SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 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
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Emjay Boulevard, Brentwood, New York 11717
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 273-4000
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve 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 [ ]
1
<PAGE>
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class November 11, 1997
- ------------------------------------- -----------------
Class A Common Stock, $.001 par value 4,559,850
Class B Common Stock, $.001 par value 1,200,000
2
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ALLOU HEALTH & BEAUTY CARE, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1997
(unaudited)and March 31,1997....................................5
Consolidated Statement of Income and Retained Earnings (unaudited)
For the Six Months Ended September 30, 1997
and 1996........................................................6
Consolidated Statement of Income & Retained Earnings (unaudited)
For the Three Months Ended September 30, 1997
and 1996........................................................7
Consolidated Statement of Cash Flows (unaudited)
For the Six Month Periods Ended September 30, 1997 and 1996.....8
Notes to Consolidated Financial Statements (unaudited)..............9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............19
Item 6. Exhibits and Reports on Form 8-K................................20
SIGNATURES....................................................................21
EXHIBIT INDEX.................................................................22
3
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
4
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ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
------
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- ---------
Current Assets
- --------------
<S> <C> <C>
Cash $ 62,194 $ 76,531
Accounts Receivable (less allowance for
doubtful accounts of $958,418 at September 30,
1997 and $555,682 at March 31, 1997 (Notes 1 & 5) 55,446,245 48,424,882
Inventories (Notes 1 & 5) 100,864,536 96,661,103
Other Current Assets (Note 2) 10,626,218 8,168,603
------------ ------------
Total Current Assets $166,999,193 $153,331,119
Fixed Assets, Less Accumulated Depreciation
(Notes 1 & 3) 3,626,245 3,642,758
Other Assets (Note 4) 4,340,073 4,373,918
------------ ------------
TOTAL ASSETS $174,965,511 $161,347,795
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities
- -------------------
Amounts Due Bank (Note 5) $ 98,671,621 $ 96,740,253
Current Portion of Long-Term Debt (Note 6) 386,281 540,500
Accounts Payable and Accrued Expenses (Note 7) 23,562,486 13,998,641
------------ ------------
Total Current Liabilities $122,620,388 $111,279,394
------------ ------------
Long Term Liabilities
- ---------------------
Long-Term Debt, Less Current Portion (Note 6) 1,855,722 1,841,470
------------ ------------
Total Long Term Liabilities 1,855,722 1,841,470
------------
------------ ------------
TOTAL LIABILITIES $124,476,110 $113,120,864
------------ ------------
Commitments & Contingencies (Note 8)
Stockholders' Equity (Notes 1 & 9)
- --------------------
Preferred Stock, $.001 par value, 1,000,000
shares authorized, none issued and outstanding
Class A Common Stock, $.001
par value; 10,000,000 shares authorized and
4,559,850 and 4,552,225 issued and outstanding at
September 30,1997 and March 31, 1997, respectively $ 4,560 $ 4,552
Class B Common Stock, $.001 par value; 2,200,000
authorized at September 30, 1997 and March 31, 1997
respectively, 1,200,000 issued and outstanding
at September 30, 1997 and March 31, 1997 1,200 1,200
Additional Paid-In Capital 23,522,250 23,476,508
Retained Earnings 26,961,391 24,744,671
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 50,489,401 48,226,931
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $174,965,511 $161,347,795
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
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ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For The Six Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Revenues $148,196,799 $145,796,500
Costs of Revenues 129,200,439 129,293,994
------------ ------------
Gross Profit 18,996,360 16,502,506
------------ ------------
Operating Expenses
Warehouse & Delivery 4,466,186 4,256,051
Selling, General & Administrative 6,981,725 6,150,466
------------ ------------
Total Expenses 11,447,911 10,406,517
------------ ------------
Income From Operations 7,548,449 6,095,989
------------ ------------
Other Charges (Credits)
Interest 3,978,595 3,091,491
Other (9,866) (18,013)
------------ ------------
