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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended March 31, 2001
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to _____________
Commission file no. 1-10340
ALLOU HEALTH & BEAUTY CARE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2953972
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Emjay Boulevard, Brentwood, New York 11717
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 273-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Class A Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /__/
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant on June 29, 2001 was $23,006,609. Such
aggregate market value is computed by reference to the closing sales price of
the Class A common stock on such date. For purposes of this calculation, the
Registrant has excluded the Class B common stock, which is held primarily by
affiliates and is not publicly-traded.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 5,636,468 shares of Class A
common stock and 1,200,000 shares of Class B common stock as of the close of
business on June 29, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement relating to the
Registrant's 2001 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.
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PART I
ITEM 1. Business
GENERAL
We are a leading distributor of prestige brand name fragrances and
cosmetics, and health and beauty aid products in metropolitan New York City, New
Jersey, Connecticut, Philadelphia and Miami. We also manufacture upscale hair
and skin care products for sale under private labels. We distribute
approximately 22,000 SKUs of branded consumer products to over 140 national mass
merchandisers including: Sears Roebuck & Co., Wal-Mart, J.C. Penney, Target,
CVS, and Walgreens, and to approximately 4,200 independent retailers. We believe
that products distributed by us are sold in a total of over 15,000 retail
stores. Since our current principal stockholders acquired us, we have grown
through internal growth and strategic acquisitions, which have enabled us to
expand our product offerings, enter into new geographic markets, add new
customers and cross-sell existing and new product lines to our diversified
customer base.
PRODUCTS
We distribute four general categories of products:
o fragrances and cosmetics;
o name brand health and beauty aids and health and beauty aids
under our Allou brand;
o prescription pharmaceuticals; and
o non-perishable food items.
In addition, we manufacture upscale hair and skin care products.
Fragrances and Cosmetics
We distribute prestige designer fragrances of many large
manufacturers, which include: Ralph Lauren, Calvin Klein, Lancome and Chanel.
See "Manufacturers and Suppliers." Fragrance and cosmetic sales accounted for
approximately 40% of our revenues during the fiscal year ended March 31, 1999,
36% of our revenues during the fiscal year ended March 31, 2000, and 29% of our
revenues during the fiscal year ended March 31, 2001. Our profit margins on
fragrance and cosmetic sales are typically greater than those on name brand
health and beauty aids and, accordingly, we have sought to increase our sales
and marketing efforts in this area.
Some fragrance and cosmetic brands that we distribute are:
o Polo o Revlon
o Eternity o Maybelline
o Hugo o Lancome
Some fragrance and cosmetic products that we distribute are:
o Perfume o Eyeshadow
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o Cologne o Lipstick
o Nail Polish o Mascara
Health and Beauty Aids
We distribute approximately 8,000 brand name health and beauty aid
products by such manufacturers as Colgate-Palmolive, Clairol, Procter & Gamble,
Johnson & Johnson and Gillette. See "Manufacturers and Suppliers." We also
distribute nail polish, toothpaste, petroleum jelly and other health and beauty
aid products manufactured by others and sold under our Allou brand label. Health
& Beauty Aids accounted for approximately 37% of our revenues during the fiscal
year ended March 31, 1999, 30% of our revenues during the fiscal year ended
March 31, 2000 and 25% of our revenues during the fiscal year ended March 31,
2001. Sales of Allou brand are not material.
Some health and beauty aid brands that we distribute are:
o Pantene Pro-V shampoo o Colgate toothpaste
o Johnson's Baby Lotion o Rave hairspray
o Gillette Mach 3 razors o Vaseline Intensive Care lotion
Some health and beauty aid products that we distribute are:
o Antacids o Oral Antiseptics and Sprays
o Baby Care o Deodorants
o Cough and Cold Remedies o Shampoos
Prescription Pharmaceuticals
During fiscal 1994, we acquired the capital stock of M. Sobol, Inc., a
manufacturers' distributor of branded prescription pharmaceuticals. M. Sobol,
Inc. was founded in 1928 and currently distributes pharmaceuticals to
approximately 700 independent pharmacies in the Northeast. We purchase
approximately 4,000 branded pharmaceuticals from such manufacturers as Pfizer,
Eli Lilly, Merck and Glaxo. Additionally, we distribute 3,000 generic
prescription pharmaceutical products which are purchased from manufacturers such
as Schein Pharmaceuticals, Inc., Barre National, Inc., and Sidmak Laboratories,
Inc. During fiscal 2000, we acquired the assets of Tri-State Pharmaceutical
Consultants, Corp. a national distributor of branded and generic
pharmaceuticals. Tri-State was founded in 1995 and currently distributes
pharmaceuticals to national chains such as Rite Aid and wholesalers such as
McKesson. Pharmaceuticals accounted for approximately 14% of our revenues during
the fiscal year ended March 31, 1999, 26% of our revenues during the fiscal year
ended March 31, 2000 and 42% of our revenues during the fiscal year ended March
31, 2001.
Food
We sell non-perishable packaged food items which we purchase almost
exclusively at discount prices from major food companies. This product line
requires little additional operating costs to us since sales of non-perishable
food are pre-sold and drop-shipped directly to our customers from the vendors.
Non-perishable food items accounted for approximately 10% of our revenues during
the fiscal year ended
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March 31, 1999, 6.1% of our revenues during the fiscal year ended March 31, 2000
and 3% of our revenues during the fiscal year ended March 31, 2001.
Hair and Skin Care Product Manufacturing
During fiscal 1996, we purchased selected assets of Russ Kalvin, Inc.
This acquisition has enabled us to manufacture and distribute salon quality hair
and skin care products to national mass merchandisers and independent retailers.
Since 1998, we have manufactured private label upscale hair and skin care
products for J.C. Penney, Bath and Body Works, Sears Roebuck & Co., and other
specialty retailers. In addition, we manufacture a proprietary line of hair care
and skin care products which we market under the Russ Kalvin generic brands.
This business generates substantially higher gross profit margins than our
distribution business. Hair and skin care products accounted for approximately
1.7% of our revenues during the fiscal year ended March 31, 2000 and 1% of our
revenues during the fiscal year ended March 31, 2001. Revenues from prior years
were not material.
MANUFACTURERS AND SUPPLIERS
The products we distribute are manufactured and supplied by
independent foreign and domestic companies. Many of these companies also
manufacture and supply health and beauty aid products, fragrances and cosmetics
for many of our competitors. We purchase approximately 8,000 brand name health
and beauty aid products from such manufacturers as Procter & Gamble, Johnson &
Johnson and Gillette and approximately 7,000 fragrance and cosmetic products
directly from manufacturers such as Coty, a division of Pfizer, and Revlon, as
well as from secondary sources. We purchase approximately 4,000 branded
pharmaceuticals and 3,000 generic prescription pharmaceuticals from such
manufacturers as Pfizer, Eli Lilly, Schein Pharmaceuticals, and Barre National.
Additionally, we purchase non-perishable packaged food items which we purchase
almost exclusively at discount prices from manufacturers such as General Mills,
General Foods and Nabisco. We contract with manufacturers to produce the
products which carry our name brand and we manufacture our proprietary line of
Russ Kalvin generic brand hair and skin care products through our wholly-owned
subsidiary, Allou Personal Care.
We typically purchase health and beauty aids and pharmaceuticals from
manufacturers on open accounts which are payable in 30 days and may receive
discounts of up to 2% for early payments. As is customary in the industry, we
prepay certain suppliers for products that we purchase at deep discounts. These
types of purchases are opportunistic and highly dependent upon availability and
price. If the products that we have prepaid for and ordered are not shipped to
us, this could have an adverse effect on our operations. To date, we have not
suffered any such adverse effect. In addition, we may return health and beauty
aid and prescription pharmaceutical products to our suppliers for full credit if
the products are damaged, their shelf life has expired, or they are otherwise
not saleable.
Manufacturers of prestige fragrances have historically restricted
direct sales of their products in the United States primarily to prestige
department stores and specialty stores. As a result, mass-market retailers have
traditionally obtained prestige products from secondary sources. Historically,
the secondary sources available to the mass market have been limited to:
o direct distributors like us which receive products directly from
fragrance manufacturers, and
o distributors of prestige products manufactured by, or distributed
to, foreign sources for foreign distribution, which are diverted to the
United States.
Under existing court decisions, there are variations in the extent to
which trademark laws, copyright laws and customs regulations may restrict the
importation of trademarked or copyright fragrance products through those
distributors who divert the prestige products to the United States without the
consent of the trademark or copyright owner. As is customary in the industry, we
purchase a substantial portion of our fragrance products from secondary sources.
In addition, from time to time, we
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may take advantage of favorable buying opportunities and purchase limited
amounts of health and beauty aid products from secondary sources. There can be
no assurance that these sources of product will be available in the future or
that may not become the subject of legal action arising from its buying
activities with respect to these products. To date, we have not been the subject
of any such legal action.
We have had long-term relationships with most of our suppliers. As is
customary in our industry, we have not entered into written agreements with most
of our suppliers. However, we believe that our relationships with our suppliers
are good. We have not experienced any interruptions in the supply of products
which have had a material adverse effect on our operations.
MARKETING AND SALES
Sales are made by our in-house sales staff of telemarketing
professionals. We pay in-house sales persons a base salary plus a commission
based on sales and gross margins. Sales are also made by sales account
representatives who make on-site visits to our customers.
We publish a monthly health and beauty aid catalogue and a quarterly
fragrance catalogue containing order forms, product descriptions, the
manufacturer's suggested retail price and net cost per unit or per dozen. The
catalogues are mailed to each of our active customers. The catalogues also help
serve the advertising needs of the manufacturers which provide us with rebates
which have historically paid for the full cost of preparing, printing and
mailing the catalogues. In addition to the catalogues, we frequently supply our
customers with flyers advising them of items being sold at a discount. The sale
of fragrances nationally to independent stores is handled exclusively by mail
order through the catalogues.
