Item 1. Business General
BeautiControl Cosmetics, Inc. is a manufacturer and direct seller of skin care, nutritional supplements, cosmetics, nail care, toiletries, beauty supplements and related products. The Company sells its products through independent sales persons called "Consultants" (or "Distributors"), who purchase the products from BeautiControl and then sell them directly to consumers in the home or workplace. Products and image services are provided to clients in the United States, Taiwan, Canada, Puerto Rico and other emerging international markets.
Skin Condition Analysis utilizes the patented product "Skin Sensors" to assist the Consultant in analyzing the customer's skin condition. This enables the Consultant to recommend the specific customized skin care regimen required to meet the individual needs of each consumer.
Color analysis, an image-enhancing service, allows the matching of color-coded cosmetics with a customer's natural coloring, helping customers select the most flattering color choices. A computer- assisted head-to-toe image analysis referred to as the Personal Image Profile is used to provide women with specific recommendations on makeup, fashion and accessory styles to create each individual's best image.
These services, combined with products that are fragrance free, dermatologist, sensitivity, allergy and ophthalmologist tested, and which are also certified as non-comedogenic, constitute total wellness offered by the Company.
The Company was organized and incorporated in 1986 under the laws of the State of Delaware and maintains its principal executive offices at 2121 Midway Road, Carrollton, Texas 75006.
Products
The Company's products consist of skin care products, nutritional supplements, cosmetic makeup products, nail care products, fragrances, beauty supplements and color and image analysis accessories.
The Company believes that skin care and cosmetic products sold at retail may generally be grouped in three price categories: the least expensive are generally sold in drug stores and supermarkets; moderately priced and premium priced products are generally sold in leading department stores and specialty shops. Although the Company's skin care products and cosmetic makeup products are considered by the Company to be comparable in quality and image to premium priced products, the Company suggests that Consultants sell the Company's products at retail prices which the Company believes are equivalent to those moderately priced products sold in leading department stores and specialty shops.
The Company's nutritional supplement products use formulas designed to increase total wellness, including a line of advanced nutritional supplements known as nutraceuticals. These products build up the immune system using a proprietary ingredient called Veraloe and are not found in retail outlets or drug stores.
The Company also has a health and beauty supplements line, WITHIN BEAUTY[TM]. This product line includes hair and nail supplements, skin condition supplements and supplements designed for the different stages of a woman's life. The Company also provides SlenderGenics, a weight management system, and PMS Support Complex to its health and beauty product line. The SlenderGenics system includes a metabolic booster supplement and appetite satisfying wafers. PMS Support Complex contains beneficial vitamins, minerals and herbs to help reduce the negative physical and emotional symptoms of PMS.
During 1998, the Company presented all new skin care and glamour product packaging. Major new product introductions include the addition of REGENERATION[R] GOLD lip therapy to the REGENERATION product line and Cell Block-C which provides comprehensive skin care protection.
Marketing and Distribution
The Company's skin care, cosmetics, nutritional supplements and related products are sold through Consultants (or Distributors) who are independent contractors, not employees of the Company. As of November 30, 1998, the total Consultant and Distributor count was 63,205.
Consultants may sell the Company's products one-on-one, to groups of people or through home demonstrations called Skin Care and Color Clinics ("Clinics"). Additionally, Consultants are encouraged to market the products through personal consultations and product brochure sales in order to utilize multiple selling opportunities.
In order to provide immediate product delivery, Consultants may maintain a small inventory of products. Consultants make their own payment arrangements with their customers. The Company clears credit card payments to Consultants for selected credit cards, presently MasterCard, Visa, Novus/Discover Card and American Express.
The Company sells its products to its Consultants generally on a payment-in-advance basis. Consultants pay for the Company's products by wire transfer, Western Union Quick Collect, money order or credit card, and selectively by personal check. Additionally, the Company offers occasional product programs allowing credit terms of approximately 45 days to approved Consultants.
Consultants are offered the Company's products at wholesale discounts from suggested retail prices for resale to their customers. These wholesale discounts range from 25% to 55% based upon the timing and dollar amount of the Consultant's order. Sales taxes are generally prepaid to the Company by Consultants for transmittal to taxing authorities.
The Company maintains inventory which generally permits the Company to ship goods in response to an order within 72 hours of the Company's receipt of the order.
During 1998 in the U.S., the Company relied primarily upon United Parcel Service and United States parcel post and mail to ship products from its distribution facility in Farmers Branch, Texas. The Canadian subsidiary utilizes United Parcel Service and Canada Post. The Taiwan Branch orders are either picked up on-site or delivered by a local service.
In the U.S. Client Connection Program, direct mailings to consumers are made by the Company that vary five to six times a year. This direct mailing program allows the Company to communicate directly with the consumer and encourages the consumer to contact her Consultant to reorder the Company's products.
Product orders from the Company can be made by mail, fax and through on line services.
The sales efforts of Consultants are also supported through Company-sponsored seminars and sales conferences held several times each year in various locations.
Manufacturing
The Company's manufacturing facility is located in Carrollton, Texas at which it manufactures or assembles the majority of products sold.
Of the Company's sales approximately 20% was comprised of items produced by various unaffiliated manufacturers. Such outside manufacturers are used when the Company believes that such firms are able to manufacture products according to Company specifications less expensively than the Company.
Materials used in the Company's skin care, cosmetic and beauty supplements products consist chiefly of readily available ingredients, containers and packaging materials. Such raw materials and components used in goods manufactured and assembled by the Company are available from a number of sources. To date, the Company has been able to secure an adequate supply of raw materials and components for its manufacturing facility. The Company endeavors to maintain relationships with backup suppliers in an effort to ensure that no interruptions in the Company's operations are likely to occur.
The Company's manufacturing facility includes microbiology/quality control and product development laboratories. These laboratories are intended to facilitate and expedite quality control and to continue the development of new products for the Company. The Company continually engages in research and development activities to improve its existing products and to develop new products. The amount spent on research and development activities on the formulation and improvement of Company products was $933,000 in 1998, $918,000 in 1997 and $851,000 in 1996. Expenditures included in these amounts consist of the following direct costs: materials consumed, depreciation of equipment used in development activities, labor, and contractual services performed by outside parties for product testing. Research and development activities are primarily conducted on product and packaging design for the Company's skin care, nutritional supplements, cosmetics, fragrance and beauty supplements.
Employees
At February 1, 1999, the Company employed 364 persons in North America and Taiwan, 38 of which were engaged in the manufacture and assembly of the Company's products. None of the Company's employees are represented by a union and the Company considers its employee relations to be good. All key employees are required to enter into an agreement with the Company whereby each employee agrees to maintain the confidentiality of customer lists and other sensitive information.
Trademarks and Patents
The Company has registered all its trademarks in the United States and has registered or is in the process of registering its principal trademarks in Canada, Taiwan, Hong Kong and many other countries. The Company has the exclusive right to distribute the Skin Condition Analysis product "Skin Sensors" worldwide with the option to renew this exclusive right each year. The Company is licensed to use the following trademarks: "Skinlogics", "Sunlogics" and "Nailogics". The Company has a patent on the formulas for its "REGENERATION and REGENERATION [2]", alpha-hydroxy acid based, products.
Competition
The cosmetic and nutritional supplement industries are highly fragmented and competitive markets which are sensitive to changing consumer preferences and demands. There are many large and well known companies that manufacture and sell broad lines of skin care, nutritional supplements and cosmetic products through retail establishments. The Company competes with a number of direct sales companies who market skin care and cosmetic products and nutritional supplements. The Company also competes, to an extent, with other direct sales companies in attracting new Consultants. Many companies market products which are better known than the Company's products and many cosmetics companies are larger and have substantially greater resources than the Company.