Total 3,968,729 3,073,478
------------ ------------
Income Before Income Taxes 3,579,720 3,022,511
Provision for Income Taxes (Note 10) 1,363,000 1,143,000
------------ ------------
NET INCOME 2,216,720 1,879,511
RETAINED EARNINGS - BEGINNING 24,744,671 20,686,136
------------ ------------
RETAINED EARNINGS - ENDING $ 26,961,391 $ 22,565,647
============ ============
Net Income Per Common Share: (Note 1) $ 26,961,391 $ 22,565,647
============ ============
Primary and Fully Diluted $ .37 $ .33
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
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ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For The Three Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Revenues $83,341,115 $76,838,439
Costs of Revenues 74,051,030 68,466,379
----------- -----------
Gross Profit 9,290,085 8,372,060
----------- -----------
Operating Expenses
- ------------------
Warehouse & Delivery 3,266,954 2,261,178
Selling, General & Administrative 2,088,009 2,794,385
----------- -----------
Total Expenses 5,354,963 5,055,563
----------- -----------
Income From Operations 3,935,122 3,316,497
----------- -----------
Other Charges (Credits)
- -------------
Interest 1,999,857 1,601,682
Other (6,485) (7,029)
----------- -----------
Total 1,993,372 1,594,653
----------- -----------
Income Before Income Taxes 1,941,750 1,721,844
Provision for Income Taxes (Note 10) 713,000 645,000
----------- -----------
NET INCOME 1,228,750 1,076,844
RETAINED EARNINGS - BEGINNING 25,732,641 21,488,803
----------- -----------
RETAINED EARNINGS - ENDING $26,961,391 $22,565,647
=========== ===========
Net Income Per Common Share: (Note 1) $29,961,391 $22,565,647
=========== ===========
Primary and Fully Diluted $ .21 $ .19
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
7
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ALLOU HEALTH & BEAUTY CARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For The Six Months Ended
September 30,
1997 1996
---- ----
Cash Flows From Operating Activities
- ------------------------------------
<S> <C> <C>
Net Income $ 2,216,720 $ 1,879,511
Adjustments to Reconcile Net Income to Net Cash Used in
Operating Activities:
Depreciation and Amortization 351,672 343,636
Decrease (Increase) In Assets:
Accounts Receivable (7,021,363) (20,153,038)
Inventories (4,203,433) (10,327,064)
Prepaid Purchases and Other Assets (2,457,202) 4,286,827
Increase (Decrease) In Liabilities:
Accounts Payable and Accrued Expenses 9,563,845 7,802,004
----------- ------------
Net Cash Used In Operating Activities (1,549,761) (16,168,124)
----------- ------------
Cash Flows Used in Investing Activities
- ---------------------------------------
Acquisition of Fixed Assets (301,727) (369,770)
----------- ------------
Cash Flows From Financing Activities
- ------------------------------------
Net Increase in Amounts Due Bank 1,931,368 14,711,284
Borrowings 215,771 2,010,376
Repayment of Debt (355,738) (267,155)
Proceeds from Exercise of Options 45,750 0
----------- ------------
Net Cash Provided By Financing Activities 1,837,151 16,454,505
----------- ------------
DECREASE IN CASH (14,337) (83,389)
CASH AT BEGINNING OF PERIOD 76,531 144,118
----------- ------------
CASH AT END OF PERIOD $ 62,194 $ 60,729
=========== ============
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $ 3,959,378 $ 3,008,007
Income Taxes $ 1,580,108 $ 894,000
</TABLE>
During the six months ended September 30, 1997, the Company issued notes for
$215,771 $2,010,376, respectively.
The accompanying notes are an integral part of this financial statement.
8
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Organization:
Allou Health & Beauty Care, Inc. (the "Company") was incorporated on
January 20, 1989 under the laws of the state of Delaware, on which date it
acquired all of the outstanding shares of Allou Distributors, Inc. in exchange
for 2,400,000 shares (1,200,000 post-split) of its Class B Common Stock, thus
making it a wholly-owned subsidiary.
Effective April 1, 1993, the Company acquired all of the outstanding
shares of M. Sobol, Inc., a wholesaler of pharmaceutical products in a
transaction accounted for under the purchase method. The price for the stock was
$1,472,382.
On October 2, 1995, the Company purchased certain assets of Russ
Kalvin Inc., a manufacturer of hair care products located in southern California
for $2,296,735. These assets included accounts receivable, inventory, equipment
and intangibles. The Company has incorporated wholly-owned subsidiaries that
manufacture and distribute these products.
These financial statements include the consolidated operations of the
Company and its subsidiaries. All intercompany transactions have been
eliminated.