OPERATIONS
We maintain an approximately 157,000 square foot warehouse facility
with sales and administrative offices in Brentwood, New York. The warehouse
typically contains on a blended basis inventory for approximately four months of
distribution to customers. We maintain these levels of inventory in order to
provide our customers with the convenience of one stop shopping privileges. We
use a computerized data base system which enables management to monitor sales,
purchases and inventory status. Historically, we have not experienced problems
with product shelf lives, as most products we sell are not perishable. Those
products that are perishable generally can be returned to the manufacturer if
they are not sold by the expiration date. We also lease an approximately 105,000
square foot facility in Saugus, California and a 10,000 square foot facility in
Miami, Florida.
We contract with local carriers and independent trucking agents to
make deliveries to our customers. From the time it is placed, a customer order
will generally be shipped within 48 hours.
Work in the warehouse is cyclical and workers are trained in several
tasks so that they can be rotated to fill the jobs where they are most needed.
Since we acquired selected assets of Russ Kalvin, Inc. in October
1995, we have consolidated operations and reduced overhead, and positioned
ourself to market and manufacture quality hair and skin care products to major
retailers such as J.C. Penney, Bath and Body Works, Sears Roebuck, & Co., and
other specialty retailers. We have consolidated all administrative functions of
Russ Kalvin into our Brentwood, New York facility. In addition, we have 105,000
square feet of leased space in Saugus, California which is used to manufacture
and distribute upscale private label hair and skin care products for major
retailers.
MANAGEMENT INFORMATION AND CONTROL SYSTEM
We use a proprietary, computerized database management system which
collects, integrates and analyzes data concerning sales, order processing,
shipping, purchases, receiving, inventories and financial reporting. At any
given time, we are able to determine the quantity of each item in inventory by
brand, style, cost, list price and other characteristics. Our system also
provides our telemarketing professionals
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with immediate product availability and gross margin information on-screen when
receiving customer orders. This system allows us to provide our customers with
real-time inventory and pricing information and to ship orders within 48 hours
of receipt, which allows our customers to better manage their inventory.
The computerized system enables us to better manage our inventories.
It keeps a running inventory of goods on hand for each item we distribute. When
the inventory of any item drops to a certain pre-set level, a purchase order for
a set number of additional units of the item is automatically written and, after
being reviewed by management, is sent directly to the manufacturer. We recently
engaged J.D. Edwards & Company a software technology provider to upgrade Allou's
EDP systems. The implementation of this technology will provide the
technological infrastructure required to meet Allou's goal for future growth.
COMPETITION
The distribution of health and beauty aid products is extremely
competitive. We compete with pharmaceutical wholesalers that carry health and
beauty aid products as an accommodation for their customers. Many of these
wholesalers have greater financial and other resources than we do. However, to
our knowledge, there is no significant competitor which distributes to its
customers the assortment of fragrances, cosmetics and health and beauty aid
products that we distribute. We believe that we compete on the basis of the
services we provide to our customers which include quick delivery and low
minimum order requirements.
The distribution of fragrance and high priced cosmetic items is also
very competitive. We compete to obtain our fragrances and cosmetics from
manufacturers and importers who also supply competing distributors and sell
directly to retailers. We compete on the basis of price and the services we
provide to our customers, which include quick delivery and low minimum order
requirements.
In addition, we face intensive competition with respect to marketing
our own brand of health and beauty aid products and the Russ Kalvin generic
brand of hair and skin care products. We compete with major health and beauty
aid companies, as well as hair and skin care companies who have well-established
product lines, spend large sums for advertising and marketing and have far
greater financial and other resources than we do. We also compete with these
companies for shelf space and product placement in various retail outlets.
EMPLOYEES
As of March 31, 2001, we employed approximately 295 persons on a full
time basis, including 5 in executive positions, 13 in purchasing, 46 in
marketing and sales, 89 in administration and accounting, and 142 in warehouse
and receiving. Some of our sales personnel are partially paid on a commission
basis. During peak selling seasons we also employ part-time personnel.
We are a party to a collective bargaining agreement expiring December
14, 2003 with the National Organization of Industrial Trade Unions covering 85
of our warehouse and receiving employees. We have not experienced any work
stoppages. We believe our relations with our employees are satisfactory.
TRADENAMES AND TRADEMARKS
We use the unregistered tradename for our brand "Allou Brand" on
generic products that we distribute. With the introduction of additional generic
products, we may adopt other unregistered tradenames and trademarks. During
fiscal 1996, we acquired the patents, trademarks and all other intellectual
property of Russ Kalvin, Inc. We believe that no single trademark, tradename or
servicemark is material to our business as a whole.
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GOVERNMENT REGULATION
The United States Food, Drug and Cosmetic Act and the Fair Packaging
and Labelling Act regulate the purity and packaging of health and beauty aid
products and fragrances and cosmetic products. Similar statutes are in effect in
various states. Manufacturers and distributors of health and beauty aid products
are also subject to the jurisdiction of the Federal Trade Commission with
respect to matters such as advertising content and other trade practices. To our
knowledge, we only distribute products produced by manufacturers who comply with
those regulations and who periodically submit their products to independent
laboratories for testing. However, the failure by our manufacturers or suppliers
to comply with applicable government regulations could result in product recalls
that could adversely affect our relationships with our customers. In addition,
the extent of potentially adverse government regulations which might arise from
future legislation or administrative action cannot be predicted.
Some of the products that we manufacture contain alcohol and certain
active ingredients which are regulated by the Bureau of Alcohol, Tobacco and
Firearms and the Food and Drug Administration. We have obtained the appropriate
licenses from these agencies in order to comply with applicable regulations.
ITEM 2. PROPERTIES
We lease approximately 157,000 square feet of space for our principal
executive offices, warehouse and distribution facilities and sales headquarters
in the Brentwood Industrial Park, 50 Emjay Boulevard, Brentwood, New York 11717.
We have a ten-year lease which expires on May 31, 2005, and includes a five-year
option for renewal. The base annual rental of the property is approximately
$500,000 with additional charges for insurance, fuel and taxes and increases
during the initial term of the lease. We also lease approximately 105,000 square
feet of space in Saugus, California to manufacture and distribute hair and skin
care products. This space is leased through two leases. One lease, covering
approximately 27,800 square feet, expires on September 30, 2010, with a ten-year
option for renewal at a base annual rental of approximately $333,173 with
additional charges for insurance, fuel, taxes and increases during the initial
term of the lease. The other lease, covering approximately 25,000 square feet,
expires on May 31, 2010, with a ten-year option for renewal at a base annual
rental of approximately $108,000, with an additional surcharge of $2,000 per
month from May 2001 to April 2003 and additional charges for insurance, fuel,
taxes and increases during the initial term of the lease We also lease 10,000
square feet of space in Miami, Florida, which expires on April 30, 2003 at a
base annual rent of approximately $156,000 for warehousing and distribution
purposes.
ITEM 3. LEGAL PROCEEDINGS
We are a party to a number of legal proceedings all of which are
routine litigation incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Report,
no matters were submitted to a vote of security holders through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
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Our Class A common stock is listed on the American Stock Exchange
under the symbol "ALU". There is no established public trading market for our
Class B common Stock.
The following table sets forth the quarterly high and low sales price
of the Class A common stock during our last two fiscal years:
HIGH LOW
---- ---
Fiscal year ending March 31, 2000:
Quarter ending June 30, 1999 ........................... $14.250 $7.625
Quarter ending September 30, 1999 ..................... 7.375 5.375
Quarter ending December 31, 1999 ....................... 8.750 5.375
Quarter ending March 31, 2000 ......................... 9.500 6.312
HIGH LOW
---- ---
Fiscal year ending March 31, 2001:
Quarter ending June 30, 2000 ........................... $ 8.250 $5.625
Quarter ending September 30, 2000 ..................... 7.312 5.125
Quarter ending December 31, 2000 ....................... 5.500 3.125
Quarter ending March 31, 2001 ......................... 5.750 3.375
Quarter ending June 30, 2001 ......................... 4.950 3.160
Holders
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As of June 29, 2001, there were 83 holders of record of our Class A
common stock and four (4) holders of record of our Class B common stock. Based
upon conversations with brokers, management believes that there are in excess of
1,000 beneficial owners of the Class A common stock.
Dividends
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We have not paid a dividend on our shares of Class A common stock or
Class B common stock and have no present expectation of doing so in the
foreseeable future.
Recent Sales of Unregistered Securities
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During fiscal 2001, we issued to an institutional investor an
aggregate of $15,000,000 of 12% senior subordinated notes due July 2005 and
seven year warrants to purchase an aggregate of 1,700,000 shares of our Class A
Common Stock at $4.50 per share. The exercise price of the warrants is subject
to increase if we meet certain earnings and revenue targets. In the event that
these warrants have not been converted to common stock, the investor may have
the right, under certain circumstances, which are based on financial results for
the years ending March 31, 2002 and 2003, to put the warrants to us after five
years at a price of $8 per warrant. These warrants were initially valued at
$4,314,006 using the Black-Sholes Pricing Model. The initial value of the
warrants was established as a discount to the subordinated debt, and this
discount is being accreted over the life of the subordiniated notes. Included in
interest expense for fiscal 2001 is $557,066, representing such accretion.