The principal bases of competition in the cosmetic and nutritional supplement businesses generally are marketing, price, quality and newness of products. The Company has attempted to differentiate itself and its products from the industry in general through the use of a number of value-added services previously described and by being technologically at the forefront of the industry. There can be no assurance that similar marketing techniques and products will not be adopted by competitors in the future.
Regulation
The Company is subject to regulation by the United States Food and Drug Administration and the Bureau of Alcohol, Tobacco and Firearms of the Treasury Department, as are other marketers and manufacturers of cosmetic and nutritional supplement products. The Company's advertising and sales practices are subject to the jurisdiction of the Federal Trade Commission. In addition, the Company is subject to numerous federal, state, and local laws relating to marketing and to the content, labeling and packaging of its products.
Various governmental agencies regulate direct selling activities, and the Company has occasionally been requested to supply information regarding its marketing plan to certain such agencies. Also, the Company is currently an active member in certain associations unique to the direct selling industry. These associations require companies to abide by a specific code of ethics established by the industry. Although the Company believes that its method of distribution is in compliance with laws and regulations relating to direct selling activities, there is no assurance that legislation and regulations adopted in particular jurisdictions in the future will not affect the Company's operations.
In connection with its manufacturing processes, the Company is subject to various governmental regulations governing the discharge of materials into the environment. Compliance with these regulations has not had, and is not anticipated to have, any material impact upon the Company's capital expenditures, earnings or competitive position.
Recent Developments
The Company established a wholly owned subsidiary in the United States called Eventus[TM] International, Inc. This Company will operate in the network marketing segment of the direct selling industry and its products will be sold through independent sales persons ("Distributors"). Eventus International will position itself in the nutritional supplements market and will support a personalized, preventive approach to wellness and health care through the use of nutritional supplements known as nutraceuticals. Products offered will be individualized to a person's specific cultural heritage, with additional supplements based on a person's specific health needs. The Distributor compensation plan, which is a unilevel and generational plan, consists of two elements which the Company calls the Fast Track Star Bonus program and the UniGen[TM] Compensation Plan. Together, these plans form a compensation structure that provides immediate income opportunities. An informal pre-launch for Eventus[TM] International, Inc. was January 22, 1999. The Company will begin full operations on or about April 1, 1999. Initially, the Company will conduct business in the United States. In the future, the Company expects to expand Eventus internationally.
Item 2.
Item 2. Properties.
The Company's domestic corporate headquarters is located in Carrollton, Texas in a building owned by the Company. The manufacturing and warehouse facility is also located in Carrollton, Texas. The Company leases this building under a lease that expires in 1999. The Company's distribution center is housed in a leased building in Farmers Branch, Texas under a lease expiring in 1999. Both leases, at the Company's option, may be extended for an additional five years at the fair market rental rate in effect at the time for properties of equivalent use and size in the area. The Company also leased an additional warehouse facility in 1997 which is located in Carrollton, Texas; this lease was renewed through September 1999. The Canadian subsidiary, located in Burlington, Ontario leases a combined office and distribution facility that expires in 2001. The Company's Taiwan branch has a leased facility in Taipei, Taiwan that expires in 2000 with first rights to renew upon expiration. The Company's Hong Kong branch leased a facility starting in December 1999 and expiring in 2003.
Item 3.
Item 3. Legal Proceedings.
Neither the Company nor its subsidiaries is a party to any pending proceedings which in Management's opinion, would have a material adverse effect on the results of operations or financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.
Item 5.
Item 5. Market for the Company's Common Stock and Related Stockholder Matters.
The Common Stock is traded in the over-the-counter market under the symbol BUTI and is quoted on the NASDAQ National Market System.
The following table sets forth, for the periods indicated, the high and low closing sale prices for the Company's Common Stock on the NASDAQ National Market System.
1998 1997 High Low High Low ----- ----- ------ ------ First Quarter $8.625 $7.125 $18.750 $13.000 Second Quarter 10.250 8.125 17.125 8.875 Third Quarter 10.000 6.125 12.875 9.000 Fourth Quarter 8.000 5.375 10.000 8.000
The high and low sales prices on February 4, 1999, as quoted on the NASDAQ National Market System were $6.125 and $6.000, respectively.
As of February 8, 1999, there were approximately 2,055 shareholders of record of the common stock, including nonobjecting beneficial holders whose stock is held in nominee or street name by broker.
Cash dividends were paid in each quarter of 1998 and 1997 at a rate of $.105 per share. While it is anticipated that quarterly dividends will continue to be declared, the final determination will depend upon the future earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate.
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation
BeautiControl Cosmetics, Inc. (the Company) is a manufacturer and direct seller of skin care, nutritional supplements, cosmetics, beauty supplements and related products. The Company sells its products to independent Consultants (or Distributors) who in turn sell to end consumers. Sales figures are based on orders shipped less returns. The percentage of the Company's total sales contributed by various product groups for the period set forth below were as follows:
Year end November 30, 1998 1997 1996 ---- ---- ---- Skin care products 47% 46% 44% Cosmetic makeup products 33 32 31 Cosmetics, color an image analysis accessories 13 13 13 Nutritional and Beauty 4 6 10 supplements Fragrance, toiletry and nail 3 3 2 care products ---- ---- ---- Total sales 100% 100% 100%
1998 was an important year for the Company in the progress achieved in business expansion to new geographic markets and new segments of the direct selling industry. These new directions are key steps in positioning the Company as an international provider of both cosmetics and wellness products for our consumers as well as innovative career and earnings opportunities for our Consultants, Directors and Distributors.
The base U.S. business, BeautiControl Cosmetics, had improved sales results year over year for the fourth quarter of 1998 but experienced a decrease in annual sales. This "party plan" business has continued to be impacted by the U.S. environment of low employment and low inflation, which makes recruiting difficult. In early Spring, the Company plans to introduce innovative improvements to the earnings opportunity for this segment of the business.
January of 1998 marked the opening of the Company's Taiwan operations, the first Asia Pacific country in its global expansion strategy. Operations in the Company's second Asian market, Hong Kong, are slated to open in March, 1999. New product lines are being introduced and new features added to the compensation plan to ensure continued growth in recruiting and sales for both markets.
In January, 1999 the Company is also entering into the fast growing nutritional supplements market with the opening of a U.S. subsidiary, Eventus International, Inc. Eventus will offer leading products in the advanced field of nutritional supplements known as nutraceuticals. These products build up the immune system using a proprietary ingredient called Veraloe[TM] and are not found in drug stores or other retail outlets.
This planned expansion continues to require significant investments in operating expenses, inventory and capital. In 1998, our Asia and U.S. network marketing expansion and development costs impacted before tax profits by $4.4 million. The Company expects capital and start-up expenses in these businesses to continue into 1999.
RESULTS OF OPERATIONS OF THE COMPANY
Fiscal 1998 compared to Fiscal 1997 Net sales for 1998 were $72,163,000 compared with $69,421,000 in 1997. This year's consolidated sales growth of 4.0% is attributed to the added Taiwan business that opened in January 1998. Domestic sales were down 3.2% in 1998 compared with 1997. This was due to the adverse impact on sales and recruiting activity caused by the continuing trend of a favorable economy of low unemployment and low inflation creating a challenging environment for new recruits.
