Item 1. Business
General
BeautiControl Cosmetics, Inc. is a leading manufacturer and direct seller of skin care, cosmetics, nail care, toiletries, health and beauty supplements and related products for women. The Company sells its products through independent sales persons, called Skin Care and Image Consultants ("Consultants"), who purchase the products from BeautiControl and then sell them directly to consumers in the home or workplace.
The Company presents itself as "The World's Premier Skin Care and Image Company", offering a "Total Skin Care and Image Solution" to women through its many value added services. These services include Skin Condition Analysis, Color Analysis, Image Analysis and Makeup/Fashion Personality Analysis and are typically offered to the consumer at no charge.
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 the "Total Skin Care and Image Solution" offered by the Company.
The Company is incorporated 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, cosmetic makeup products, nail care products, fragrances, health and 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.
Cosmetic, color analysis and image analysis accessories sold by the Company to its Consultants include sales demonstration kits and literature, sample size products, Skin Condition Analysis supplies, books of color swatches which are used by customers to help select appropriate colors and shades, and the Personal Image Profile questionnaire packet and related supplies. These accessories are used primarily as hostess gifts, gifts with purchase, business supplies or sales aids, and in some cases are for sale to customers.
The Company also has a health and beauty supplements line, WITHIN BEAUTY . This product line includes hair and nail supplements, skin condition supplements and supplements designed for the different stages of a woman s life. During 1996, the Company expanded its health and beauty supplements to include SlenderGenics, a Weight Management System, and PMS Support Complex. 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. Other major product introductions during the year included Color Freeze Lip and Eye Colors, Vintage and Sheer Rain Fragrance Collections and All Clear Skin Clearing System.
Marketing and Distribution
The Company's skin care, cosmetics, health and beauty supplements and related products are sold through Consultants who are independent contractors, not employees of the Company. As of November 30, 1996, the total Consultant count was 50,897 with 537 of these being Directors.
Consultants may sell the Company's products through home demonstrations called Skin Care and Color Clinics ("Clinics"). Consultants also make individual sales to customers previously introduced to the Company's products at a Clinic. 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 generally 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, 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, cashier's check, money order or credit card except in the case of a Consultant's inventory order placed at training where, after credit approval, the Consultant may pay by personal check. Additionally, in 1996, the Company offered specific product programs on 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 1996 the Company relied primarily upon United Parcel Service and United States parcel post and mail to ship products from its distribution facility in Dallas, Texas.
Under the Client Connection Program, direct mailings to consumers are made by the Company a minimum of four 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.
The consumer may order cosmetics either from the Consultant or directly from the Company by mail or by dialing a toll-free "800" number. The Consultant earns a sales commission regardless of the purchase method.
The sales efforts of Consultants are also supported through Company-sponsored seminars and sales conferences held several times each year in various locations.
Consultants may advance to the level of Senior Consultant by achieving specified standards for introducing to the Company individuals who also become Consultants ("Recruits"). A non- fluctuating percentage commission is paid to this level of Consultant based upon products purchased by the new Recruits for resale to customers and based on the Senior Consultant maintaining a certain personal monthly purchase volume. The commission is paid monthly as long as both the Recruiter and new Consultant remain active with the Company and the Recruiter maintains a certain personal purchase volume and her Senior Consultant status. At this level, the Consultant is also entitled to purchase products from the Company at a 50% discount regardless of the order size. A Consultant who has met further recruiting standards may qualify as a Unit VIP and thereby earn a higher percentage commission. This commission percentage is based on the Unit VIP's personal purchase volume and her Recruits purchase volume. By meeting additional recruiting and sales goals, a Unit VIP may qualify for the Unit Manager level. As a Unit Manager, the Consultant earns a higher percentage commission on product sales of her unit and is entitled to either drive an automobile furnished by the Company or receive a cash bonus. Upon meeting certain higher recruiting and sales levels, a Unit VIP or a Unit Manager may be appointed as a Unit Director ("Director"). In addition to the commissions on product sales of her unit and a higher automobile or cash option, each Consultant who advances to Director status is eligible to receive a leadership development bonus for any members of her unit who become Directors themselves. A unit generally includes all Consultants recruited directly by the Director or indirectly through Consultants recruited by the Director, who actively order from the Company and who have not themselves become Directors. Each Director also receives a commission on products purchased for resale by units headed by former members of her unit. In addition to the foregoing, the Company sponsors programs through which bonuses and prizes are awarded to Consultants who reach certain levels of performance in sales and in attracting new Consultants. In 1996, the Company tested changes to its compensation program in certain defined states to evaluate the effectiveness of alternate compensation plans.