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On January 2, 2000, we issued 75,472 shares of Class A common stock to
the shareholders of Tri-State Pharmaceutical Consultants Corp. as partial
consideration for the purchase of assets. The issuance and sale of the
securities set forth above are exempt from registration under the Securities Act
in reliance upon Section 4(2) of the Securities Act as a transaction not
involving a public offering.
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ITEM 6. SELECTED FINANCIAL DATA, INCOME STATEMENT DATA:
Years Ended March 31,
2001 2000 1999(1) 1998(1) 1997
---- ---- ---- ----- ----
(In thousands, except for per share data)
Revenues $548,147 $421,047 $334,175 $301,092 $285,311
Costs of revenues 482,590 367,964 289,637 262,237 250,843
-------- -------- -------- -------- --------
Gross profit 65,557 53,083 44,538 38,855 34,468
Warehouse and delivery expense 15,121 12,307 10,279 9,288 8,592
Selling, general and
administrative expense 21,946 18,520 14,707 13,264 12,766
-------- -------- -------- -------- --------
Income from operations 28,490 22,256 19,552 16,303 13,110
Interest and other 24,444 10,874 9,647 8,470 6,567
-------- -------- -------- -------- --------
Income from operations
before income taxes 4,046 11,382 9,905 7,833 6,543
-------- -------- -------- -------- --------
Discontinued operations, net
of income taxes - 7,916 ( 4,599) ( 576)
-------- -------- -------- --------
Net income $ 2,458 $ 14,959 $ 1,348 $ 4,280 $ 4,059
======== ======== ======== ======== ========
Net income per common share (2)
Basic:
Operations $ .36 $ 1.05 $ .98 $ .84 $ .71
Discontinued operations - 1.17 ( .76) ( .10) -
-------- -------- -------- -------- --------
$ .36 $ 2.22 $ .22 $ .74 $ .71
======== ======== ======== ======== ========
Diluted:
Operations $ .34 $ .97 $ .87 $ .81 $ .70
Discontinued Operations - 1.08 ( .67) ( .09) -
-------- -------- -------- -------- --------
$ .34 $ 2.05 $ .20 $ .72 $ .70
======== ======== ======== ======== ========
BALANCE SHEET DATA:
As of March 31,
2001 2000 1999 1998 1997
---- ---- ---- ----- ----
Cash $ 264 $ 51 $ 400 $ 47 $ 77
Working capital 83,412 64,725 52,192 43,959 42,052
Total assets 291,764 259,955 219,907 178,384 161,348
Total long-term liabilities 17,697 1,640 724 1,354 1,841
Total liabilities 212,789 183,799 159,571 125,771 113,121
Stockholders' equity 78,975 76,157 60,336 52,613 48,227
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(1) As a result of our the sale of our majority interest in The Fragrance
Counter Inc., the statements of income for the prior years have been restated to
segregate the net results of continued and discontinued operations.
(2) Net income per common share for fiscal 1997 and prior periods have been
restated in accordance with Financial Accounting Standards No. 128, "Earnings
Per Share, which requires presentation of basic earnings per share and diluted
earnings per share.
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SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
March 31, 2001
--------------
Revenues $134,664,654 $132,250,479 $140,652,706 $140,579,114 $548,146,953
Net income (loss) $ 2,088,762 $ 1,805,248 $ 1,110,741 $( 2,546,384) $ 2,458,367
============ ============ ============ ============ ============
Earnings per common share - basic
Basic $ .31 $ .27 $ .16 $ (.38) $ .36
===== ===== ===== ====== =====
Earnings per common share - diluted
Diluted $ .29 $ .24 $ .16 $ (.35) $ .34
===== ===== ===== ====== =====
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March 31, 2000
--------------
Revenues $78,147,211 $101,011,666 $108,094,099 $133,793,797 $421,046,773
Income from
continuing operations 1,335,745 2,063,686 1,915,933 1,728,184 7,043,548
Income (loss) from
discontinued operations 12,796,461 - 0 - - 0 - (a)( 4,880,824) 7,915,637
Net income (loss) $14,132,206 $ 2,063,686 $ 1,915,933 $( 3,152,640) $14,959,185
========== ============ ============ =========== ==========
Earnings per common share - basic
Continuing operations $ .20 $ .31 $ .29 $ .25 $1.05
Discontinued operations 1.93 - 0 - - 0 - (.76) 1.17
---- ----- ----- --- ----
Net income (loss) $2.13 $ .31 $ .29 $(.51) $2.22
==== ==== ==== === ====
Earnings per common shares - diluted
Continuing operations $ .18 $ .29 $ .27 $ .24 $ .98
Discontinued operations 1.69 - 0 - - 0 - (.61) 1.08
---- ----- ----- --- ----
Net income (loss) $1.87 $ .29 $ .27 $(.37) $2.06
==== ==== ==== === ====
a) Reflects an adjustment due to the Company's 100% valuation allowance against
its note receivable net of taxes. (see note 2 of the financial statements)
Earnings per common share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly per common share
information may not equal the annual earnings per common share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
Revenues. Revenues for the fiscal year ended March 31, 2001 increased
$127.1 million to $548.1 million, representing a 30.2% gain as compared to
revenues of $421.0 million for the fiscal year ended March 31, 2000, which
resulted from a blended increase in revenues from the segments of our business
as described below. The increased demand for our products resulted from an
expanded customer base and increases in same store sales.
Contributions to this increase in revenues by product segment is as
follows: health and beauty aids sales increased 5.0% in fiscal 2001 compared to
fiscal 2000 due to increases in same store sales. Prestige designer fragrance
sales increased 5.5% in fiscal 2001 compared to fiscal 2000 due to an increase
in same store sales. Nationally advertised branded non-perishable food product
sales decreased 26% in fiscal 2001, when compared to fiscal 2000, because of
smaller quantities of promotionally priced non-perishable food products were
available from our vendors during fiscal 2000. Sales of prescription
pharmaceuticals increased 108% in fiscal 2001 when compared to prior year. This
increase is largely due to increased sales resulting from our acquisition of
Tri-State Pharmaceutical Consultants Corporation which was consummated during
the fourth quarter of fiscal year 2000. This acquisition has enabled the company
to become a national distributor of prescription pharmaceuticals thereby
expanding our customer base resulting in a substantial increase in sales.
Cost of Goods Sold. Cost of goods sold for the fiscal year ended March 31,
2001 increased as a percentage of revenues to 88.0% from 87.4% for the fiscal
year ended March 31, 2000. This increase in the cost of goods sold resulted
primarily from decreased profit margins associated with the distribution of
pharmaceutical products.
Warehouse, Delivery, Selling, General and Administrative Expenses.
Warehouse, Delivery, Selling, General and Administrative expenses for the fiscal
year ended March 31, 2001 increased $6.2 million to $37.0 million, or 6.8% of
sales, as compared to expenses of $30.8 million or 7.3% of sales for the fiscal
year ended March 31, 2000. This increase was largely due to marketing, delivery
and warehouse expenses associated with our wholly-owned pharmaceutical and
manufacturing subsidiaries.
Interest Expense. Interest expense for the fiscal year ended March 31, 2001
increased $7.9 million to $18.8 million or 3.4% as a percentage of sales, as
compared to $10.9 million, or 2.6%, for the fiscal year ended March 31, 2000,
due to increased borrowings at a higher rate and non-cash interest from the
warrant discount accretion of approximately $600,000.
Net Income. Our net income for the fiscal year ended March 31, 2001
decreased $12.5 million to $2.5 million or 839% as compared to $14.9 million for
the fiscal year ended March 31, 2000. This decrease in net income is due in part
to our Internet investments totaling $5,642,678 which management
determined had become permanently impaired thus incurring to take a loss on the
investment. Additionally, an increase in the interest expense of approximately
72% contributed to these decreased earnings. Net income from operations
(excluding write-offs of investments in discontinued operations) for fiscal 2001
is $5,890,404 or 82 cents per share when compared to net income from continuing
operations for fiscal year ended March 31, 2000 of $7,043,548 or 97 cents per
share. Net income for fiscal 2001 is $2,458,367 or 34 cents per diluted share,
when compared to $14,959,185 or $2.05 per diluted share for the same period a
year-earlier.
-12-
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues. Revenues for the fiscal year ended March 31, 2000 increased $86.9
million to $421.0 million, or 26% as compared to revenues of $334.2 million for
the fiscal year ended March 31, 1999, which resulted from increased revenues
from all segments of our business as described below. The increased demand for
our products resulted from an expanded customer base, increases in same store
sales and through revenues generated as a result of our acquisition of Tri-State
Pharmaceutical Consultants, Corp., consummated during the fourth quarter of
fiscal 2000.
Contributions to this increase in revenues by product segment is as
follows: health and beauty aids increased 19% in fiscal 2000 compared to fiscal
1999 due to increases in same store sales and expanded customer base. Prestige
designer fragrances grew 20% in fiscal 2000 compared to fiscal 1999 due to an
increase in same store sales and an expanded customer base, thus increasing the
volume of products sold. Nationally advertised branded non-perishable food
products increased 38% in fiscal 2000, when compared to fiscal 1999, because of
greater quantities of promotionally priced non-perishable food items were
available to us from our vendors during fiscal 2000. Sales of prescription
pharmaceuticals increased 135% in fiscal 2000 when compared to the prior year.
Cost of Goods Sold. Cost of goods sold for the fiscal year ended March 31,
2000 increased as a percentage of revenues to 87.4% from 86.7% for the restated
fiscal year ended March 31, 1999. This increase in the cost of goods sold
resulted primarily from decreased profit margins associated with the
distribution of pharmaceutical products.
Warehouse, Delivery, Selling, General and Administrative Expenses.