B. Description of Operations:
The Company is engaged in the business of distributing brand name
health and beauty aids, cosmetics, fragrances, grocery products and
pharmaceuticals. The Company also distributes generic brand health and beauty
aids and hair care products. The Company sells these products to retailers
throughout the United States.
C. Revenue Recognition:
The Company recognizes revenue on its entire product line at the time
the products are shipped to the customer.
D. 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.
E. Inventories:
Inventories, which consist of finished goods, are stated at the lower
of average cost or market.
F. Fixed Assets:
Property and equipment are stated at cost. Depreciation is provided
for over the estimated useful lives of the assets by use of straight-line and
accelerated methods.
9
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ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. Earnings Per Share:
Primary and fully diluted earnings per share are computed on weighted
average number of shares actually outstanding, plus the shares that would be
outstanding assuming the exercise of the Company's outstanding stock warrants
and stock options, which are considered to be common stock equivalents, in
accordance with the treasury stock method.
H. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
I. Stock Based Compensation:
The Company accounts for stock options as prescribed by APB opinion
No. 25 and includes pro forma information in the stock options footnote, as
permitted by statement of financial accounting standard No. 123.
2. OTHER CURRENT ASSETS:
Included in other current assets at September 30, 1997 are $8,961,520
of prepayments on merchandise.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
September 30, March 31, Estimated
1997 1997 Useful Lives
----- ---- ------------
<S> <C> <C> <C>
Machinery & Equipment $1,897,311 $1,765,908 5 years
Furniture, Fixtures & Office Equipment 2,361,967 2,295,084 5-10 years
Transportation Equipment 96,750 96,750 3-5 years
Leasehold Improvements 2,682,398 2,578,957 10-33 years
---------- ---------
7,038,426 6,736,699
Less: Accumulated Depreciation 3,412,181 3,093,941
---------- ----------
$3,626,245 $3,642,758
========== ==========
</TABLE>
Depreciation expense for the six months ended September 30, 1997 and
1996 amounted to $318,240 and $309,704, respectively. Depreciation expense for
the three months ended September 30, 1997 and 1996 amounted to $159,120 and
$154,699, respectively.
4. OTHER ASSETS:
Included in other assets is $1,729,711 of goodwill, net of
amortization, created upon the purchase of the shares of M. Sobol Inc., the
Company's wholly-owned subsidiary, and the purchase of selected assets of Russ
Kalvin Inc. (note 1-A), and $2,118,000 of interest-bearing officers' loans. The
goodwill is being amortized over forty years and fifteen years, respectively.
Amortization expense for the six months ended September 30, 1997
10
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ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and 1996, amounted to $33,432 and $33,932, respectively. Amortization expense
for the three months ended September 30, 1997 and 1996 amounted to $16,716 and
$16,966, respectively.
5. AMOUNTS DUE BANK:
The Company has a secured line of credit with a consortium of banks.
The financing agreement provides for advances of up to 85% of eligible
receivables and 60% of eligible inventories with aggregate maximum advances
which have been increased as of October 22, 1997 from $110,000,000 to
$145,000,000, including a $6,500,000 sublimit for overadvances. Interest on the
loan balance is payable monthly at 3/8% above the prime rate or 2% above the
Eurodollar rate, at the option of the Company. The loan is collateralized by the
Company's accounts receivable and inventories and the overadvances are
guaranteed by the Company's principal stockholders. In addition, the Company is
required to abide by certain financial covenants. The effective interest rate
charged to the Company at September 30, 1997 was 7.79%, which was based on a
combination of 2% above the Eurodollar rate and 3/8% above the prime rate.
6. 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 $52,282, which include interest at rates varying from 3/8% above
the prime rate to 3.36% above the treasury rate.
(b) a loan payable to the previous stockholder of M. Sobol, Inc. (see
note 1-A). Interest payable on the declining principal balance has been
calculated at 5.45% per annum, through April 1, 2000.