Gross profit margins were 70.0% in 1998 compared with 72.6% in 1997. The change in margins is primarily a result of increases to obsolete inventory reserves. In 1998, the Company provided for non-cash write-downs of $2,140,000 for inventory due to excess supply of dated inventory for a product line introduced in 1996 and write-downs related to new developments planned for the U.S. business in early 1999 which made certain products obsolete. Also affecting profit margins in 1998 was the spring recruiting drive during the second quarter. The promotion offered a reduced entry cost on low margin demonstration kits sold to new Consultants.
Selling, general and administrative expenses as a percent of sales increased to 77.2% in 1998 compared with 72.4% in 1997. The increase in costs is largely due to higher commission expense resulting from the addition of the Taiwan business. Total Company commissions as a percent of sales were 3.2% higher in 1998 versus 1997. Promotion costs increased $887,000 or 1.2% of net sales in 1998 compared with 1997 as a result of the Company's aggressive spring recruiting drive which occurred in the second quarter of 1998. Expansion and development costs also increased this year due to the opening and continued development of the Taiwan branch, expansion into Hong Kong and the establishment of a new Company in the U.S., Eventus[TM] International, Inc. Total expansion costs for 1998, affecting selling, general and administrative, were $3,829,000 compared with $3,056,000 in 1997.
Primarily as a result of these new expansion efforts and the inventory write-down, net loss was ($3,162,000) or ($.49) per common share in 1998 compared with net income of $124,000 or $.02 per common share in 1997. The income tax benefit for 1998 was ($1,707,000) compared to a provision of $274,000 in 1997. The effective tax rate was affected by state franchise tax partially offset by a foreign operations net loss.
Fiscal 1997 compared to Fiscal 1996
Net sales for 1997 were $69,421,000 compared with $80,108,000 in 1996. Several key factors have attributed directly to 1997's sales performance. Most notably were those that have affected recruiting. Year end Consultant count was 49,413 in 1997 versus 50,897 in 1996. A favorable U.S. economy of low unemployment and low inflation has had an adverse impact on the direct selling industry which created a challenging environment for new recruits.
Two major successes in 1996 also impacted the year's sales results. They include the Company's highly successful recruiting promotion during the first half of 1996 and the introduction of SlenderGenics Weight Management System which generated nearly $4,000,000 in incremental sales during the fourth quarter of 1996.
Extensions to the REGENERATION product line, REGENERATION GOLD and REGENERATION GOLD Eye Repair caused shifts in product categories in 1997. The skin care line increased to 46% in 1997 from 44% in 1996. The 1996 introduction of the SlenderGenics Weight Management System shifted the health and beauty supplements to 10% in 1996 from 4% in 1995; this category subsequently evened out to 6% in 1997.
Gross profit margins were 72.6% in 1997 compared with 75.2% in 1996. The decrease in gross profit margins for 1997 was largely due to absorption of factory overhead and increases in inventory reserves. For the year, these costs were an additional 2.4% of net sales in 1997 compared to 1996.
Selling, general and administrative expenses as a percent of sales increased to 72.4% in 1997 from 65.3% in 1996. Overall total spending in these costs were reduced by nearly $2,000,000 in 1997 compared to 1996. However, a decrease in sales has caused actual cost as a percent of sales to be unfavorable. The first two quarters of 1997 made up most of the dollar savings in total spending for selling, general and administrative expenses. This was primarily due to lower costs incurred in recruiting and promotion activities. In addition, there was a reduction from prior year promotion and training costs associated with the successful 1996 recruiting campaign. Selling, general and administrative spending in the third and fourth quarters of 1997 was heavily focused on start-up and investment spending for the Company's Taiwan branch that opened on January 8, 1998.
Other income and expense decreased to $276,000 in 1997 compared with $442,000 in 1996. In 1997, the Company sold its investments resulting in a reduction in investment related income.
As a result of the above, net income decreased to $124,000 or $.02 per common share in 1997 compared with net income of $5,401,000 or $.93 per common share in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at November 30, 1998 was $9,656,000 compared with $7,391,000 at November 30, 1997. Combined cash and short- term investments increased by $8,513,000 in 1998 versus 1997. Primary sources of cash were provided through financing activities of both issuance of stock and an increase in borrowings that occurred during the third quarter of 1998. Classification of $7,779,000 to short-term borrowings from long-term borrowings on the Company's line of credit and term loan (discussed in more detail below) also affected changes in working capital. This is due to the current terms of the Company's debt. Income tax receivable increased by $1,254,000 in 1998 to $1,981,000. This was due to operating losses before income taxes of ($4,869,000).
The Company's net inventory levels decreased by $1,180,000 during 1998 compared with 1997. This was largely due to an increase in obsolete inventory reserves of $1,841,000. A write-down of inventory from an excess supply of dated product affected 1998 reserves. Also, a provision was made on unusable inventory resulting from changes planned for the Consultant career opportunity in 1999 for the U.S. business. During 1998 inventory levels in raw material and finished goods components increased by $661,000 over 1997. This increase was largely due to the addition of inventory carried for the Taiwan branch.
The Company has an unsecured line of credit of $15,000,000 primarily to be used for expansion and for operating cash when needed for the business. The interest rate is based on a LIBOR rate plus a spread that adjusts with the debt ratio. The weighted average interest rates for 1998 and 1997 were 6.99% and 6.85%, respectively. A commitment fee of .25% is paid quarterly based on the unused portion of the line of credit. The outstanding balance at November 30, 1998 was $7,600,000 and was classified as short term; the outstanding balance at November 30, 1997 was $1,200,000 and classified as long term. The expiration date is November 30, 1999. Under this line of credit, the Company is required to meet covenants related to certain financial ratios on a quarterly basis and an annual capital expenditures limitation. Also, this line of credit is potentially secured by certain assets of the Company based on the calculation of one of the financial ratios. Primarily as a result of the expansion strategy currently in place and non- cash inventory write-downs, the Company did not achieve one of the financial covenants for the quarters ending August 31, 1998 and November 30, 1998. The Company and the lender entered into an agreement until April 16, 1999 whereby the lender has agreed to forbear based upon the Company's representation that the Company is pursuing alternative arrangements. The maximum amount of credit currently available under this line of credit is $6,000,000 - the balance at February 24, 1999. All borrowings under this line of credit are deemed to be at fair value due to the short-term nature of the interest rates charged.
The Company has a secured term loan outstanding at November 30, 1998 in the amount of $1,400,000. This loan has a maximum borrowing amount of $2,900,000. The Company borrowed $1,500,000 in December 1998 against this term loan taking the outstanding amount to the maximum of $2,900,000. This is a five year loan bearing a fixed rate of interest of 7.72% with a ten year amortization. Monthly payments are $31,125 including principal and interest for 60 months with a balloon payment of $2,008,000 due on December 3, 2003. This loan has two covenants related to certain financial ratios on a quarterly basis, of which the Company was in compliance at November 30, 1998. Certain assets of the Company secure this line of credit. This debt is at fair value given the timing of when this loan was secured.
As of November 30, 1998, the Company did have funds in excess of its total borrowings including $11,497,000 in cash, marketable securities and investments.
In 1998, the Company committed to a three year non-cancellable capital lease for computer related hardware and software. Assets under capital leases are capitalized using interest rates appropriate at the inception of the lease.
Even though the Company did not repurchase any of its common stock in 1998, it remains approved by the Board of Directors to purchase up to 1,000,000 additional shares of its common stock.