Warehouse, Delivery, Selling, General and Administrative expenses for the fiscal
year ended March 31, 2000 increased $5.3 million to $30.8 million, or 7.3% of
sales when compared to expenses of $24.9 million or 7.5% of sales for the fiscal
year ended March 31, 1999. This increase was largely due to marketing, delivery
and warehouse expenses associated with our wholly-owned manufacturing
subsidiary, Allou Personal Care Corporation.
Interest Expense. Interest expense for the fiscal year ended March 31, 2000
increased $1.2 million to $10.9 million or 2.6% as a percentage of sales when
compared to $9.6 million or 2.9% for the fiscal year ended March 31, 1999 due to
increased borrowings at a higher rate.
Net Income. Our net income for the fiscal year ended March 31, 2000
increased $13.6 million to $14.9 million or 901% when compared to $1.3 million
for the fiscal year ended March 31, 1999. This increase in net income is due in
part to the sale of a majority interest in our Internet subsidiary during the
first quarter of fiscal 2000. Our independent auditors in accordance with
generally accepted accounting standards restated the financial statements of
fiscal 1999, to reflect the gains and losses resulting from the sale of our
majority interest in our Internet subsidiary. Therefore, net income from
continuing operations restated for fiscal 2000 is $7,043,548 or 97 cents per
share when compared to a restated income from continuing operations for fiscal
year ended March 31, 1999 of $5,946,878. Net income for fiscal 2000 is
$14,959,185 or $2.05 per share, when compared to $1,347,855 or 20 cents per
share for the same period a year-earlier.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $212,463 to $263,774 at March 31, 2001 from $51,311 at the
beginning of the fiscal year.
-13-
Our working capital increased $18.6 million to $83.4 million at March 31,
2001 from $64.7 million at March 31, 2000, primarily due to an increase in
accounts receivable and inventories.
At March 31, 2001 we had $170.7 million in borrowings and approximately
$14.3 million of unused credit under our $185 million credit facility. Our
credit facility is secured by a security interest in certain of our assets and
properties including the capital stock of certain of our subsidiaries.
We require capital principally to grow the business through acquisition,
expansion of current operations, to pay off debt, and for general operating
purposes. We currently estimate capital expenditures of approximately $5.0
million per annum are required to adequately maintain our current operations.
Our primary sources of liquidity are expected to be cash flows from
operations and our financing agreement with a consortium of banks led by the
Fleet Capital Corp. for financing our accounts receivable and inventory under
our $185 million bank line of credit. The loan is collaterized by our inventory
and accounts receivable. Interest on the loan balance is payable monthly at .75%
per annum above the prime rate or 2.5% per annum above the Eurodollar rate at
our option. The effective interest rate charged to us at March 31, 2001 was 8.4%
which was based on a combination of 2.5% above the Eurodollar rate and .75%
above the prime rate. We utilize cash generated from operations to reduce
short-term borrowings, which in turn acts to increase loan availability
consistent with our financing agreement. On May 7, 2001 we entered into an
agreement with our consortium of banks to extend the maturity date of our
banking facility to September 4, 2001. During this period our credit facility is
$180 million and interest is payable monthly at a rate of 1.75% per annum above
the prime rate or 3.50% per annum above the Eurodollar rate. On June 28, 2001 we
received notification that the credit committee of Congress Financial
Corporation has approved financing a $200 million revolving credit facility.
This facility will have a term of three years and is contemplated to close
within forty five days of credit committee approval, which occurred on June 27,
2001. Interest on the new facility will be .25% per annum above the prime rate
or at our option 2.75% per annum above the Eurodollar rate.
Based upon current levels of operations and anticipated growth, we expect
that sufficient cash flows will be generated from operations so that, combined
with other financing sources we will be able to meet all of our debt service,
capital expenditure and working capital requirements for the next twelve months.
Operations for the year ended March 31, 2001, excluding non-cash charges
for depreciation and amortization and deferred income taxes, and asset
impairment provided cash of $9.8 million. Other changes in assets and
liabilities resulting from operating activities for the year ended March 31,
2001 used cash of $44.0 million, resulting in net cash used in operating
activities of $34.2 million. Investing activities, which principally consisted
of acquisitions of property, plant and equipment, resulted in a use of cash of
$994,308 for the year ended March 31, 2001. For the year ended March 31, 2001,
financing activities provided cash of $35.4 million, principally consisting of
increased borrowing and issuance of common stock.
INFLATION AND SEASONALITY
Inflation has not had any significant adverse effects on our business and
we do not believe it will have any significant effect on our future business.
Our fragrance business is seasonal, with greater sales during the Christmas
season than in other seasons. Our other product lines are not seasonal.
-14-
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this time is set forth in the Financial
Statements, commencing on page F-1 included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III (Items 10,11,12 and 13) is
incorporated by reference to such information as it will be included in our
definitive Proxy Statement with respect to our 2001 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. Financial Statements Page
----
Reports of Independent
Public Accountants........................................F-1, F-2
Consolidated Balance Sheets -- March 31, 2001 and
2000......................................................F-3
Consolidated Statements of Income -- Years ended March 31,
2001, 2000 and 1999.......................................F-4
Consolidated Statements of Stockholders' Equity -- Years
ended March 31, 2001, 2000 and 1999.......................F-5
Consolidated Statement of Cash Flows -- Years ended
March 31, 2001, 2000 and 1999.............................F-6
Notes to Consolidated Financial Statements................F-7
2. Financial Statement Schedules
Report of Independent Public Accountants on
Schedule..................................................S-1, S-2
-15-
Schedule II - Valuation and Qualifying Accounts
and Reserve...............................................S-3
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the last quarter
of the period covered by this Report.
(c) Exhibits.
The following Exhibits are filed as a part of this Report:
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of the Registrant as amended on October 19,
1998 and currently in effect (filed as Exhibit 3.1 to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended March 31, 2000
Commission File No. 1-10340 and incorporated herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3b to Registration Statement
No. 33-26981 on Form S-1 ("Registrant's Form S-1"), and incorporated
herein by reference).
10.4 Employment Contract dated as of June 30, 1996 between the Registrant and
Ramon Montes (filed as Exhibit 10.3 to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1996 Commission File No.
1-10340 and incorporated herein by reference).
10.5 Amended and Restated 1989 Incentive Stock Option Plan (filed as Exhibit
10(e) to Registrant's Annual Report on From 10-K for the fiscal year
ended March 31, 1990 Commission File No. 1-10340 and incorporated herein
by reference).
10.6 1991 Stock Option Plan (filed as Exhibit 10(e)(1) to Registrant's
Post-Effective Amendment No. 1 to Registrant's Form S-1 and incorporated
herein by reference).
10.7 1992 Stock Option Plan (filed as Exhibit 10(e)(2) to Registrant's Annual
Report on From 10-K for the fiscal year ended March 31, 1993 Commission
File No. 1-10340 and incorporated herein by reference).
10.8 1995 Nonqualified Stock Option Plan (filed as Exhibit A to Registrant's
1996 Definitive Proxy Statement on Schedule 14A Commission File No.
1-10340 and incorporated herein by reference).
10.9 1996 Stock Option Plan (filed as Exhibit B to Registrant's 1996
Definitive Proxy Statement on Schedule 14A Commission File No. 1-10340
and incorporated herein by reference).
10.10 Lease Agreement dated December 8, 1993 between Allou Distributors, Inc.
and Brentwood Distribution Co. (filed as Exhibit 10(f) to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995
Commission File No. 1-10340 ("1995 Form 10-K") and incorporated herein
by reference).
10.11 Lease Agreement dated March 4, 1980 between Registrant and Pueblo
Supermarkets, Inc. (filed as Exhibit 10g to Registrant's Form S-1 and
incorporated herein by reference).
-16-
10.12 Lease Agreement dated January 1, 1993 between M. Sobol, Inc. and Simon
and Barbara J. Mandell (filed as Exhibit 10(g) to Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1994 Commission
File No. 1-10340 ("1994 Form 10-K") and incorporated herein by
reference).
10.13 Agreement dated December 13, 1994 between Allou Distributors, Inc. and
the National Organization of Industrial Trade Unions (filed as Exhibit
10(i) to the Registrant's 1995 Form 10-K and incorporated herein by
reference).
10.14 Agreement dated December 15, 1997 between Allou Distributors, Inc. and
Local No. 1. (titled as Exhibit 10.14 to the Registrant's 1998 10-K and
incorporated herein by reference).
10.15 Third Restated and Amended Revolving Credit and Security Agreement dated
October 22, 1997 among BankBoston, N.A., IBJ Schroder Bank & Trust
Company, Sanwa Business Credit Corporation, LaSalle Business Credit,
Inc., Bank Leumi Trust Company of New York, The Dime Savings Bank of New
York, FSB, The First National Bank of Maryland, Key Corporate Capital,
Inc. (titled as Exhibit 10.15 to the Registrant's 1998 10-K and
incorporated herein by reference).
10.16 Master Lease Finance Agreement dated as of April 24, 1996 between
BankBoston Leasing Inc. and Allou Distributors, Inc. (filed as Exhibit
10.14 to Registrant's 1996 10-K and incorporated herein by reference).
10.17 Fifth Restated and Amended Revolving Credit and Security Agreement dated
May 5, 2000 among Fleet Capital Corporation, LaSalle Business Credit,
Inc., Bank Leumi USA, Dime Commercial Corp., Allfirst Bank, Key
Corporate Capital, Inc., American National Bank and Trust Company of
Chicago, Webster Bank, Mellon Bank, N.A., Allou Health & Beauty Care,
Inc. and Allou Distributors, Inc. (filed as Exhibit 17.1 to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended March 31, 2000
Commission File No. 1-10340 and incorporated herein by reference).
