<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 September 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 November 11, 1997
<PAGE>
INDEX
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997 1
(unaudited) and December 31, 1996
Consolidated Statements of Operations - Three and 2
nine months ended September 30, 1997 and 1996
(unaudited)
Consolidated Statements of Cash Flows - 3
Nine months ended September 30, 1997 and 1996
(unaudited)
Notes to Consolidated Financial Statements - 4
September 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 can be identified by the use of
forward-looking terminology such as "believes," "projects," "estimates,"
"intends," "anticipates," "expects," and similar expressions, and include
statements with respect to (i) changes in the trend of retail sales and (ii)
the slow recovery of revenues. In addition, forward-looking statements are
identified by discussions of strategies that involve risks and uncertainties.
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>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,919,831 $ 4,238,182
Accounts receivable, less allowance
of $144,000 and $142,000, respectively 1,024,608 814,000
Current portion of notes receivable,
less allowance of $68,000 and $170,000, respectively 206,027 197,759
Inventories 3,052,398 2,723,916
Prepaid expenses and other current assets 403,826 567,543
Deferred income taxes 216,000 229,500
----------- -----------
Total current assets 8,822,690 8,770,900
Cost in excess of net assets acquired, net 412,828 450,358
Notes receivable, less current portion 326,373 460,089
Property, plant and equipment, net 2,384,067 2,627,868
Other assets 327,705 366,126
----------- -----------
Total assets $12,273,663 $12,675,341
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 600,000 $ 604,261
Accounts payable 485,294 357,404
Accrued expenses 521,509 792,189
Accrued compensation and benefits 71,032 187,021
Current portion, deferred franchise fee revenue 98,727 85,981
----------- -----------
Total current liabilities 1,776,562 2,026,856
Deferred interest 574,031 474,216
Deferred income taxes 111,000 152,000
Long-term debt, less current maturities 1,105,720 1,556,707
Deferred franchise fee revenue, less current portion 62,936 87,773
----------- -----------
Total liabilities 3,630,249 4,297,552
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized, 2,963,134 shares issued and outstanding
as of September 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 (1,166,272) (1,122,944)
Retained earnings 11,323,432 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 8,643,414 8,377,789
----------- -----------
Total liabilities and shareholders' equity $12,273,663 $12,675,341
=========== ===========
</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 September 30, Nine Months Ended September 30,
1997 1996 1997 1996
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $1,853,682 $2,311,725 $6,281,483 $7,367,730
Revenue from franchise operations 333,922 386,001 1,091,578 1,282,436
Sales of franchises 3,401 4,047 26,740 43,596
---------- ---------- ---------- ----------
2,191,005 2,701,773 7,399,801 8,693,762
---------- ---------- ---------- ----------
Costs and expenses:
Cost of product sales 1,115,561 1,391,566 3,707,381 4,452,409
Selling, general and administrative 927,546 1,087,092 3,115,130 3,315,283
Sales of franchises 1,248 22,137 20,281 133,023
---------- ---------- ---------- ----------
2,044,355 2,500,795 6,842,792 7,900,715
---------- ---------- ---------- ----------
Operating income 146,650 200,978 557,009 793,047
Other income, net 13,082 61,710 43,607 1,669
---------- ---------- ---------- ----------
Income before income taxes 159,732 262,688 600,616 794,716
Provision for income taxes 34,000 54,000 128,000 134,000
---------- ---------- ---------- ----------
Net income $ 125,732 $ 208,688 $ 472,616 $ 660,716
========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------
Per share data:
Net income $ .06 $ .10 $ .22 $ .31
========== ========== ========== ==========
Dividends - - - -
========== ========== ========== ==========
Weighted average shares
outstanding 2,104,253 2,157,253 2,134,231 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 nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 472,616 $ 660,716
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation & amortization 348,991 408,757
Provision for doubtful accounts and notes receivable 58,863 102,913
Loss on sale of property, plant and equipment - 43,085
Franchise fee revenue (10,740) (23,596)
Deferred interest 99,815 134,380
Other (950) 4,741
Changes in operating assets and liabilities:
(Increase) decrease in receivables (259,130) 23,360
(Increase) decrease in inventories (327,770) 660,978
(Increase) in prepaid and other current assets (94,978) (114,197)
Increase (decrease) in accounts payable and accrued expenses (54,578) 59,511
---------- ----------
Net cash provided by operating activities 232,139 1,960,648
---------- ----------
Cash flows from investing activities:
Proceeds of notes receivable, net 109,911 156,460
Purchase of property, plant and equipment (25,724) (42,993)
Proceeds from sale of property, plant and equipment 1,751 186,488
(Increase) decrease in other assets (22,640) 33,127
---------- ----------
Net cash provided by investing activities 63,298 333,082
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (163,662) -
Payment of long-term debt (455,248) (565,012)
---------- ----------
Net cash (used in) financing activities (618,910) (565,012)
---------- ----------
Effect of exchange rate changes on cash 5,122 59,846
---------- ----------
Net increase (decrease) in cash and cash equivalents (318,351) 1,788,564
Cash and cash equivalents at beginning of year 4,238,182 1,024,114
---------- ----------
Cash and cash equivalents at end of period $3,919,831 $2,812,678
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALOETTE COSMETICS, INC. AND SUBSIDIARIES
SEPTEMBER 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 results of operations for the nine
months ended September 30, 1997, are not necessarily indicative of the results
for the year ending December 31, 1997. These financial statements should be
read in conjunction with the audited financial statements and the notes
thereto, included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in the consolidation.
