventory in
anticipation of seasonally higher sales levels typically experienced during the
second quarter as well as associated purchases made to take advantage of certain
volume discounts.
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total liabilities decreased $300,000 to approximately $4.0 million as
of June 30, 1997 from approximately $4.3 million as of December 31, 1996. The
decrease was attributable to payments made (i) to reduce outstanding debt; and
(ii) as foreign tax payments. Treasury stock increased to $8.9 million due to
the repurchase of 53,000 shares of the Company's common stock under the stock
repurchase program.
RESULTS OF OPERATIONS:
Net Income
The Company reported net income of approximately $347,000, or $.16 per
share, compared to $452,000, or $.21 per share, for the six months ended June
30, 1997 and 1996, respectively. Net income was $208,000 and $292,000 for the
second quarters of 1997 and 1996, respectively. Operating income for the first
six months of 1997 was $410,000 compared to $592,000 for the first six months of
1996. While the Company continued to benefit from reductions in costs and
expenses, operating income was negatively impacted by the decline in revenues
discussed below.
Revenues
Total revenues for the first six months of 1997 decreased approximately
$783,000, or 13%, to $5.2 million from 6.0 million in the first six months of
1996. Net product sales were $4.4 million in the first half of 1997 versus $5.1
million in the comparable period in 1996. The decrease in revenues was related
to the decrease in retail sales -- sales by franchises to their customers. In
the U.S., retail sales declined 10% to $9.5 million at June 30, 1997 from $10.6
million for the period ended June 30, 1996. Similarly, the Canadian subsidiary
experienced an 18% decrease to approximately $6.8 million at June 30, 1997 from
$8.3 million for the first six months of 1996. The decline in retail sales was
attributable to a reduction in the Company's independent sales force, consisting
of Beauty Consultants and Managers, and the termination in prior quarters of
certain franchises in the U.S. which were not in compliance with the Company's
franchise agreements or operating procedures.
Total revenues were $2.7 million and $3.2 million for the second
quarter of 1997 and 1996, respectively. Net product sales were $2.3 million and
$2.7 million for the same periods.
In order to attempt to reverse the current trend in revenues, the
Company is continuing to promote franchise opportunities in open territories, as
well as explore other methods to accelerate the development of specific
geographic areas, to introduce enhanced recruiting materials and incentives and
to expand its new product introductions. While the Company cannot provide any
assurances that it will be successful in altering the trend in retail sales, and
thus revenues, management does expect, that revenues will be slow to recover.
6
<PAGE>
Cost of Product Sales
Cost of product sales as a percentage of net product sales decreased to
59% for the first six months of 1997 from 60% for the first six months of 1996.
The decrease was primarily attributable to improved margins at the Canadian
subsidiary which resulted from lower expenses related to custom duty and
improved internal controls. Although management will continue to explore methods
to improve margins by continuing to negotiate discounts with certain suppliers
and increase controls in purchasing, it is expected that this percentage will
remain relatively constant in 1997 as compared to 1996.
Expenses
Year to date total selling, general and administrative expenses
decreased approximately $41,000, or 2%, for the period ended June 30, 1997
compared to June 30, 1996. The decrease resulted from continued cost reduction
initiatives implemented in prior periods. The cost reduction initiatives include
more efficient staff levels, reduced maintenance costs and limited use of
consultants. Although management will continue to evaluate additional areas for
expense reductions, further expenditures and investments to alter the current
revenue trend are being considered.
The costs associated with the sales of franchises decreased $92,000 to
$19,000 at June 30, 1997 compared to $111,000 at June 30,1996. The decrease was
due to a reduction in breakaway credits given to existing franchisees as a
result of a Beauty Consultant purchasing a franchise from the Company. The
majority of such credits were for the period beginning in the fourth quarter of
1995 through the third quarter of 1996. Management does not expect that the
breakaway fee expense will increase during 1997.
Other Income (Expense), Net
For the first six months of 1997, the Company recorded net other income
of $30,000 compared to net other expense of $60,000 for the first six months of
1996. This $90,000 positive change is attributable to a decrease in interest
expense due to the lower outstanding debt balance in 1997 and an increase in
interest income resulting from the increase in cash and cash equivalents.
Income Taxes
The Company recorded a $94,000 provision for income taxes for the six
months ended June 30, 1997 compared to a $80,000 provision for income taxes for
the six months ended June 30, 1996. The lower provision in 1996 was primarily
attributable to the utilization of a net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1997, the Company held over $4.2 million in cash and cash
equivalents and had no outstanding borrowings under its $1.0 million line of
credit. Working capital increased approximately $200,000 to approximately $7.0
million as of June 30, 1997. Under its current financing arrangements, the
Company is subject to certain covenants which included maintaining certain
financial ratios, restricting the payment of dividends and imposing restrictions
on additional indebtedness and capital expenditures. The Company was in
compliance with all such covenants at June 30, 1997.
In April 1997, the Company announced an increase in the number of
shares available for repurchase under a previously announced stock repurchase
program to 500,000 shares of the Company's common stock. The stock may be
purchased in the open market from time to time. As of June 30, 1997 the Company
had repurchased 53,000 shares of common stock.
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 27, 1997, 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
<TABLE>
<CAPTION>
Abstentions &
Name of Nominee Votes For Votes Withheld Broker & Non-Votes
--------------- --------- -------------- ------------------
<S> <C> <C> <C>
William J. Albertus, Sr. 1,928,641 43,599 --
Robert B. Throm 1,928,641 43,599 --
</TABLE>
(ii) Ratification of Cooper & Lybrand L.L.P. as the Company's
Independent Auditor
For 1,936,250
Against 3,918
Abstain 32,072
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, 1997.
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 13, 1997 /s/ Patricia J. Defibaugh
---------------------------------
Patricia J. Defibaugh,
Chairman of the Board, President,
Chief Executive and Operating Officer
Date: August 13, 1997 /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, 1997 and 1996
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Net income $346,885 $452,028
Weighted average number of common shares outstanding during
the year 2,149,468 2,157,253
Net income per common share $.16 $.21
PRIMARY (1)
Net income $346,885 $452,028
Weighted average number of shares used in calculation
of primary income per share 2,156,733 2,157,253
Net income per common share $.16 $.21
FULLY DILUTED (1)
Net income $346,885 $452,028
Weighted average number of shares used in calculation of
fully diluted income per share 2,157,026 2,157,253
Net income per common share $.16 $.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%.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000792160
<NAME> ALOETTE COSMETICS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,213
<SECURITIES> 0
<RECEIVABLES> 1,481
<ALLOWANCES> (290)
<INVENTORY> 2,935
<CURRENT-ASSETS> 415
<PP&E> 4,659
<DEPRECIATION> (2,173)
<TOTAL-ASSETS> 12,580
<CURRENT-LIABILITIES> 2,024
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 8,530
<TOTAL-LIABILITY-AND-EQUITY> 12,580
<SALES> 4,428
<TOTAL-REVENUES> 5,209
<CGS> 2,592
<TOTAL-COSTS> 4,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 441
<INCOME-TAX> 94
<INCOME-CONTINUING> 347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 347
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