*10.18 Fourth Amendment to the Fifth Restated and Amended Revolving Credit and
Security Agreement dated May 7, 2001, among Fleet Capital Corporation,
LaSalle Business Credit, Inc., Bank Leumi USA, Dime Commercial Corp.,
Allfirst Bank, Key Corporate Capital, Inc., American National Bank and
Trust Company of Chicago, Webster Bank, Mellon Bank, Allou Health &
Beauty Care, Inc. and Allou Distributors, Inc.
21 Subsidiaries of the Registrant (filed as Exhibit 21 to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended March 31, 2000
Commission File No. 1-10340 and incorporated herein by reference).
*23-1 Consent of Mayer Rispler & Company, P.C.
*23-2 Consent of Arthur Andersen LLP
----------------
* Filed herewith
-17-
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.
ALLOU HEALTH & BEAUTY CARE, INC.
By: /s/ Victor Jacobs
--------------------------------
Victor Jacobs
Chairman of the Board
Dated: June 28, 2001
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Victor Jacobs Chairman of the Board June 28, 2001
-------------------------
Victor Jacobs
/s/ Herman Jacobs
-------------------------
Herman Jacobs Chief Executive Officer and June 28, 2001
Director
/s/ David Shamilzadeh President, Chief Financial
------------------------- Officer and Director June 28, 2001
David Shamilzadeh
/s/ Jack Jacobs Executive Vice President June 28, 2001
------------------------- and Director
Jack Jacobs
/s/ Jeffrey Berg Director June 28, 2001
-------------------------
Jeffrey Berg
/s/ Sol Naimark Director June 28, 2001
-------------------------
Sol Naimark
/s/ Stuart Glasser Director June 28, 2001
-------------------------
Stuart Glasser
-2-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Allou Health & Beauty Care, Inc.:
We have audited the accompanying consolidated balance sheet of Allou Health &
Beauty Care, Inc. (a Delaware corporation) and subsidiaries as of March 31,
2001, and the related consolidated statements of income, stockholders' equity
and cash flows for the fiscal 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 auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allou Health & Beauty Care,
Inc. and subsidiaries as of March 31, 2001, and the results of their operations
and their cash flows for the fiscal year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Melville, New York
July 2, 2001
F-1
[LETTERHEAD OF MAYER RISPLER & COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors & Stockholders:
Allou Health & Beauty Care, Inc.
Brentwood, New York
We have audited the accompanying consolidated balance sheets of Allou
Health & Beauty Care, Inc. as of March 31, 2000 and 1999 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the two-year period ended March 31, 2000. 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 audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allou Health
and Beauty Care, Inc. at March 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the two-year period ended
March 31, 2000, in conformity with generally accepted accounting principles. New
York, New York June 19, 2000
/s/ Mayer Rispler & Company, P.C.
Brooklyn, New York
June 19, 2000
F-2
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETs
MARCH 31, 2001 AND 2000
ASSETS 2001 2000
---------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 263,774 $ 51,311
Accounts receivable, net of allowance for doubtful accounts of
$1,337,075 and $1,285,000, respectively 85,579,734 75,853,958
Inventories 176,396,785 163,752,266
Prepaid inventory purchases 9,187,510 2,942,409
Prepaid income taxes 3,042,904 --
Other current assets 2,996,330 3,547,312
Deferred income taxes 1,037,067 --
------------- -------------
Total current assets 278,504,104 246,147,256
PROPERTY AND EQUIPMENT, net 5,672,234 3,924,543
GOODWILL AND INTANGIBLE ASSETS, net 4,474,846 4,844,727
OTHER ASSETS 3,074,670 4,302,640
DEFERRED INCOME TAXES 38,312 --
------------- -------------
TOTAL ASSETS $ 291,764,166 $ 259,219,166
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Line of credit $ 170,674,820 $ 148,470,692
Current portion of long-term debt 915,010 1,831,547
Accounts payable and accrued expenses 23,502,321 28,552,891
Income taxes payable -- 2,566,969
------------- -------------
Total current liabilities 195,092,151 181,422,099
------------- -------------
LONG TERM LIABILITIES:
Long-term debt 1,959,369 1,640,222
Subordinated debt 11,243,060 --
Common stock put warrants (Note 8) 4,359,925 --
Deferred income tax liability 134,166 --
------------- -------------
Total Long-term liabilities 17,696,520 1,640,222
------------- -------------
TOTAL LIABILITIES 212,788,671 183,062,321
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value; 1,000,000 shares authorized, none
issued and outstanding -- --
Class A Common Stock, $.001 par value; 15,000,000 shares authorized,
5,636,484 and 5,566,273 shares issued and outstanding, respectively 5,636 5,566
Class B Common Stock, $.001 par value; 2,200,000 shares authorized,
1,200,000 shares issued and outstanding 1,200 1,200
Additional paid-in capital 31,178,371 30,818,158
Retained earnings 47,790,288 45,331,921
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 78,975,495 76,156,845
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 291,764,166 $ 259,219,166
============= =============
The accompanying notes are an integral part of these consolidated balance sheets.
F-3
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
2001 2000 1999
------------- ------------- -------------
Revenues, net $ 548,146,953 $ 421,046,773 $ 334,175,150
Costs of revenues 482,590,356 367,963,675 289,637,296
------------- ------------- -------------
Gross profit 65,556,597 53,083,098 44,537,854
------------- ------------- -------------
OPERATING EXPENSES:
Warehouse and delivery 15,120,997 12,306,859 10,279,515
Selling, general and administrative 21,945,537 18,519,681 14,706,612
------------- ------------- -------------
Total operating expenses 37,066,534 30,826,540 24,986,127
------------- ------------- -------------
Income from operations 28,490,063 22,256,558 19,551,727
------------- ------------- -------------
OTHER (EXPENSE) INCOME:
Interest expense, net (18,801,734) (10,902,244) (9,655,427)
Other -- 28,234 9,098
Loss on impairment of investments (Note 2) (5,642,678) -- --
------------- ------------- -------------
Total (24,444,412) (10,874,010) (9,646,329)
------------- ------------- -------------
Income before provision for income taxes 4,045,651 11,382,548 9,905,398
PROVISION FOR INCOME TAXES 1,587,284 4,339,000 3,958,520
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 2,458,367 7,043,548 5,946,878
------------- ------------- -------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of income taxes -- (516,764) (6,399,023)
Gain on disposal of segment, net of income taxes -- 8,432,401 1,800,000
------------- ------------- -------------
Gain (loss) on discontinued operations -- 7,915,637 (4,599,023)
------------- ------------- -------------
NET INCOME $ 2,458,367 $ 14,959,185 $ 1,347,855
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE - BASIC:
Continuing operations $ .36 $ 1.05 $ .98
Discontinued operations -- 1.17 (.76)
------------- ------------- -------------
Net earnings per common share $ .36 $ 2.22 $ .22
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE - DILUTED:
Continuing operations $ .34 $ .97 $ .87
Discontinued operations -- 1.08 (.67)
------------- ------------- -------------
Net earnings per common share $ .34 $ 2.05 $ .20
============= ============= =============
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE:
Basic 6,812,483 6,673,617 6,061,431
============= ============= =============
Diluted 7,202,903 7,296,884 6,800,143
============= ============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Common Stock Shares Common Stock Amounts
------------------- -------------------- Additional
Class A Class B Class A Class B Paid-in Capital
--------- --------- ------- -------- ---------------
BALANCE, March 31, 1998 4,569,850 1,200,000 $ 4,570 $ 1,200 $ 23,582,240
Net proceeds from exercise of 102,605 -- 102 -- 701,852
common stock options
Issuance of common stock 666,667 -- 667 -- 5,672,677
Net income -- -- -- -- --
--------- --------- ------- -------- ------------
BALANCE, March 31, 1999 5,339,122 1,200,000 5,339 1,200 29,956,769
Issuance of common stock 85,304 -- 86 -- --
Net proceeds from exercise of common
stock options 66,375 -- 66 -- 360,696
Issuance of common stock in connection
with acquisition of Tri State
Pharmaceutical Consultants Corp.
(Notes 2 and 7c) 75,472 -- 75 -- 500,693
Net income -- -- -- -- --
--------- --------- ------- -------- ------------
BALANCE, March 31, 2000 5,566,273 1,200,000 5,566 1,200 30,818,158
Net proceeds from exercise of common
stock options 35,440 -- 35 -- 110,248
Issuance of common stock in connections
with debt repayment to Tri State 34,771 -- 35 -- 249,965
Pharmaceutical Consultants Corp.
(Notes 2 and 7c)
Net income -- -- -- -- --
--------- --------- ------- -------- ------------
BALANCE, March 31, 2001 5,636,484 1,200,000 $ 5,636 $ 1,200 $ 31,178,371
========= ========= ======= ======== ============
Retained
Earnings Total
-------- -----
BALANCE, March 31, 1998 $ 29,024,881 $ 52,612,891
Net proceeds from exercise of -- 701,954
common stock options
Issuance of common stock -- 5,673,344
Net income 1,347,855 1,347,855
------------ ------------
BALANCE, March 31, 1999 30,372,736 60,336,044
Issuance of common stock -- 86
Net proceeds from exercise of common
stock options -- 360,762
Issuance of common stock in connection
with acquisition of Tri State
Pharmaceutical Consultants Corp.
(Notes 2 and 7c) -- 500,768
Net income 14,959,185 14,959,185
------------ ------------
BALANCE, March 31, 2000 45,331,921 76,156,845
Net proceeds from exercise of common
stock options -- 110,283
Issuance of common stock in connections
with debt repayment to Tri State -- 250,000
Pharmaceutical Consultants Corp.