The aggregate long-term debt is payable as follows:
Year Ending
March 31,
---------
1998 (six months) $ 242,408
1999 645,134
2000 677,138
2001 579,336
2002 97,987
----------
$ 2,242,003
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
September 30, March 31,
1997 1997
---- ----
Cost of Revenues $21,796,191 $12,066,836
Selling, General & Administrative 826,867 928,967
Interest - Bank 569,650 550,433
Payroll 369,775 452,405
---------- ---------
$23,562,483 $13,998,641
========== ==========
11
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
A. Operating Leases:
The Company is obligated under a real property operating lease
expiring in May 2005. Additionally, commencing on October 2, 1995, in connection
with the operations of its wholly-owned hair care products subsidiaries, the
Company entered into a five year real property operating lease for space located
in California. As of September 30, 1997, total minimum annual rentals, excluding
additional payments for real estate taxes and certain expenses, are as follows:
Year Ending
March 31,
---------
1998 (six months) $ 427,598
1999 852,797
2000 858,797
2001 768,749
2002 625,939
2003-2006 1,982,139
Rent expense for the six months ended September 30, 1997 and 1996
amounted to $460,296 and $445,685, respectively. Rent expense for the three
months ended September 30, 1997 and 1996 amounted to $243,574 and $302,299
respectively.
B. Union:
The Company has an agreement with the National Organization of
Industrial Trade Unions which terminates on December 14, 1997. The agreement
covers all warehouse and receiving employees, excluding supervisory personnel.
C. Defined Contribution Plan
Effective April 1, 1996, the Company established a non-contributory
defined contribution plan (401K) for substantially all employees not covered
under collective bargaining agreements.
D. Stock Option Plans:
The Company has adopted Stock Option Plans which provide for the
granting of stock options to certain employees and directors. An aggregate of
2,677,150 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. As of September 30, 1997, the Company
had 2,046,025 of outstanding options at prices ranging from $5.80 to $10.00. As
of September 30, 1996, the Company had 1,184,500 of outstanding options at
prices ranging from $5.75 the $10.00.
12
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. Stock Option Plans: (Continued)
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 in the six months ended September 30, 1997 and 1996 consistent with the
provisions of SFAS No. 123, net income per common share would have been reduced
to the following pro forma amounts:
September 30, September 30,
1997 1996
---- ----
Net Income - Pro Forma $1,475,272 $1,599,376
Earnings Per Common Share - Pro Forma $.25 $.28
The pro forma amounts are not indicative of anticipated future
disclosures because SFAS 123 does not apply to options granted before fiscal
1996.
The fair value of each option at date of grant for options granted
during the six months ended September 30, 1997 and 1996 was $1.50 and $2.07,
respectively, and were estimated using the Black-Scholes option pricing model.
The following assumptions were applied:
No dividend yield; expected volatility rates of 25% and 32%; Risk
free interest rates approximating 5% and expected lives of 3.3 years and 4.3
years, respectively.
E. The Company has three year employment agreements with three of its
officers which expire July 31, 1998. These agreements provide for each to
receive annual salaries of $300,000 and a bonus of 3% of the first $2,000,000,
2% on the next $1,000,000 and 1% on the remaining increase over the Company's
prior year earnings before interest and taxes. For the six months ended
September 30, 1997, these three officers received a total bonus of $99,238. For
the six months ended September 30, 1996, these three officers received no bonus.
Effective September 30, 1996, the Company entered into a three year
employment agreement with a fourth officer, providing for an annual salary of
$225,000 and a $75,000 bonus.
F. Letters of Credit:
The Company has irrevocable standby letters of credits in the sum of
$425,000 expiring thru February 28, 1998.
G. 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.
13
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY:
On September 11, 1996, the stockholders of the Company approved an
increase of the number of authorized shares of Class B Common Stock from
1,700,000 to 2,200,000 shares. The number of authorized shares of Class A Common
Stock is currently 10,000,000 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.
10. PROVISION FOR INCOME TAXES:
September 30,
1997 1996
---- ----
Income Before Income Taxes $3,579,720 $3,022,511
========= =========
Federal Income Tax $1,140,000 $ 949,000
State Income Taxes 223,000 194,000
---------- ---------
Total Provision for Income Taxes $1,363,000 $1,143,000
========= =========
The following is a reconciliation of the statutory income tax rate
to the total effective tax rates:
September 30,
1997 1996
---- ----
Federal Statutory Income Tax Rate 34.0% 34.0%
Increase in Tax Rates Resulting from:
State Income Taxes, Net of Federal Tax Benefits 4.1% 3.8%
----- -----
Total Effective Tax Rates 38.1% 37.8%
===== =====
At September 30, 1997, net operating loss carryforwards of
approximately $140,000 are available to offset future earnings. These losses
were generated by the Company's subsidiary M. Sobol Inc., prior to its
acquisition by the Company, and as such are limited to $85,000 per year as per
Internal Revenue Service regulations.