The Company's capital expenditures for 1998 totaled $1,970,000 the majority of which was capital improvements for the new Asian and Eventus businesses. The balance was for the base North American business. The Company anticipates its 1999 capital purchases to be in line with 1998 as the Company continues its Asian expansion. Capital expenditures will be funded through normal operating cash.
Year 2000 Issues
The Company defines the Year 2000 issues as those related to the inability of some computer hardware or software to interpret a two-digit year expressed as "00" as the Year 2000. When the Year 2000 begins, these computers may interpret "00" as the Year 1900 and either stop processing date-related computations or will process them incorrectly. All software, computer hardware, building facilities and equipment utilized by the Company require assessment to determine that they will continue to operate accurately when they encounter a Year 2000 date before and after January 1, 2000.
The Company has initiated a task force committee to address Year 2000 issues. The committee's purpose is to direct the project for assessment, remediation and implementation of solutions and contingency plans related to Year 2000 issues.
The project plan addresses information technology systems (IT systems) such as computer software and hardware and non- information technology systems (Non-IT systems) such as manufacturing and distribution equipment, utilities and facilities. In addition, the plan addresses Year 2000 issues relating to third parties with which the Company has a material relationship. The Company has planned readiness prior to January 1, 2000 due to the possibility of encountering Year 2000 date processing in 1999.
The Company has completed the assessment of IT systems and has implemented 90% of software upgrades scheduled. The Company is on target to reach its initiative to complete all software related upgrades during the second quarter of 1999. The overall project is estimated to be about 80% complete and scheduled to be complete by October, 1999.
Estimated % Complete at Start Date End Date November 30, 1998 ---------- ---------- -------- IT Systems: Assessment of Software 04/01/1998 06/30/1998 100% Remediation/Testing of Software 06/01/1998 03/31/1999 90% Assessment of Hardware 07/01/1998 08/15/1998 100% Remediation/Testing of Hardware 11/01/1998 03/31/1999 90% Non-IT Systems: Assessment 06/01/1998 06/30/1999 80% Remediation/Testing 11/01/1998 10/30/1999 70%
The Company prepared and mailed a Year 2000 readiness survey to numerous third party suppliers and service providers upon which the Company relies for various goods and services. As of November 30, 1998, the Company has received written responses from 49% of those mailed. Of those responding, 62% stated that they are either currently compliant or anticipate that they will address all Year 2000 issues by December, 1998. The committee is currently evaluating responses to schedule follow- up correspondence and to address contingency plans for alternate sources and suppliers.
The committee plans to prepare specific contingency plans, if necessary, to mitigate the potential risks associated with non- readiness of key suppliers and vendors, information technology and non-information technology areas by June, 1999.
Additionally, the Company plans to continue its current operating policy to maintain 60 to 90 days of finished goods on-hand of key products as well as on-hand quantities of components. The Company as a part of its normal operating plan contracts with a third party for backup computer hardware service in the event of a failure or serious interruptions of its on-site operations.
Costs for implementing the Year 2000 project are expected to be in the range of $350,000 to $400,000 over the two year fiscal period of 1998 and 1999 and are not expected to materially affect results of operations or the financial position of the Company. Expenditures relating to Year 2000 to date are estimated to be $153,000 as of November 30, 1998, due primarily to software remediation, and were funded through operating cash flows. Other IT projects and initiatives have not been adversely affected by the Company's resources allocation to the Year 2000 project. The Company currently believes that it is addressing Year 2000 issues on a timely and adequate basis according to suggested methodologies and procedures. Although the Company is addressing the Year 2000 issue and plans to monitor its progress through completion, there can be no assurance that total compliance internally as well as with third party vendors and suppliers will be achieved.
Item 7A
Item 7A - Quantitative and Qualitative Disclosure About Market Risk
The Company has evaluated its potential exposures to market risks as they relate to interest rate volatility on investments and debt and on risks related to foreign currency changes.
The Company's investments management strategy is to primarily invest in very low risk, secure investments and, secondly, to achieve a good return from interest income. The investment activities of the Company are not for trading purposes but to invest excess cash until needed for the business.
At November 30, 1998, the Company had high grade, short-term municipal bonds that are either backed by U.S. Treasury bonds or are insured of which $6,068,000 were short term. In addition, the Company had $2,215,000 in bond investments that are laddered in maturity from 13 months to 29 months. Any risks to principal due to market interest rate changes are not material because for bonds of short maturity, interest rate changes have little impact on market value. For example, a one percentage point increase in market interest rate might result in a reduction in the value of the long-term bonds of $36,000.
The Company also has $6,000,000 outstanding under a line of credit which has an interest rate based on a LIBOR rate plus a spread that adjusts with the debt ratio. The weighted average interest rates for 1998 and 1997 were 6.99% and 6.85%, respectively. If this 1998 weighted average interest rate were to increase 10% to 7.69% for fiscal 1998 with the balance remaining constant at $6,000,000, incremental interest expense would reduce earnings before taxes by $42,000 in fiscal 1999. The Company also has a five year bank loan of $2,900,000 with a fixed interest rate and is thus not subject to interest rate volatility.
The Company manufactures and sells inventory to its foreign subsidiaries, currently in Canada and Taiwan. These receivables are dollar denominated. The payables on the subsidiary books are recorded at the functional currency of each respective country. As fluctuations occur, the subsidiary marks the payable to the new exchange rate required to convert the payable into U.S. dollars with the resulting difference recorded through income. Thus, the Company's earnings are affected by fluctuations in the value of the foreign currencies as compared to the U.S. dollar.
At November 30, 1998, the result of a 10% strengthening in the aggregate value of the foreign currencies would have resulted in an increase in gross profit of $82,600 for fiscal 1999; comparatively, a 10% strengthening of the U.S. dollar would result in a decrease in gross profit of $89,900 for fiscal 1999.
The Company also has receivables from its foreign subsidiaries which are denominated in the functional currency of the subsidiary. The amounts and short term nature of these receivables significantly limit the exposure to changes. The Company believes that any foreign currency risk on these items is not material.
The Company is not currently engaged in any derivatives activity. However, if the above currency fluctuations become probable and material, the Company would likely take action to mitigate its exposure to the change.
In fiscal 1997, the Company had substantially the same risks with potential foreign currency fluctuations and interest rate fluctuations. As in the current year, net adjustments made related to these changes during fiscal 1997 were not material.
Certain statements in this Management's Discussion and Analysis section contain forward-looking information. These statements are based on current expectations, and actual results could differ materially. Important factors that could cause actual results to differ materially from those projected in forward- looking statements include, but are not limited to the following: Consultants (or Distributors) sales activity levels, recruiting of new Consultants and Distributors, services of certain members of senior management, new product introductions, protection of intellectual property rights and third party infringement, changes in U.S. or international economic conditions, results of international operations including governmental, regulatory, political and foreign exchange rate impacts, results of operations in new markets, global and domestic expansion efforts, capital resources and ability to obtain necessary financing, market risk, and risks and costs related to the Year 2000.
Item 8
Item 8 - Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders BeautiControl Cosmetics, Inc.
We have audited the accompanying consolidated balance sheets of BeautiControl Cosmetics, Inc. and Subsidiaries as of November 30, 1998 and 1997, and the related statements of income, stockholders equity and cash flows for each of the three years in the period ended November 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. In 1998, we did not audit the financial statements of BeautiControl Taiwan, Inc., Taiwan Branch, a wholly-owned branch, which statements reflect total assets constituting 6.7% at November 30, 1998 and total revenues constituting 6.9% for the year ended November 30, 1998, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for BeautiControl Taiwan, Inc., Taiwan Branch for that period, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BeautiControl Cosmetics, Inc. and Subsidiaries at November 30, 1998, and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Ernst & Young LLP Dallas, Texas December 23, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of BeautiControl Taiwan, Inc.