(Notes 2 and 7c)
Net income 2,458,367 2,458,367
------------ ------------
BALANCE, March 31, 2001 $ 47,790,288 $ 78,975,495
=== ==== ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 2,458,367 $ 7,043,548 $ 5,946,878
Adjustments to reconcile net income to net cash used in
operating activities:
Income (loss) from discontinued operations -- 7,915,637 (4,599,023)
Depreciation and amortization 2,033,136 939,198 832,613
Deferred income taxes (941,213) (725,600) 832,000
Asset impairment 5,642,678 -- --
Amortization of discount on subordinated debt 557,066 -- --
Non-cash change in value of contingent put warrants (Note 8) 45,919 -- --
Decrease (increase) in operating assets:
Accounts receivable (9,725,776) (25,691,508) (6,044,539)
Inventories (12,644,519) (40,834,355) (10,387,252)
Other assets (14,469,085) 26,401,905 (24,679,102)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (7,152,411) (2,186,477) 20,761,274
------------ ------------ ------------
Net cash used in operating activities (34,195,838) (27,137,652) (17,337,151)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (994,308) (712,090) (891,390)
------------ ------------ ------------
Net cash used in investing activities (994,308) (712,090) (891,390)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in line of credit 22,204,128 25,099,464 12,774,467
Borrowings 15,000,000 3,993,256 108,704
Repayment of debt (1,911,802) (1,953,373) (676,513)
Net proceeds from exercise of options and issuance of
common stock 110,283 361,616 6,375,298
------------ ------------ ------------
Net cash provided by financing activities 35,402,609 27,500,963 18,581,956
------------ ------------ ------------
Net increase (decrease) in cash 212,463 (348,779) 353,415
CASH AND CASH EQUIVALENTS, beginning of year 51,311 400,090 46,675
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 263,774 $ 51,311 $ 400,090
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 18,050,106 $ 10,762,927 $ 10,162,264
============ ============ ============
Income taxes $ 8,108,953 $ 5,279,000 $ 1,474,304
============ ============ ============
Non-cash financing activities:
Notes issued $ 1,563,533 $ 2,873,369 $ 108,764
============ ============ ============
Common stock issued for business acquisition $ -- $ 500,000 $ --
============ ============ ============
Common stock issued for debt repayment (Note 7c) $ 250,000 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Description of Operations
-------------------------
Allou Health & Beauty Care, Inc., (the "Company") is a distributor of brand name
health and beauty aids, cosmetics, fragrances, grocery products and
pharmaceuticals. The Company also distributes generic brand health and beauty
aids and manufactures hair and skin care products. The Company sells these
products primarily to retailers throughout the United States.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less.
Revenue Recognition
-------------------
The Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
No. 101, or other specific authoritative literature, as applicable. Accordingly,
revenues from merchandise sales are recorded when all four of the following
critieria are met: (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred or services have been rendered; (iii) the Company's price
to the buyer is fixed or determinable; and (iv) collectibility is reasonably
assured. The Company reports its sales levels on a net revenue basis, with net
revenues being computed by deducting from gross revenues the amount of actual
sales returns and the amount of reserves established for anticipated sales
returns.
The Company's shipping and handling costs, billed to customers, are included in
revenue in accordance with Emerging Issues Task Force ("EITF") issue No. 00-10,
"Accounting for Shipping and Handling Revenues and Costs.". The purpose of this
issue discussion was to clarify the classification of shipping and handling
revenues and costs. The consensus reached was that all shipping and handling
billed to customers should be recorded as revenue. Accordingly, the Company
records its shipping and handling amounts within net sales and operating
expenses. Shipping and handling billed to customers and included in revenues for
fiscal 2001, 2000, and 1999 was not material. Shipping and handling costs
totaled approximately $4,743,858, $4,233,624, and $3,658,229 for the years ended
March 31, 2001, 2000 and 1999, respectively.
Fair Value of Financial Instruments
-----------------------------------
The carrying values of financial instruments approximate fair value due to the
relatively short period of time between origination of the instruments and their
expected realization, or, in the case of notes payable, because the notes are at
interest rates competitive with those that would be available to the Company in
the current market environment. See Note 8 for a description of the Company's
accounting for contingent put warrants issued in fiscal 2001 in connection with
subordinated debt, the value of which has been marked to market. At March 31,
2001, the carrying value of all other financial instruments approximated fair
value.
Concentration of Credit Risk
----------------------------
The Company extends credit based on an evaluation of the customer's financial
condition, generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial condition. The
Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
Concentration of credit risk with respect to trade accounts receivable is
limited due to the number of entities and the size of those entities comprising
the Company's customer base, which is primarily in the United States. No single
customer accounted for more than 10% of the Company's consolidated net revenues
during fiscal years 2001, 2000 and 1999.
F-7
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
-----------
Inventories, which consist primarily of finished goods, are stated at the lower
of average cost method or market.
Long-Lived Assets
-----------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, " long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment would
be recorded in circumstances where undiscounted cash flows expected to be
generated by an asset are less than the carrying value of that asset. The
Company has performed a review of its long-lived assets and has determined that
no impairment of the respective carrying values has occurred as of March 31,
2001.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets by use of straight-line and accelerated
methods.
Goodwill and Other Intangible Assets
------------------------------------
Goodwill, representing the excess of the purchase price over the fair value of
net assets acquired, is being amortized using the straight-line method, over
periods ranging from ten to forty years. The Company periodically performs
reviews to evaluate the recoverability of goodwill and other intangibles and
takes into account events or circumstances that warrant revised estimates of
useful lives or that indicate that an impairment exists. Management believes
that there is no impairment to recorded goodwill or other intangible assets as
of March 31, 2001.
Amortization of goodwill and other intangible assets charged to operations
amounted to $369,881, $148,073, and $76,239 for the years ended March 31, 2001,
2000 and 1999, respectively.
Income Taxes
------------
The provision for income taxes is determined in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities arise from
temporary differences between the tax bases of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in
taxable or deductible amounts in future years (see Note 13).
Per Share Data
--------------
The Company follows the provisions of SFAS No. 128, "Earnings Per Share." Basic
net income per common share ("Basic EPS") is based on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted net income per common share ("Diluted EPS") is
calculated by dividing net income by the weighted average number of common
shares used in the basic earnings per share calculation plus the number of
common shares that would be issued assuming conversion of all potentially
dilutive common shares outstanding. SFAS No.128 requires the presentation of
both Basic EPS and Diluted EPS on the face of the consolidated statements of
income. See Note 14 for a description of the Company's calculation of earnings
per share.
F-8
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
------------------------
The Company complies with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
Financial Accounting Standards Board Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" while providing the required
pro forma disclosures as if the fair value method had been applied.
Accordingly, no compensation expense has been recognized in the consolidated
financial statements for options granted with an exercise price at least equal
to market value at the date of grant or in connection with the Company's various
employee stock option plans (see Note 11).
Catalog Costs
-------------
The costs of producing and distributing the Company's principal catalogs, which
are produced periodically throughout the year, are charged to expense as
incurred.
Comprehensive Income
--------------------
The Company complies with the provisions of SFAS No. 130 "Reporting
Comprehensive Income", which established the reporting of comprehensive income
and its components. The adoption of this statement had no impact on the
Company's net income or shareholders' equity. For the fiscal years 2001, 2000
and 1999, the Company's operations did not give rise to items includable in
comprehensive income which were not already included in net income. Accordingly,
the Company's comprehensive income is the same as its net income for all periods
presented.
Research and Development
------------------------
Research and development costs associated with the Company's manufacturing
segment are expensed as incurred. Such costs were not material for the years
ended March 31, 2001, 2000 and 1999.
Derivative Instruments
----------------------
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal years beginning after June 15, 2000 and does not require retroactive
restatement of prior period financial statements. This statement requires the
recognition of all derivative instruments as either assets or liabilities in the
balance sheet measured at fair value. Derivative instruments will be recognized
as gains or losses in the period of change. If certain conditions are met where
the derivative instrument has been designated as a fair value hedge, the hedge
items may also be marked to market through earnings, thus creating an offset. If
the derivative is designed and qualifies as a cash flow hedge, the changes in
fair value of the derivative instrument may be recorded in comprehensive income.
The Company adopted this statement on April 1, 2001, and the impact of adoption
did not have a material effect on the Company's financial position.
See Note 8 for a description of the Company's accounting for contingent put
warrants issued in fiscal 2001 in connection with subordinated debt. The value
of these warrants has been accounted for as a derivative since issuance.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of the revenues and expenses during the
reported period. Actual results could differ from those estimates.
F-9
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. ACQUISITIONS, INVESTMENTS AND DISPOSITIONS
------------------------------------------
On April 23, 1999, the Company sold a majority interest in The Fragrance Counter
Inc., then a wholly-owned subsidiary, for net proceeds of $11,296,584 in cash
and $8,900,000 in notes. $400,000 was due and paid in July 1999 and $8,500,000
was due in April 2000 with accrued interest. The Company retained a minority
interest in ibeauty.com, the successor to the Fragrance Counter Inc.
In April 2000, the Company was notified that the makers of the notes would not
honor their obligation. As a result, effective March 31, 2000, the Company
recorded a valuation allowance of $8,500,000 equal to the face value of the
notes. As a result of the sale, the Company recognized a gain of $8,432,401 net
of taxes in fiscal 2000, after the provision for the valuation allowance. At
March 31, 2001, the Company has determined that its minority interest in
ibeauty.com, successor to the Fragrance Counter Inc., has become permanently
impaired. Consequently, the Company has provided for a full allowance of
$3,000,000 in fiscal 2001.