The Company discontinues its relationship with Consultants who fail to maintain a certain level of sales activity on a regular basis.
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 37% 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 health 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. However, during the fiscal years ended November 30, 1994, 1995 and 1996, such activities have not required the expenditure of material amounts.
Employees
At February 1, 1997, the Company employed 286 persons, 43 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 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 Canada and has registered or is in the process of registering its principal trademarks in 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, alpha-hydroxy acid based, products.
Competition
The cosmetics industry is a highly fragmented and competitive market which is sensitive to changing consumer preferences and demands. There are many large and well known cosmetics companies that manufacture and sell broad lines of skin care products and cosmetics through retail establishments. The Company competes with a number of direct sales companies who market skin care and cosmetic products and health and beauty supplements. The Company also competes, to an extent, with other direct sales companies in attracting new Consultants. Many cosmetics 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 business 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 manufacturers of cosmetic 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 of such agencies. 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.
Item 2.
Item 2. Properties.
The Company's 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 Dallas, 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.
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.
Part II
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.
The high and low sales prices on February 7, 1997, as quoted on the NASDAQ National Market System were $17.63 and $17.25, respectively.
As of January 31, 1997, there were approximately 1,500 holders 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 1996 and 1995 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 leading manufacturer and direct seller of skin care, cosmetics, health and beauty nutritional supplements and related products. The Company sells its products to independent Consultants 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:
During 1996, quality product introductions and extensions to successfully established product lines were the keys to sales growth for the Company. Introduced in October 1996, SlenderGenics , the Company s Weight Management System, was the largest new product introduction of the year. REGENERATION Extreme Repair Hand Therapy, an extension to the Company s alpha hydroxy acid line has also shown great sales success. Expansion into international markets via sales distributorships, which the Company started in 1995, showed promising results in 1996 with 7 distributors established by year-end. The Company also transitioned its United Kingdom business from a subsidiary to a distributor during the year. The Company s commitment to international growth was also evidenced by the opening of administrative offices and a distribution facility in Canada. Along with innovative product introductions and international development in 1996, the Company implemented a more competitive entry and training method and alternate leadership compensation for its Consultants in certain test states.
During 1997, the Company has numerous new product introductions scheduled. Plans also include fully implementing by 1997 year end the recruiting, training and compensation programs tested in 1996. Emphasis will again be placed on building and expanding quality international distributorships through seeking out and nurturing these relationships. With these plans in place, the Company anticipates long-term increases in sales and profitability.
RESULTS OF OPERATIONS OF THE COMPANY Fiscal 1996 compared to Fiscal 1995 Net sales increased 7% from $74,679,000 in 1995 to $80,108,000 in 1996. Both innovative new product introductions and increased Consultant count were important to this year s sales growth. Sales increases were in part due to the successful product launch of the SlenderGenics Weight Management System - a complete weight maintenance program, extensions to existing product lines including REGENERATION Extreme Repair Hand Therapy and PMS Support Complex supplements.
The SlenderGenics Weight Management System S introduction caused shifts in product category percentages; health and beauty supplements increased from 4% in 1995 to 10% in 1996. As a result of this category s growth, the skin care category decreased from 46% in 1995 to 44% in 1996 and the cosmetic makeup line decreased from 34% in 1995 to 31% in 1996.
Gross profit margins remained constant at 75% of sales in both 1996 and 1995. Even though there were shifts in product group sales, the Company s pricing within each sales group provided comparable profit margins in both years.
Selling, general and administrative expenses as a percentage of sales remained constant at 65%. In 1996, approximately $570,000 was spent on testing a more competitive recruiting, training and leadership compensation program in three test states. Some costs related to this test process such as literature development are primarily onetime expenses which will not significantly affect 1997. Other costs such as meeting costs related to the implementation of this program will continue in 1997 but on a streamlined basis. In 1995, $415,000 was spent on expenses related to a WITHIN BEAUTY supplements line launch.