We have audited the balance sheets of BeautiControl Taiwan, Inc., Taiwan Branch as of November 30, 1998 and 1997, and the related statements of operations and changes in accumulated deficit and of cash flows for the year ended November 30, 1998 and for the period from inception on August 15, 1997 to November 30, 1997 as derived from the accounts and records maintained by the Branch. The financial statements are the responsibility of the Branch's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of BeautiControl Taiwan, Inc., Taiwan Branch at November 30, 1998 and 1997, and the results of its operations and cash flows for the year ended November 30, 1998 and for the period from inception on August 15, 1997 to November 30, 1997, in conformity with accounting principles generally accepted in the United States of America.
PriceWaterhouseCoopers
Taipei, Taiwan, Republic of China December 15,1998
BEAUTICONTROL COSMETICS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 1998, 1997 AND 1996
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BeautiControl Cosmetics, Inc. and Subsidiaries is a manufacturer and direct seller of skin care, nutritional supplements, cosmetics, nail care, toiletries, beauty supplements and related products. The Company sells its products in North America, Taiwan and Hong Kong through independent sales persons and other countries through Distributors who purchase the products from the Company and then sell them directly to consumers in the home or workplace.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its majority- owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Reclassifications - Certain amounts for the prior years have been reclassified to conform to the current year presentation.
Property and Equipment - Depreciation and amortization is provided for property and equipment by the straight-line method over the following estimated useful lives of the assets:
Office building.............................. 30 years Office furniture and equipment.............. 3-5 years Machinery and equipment.................... 5-8 years Transportation equipment.................. 5-15 years Property under capital leases............... 3 years
Leasehold improvements are amortized over the lives of the respective leases or the service life of the improvements, whichever is shorter.
Cost in Excess of Net Tangible Assets Acquired - Costs in excess of net tangible assets acquired and other intangible assets is being amortized on a straight-line basis over 40 years.
Long-Lived Assets - The Company reviews its long-lived assets, including property and equipment and costs in excess of net tangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any impairment would be recognized in operating results.
Cash Equivalents - Investments that are short-term (generally with original maturities of three months or less) and highly liquid are considered to be cash equivalents.
Deferred Income Taxes - Deferred income taxes are provided under the provisions of Financial Accounting Standards Board Statement No. 109.
Revenue Recognition - Revenue is recognized when orders are shipped. Included in deferred income are orders which are paid for but not shipped and prepaid registration fees for future meetings.
Product Returns - The Company guarantees the quality of its merchandise and will replace the product or refund the purchase price if products are returned by unsatisfied consumers. The Company will repurchase at cost, less a 10% restocking fee, any currently marketable merchandise purchased in the previous 12 months from any Consultant who chooses to leave the business. During 1998, the amount of inventory returns for the Company was not material. Product returns as a percent of net sales for 1998, 1997 and 1996 were 0.2%, 0.2% and 0.3%, respectively. In 1998 inventory bought back was 0.07% of net sales.
Research and Development - The Company's policy is to expense as incurred all activities engaged in the research and development of products. The amount spent on research and development activities on the formulation and improvement of Company products was $933,000 in 1998, $918,000 in 1997 and $851,000 in 1996. Expenditures included in these amounts consist of the following direct costs: materials consumed, depreciation of equipment used in development activities, labor, and contractual services performed by outside parties for product testing.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Recently Issued Accounting Statements During 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-5, Reporting on the Cost of Start-Up Activities. SOP 98-5 requires entities to charge to expense start-up costs, including organizational costs, as incurred. In addition, SOP 98-5 will require most entities upon adoption to write-off as a cumulative change in accounting principle any previously capitalized start-up or organization costs. The Company will be required to adopt SOP 98-5 on December 1, 1999. The Company's current accounting policy with regard to reporting of start-up activities is consistent with this statement.
During 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires capitalization of certain costs to purchase or develop internal use software. The Company will be required to adopt SOP 98-1 on December 1, 1999. The Company's current accounting policy with regard to internal use software is consistent with this statement.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The statement permits early adoption as of the beginning of any fiscal quarter after its issuance. FAS No. 133 requires that all derivatives be recognized on the balance sheet at fair value. Derivatives that do not qualify as hedges must be adjusted to fair value through income. Depending on the nature of the hedge transaction, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be recognized in current period earnings. At the present time, the Company is not engaged in any derivative activity and therefore there is no impact that the adoption of FAS No. 133 would have on earnings or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will be required to adopt SFAS 131 on December 1, 1998. Currently, the Company anticipates that only the results of its international operations and subsidiaries, might be required to be separately disclosed from U.S. base operations under the reporting guidelines of SFAS 131.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Under existing accounting standards, other comprehensive income shall be classified separately into foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. This statement is effective for the Company on December 1, 1998. The Company will be required to separately disclose the components of comprehensive income listed above.
NOTE B - NET INCOME (LOSS) PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128) Earnings per Share. This statement requires companies to present basic earnings per share which includes the weighted average number of common shares outstanding and, if applicable, diluted earnings per share which includes common equivalent shares outstanding. This replaces primary and fully diluted earnings per share that was previously required under APB Opinion 15. The Company adopted SFAS 128 in December 1, 1997. The following table sets forth the computation of basic and diluted earnings (loss) per share:
1998 1997 1996 Numerator: ---------- -------- --------- Net income (loss) - Numerator for basic and diluted earnings per share-income (loss) available to common ($3,161,661) $123,957 $5,400,714 stockholders
Denominator: Denominator for basic earnings per share- weighted-average shares 6,394,877 5,906,433 5,829,924
Effect of dilutive securities: - 247,933 195,199 Employee stock options Denominator for diluted earnings per share- adjusted weighted-average shares and assumed 6,394,877 6,154,366 6,025,123 conversions
Basic earnings (loss) per share $ (0.49) $ 0.02 $ 0.93
Diluted earnings (loss) per share $ (0.49) $ 0.02 $ 0.90
NOTE C - INVESTMENTS Investments - The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). SFAS 115 requires companies to classify their investments as either held-to-maturity or available-for- sale. Held-to-maturity securities represent those securities that the Company has both the positive intent and ability to hold to maturity and are carried at amortized cost. Available-for-sale securities represent those securities that do not meet the classification of held-to-maturity, are not actively traded and are carried at fair value. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of stockholders equity, net of applicable taxes, until realized.
The market value and scheduled maturities of investments at November 30, 1998 are as follows:
1998 Market Value ---- ---------- Available-for-sale Due in 1 year or less: U.S. Government and Agencies Bonds $ 280,000 Municipal Bonds 5,788,358
Due in 1-5 years: Municipal Bonds 2,264,381 ---------- Total $8,332,739 =========
In November of 1998, the Company purchased investments in debt securities. These investments are classified as available-for- sale and are therefore carried at fair value. Due to the timing of the purchase of these investments, there were no gross unrealized gains and losses.