On January 3, 2000, the Company purchased the intangible assets of Tri-State
Pharmaceutical Consultants Corp., a pharmaceutical wholesaler, for cash, stock
and notes payable (see Note 7) aggregating $ 2,873,368. The Company also entered
into an employment contract with Tri-State's former principal shareholder.
Proforma results of operations as if the acquisition had been completed by April
1, 1998 have not been presented, as the impact on the Company's results of
operations would not have been material.
On February 8, 2000, the Company entered into an agreement whereby it obtained a
50% interest in Discreet Medical Solutions, LLC ("DMS"), a company formed to
create an internet portal to provide on-line delivery of certain medical
products and content. The terms of the agreement required the Company to advance
up to $5,000,000 for general working capital purposes. During the fourth quarter
of fiscal 2001, the use of Discreet Medical Solutions as an internet portal was
abandoned, resulting in an impairment charge of $2,642,678, representing the
amount advanced and invested to date. No further investments or advances have
been made.
3. OTHER CURRENT ASSETS
--------------------
The components of other current assets are:
March 31
2001 2000
-------------- --------------
Interest bearing loans to officers (Note 15) $ 1,300,000 $ 1,743,866
Prepaid expenses and other 1,696,330 1,803,446
------------- -------------
$ 2,996,330 $ 3,547,312
============= =============
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of:
March 31,
2001 2000 Estimated Useful Lives
------------ ----------- ---------------------------
Machinery and equipment $ 2,971,003 $ 2,397,524 5 years
Furniture, fixtures and office 3,648,480 3,138,250 5-10 years
equipment
Leasehold Improvements 4,641,077 3,166,945 lesser of lease term or
------------ ----------- estimated useful life
11,260,560 8,702,719
Less: Accumulated depreciation 5,588,326 4,778,176
------------ -----------
$ 5,672,234 $ 3,924,543
============ ===========
F-10
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the years ended March 31, 2001, 2000 and 1999 amounted
to $810,150, $627,454 and $664,706, respectively.
5. OTHER ASSETS
------------
The components of other assets are:
March 31,
2001 2000
------------ ------------
Interest bearing loans to officers (Note 15) $ 1,371,016 $ -
Minority interest investment (Note 2) - 3,000,000
Other 1,703,654 1,302,640
------------ ------------
$ 3,074,670 $ 4,302,640
============ ============
6. LINE OF CREDIT
--------------
The Company has a secured line of credit agreement with a consortium of banks
expiring September 1, 2001. The financing agreement provides for advances of up
to 85% of eligible receivables and 60% of eligible inventories with aggregate
maximum advances of $180,000,000. Interest on the loan balance is payable
monthly at 13/4% above the prime rate or 31/2% above the Eurodollar rate, at the
option of the Company. The loan is collateralized by the Company's accounts
receivable and inventories. In addition, the Company is required to abide by
certain financial covenants. On May 7, 2001, the Company obtained a waiver which
amended these financial covenants. Accordingly, effective March 31, 2001, the
Company is in compliance with the amended covenants. The effective interest
rates charged to the Company at March 31, 2001 and 2000 were 7.85% and 7.96%,
respectively.
In accordance with EITF Issue No 95-22, "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreement that Include both a
Subjective Acceleration Clause and a Lock Box Arrangement", the Company accounts
for the secured line of credit as a short-term obligation.
On June 28, 2001, the Company received notification that the credit committee of
a financial institution has approved financing a $200,000,000 revolving credit
facility. This facility will have a term of three years and it is contemplated
to close within forty five days of credit committee approval, which occurred on
June 27, 2001. Interest on the new facility will be .25% per annum above the
prime rate or at the Company's option 2.75% per annum above the Eurodollar rate.
7. LONG-TERM DEBT
--------------
Long-term debt consists of:
(a) Notes collateralized by certain of the Company's equipment and leasehold
improvements, payable in aggregate monthly installments of approximately
$67,885, which include interest at rates varying from 3/8% above the prime
rate to 8.8% above the three year treasury rate. At March 31, 2001 and
2000, the principal balance outstanding was $2,433,442 and $1,639,359,
respectively.
(b) Loan payable to the former stockholder of M. Sobol, Inc. (acquired in
fiscal 1993), with interest payable on the declining principal balance at
5.45% per annum, through April 1, 2000. At March 31, 2001 and 2000, the
principal balance outstanding was $0 and $109,042, respectively.
(c) Notes payable to former stockholder of Tri-State Pharmaceutical Consultants
Corp. (Note 2), with interest payable on the declining balance at 6% per
annum through July 1, 2002. During fiscal 2001, $250,000 of this debt was
repaid with the issuance of 34,771 shares of the Company's common stock. At
March 31, 2001 and 2000, the principal balance outstanding was $440,057 and
$1,723,368, respectively.
F-11
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate long-term debt is payable as follows:
Year Ending March 31,
2002 $ 915,010
2003 864,294
2004 662,874
2005 432,201
-------------
$ 2,874,379
Less current portion: (915,010)
-------------
$ 1,959,369
8. SUBORDINATED DEBT
-----------------
During fiscal 2001, the Company issued to an institutional investor an aggregate
of $15,000,000 of 12% senior subordinated notes due July 2005 and seven year
warrants to purchase an aggregate of 1,700,000 shares of the Company's Class A
Common Stock at $4.50 per share, The exercise price of the warrants is subject
to increase if the Company meets certain earnings and revenue targets. In the
event that these warrants have not been converted to common stock, the investor
may have the right, under certain circumstances, presently to be based on
financial results for the years ending March 31, 2002 and 2003, to put the
warrants to the Company after five years at a price of $8 per warrant. These
warrants were initially valued at $4,314,006 using the Black-Sholes Pricing
Model. The initial value of the warrants was established as a discount to the
subordinated debt, and this discount is being accreted over the life of the
subordinated notes. Included in interest expense for fiscal 2001 is $557,066,
representing such accretion.
The value of these contingent put warrants has been reflected as a liability in
the accompanying consolidated balance sheets. In accordance with EITF Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the warrants will be marked to
market through earnings on a quarterly basis. The value of these warrants at
March 31, 2001 is $ 4,359,925. Included in interest expense for fiscal 2001 is $
45,919 representing the change in the value of these warrants through March 31,
2001.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
Accounts payable and accrued expenses consist of:
March 31,
2001 2000
------------ -----------
Accounts payable for inventory purchases $ 20,902,427 $24,791,183
Accrued selling, general and administrative expenses 947,551 2,391,120
Accrued interest 970,974 822,490
Accrued payroll 681,369 548,098
------------ -----------
$ 23,502,321 $ 28,552,891
============ ===========
F-12
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
Operating Leases
----------------
The Company is obligated under real property operating leases expiring through
May, 2005. As of March 31, 2001, total minimum annual rentals, excluding
additional payments for real estate taxes and certain expenses, are as follows:
Year Ending March 31,
2002 $ 1,322,933
2003 1,255,692
2004 1,110,436
2005 1,114,189
2006 475,566
Rent expense for the years ended March 31, 2001, 2000 and 1999 amounted to
$1,330,845, $1,157,837 and $1,074,675, respectively.
Collective Bargaining Agreement
-------------------------------
The Company has an agreement with the National Organization of Industrial Trade
Unions which terminates on December 14, 2003. The agreement covers all warehouse
and receiving employees, excluding supervisory personnel and provides for
salaries, pension and certain other benefits as defined in the agreement.
Defined Contribution Plan
-------------------------
Effective April 1, 1996, the Company established a defined contribution plan
(401k) for substantially all employees not covered under collective bargaining
agreements. All employees over the age of 21, with at least one year of service
to the Company, can contribute from 2% to 15% of their gross salaries limited to
Internal Revenue Service regulations. Contributions by the Company are optional.
For the years ended March 31, 2001, 2000 and 1999, the Company did not
contribute to this plan.
Employment Agreements
---------------------
The Company has three-year employment agreements with three of its officers,
which expire July 31, 2001. These agreements provide for each officer to receive
an annual salary of $500,000 and bonuses based on a percentage of the Company's
earnings. For the years ended March 31, 2001, 2000 and 1999, such bonuses
aggregated $330,000, $1,536,000 and $- 0 -, respectively.
Legal Proceedings
-----------------
The Company is a party to a number of legal proceedings as either plaintiff or
defendant, all of which are considered routine litigation incidental to the
business of the Company. Management believes that the results of these legal
proceedings will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
11. STOCK OPTION PLANS
------------------
The Company has adopted four Stock Option Plans which provide for the granting
of stock options to certain employees and directors. An aggregate of 3,800,000
shares of common stock are reserved for issuance under the Plans. Incentive
stock options are granted at no less than fair market value of the shares on the
date of grant. Options granted to individuals owning more than 10% of the voting
power of the Company's capital stock are granted at 110% of the fair market
value at the date of grant.
F-13
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option activity for the years ended March 31, 2001, 2000 and 1999, was as follows:
2001 2000 1999
--------- --------- ---------
Options outstanding at beginning of year 2,774,465 2,489,420 2,036,025
Granted 255,832 388,300 559,750
Exercised (35,440) ( 66,375) (102,605)
Cancelled (56,515) (36,880) (3,750)
--------- --------- ---------
Options outstanding at end of year 2,938,342 2,774,465 2,489,420
========= ========= =========
Option price range at end of year $3.00 to $10.00 $4.00 to $10.00 $4.00 to $7.70
===== ====== ===== ====== ===== =====
The Company has adopted the disclosure only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." If the Company had elected to
recognize compensation costs based on the fair value at the date of grant for
awards consistent with the provisions of SFAS No. 123, net income per common
share from continuing operations would have been reduced to the following:
Years Ended March 31,
2001 2000 1999
----------- ----------- -----------
Net Income from Continuing Operations - Pro $ 1,356,769 $ 6,210,756 $ 5,553,573
Forma
Earnings Per Common Share from Continuing
Operations - Pro Forma $ .19 $ .86 $ .81
The weighted average fair values at date of grant for options granted during
fiscal 2001, 2000 and 1999 were $2.51, $3.09 and $1.51, respectively, and were
estimated using the Black-Scholes option pricing model utilizing the following
assumptions: No dividend yield; expected volatility rates of 60%, 54%, and 42%;
risk free interest rates approximating 6%, 6%, and 4%, respectively, and
expected lives of 5 years.