11. RELATED PARTY TRANSACTIONS:
For the six months ended September 30, 1997 and 1996, purchases from
related parties amounted to $2,035,183 and $356,120 respectively, and prepaid
purchases amounted to $2,800,876 and $11,066 at September 30, 1997 and 1996,
respectively.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
and Results of Operations.
A. RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
Revenues for the six months ended September 30, 1997 were
$148,196,799 representing a 1.7% increase over revenues of
$145,796,500 for the six months ended September 30, 1996.
This increase in revenues is attributable to an increase in sales
volume for the segments of the Company's business described below, an
expanded customer base and an increase in same store sales, which has
together caused an increase in the volume of products sold.
Contributions to this increase in revenues by product segment is as
follows:
o Health and beauty aids increased 16.4% when compared to the
same period in the previous year. This increase in revenue is due
to an increase in same store sales and an expanded customer base.
o Prestige designer fragrances grew 6.1% when compared to the
same period in the prior year due to increases in same store
sales.
o Nationally advertised non-perishable branded food products
decreased 23% when compared to the same period in the prior year
due to management's decision to eliminate a variety of products
from the Company's distribution mix due to increased costs and
lower gross profit margins associated with those products. It is
management's expectation that the Company will continue to focus
its resources on those non- perishable branded food products
which carry higher gross profit margins.
o The 11.2% decrease in sales of pharmaceutical items within the
Company's wholly-owned subsidiary, M. Sobol, Inc. as compared to
the same period in the prior year was a result of management's
decision to de-emphasize sales of branded pharmaceuticals, which
are characterized by limited operating margins. The Company has
required that all sales of its branded pharmaceutical products to
its customers be combined with orders for generic pharmaceuticals
and over-the-counter health and beauty aids products which
historically have been marked by higher gross profit margins.
Gross profit as a percentage of revenues increased to 12.8% for
the six months ended September 30, 1997 when compared to 11.3%
for
15
<PAGE>
the same period in the previous year. This increase was due to
improved profit margins associated with the sales of the
Company's fragrance products.
Warehouse, delivery, selling, general and administrative expenses
increased as a percentage of sales to 7.7% for the six months ended
September 30, 1997, from 7.1% when compared to the same period in the
prior year. This increase in operating expenses is due to reduced
revenues in the Company's non-perishable food and branded
pharmaceutical products without a proportional reduction of expenses
relating to these areas. Additionally, the Company experienced
increased expenses associated with increasing the number of personnel
in its wholly-owned subsidiary, Allou Personal Care Corporation, a
manufacturer and distributor of hair and skin care products.
Interest expense as a percentage of revenues for the six months ended
September 30, 1997 increased to 2.7% from 2.1% when compared to the
six months ended September 30, 1996. This increase is a result of
increased borrowing.
Net income for the six months ended September 30, 1997 was $2,216,720
representing an 18% increase over net income of $1,879,511 for the
comparable period in 1996. The increase in net income is due
primarily to improved margins.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenues for the three months ended September 30, 1997 were
$83,341,115 representing a 9% increase over revenues of $76,838,439
for the three months ended September 30, 1996.
This increase in revenues is attributable to an increase in sales
volume for the segments of the Company's business described below, an
expanded customer base and an increase in same store sales, which has
together caused an increase in the volume of products sold.
Contributions to this increase in revenues by product segment is as
follows:
o Revenues from health and beauty aids increased 26% when compared
to the same period in the previous year. This increase in in
revenues is due to an increase in same store sales volume and an
expanded customer base.
o Revenues from prestige designer fragrances decreased 2.1% when
compared to the same period in the prior year due to a decrease
in same store sales.
16
<PAGE>
o Revenues from nationally advertised non-perishable branded food
products grew 17% when compared to the same period in the prior
year due to an increase in the volume of products sold.
o Revenues from prescription pharmaceuticals decreased 13% when
compared to the same period in the prior year due primarily to
the reasons discussed above.