During the fourth quarter of 1997, the Company had sold all its existing available-for-sale and held-to-maturity securities. Gross realized gains and losses had been included in earnings and all previously recorded unrealized gains and losses had been reversed as a separate component of stockholders equity. The gross proceeds from the sale of available-for-sale preferred stock were $1,048,205 with a gross realized gain of $8,697. The gross proceeds from the sale and call of held-to-maturity municipal bonds were $1,794,340 with a gross realized gain of $16,031. For the purpose of determining the gross realized gains and losses, the cost of securities sold was based upon specific identification.
NOTE D - INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market.
Inventories (in thousands) consist of the following:
November 30,
1998 1997 ------ ------ Finished Goods $10,282 $9,325 Raw Materials 5,263 5,559 Reserve for Obsolescence (3,926) (2,085) ------ ------ Total $11,619 $12,799 ====== ======
NOTE E - INCOME TAXES The components of deferred income taxes (in thousands) are as follows: November 30, 1998 1997 ------ ------ Deferred tax assets: Inventories $1,453 $970 Allowance for doubtful accounts 288 235 Accrued expenses 453 319 Foreign subsidiary net operating loss carry forward 240 130 Other 50 8 ------ ------ $2,484 $1,662 Less valuation allowance (240) (130) ------ ------ $2,244 $1,532 Deferred tax liabilities: Property and equipment ($791) ($422) Other (15) - ------ ------ ($806) ($422)
Deferred tax assets and liabilities are classified as follows: Current deferred tax assets $2,229 $1,530 Noncurrent deferred tax liability (791) (440) ------ ------ $1,438 $1,090 Income tax expense (benefit) (in thousands) is comprised of the following:
Year Ended November 30, 1998 1997 1996 ----- ----- ----- Current Federal ($1,173) $212 $3,282 State (186) 33 319 Deferred Federal (86) 29 (590) State (262) - - ----- ----- ----- ($1,707) $274 $3,011
Reconciliation of income taxes computed at the Federal statutory rate and income tax expense (benefit) is as follows:
Year End November 30, 1998 1997 1996 ---- ---- ---- Federal statutory rate (34.0%) 34.0% 34.0% State (3.7) 5.5 2.5 Unbenefitted foreign losses 2.1 28.9 .7 Other .5 .5 (1.4) ---- ---- ---- Effective tax rate (35.1%) 68.9% 35.8%
NOTE F - LINE OF CREDIT The Company has an unsecured line of credit of $15,000,000 primarily to be used for expansion and for operating cash when needed for the business. The interest rate is based on a LIBOR rate plus a spread that adjusts with the debt ratio. The weighted average interest rates for 1998 and 1997 were 6.99% and 6.85%, respectively. A commitment fee of .25% is paid quarterly based on the unused portion of the line of credit. The outstanding balance at November 30, 1998 was $7,600,000 and was classified as short term; the outstanding balance at November 30, 1997 was $1,200,000 and classified as long term. The expiration date is November 30, 1999. Under this line of credit, the Company is required to meet covenants related to certain financial ratios on a quarterly basis and an annual capital expenditures limitation. Also, this line of credit is potentially secured by certain assets of the Company based on the calculation of one of the financial ratios. Primarily as a result of the expansion strategy currently in place and non-cash inventory write-downs, the Company did not achieve one of the financial covenants for the quarters ending August 31, 1998 and November 30, 1998. The Company and the lender entered into an agreement until April 16, 1999 whereby the lender has agreed to forbear based upon the Company's representation that the Company is pursuing alternative arrangements. The maximum amount of credit currently available under this line of credit is $6,000,000 - the balance at February 24, 1999. All borrowings under this line of credit are deemed to be at fair value due to the short-term nature of the interest rates charged.
The Company has a secured term loan outstanding at November 30, 1998 in the amount of $1,400,000. This loan has a maximum borrowing amount of $2,900,000. The Company borrowed $1,500,000 in December 1998 against this term loan taking the outstanding amount to the maximum of $2,900,000. This is a five year loan bearing a fixed rate of interest of 7.72% with a ten year amortization. Monthly payments are $31,125 including principal and interest for 60 months with a balloon payment of $2,008,000 due on December 3, 2003. This loan has two covenants related to certain financial ratios on a quarterly basis, of which the Company was in compliance at November 30, 1998. Certain assets of the Company secure this line of credit. This debt is at fair value given the timing of when this loan was secured.
As of November 30, 1998, the Company did have funds in excess of its total borrowings including $11,497,000 in cash, marketable securities and investments.
In 1998, the Company committed to a three year non-cancellable capital lease for computer related hardware and software. Assets under capital leases are capitalized using interest rates appropriate at the inception of the lease.
NOTE G - COMMITMENTS AND CONTINGENCIES At November 30, 1998, the Company and subsidiaries were committed under non-cancellable operating leases, principally for six buildings, equipment and automobiles. U.S. building leases expire in 1999. Two principal leases may be extended for five years at the fair market rental rate in effect at that time. Building leases in Taiwan, Canada and Hong Kong expire in 2000, 2001, and 2003, respectively.
Fiscal Year Capital Operating Leases Leases ----- ------ 1999 $151 $2,791 2000 151 1,975 2001 126 778 2002 447 2003 250 ----- ------ Total minimum lease payments 428 6,241
Less: Amount representing estimated taxes and maintenance costs included in total minimum lease payments 70 ---- Net minimum lease paymentsLess: 358 Amount representing interest 22 ---- Present value of net minimum lease payments 336 Current portion 114 ---- Long-term capitalized lease obligations $222 ====
Assets recorded under capital leases are included in property, plant, and equipment, as follows (in thousands):
November 30, 1998 1997
Office furniture and equipment 354 - Less accumulated amortization 20 - --- --- Net capital lease assets 334 - === ===
Rental expense (in thousands) is as follows:
Year Ending November 30, 1998 ...................$2,741 1997 .................. 1,918 1996 .................. 1,809
In 1998, the Company committed to a three year non-cancellable capital lease for computer related hardware and software. Assets under capital leases are capitalized using interest rates appropriate at the inception of the lease.
In December 1998, the Company signed a five year contract to buy Manapol[R], a nutraceutical raw material, from Caraloe, Inc. a consumer products subsidiary of Carrington Laboratories, Inc. of Irving, Texas. The contract for the nutraceutical Manapol[R] requires total minimum raw material purchase and royalty payments of $4.5 million during the five years.
NOTE H - CAPITAL STOCK The Company is authorized to issue 1,000,000 shares of $.10 par value preferred stock with voting powers and other special rights or restrictions, if any, to be determined by the Board of Directors at the time of issuance.
The Company has 1,196,000 shares of common stock reserved for future issuance under its stock option plans.
On August 3, 1998, the Company completed a private equity placement where 1,200,000 shares of common stock were issued in exchange for $9,912,000 in cash. The shares were sold to Jim Sowell Construction Company, Inc., an affiliate of Sowell & Company, a Dallas based firm with real estate operations and investment holdings.
As of November 30, 1998, the Company had purchased a total of 3,708,800 shares of its common stock pursuant to a plan approved by the Board of Directors to acquire up to 4,708,800 shares.
Four quarterly dividends were paid during 1998, 1997 and 1996. The aggregate totals and per share amounts for each year respectively were $2,644,000 or $.42, $2,483,000 or $.42, and $2,442,000 or $.42.
NOTE I - STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS The Company has three stock option plans covering key employees and non-employee directors.
The 1996 Incentive Stock Option Plan permits the issuance of incentive stock options to employees of the Company to purchase up to 130,000 common shares of the Company. Specific terms of the options will be determined by the Compensation Committee of the Board of Directors; however, no options may be granted for less than the fair market value of the common stock nor for terms exceeding ten years. The options vest 20% each year beginning one year after the grant date and expire ten years from the date of grant.