12. STOCKHOLDERS' EQUITY
--------------------
On September 15, 1998, the stockholders of the Company approved an increase in
the number of authorized shares of Class A common stock from 10,000,000 to
15,000,000 shares. The Company is also authorized to issue 1,000,000 shares of
preferred stock. Holders of Class A Common Stock and Class B Common Stock share
pro rata in all dividends declared by the Board of Directors. The holders of
Class A Common Stock and Class B Common Stock are entitled to one and five votes
per share, respectively, for every matter on which the stockholders of the
Company are entitled to vote. Each share of Class B Common Stock is convertible
at the option of the holder into one share of Class A Common Stock. All
outstanding shares of Class A Common Stock and Class B Common Stock are freely
transferable, subject to applicable law. The Company is authorized to issue
2,200,000 shares of Class B Common Stock.
On December 15, 1998, the Company sold 666,667 shares of its Class A Common
Stock at $9 per share in a private placement offering, which were registered on
January 26, 1999. Net proceeds to the Company from the offering after deduction
of associated expenses were $5,673,344. This sale included the sale of Warrants
which were exercisable for variable number of shares of Class A Common Stock if
the market price fell below 115% ($10.35) of the sale price during three
exercise periods which began 30 days after the effective date. As a result of
the market price fluctuations of the Company's stock during these periods,
during fiscal 2000 the Company issued an additional 85,304 shares of its Class A
Common Stock in connection with the private placement. Warrants issued in
connection with issuance have been satisfied as of fiscal 2000.
During fiscal 1999, employees of the Company exercised stock options for 102,605
shares, which resulted in net proceeds to the Company of $701,954.
During fiscal 2000, employees of the Company exercised stock options for 66,375
shares, which resulted in net proceeds to the Company of $360,762.
On January 4, 2000, the Company issued 75,472 common shares valued at $500,768,
in connection with its purchase of Tri-State Pharmaceutical Consultants Corp
(see Note 2).
F-14
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2001, employees of the Company exercised stock options for 35,440
shares which resulted in net proceeds to the Company of $110,283. During fiscal
2001, the Company issued 34,771 shares valued at $250,000 as partial repayment
of the debt to the former owner of Tri-State Pharmaceutical Consultants Corp.
(see Notes 2 and 7c).
13. INCOME TAXES
The components of income tax expense from continuing operations are summarized as follows:
Years Ended March 31,
2001 2000 1999
----------- ----------- -----------
Current:
Federal $ 1,618,154 $ 3,553,000 $ 3,364,742
State 275,383 679,600 913,778
----------- ----------- -----------
1,893,537 4,232,600 4,278,520
----------- ----------- -----------
Deferred:
Federal (263,811) 98,000 (272,000)
State (42,442) 8,400 (48,000)
----------- ----------- -----------
(306,253) 106,400 (320,000)
----------- ----------- -----------
Total $ 1,587,284 $ 4,339,000 $ 3,958,520
=========== =========== ===========
The following is a reconciliation of the federal statutory income tax rate to the effective tax on income
from continuing operations:
Years Ended March 31,
2001 2000 1999
----------- ----------- -----------
Federal Statutory Income Tax Rate 34.0% 34.0% 34.0%
Increase in Tax Rates Resulting from:
State Income Taxes, Net of Federal Tax Benefits 4.5% 4.1% 7.2%
Other 0.7% (0.0)% (1.2)%
--- ---- ----
Effective Tax Rate For Continuing Operations 39.2% 38.1% 40.0%
==== ==== ====
Deferred income tax assets (liabilities) as of March 31, 2001 are comprised of the following:
Accounts receivable valuation allowance $ 534,958
Inventory cost capitalization 502,109
Depreciation (126,840)
Other 30,986
-----------
Net deferred tax asset $ 941,213
===========
14. EARNINGS PER COMMON SHARE
-------------------------
The following table sets forth a reconciliation of the weighted-average shares (denominator) used in the
computation of basic and diluted EPS for the statements of income periods presented herein.
Years Ended March 31,
2001 2000 1999
Basic 6,812,483 6,673,617 6,061,431
Assumed exercise of stock options and warrants 390,420 623,267 738,712
--------- --------- ---------
Diluted 7,202,903 7,296,884 6,800,143
========= ========= =========
Potentially dilutive securities excluded from
computations because they are anti-dilutive 1,620,090 320,250 -
========= ========= =========
F-15
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income as presented in the consolidated statements of operations is used as
the numerator in the EPS calculation for both the Basic EPS and Diluted EPS
computations.
15. RELATED PARTY TRANSACTIONS
--------------------------
The Company purchases inventories from various entities that are controlled by
certain of the Company's officers. For the years ended March 31, 2001, 2000 and
1999, purchases from related parties amounted to $2,513,523, $12,229,183 and
$14,705,794, respectively.
The Company has issued loans to certain shareholders, which management believes
have been extended on terms which are equivalent to market value (see Notes 3
and 5). The loans bear interest at 9%.
F-16
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT DATA
------------
The Company follows the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Reportable operating segments are
determined based on the Company's management approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief operating
decision-maker organizes the segments within an enterprise for making operating
decisions and assessing performance. The operating segments of the Company are
managed separately because each segment represents a strategic business unit
that offers different products or a different customer base.
The Company's reportable operating segments are:
a) Wholesale distribution of cosmetics, fragrances, health and beauty aids and
non-perishable food products.
b) Wholesale distribution of pharmaceuticals.
c) Manufacturing of hair and skin care products.
The accounting policies of the Company's operating segments are the same as
those described in Note 1 - Summary of Significant Accounting Policies. The
Company evaluates the performance of its segments based on segment profit, which
includes the overhead charges directly attributable to the segment and excludes
certain expenses, which are managed outside the reportable segments. Corporate
expenses including interest are being allocated based on percentage of sales by
segment.
Segment data from continuing operations for each of the three years in the
period ended March 31, 2001 was as follows:
Wholesale Pharmaceuticals Intersegment
Distribution Distribution Manufacturing Transactions Consolidated
------------ ------------ ------------ ------------ ------------
Year Ended March 31, 2001
Revenue, net $313,409,056 $228,533,005 $ 7,994,548 $ (1,789,656) $548,146,953
Depreciation and 1,785,921 23,290 223,925 - 2,033,136
amortization
Loss on impairment of
assets
Income (loss) from
operations
before taxes (1,610,282) 9,583,925 (3,927,992) - 4,045,651
Segment assets 233,351,111 50,942,007 7,471,048 - 291,764,166
Year Ended March 31, 2000
Revenue $334,797,233 $110,241,393 $ 7,327,336 $(31,319,189) $421,046,773
Depreciation and 743,110 53,700 142,388 - 939,198
amortization
Income (loss) from
operations
before taxes 11,250,797 406,067 (274,316) - 11,382,548
Segment assets 211,415,018 41,467,227 6,336,921 - 259,219,166
Year Ended March 31, 1999
Revenue $292,004,548 $ 46,961,918 $ 1,867,979 $ (6,659,295) $334,175,150
Depreciation and 712,345 14,189 106,079 - 832,613
amortization
Income (loss) from
operations
before taxes 11,111,721 424,208 (1,630,531) - 9,905,398
Segment assets 204,911,125 12,744,061 2,252,195 - 219,907,381
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Allou Health & Beauty Care, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of Allou Health & Beauty Care, Inc.
included in this Form 10-K and have issued our report thereon dated July 2,
2001. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. This schedule (Schedule II - Schedule of
Valuation and Qualifying Accounts) is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule, for the year ended March 31, 2001, has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Melville, New York
July 2, 2001
S-1
REPORT ON INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Allou Health and Beauty Care, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of Allou Health and Beauty Care, Inc.
included in this Form 10-K and have issued our report thereon dated June 19,
2000. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. This schedule (Schedule II - Schedule of
Valuation and Qualifying Accounts) is presented for purposes of complying with
the Securities and Exchange Commisions's rules and is not part of the basic
financial statements. This schedule, for the years ended March 31, 2000 and
1999, has been subjected to the auditing procedures applied in our audits of the
basic financial statements and, in our opinon, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ MAYER RISPLER & COMPANY P.C.
Mayer Rispler & Company P.C.
Certified Public Accountants
Brooklyn, New York
June 19, 2000
S-2
SCHEDULE II
ALLOU HEALTH & BEAUTY CARE, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column C Column D
Column A Column B Additions Deductions Column E
-------- -------- --------- ---------- --------
Balance at Charged to Write-off of
Beginning Costs and Uncollectible Balance at
Description of Period Expenses Accounts End of Period
------------------------------------------- ----------- ---------- ------------- -------------
March 31, 1999
Allowance for Doubtful Accounts $ 371,475 $1,465,000 $ 220,510 $ 1,615,965
March 31, 2000
Allowance for Doubtful Accounts $1,615,965 $1,471,547 $1,802,512 $ 1,285,000
March 31, 2001
Allowance for Doubtful Accounts $1,285,000 $ 780,000 $ 727,925 $ 1,337,075
S-3