Other income and expense, net, decreased from $529,000 in 1995 to $442,000 in 1996 as a result of lower investable cash and interest expense on increased borrowings.
The income tax provision for 1996 was $3,011,000 as compared to $2,914,000 in 1995. The effective tax rate was impacted in 1996 by a tax benefit related to dissolution of the United Kingdom subsidiary.
Net income was impacted in 1996 by the factors stated above as well as from a combined $340,000 loss from the Company s United Kingdom subsidiary s operations and subsequent conversion to a distributorship.
Fiscal 1995 compared to Fiscal 1994 Net sales increased 6% from $70,591,000 in 1994 to $74,679,000 in 1995. This sales increase is due primarily to new product introductions such as WITHIN BEAUTY - a revolutionary health and beauty nutritional supplement system and expansions in product lines such as REGENERATION Extreme Repair and REGENERATION2 which were early year additions to the REGENERATION alpha hydroxy acid line. Increased Consultant count also positively impacted sales.
The April 1995 introduction of WITHIN BEAUTY health and beauty supplements contributed to increased sales. A new skin care line introduction in January of 1994 helped propel skin care products to 49% of sales in 1994; in 1995, the Company saw a leveling off of this percentage to 46%. The August 1995 introduction of newly formulated eye shadows and blushes attributed to the increase in cosmetic makeup products from 32% in 1994 to 34% in 1995.
Gross profit margins decreased slightly from 76% in 1994 to 75% in 1995. Sales of low margin demonstration kits as a result of a recruiting promotion impacted this percentage in 1995.
Selling, general and administrative expenses increased as a percentage of sales from 63% in 1994 to 65% in 1995 primarily due to expenses related to the WITHIN BEAUTY product launch, development of operations in the United Kingdom, U.S. Hispanic market development and a recruiting promotion.
Other income and expense, net, increased from $396,000 to $529,000 as a result of increased investment income in the early part of the year and miscellaneous income from sales which were outside the normal course of business.
The income tax provision for 1995 was $2,914,000 as compared to $3,308,000 in 1994. For a complete analysis, see Note D in the notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES Working capital at November 30, 1996 was $5,536,000 compared to $1,950,000 at November 30, 1995. This increase is primarily attributable to increases in net trade accounts receivable and inventories, offset by an increase in short- term borrowings.
Prior to 1996, Trade Accounts Receivable remained relatively low as a result of the Company s payment in advance policy on most sales programs. During 1996, the Company had several product offers involving temporary credit terms of approximately 45 days for approved Consultants. An extimated $750,000 of the November 30, 1996 balance was related to these credit programs. The
Company plans to continue using these special credit terms selectively as well as evaluating other payment options.
During 1996, in order to improve customer service, the Company increased the carrying levels of inventory related to core products which resulted in increased inventory balances. The Company anticipates that obsolescence will not be significantly affected as only core line product balances were increased. Additionally, the year end balance in 1996 was higher due to the Company s late year introduction of its weight management system, SlenderGenics.
The Company increased its line of credit from $10,000,000 to $15,000,000 in 1996. The purpose of this line of credit is primarily for the Company to repurchase its common stock when it believes it is undervalued and for operating cash when it is needed for the business. The interest rate is based on a LIBOR rate plus a spread that adjusts with the debt ratio. The current expiration date is November 30, 1998; however, this revolving two year credit line can be extended annually and balances can be termed out at any time during the two years for a three year amortization. A commitment fee of .25% is paid quarterly based on the unused portion of this line of credit. The weighted average interest rates for 1996 and 1995 were 6.71% and 7.27%, respectively. The outstanding balances at November 30, 1996 and 1995 were $3,900,000 and $1,400,000, respectively. In 1995, the Company used its borrowings for repurchases of its common stock; in 1996, borrowings were primarily used for building inventory as discussed above. Management believes that this outstanding balance will be reduced by cash flow from operations; however, it may continue to use this line of credit as originally intended if necessary for the growth of its business.
The Company spent $1,188,000 repurchasing its common stock in 1996. The common stock was purchased under a plan previously approved by the Board of Directors that allows the Company to purchase its common stock in the open market when the Company believes it to be undervalued.
Four quarterly dividends totaling $2,442,000 or $.42 per share were paid during 1996.