The 1996 Non-Qualified Stock Option Plan permits the issuance of non-qualified stock options to key persons of the Company to purchase up to 340,000 common shares of the Company. Pursuant to this plan, options may be granted at prices to be determined by the Compensation Committee of the Board of Directors of the Company. The option period may not terminate later than ten years from the date the option is granted; the option vesting period begins after one year from the date of grant to any time after five years from date of grant. The options vest 20% per year beginning one year after the grant date and expire ten years from the date of grant.
The 1998 Special Stock Option Plan provides for issuance of stock options to nonemployee directors of the Company to purchase up to 59,000 common shares of the Company. The number of options to be granted under this plan is determined by a formula specified within the plan and the exercise price must be at least equal to the fair market value of the common shares of the Company on the date of grant of the option. All options will expire ten years from the date of grant and no option is exercisable until one year from the date of grant.
The following tables summarize the related activity and status of the Company's three stock option plans as of November 30, 1996, 1997 and 1998:
INCENTIVE PLAN
Shares Under Weighted Option Option Price Average (000's) Range Exercise Price ----- ----- ----- Outstanding at November 30, 1995 286 $3.28-$17.50 $10.72 Granted 68 $8.00-$9.50 $8.47 Exercised (41) $4.89-$8.50 $5.94 Cancelled (24) $7.50-$14.67 $11.04
Outstanding at November 30, 1996 289 $3.28-$9.50* $8.56 Granted 5 $9.75 $9.75 Exercised (45) $3.28-$9.50 $7.84 Cancelled (23) $8.00-$9.50 $11.27
Outstanding at November 30, 1997 22 $4.89-$9.75 $8.70
Exercisable at November 30, 1997 132 - $8.68
Granted 55 $5.75-$8.13 $8.03 Exercised (2) $5.00 $5.00 Cancelled (12) $6.11-$9.25 $8.09
Outstanding at November 30, 1998 267 $5.75** $5.75
Exercisable at November 30, 1998 156 $5.75
Available to Grant at November 30, 1998 21
Weighted Average Remaining Contractual Life of Options Outstanding at November 30, 1998 6
NON-QUALIFIED PLAN
Shares Under Weighted Option Option Price Average (000's) Range Exercise Price
Outstanding at November 30, 1995 508 $3.56-$17.50 $11.02 Granted - - - Exercised (1) $7.75-$8.50 $8.13 Cancelled (2) $7.75-$11.00 $10.00
Outstanding at November 30, 1996 505 $3.56-$17.50* $10.64 Granted - - - Exercised (8) $7.75-$9.25 $8.38 Cancelled (5) $7.75-$8.50 $8.21
Outstanding at November 30, 1997 492 $3.56-$17.50 $10.70
Exercisable at November 30, 1997 439 - $10.96 Granted 318 $5.75-$8.75 $7.35 Exercised (23) $3.56 $3.56 Cancelled (3) $8.13-$9.25 $8.61
Outstanding at November 30, 1998 784 $5.75** $5.75
Exercisable at November 30, 1998 550 $5.75
Available to Grant at November 30, 1998 24
Weighted Average Remaining Contractual Life of Options Outstanding at November 30, 1998 7
SPECIAL PLAN
Shares Weighted Under Option Price Average Option Range Exercise (000's) Price
Outstanding at November 30, 1995 261 $3.28-$14.25 $7.04 Granted 15 $8.00-$9.50 $9.24 Exercised - - - Cancelled - - -
Outstanding at November 30, 1996 276 $3.28-$14.25 $7.18 Granted 6 $14.63 $14.63 Exercised (63) $3.28-$10.67 $5.46 Cancelled (7) $13.00-$14.25 $13.89
Outstanding at November 30, 1997 212 $3.28-$14.63 $7.68
Exercisable at November 30, 1997 206 - $7.47 Granted - - - Exercised (67) $3.28 $3.28 Cancelled - - -
Outstanding at November 30, 1998 145 $4.89-$14.63 $9.73
Exercisable at November 30, 1998 145 $9.73
Available to Grant at November 30, 1998 59
Weighted Average Remaining Contractual Life of Options Outstanding at 3 November 30, 1998
* In January 1996, 204,070 stock options with a price range of $10.00 to $17.50 were repriced to the current fair market value price of $9.25.
** In October 1998, 920,425 stock options with a price range of $6.67 to $9.75 were repriced to the current fair market value price of $5.75.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based Compensation. This statement defines a fair value based method of accounting for an employee stock option. On December 1,1996, the Company adopted the disclosures provision of SFAS 123. Under this provision, the Company will disclose pro forma net income and pro forma earnings per share for employee stock options using a fair value based method. As allowed by SFAS 123, the Company has also elected to follow Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees and related interpretations in accounting for its employee stock option plans.
As required by SFAS 123, pro forma net income and earnings per share impact from granted options have been determined for disclosure purposes. The amounts reported do not necessarily reflect the effects of this statement on future net income or earnings per share. The fair value of employee stock options have been estimated using the Black-Scholes option pricing model. The following table summarizes the weighted average assumptions used for 1998, 1997 and 1996:
1998 1997 1996
Volatility 42.1% 36.0% 29.8%
Risk Free Rate 4.7-4.9% 5.9%- 5.8%-6.2% 6.1% Dividend Yield 7.0% 3.8% 4.4%-5.3%
Expected Life in Years 5 5 6
Weighted Average Grant Date $1.23 $3.48 $1.98 Fair Value
Net Income (loss):
As Reported ($3,162) $124 $5,401
Pro Forma ($3,659) $66 $5,174
Net Income (loss) per Common Share: As Reported ($.49) $.02 $.90
Pro Forma ($.57) $.01 $.86
The BeautiControl Cosmetics, Inc. 401(k) Plan allows for both the Company and eligible employees to contribute. Eligible employees include those over 21 years of age who have been employed with the Company a minimum of six months. Company contributions are voluntary and at the discretion of the Board of Directors of the Company. The Company's contribution expense for the years ended November 30, 1998, 1997 and 1996 was $181,000, $150,000 and $111,000, respectively.
NOTE J - RELATED PARTY TRANSACTIONS During 1996, the Company contracted with a member of the Board of Directors to provide consulting services to the Company. The Company paid $82,550 under this agreement which ended in May, 1996.
NOTE K - UNAUDITED QUARTERLY OPERATING RESULTS OPERATING RESULTS Unaudited quarterly operating results for the years ended November 30, 1998 and 1997 (in thousands) are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------ ------ ------ ------ 1998: Net sales $16,540 $21,603 $16,611 $17,409 Gross profit 12,739 14,905 11,054 11,832 Net income (loss) 994 9 (2,498) (1,666) Net income (loss) per common share basic $0.17 $0.00 $(0.39) $(0.23) Net income (loss) per common share-assuming dilution $0.17 $0.00 $(0.39) $(0.23)
1997: Net sales $16,052 $19,908 $17,306 $16,155 Gross profit 12,146 14,666 12,819 10,785 Net income (loss) 979 1,061 184 (2,100) Net income (loss) per common share basic $0.17 $0.18 $0.03 $(0.35) Net income (loss) per common share-assuming dilution $0.16 $0.17 $0.03 $(0.35)
During 1998, charges to net income in the third and fourth quarters were predominantly caused by the timing of expenses related to inventory write-offs and costs related to business expansion efforts. 1997 fourth quarter losses were primarily due to Asian expansion and start-up costs.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information relating to the Company's directors, nominees for directors, and executive officers set forth under the headings "Election of Directors" and "Directors and Executive Officers" on pages 3 through 5 of the Company's definitive Proxy Statement filed in connection with the 1999 Annual Meeting of Stockholders is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information relating to executive compensation set forth under the heading "Executive Compensation" on pages 6 through 9 of the Company's definitive Proxy Statement filed in connection with the 1999 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning the security ownership of certain beneficial owners and management set forth under the heading "Security Ownership of Principal Stockholders and Management" on pages 1 through 3 of the Company's definitive Proxy Statement filed in connection with the 1999 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) and (2) Financial Statement and Schedules
The following consolidated financial statements of BeautiControl Cosmetics, Inc. and Subsidiaries are filed herewith:
Consolidated Statements of Income for the years ended November 30, 1998, 1997 and 1996.