2. Inventories
At September 30, 1997 and December 31, 1996 inventories consisted of
the following:
1997 1996
-------- --------
Finished goods $2,272,519 $1,930,947
Work in process - 4,645
Raw materials 779,879 788,324
---------- ----------
$3,052,398 $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 seven franchises sold or refinanced
for notes receivable of approximately $364,000 compared to 1997, in which one
franchise was sold for a note receivable of $20,000.
During the first nine months of 1997, the Company utilized
approximately $12,000 of barter credits for inventory purchases compared to
$93,000 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 September 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 OPERATIONS
ASSETS:
At September 30, 1997, cash and cash equivalents were approximately
$3.9 million, or 32% of total assets. Inventories increased to $3.1 million as
of September 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 associated with purchases made to take advantage of certain volume
discounts and an increase in fragrance finished goods and components of new
products introduced late in the third quarter.
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total liabilities decreased $700,000 to approximately $3.6 million as
of September 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) for accrued foreign withholding 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 $473,000, or $.22
per share, compared to $661,000, or $.31 per share, for the nine months ended
September 30, 1997 and 1996, respectively. Net income was $126,000 and
$209,000 for the third quarters of 1997 and 1996, respectively. Operating
income for the first nine months of 1997 was $557,000 compared to $793,000 for
the first nine 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 nine months of 1997 decreased
approximately $1.3 million, or 15%, to $7.4 million from $8.7 million in the
first nine months of 1996. Net product sales were $6.3 million through
September 30, 1997 versus $7.4 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 12% to $13.7
million at September 30, 1997 from $15.6 million for the period ended
September 30, 1996. Similarly, the Canadian subsidiary experienced an 18%
decrease to approximately $13.2 million at September 30, 1997 from $16 million
for the first nine months of 1996. The decline in retail sales was
attributable to a general decline in franchise productivity and a reduction in
the Company's independent sales force, consisting of Beauty Consultants and
Managers.
Total revenues were $2.2 million and $2.7 million for the third
quarter of 1997 and 1996, respectively. Net product sales were $1.9 million
and $2.3 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 exploring 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 nine months of 1997 from 60% for the first nine 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 $200,000, or 6%, for the period ended September 30,
1997 compared to September 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 $113,000
to $20,000 at September 30, 1997 compared to $133,000 at September 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 significantly during the
remainder of 1997.
Other Income (Expense), Net
For the first nine months of 1997, the Company recorded net other
income of $44,000 compared to net other income of $2,000 for the first nine
months of 1996. This $42,000 positive change is primarily attributable to a
decrease in interest expense due to the lower outstanding debt balance in
1997.
Income Taxes
The Company recorded a $128,000 provision for income taxes for the
nine months ended September 30, 1997 compared to a $134,000 provision for
income taxes for the nine months ended September 30, 1996. The lower effective
tax rate realized in 1996 as compared to 1997 is primarily attributable to the
utilization of a net operating loss carryforward in 1996.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1997, the Company held over $3.9 million in cash and
cash equivalents and had no outstanding borrowings under its $1.0 million line
of credit. Working capital increased approximately $300,000 to approximately
$7.0 million as of September 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 September 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 September 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
Not Applicable
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 September 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: November 11, 1997 /s/ Patricia J. Defibaugh
-------------------------------------------
Patricia J. Defibaugh,
Chairman of the Board, President,
Chief Executive and Operating Officer
Date: November 11, 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 nine months ending September 30, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Net income $472,616 $660,716
Weighted average number of common shares outstanding during
the year 2,134,231 2,157,253
Net income per common share $.22 $.31
PRIMARY (1)
Net income $472,616 $660,716
Weighted average number of shares used in calculation
of primary income per share 2,146,165 2,188,107
Net income per common share $.22 $.30
FULLY DILUTED (1)
Net income $472,616 $660,716
Weighted average number of shares used in calculation of
fully diluted income per share 2,147,031 2,193,162
Net income per common share $.22 $.30
</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> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,920
<SECURITIES> 0
<RECEIVABLES> 1,443
<ALLOWANCES> (212)
<INVENTORY> 3,052
<CURRENT-ASSETS> 8,823
<PP&E> 4,558
<DEPRECIATION> (2,175)
<TOTAL-ASSETS> 12,274
<CURRENT-LIABILITIES> 1,777
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 8,618
<TOTAL-LIABILITY-AND-EQUITY> 12,274
<SALES> 6,281
<TOTAL-REVENUES> 7,400
<CGS> 3,707
<TOTAL-COSTS> 6,843
<OTHER-EXPENSES> 44
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 601
<INCOME-TAX> 128
<INCOME-CONTINUING> 473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 473
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