The Company s capital expenditures for 1996 totaled $1,104,000. Included in this amount were $586,000 for manufacturing related equipment and $285,000 for enhancements to computer operations. The Company anticipates its 1997 capital purchases will be in line with 1996 purchases.
NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of (SFAS 121). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used
or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1996, the Company adopted this statement and determined that no impairment loss need be recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123). This statement defines a fair value based method of accounting for employee stock options. Companies may, however, elect to make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting had been applied, while continuing to use the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company will be required to adopt SFAS 123 on December 1, 1996 and will continue to account for such plans under APB No. 25 resulting in no impact to the Company s financial position and results of operations.
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 the forward- looking statements include, but are not limited to the following: sales Consultants activity levels, the recruiting of new Consultants and new product introductions.
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 sheet of BeautiControl Cosmetics, Inc. and Subsidiaries as of November 30, 1996, and the related statements of income, stockholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent fairly, in all material respects, the consolidated financial position of BeautiControl Cosmetics, Inc. and Subsidiaries at November 30, 1996, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP Ernst & Young LLP Dallas, Texas December 19, 1996
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 1995, and the related consolidated statements of income, changes in stockholders equity and cash flows for each of the two years in the period ended November 30, 1995. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits.
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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BeautiControl Cosmetics, Inc. and Subsidiaries as of November 30, 1995, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended November 30, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes A and D to the consolidated financial statements, the Company changed its method of accounting for investments in 1995 and for income taxes in 1994.
/S/ GRANT THORNTON LLP Grant Thornton LLP Dallas, Texas December 26, 1995
BEAUTICONTROL COSMETICS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 1996, 1995 AND 1994
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BeautiControl Cosmetics, Inc. and Subsidiaries is a leading manufacturer and direct seller of skin care, cosmetics, nail care, toiletries, health and beauty supplements and related products for women. The Company sells its products through independent sales persons 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.
Investments - Effective December 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) which resulted in a change in the accounting for debt and equity securities held for investment purposes. Prior to December 1, 1994, the Company carried debt and equity securities at cost, which approximated market value. In accordance with SFAS 115, the Company s debt securities are now considered to be held-to- maturity and its equity securities are classified as 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. In 1995, the Company recorded decreases in available-for-sale securities of $80,000 and a related deferred tax asset of $27,200, resulting in a net decrease of $52,800 in stockholders equity. In 1996, the Company recorded increases in available for sale securities of $29,060, with a related tax effect of $9,880 which resulted in a net increase to stockholders equity for $19,180.
Inventories - Inventories are stated at the lower of cost (first- in, first-out method) or market.
Property and Equipment - Depreciation 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
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 are being amortized on a straight-line basis over the estimated future periods to be benefited (not exceeding 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 material 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 will replace defective merchandise and will refund the purchase price if products are returned by unsatisfied end consumers of the Company s products.
Net Income per Common Share - Net income per common share is based on the weighted average number of common shares and common equivalent shares outstanding during the period. Common equivalent shares include net shares issuable upon the assumed exercise of options using the treasury stock method. Dual presentation of primary and fully diluted earnings per share is shown on the face of the income statement where applicable.
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.
NOTE B - INVENTORIES Inventories (in thousands) consist of the following:
NOTE C - INVESTMENTS The fair values of investments are determined based on quoted market prices. The amortized cost and fair value of the investments (in thousands)at November 30, 1996 and November 30, 1995 are as follows:
The cost and fair value of investments (in thousands) by contractual maturity at November 30, 1996 are as follows:
NOTE D - INCOME TAXES Effective December 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The Company recorded a tax benefit of $172,053 or two cents per share, reflecting the cumulative effect of the accounting change.
NOTE E - 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.
As of November 30, 1996, 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 3,953,500 shares.
NOTE F - LINE OF CREDIT The Company increased its line of credit from $10,000,000 to $15,000,000 in 1996. The interest rate is based on LIBOR plus a spread that adjusts with the debt ratio. The weighted average interest rates for 1996 & 1995 were 6.71% and 7.27%, respectively. The outstanding balances at November 30, 1996 and 1995 were $3,900,000 and $1,400,000, respectively. The expiration date is November 30, 1998; however, this revolving two year credit line can be extended annually and balances can be termed out at any time during the two years for a three year amortization. A commitment fee of .25% is paid quarterly based on the unused portion of this line of credit.