Consolidated Balance Sheets as of November 30, 1998 and 1997.
Consolidated Statement of Changes in Stockholders Equity for the three years ended November 30, 1998.
Consolidated Statements of Cash Flows for the years ended November 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements
Report of Independent Auditors
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended November 30, 1996, 1997 and 1998.
Except for Schedule II listed above, all schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under related instructions, are not applicable or not material or the information required therein is included elsewhere in the financial statements
(3) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is hereby incorporated by reference.
(b)Reports on Form 8-K
The Company has filed no reports on Form 8-K during the fourth quarter of the year ended November 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
February 26, 1999 BEAUTICONTROL COSMETICS, INC. (Registrant)
By: /S/ RICHARD W. HEATH President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ RICHARD W. HEATH President Chief Executive February 26, 1999 Richard W. Heath Officer and Director
/S/ JINGER L. HEATH Chairman of the Board and February 26, 1999 Jinger L. Heath Director
/S/ J. ROBERT WARD-BURNS Executive Vice-President February 26, 1999 J. Robert Ward-Burns Chief Operating Officer and Director
/S/ M. DOUGLAS TUCKER Senior Vice President-Finance February 26, 1999 M. Douglas Tucker Principal Financial and Accounting Officer
/S/ CHARLES M. DIKER Director February 26, 1999 Charles M. Diker
/S/ ROBERT S. FOLSOM Director February 26, 1999 Robert S. Folsom
/S/ JOSEPH M. HAGGAR, III Director February 26, 1999 Joseph M. Haggar, III
/S/ DENISE ILITCH, Director February 26, 1999 Denise Ilitch
/S/ A. STARKE TAYLOR, JR. Director February 26, 1999 A. Starke Taylor, Jr.
/S/ JOEL T. WILLIAMS, JR. Director February 26, 1999 Joel T. Williams, Jr.
BEAUTICONTROL COSMETICS, INC. AND SUBSIDIARIES INDEX TO EXHIBITS
Exhibit Number Exhibit
3.1 Restated Certificate of Incorporation dated February 22, 1986 (Filed with the Securities and Exchange Commission as Exhibit 3.1 to the Company's Registration Statement on Form S-8, Registration No. 333-17479, and incorporated herein by reference).
3.2 Certificate of Amendment to Restated Certificate of Incorporation dated April 7, 1987 (Filed with the Securities and Exchange Commission as Exhibit 3.2 to the Company's Registration Statement on Form S-8, Registration No. 333-17479, and incorporated herein by reference).
3.3 Certificate of Amendment to Restated Certificate of Incorporation dated April 3, 1992. (Filed with the Securities and Exchange Commission as Exhibit 3.3 to the Company's Registration Statement on Form S-8, Registration No. 333-17479, and incorporated herein by reference).
3.4 By-laws of the Registrant as amended on March 21, 1991. (Filed with the Securities and Exchange Commission as Exhibit 3.4 to the Company's Registration Statement on Form S-8, Registration No. 333-17479, and incorporated herein by reference).
4.1 Specimen stock certificate for Common Stock of the Registrant. (Filed with the Securities and Exchange Commission as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-2795 and incorporated herein by reference.)
10.1 BeautiControl Cosmetics, Inc. Incentive Stock Option Plan as amended on April 7, 1994. (Filed with the Securities and Exchange Commission on September 1, 1994 with the Company's Registration Statement on Form S-8, Registration No.33-83500 and incorporated herein by reference.)
10.2 Lease Agreement by and between Crow-Southland Joint Venture No. 1 and BeautiControl Cosmetics, Inc. dated May 7,1990. (Filed with the Securities and Exchange Commission, Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended November 30, 1996 and incorporated herein by reference.)
10.3 Lease Agreement by and between Crow Deansbank No. 7 and BeautiControl Cosmetics, Inc. dated June 6, 1996. (Filed with the Securities and Exchange Commission as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended November 30, 1990 and incorporated herein by reference.)
10.8 BeautiControl Cosmetics, Inc. Non-Qualified Stock Option Plan as amended on April 7, 1994. (Filed with the Securities and Exchange Commission on September 1, 1994 with the Company's Registration Statement on Form S-8, Registration No. 33-83500 and incorporated herein by reference.)
10.11 BeautiControl Cosmetics, Inc. Special Stock Option Plan as amended on April 7, 1994. (Filed with the Securities and Exchange Commission on September 1, 1994 with the Company's Registration Statement on Form S-8, Registration No. 33-83500 and incorporated herein by reference.)
10.14 Amendment to Lease Agreement by and between Crow-Southland Joint Venture No. 1 and BeautiControl Cosmetics, Inc. dated December 17, 1991. (Filed with the Securities and Exchange Commission as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended November 30, 1997 and incorporated herein by reference.)
10.15 Amendment to Lease Agreement between Crow-Southland No. 1 and BeautiControl Cosmetics, Inc. dated May 7, 1990. (Filed with the Securities and Exchange Commission, Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended November 30, 1990 and incorporated herein by reference.)
10.16 Amendment to Lease Agreement by and between Crow Deansbank No. 7 and BeautiControl Cosmetics, Inc. dated June 6, 1990. (Filed with the Securities and Exchange Commission as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended November 30, 1990 and incorporated herein by reference.)
10.17 BeautiControl Cosmetics, Inc. 1996 Incentive Stock Option Plan. (Filed with the Securities and Exchange Commission on December 9, 1996 with the Company's Registration Statement on Form S-8, Registration No. 333-17479 and incorporated herein by reference.)
10.18 BeautiControl Cosmetics, Inc. 1996 Non-Qualified Stock Option Plan. (Filed with the Securities and Exchange Commission on December 9, 1996 with the Company's Registration Statement on Form S-8, Registration No. 333-17479 and incorporated herein by reference.)
10.19 Sublease agreement by and between Chadrach, Inc. d/b/a Dallas Moving Systems and BeautiControl Cosmetics, Inc. dated May 30, 1997.
10.20 Lease agreement by and between Te Chan Co. and BeautiControl Taiwan, Inc. dated August 1,1997.
10.21* Lease agreement by and between Perfect WIN Properties Limited and BeautiControl Hong Kong, Inc. dated December 1, 1998.
10.22* Supply agreement dated December 3, 1998 by and between Caraloe, Inc. and Eventus International, Inc.
10.23* BeautiControl Cosmetics, Inc. 1998 Special Stock Option Plan.
21* Subsidiaries of BeautiControl Cosmetics, Inc.
23.1* Consent of Independent Auditors
23.2* Consent of Independent Auditors
27* Financial Data Schedule
* Filed herewith