NOTE G - STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS The Company has three stock option plans covering key employees and non-employee directors.
The 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 Nonqualified Stock Option Plan permits the issuance of nonqualified stock options to employees and directors of the Company to purchase up to 140,000 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. During 1996, no options were granted under this plan.
The Special Stock Option Plan provides for issuance of stock options to nonemployee directors of the Company to purchase up to 412,500 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 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, 1996, 1995 and 1994 was $111,000, $150,000 and $98,000, respectively.
NOTE H - COMMITMENTS AND CONTINGENCIES At November 30, 1996, the Company was committed under non- cancellable operating leases, principally for two buildings, equipment and automobiles. The building leases expire in 1999 but may be extended for five years at the fair market rental rate in effect at that time.
Minimum rentals in succeeding periods (in thousands) are as follows: Year Ending November 30,
1997 .................. 1,372 1998 .................. 1,155 1999 .................. 807 $3,334
Rental expense (in thousands) is as follows: Year Ending November 30,
1996 .................. $1,809 1995 .................. 2,130 1994 .................. 2,440
NOTE I - 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.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On February 12, 1996, the Company dismissed Grant Thornton LLP as its independent auditors and appointed Ernst & Young LLP as the new auditors. The decision to dismiss Grant Thornton LLP and appoint Ernst & Young LLP was proposed by management, recommended by the Audit Committee of the Board of Directors, and approved by the Board of Directors.
Grant Thornton LLP s report on the financial statements for the fiscal years ending November 30, 1995 and 1994 contained no adverse opinion or disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles. Further, during the fiscal years ending November 30, 1995 and 1994 and the subsequent interim period preceding the dismissal, there were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
During the two most recent fiscal years and the subsequent interim period preceding the dismissal, there have been no reportable events (as defined in Item 304 of the Securities and Exchange Commission Regulation S-K) with Grant Thornton LLP.
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 6 of the Company's definitive Proxy Statement filed in connection with the 1996 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 7 through 11 of the Company's definitive Proxy Statement filed in connection with the 1996 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 2 of the Company's definitive Proxy Statement filed in connection with the 1996 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information concerning certain relationships and related transactions set forth under the heading "Certain Transactions" on page 6 of the Company's definitive Proxy Statement filed in connection with the 1996 Annual Meeting of Stockholders is incorporated herein by reference.
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, 1996, 1995 and 1994.
Consolidated Balance Sheets as of November 30, 1996 and 1995.
Consolidated Statement of Changes in Stockholders Equity for the three years ended November 30, 1996.
Consolidated Statements of Cash Flows for the years ended November 30, 1996 1995 and 1994.
Notes to Consolidated Financial Statements
Report of Independent Auditors
Report of Independent Certified Public Accountants
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, 1996.
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 11, 1997 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 11, 1997 Richard W. Heath Officer and Director
/S/ JINGER L. HEATH Chairman of the Board and February 11, 1997 Jinger L. Heath Director
/S/ J. ROBERT WARD-BURNS Executive Vice-President February 11, 1997 J. Robert Ward-Burns Chief Operating Officer and Director
/S/ M. DOUGLAS TUCKER Senior Vice President-Finance February 11, 1997 M. Douglas Tucker Principal Financial and Accounting Officer
/S/ CHARLES M. DIKER Director February 11, 1997 Charles M. Diker
/S/ ROBERT S. FOLSOM Director February 11, 1997 Robert S. Folsom
/S/ JOSEPH M. HAGGAR, III Director February 11, 1997 Joseph M. Haggar, III
/S/ DENISE I. LITES Director February 11, 1997 Denise I. Lites
/S/ A. STARKE TAYLOR, JR. Director February 11, 1997 A. Starke Taylor, Jr.
/S/ JOEL T. WILLIAMS, JR. Director February 11, 1997 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, 1996 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.
10.18* BeautiControl Cosmetics, Inc. 1996 Non-Qualified Stock Option Plan.
11* BeautiControl Cosmetics, Inc. and Subsidiaries - Computation of Earnings per Common Share.
21* Subsidiaries of BeautiControl Cosmetics, Inc.
23* Consent of Independent Auditors
23.1* Consent of Independent Certified Public Accountants
* Filed herewith