Gross profit as a percentage of sales increased to 11.1% for the
three months ended September 30, 1997 from 10.9% when compared to the
three months ended September 30, 1996. This increase is principally
attributable to higher profit margins associated with the Company's
fragrance products.
Warehouse, delivery, selling, general and administrative expenses as
a percentage of sales for the three months ended September 30, 1997
decreased to 6.4% from 6.6% from the same period in the prior year.
Interest expense as a percentage of revenues for the three months
ended September 30, 1997 was $1,228,753 representing a 14% increase
over net income of $1,076,844 for the comparable period in 1996. The
increase in net income is due primarily to higher margins on
increased sales.
B. LIQUIDITY AND CAPITAL RESOURCES
The Company meets its working capital requirements from internally
generated funds and from a financing agreement with a consortium of
banks led by the First National Bank of Boston for financing the
Company's accounts receivable and inventory. As of September 30,
1997, the Company had $98,671,621 outstanding under its $110,000,000
bank line of credit. The loan is collaterized by the Company's
inventory and accounts receivable. Interest on the loan balance is
payable monthly at 3/8% above the prime rate or 2% above the
Eurodollar rate at the option of the Company. The effective interest
rate charged to the company at September 30, 1997 was 7.79%, which
was based on a combination of 2% above the Eurodollar rate and 3/8%
above the prime rate. The Company utilizes cash generated from
operations to reduce short-term borrowings, which in turn acts to
increase loan availability consistent with the company's financing
agreement.
On October 22, 1997, the Company's Revolving Credit Agreement was
amended to increase the maximum availability from $110,000,000 to
$145,000,000 and to add the First national Bank of Maryland, the Dime
Savings Bank of New York FSB and Key Corporate Capital, Inc. As
additional lenders.
17
<PAGE>
The Company's accounts receivable has increased from $54,116,868 at
September 30, 1996 to $55,446,245 at September 30, 1997. This
increase in accounts receivable is due to increased sales for the
period.
The Company has minimal capital investment requirements and any
significant capital expenditures are financed through long term lease
agreements that would not adversely impact cash flow. The Company
believes that its internally generated funds and bank line of credit
will be sufficient to meet its currently anticipated cash and capital
needs through the fiscal year ending March 31, 1999.
18
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On September 15, 1997, the Company's annual meeting of stockholders
was held (the "Meeting"). At the Meeting, the stockholders approved the
following matters:
1. Election of the following individuals as directors of the Company
for a term of one year, which constitutes the entire Board of
Directors of the Company:
Victor Jacobs, Herman Jacobs, Jack Jacobs, Ramon Montes,
David Shamilzadeh, Jeffrey Berg and Sol Naimark
2. Approval of an amendment to the Company's 1996 Stock Option Plan.
There was no solicitation in opposition to the nominees of the Board
of Directors for election to the Board of Directors. All nominees of the Board
of Directors were elected. The number of votes cast for or withheld were as
follows:
Nominee Votes For Votes Withheld
------------------ ----------- -----------------
Victor Jacobs 9,800,831 243,703
Herman Jacobs 9,800,831 243,703
Jack Jacobs 9,800,974 243,560
Ramon Montes 9,800,974 243,560
David Shamilzadeh 9,800,974 243,560
Jeffrey Berg 9,780,674 263,860
Sol Naimark 9,795,674 248,860
Ratification of the amendment to the Company's 1996 Stock Option
Plan to permit grants to non-employee directors was approved by the stockholders
at the Meeting. The votes cast on this matter was as follows:
Abstentions and
Votes For Against Broker Non-Votes
------------ --------- ------------------
9,172,046 845,658 26,830
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
quarterly period ended September 30, 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLOU HEALTH & BEAUTY CARE, INC.
By: /s/ David Shamilzadeh
--------------------------------
David Shamilzadeh
Senior Vice President of Finance
and Chief Financial Officer
Dated: November 14, 1997
21
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page Number
- ------- ----------- -----------
11.1 Computation of Primary and Fully Diluted Earnings
per Common Share
27.1 Financial Data Schedule
22
<PAGE>
EXHIBIT 11.1
ALLOU HEALTH & BEAUTY CARE, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Reconciliation of net income
per consolidated statement of
operations to amount used in
earnings per share calculation:
<S> <C> <C> <C> <C>
Net Income $2,216,720 $1,879,511 $1,228,750 $1,076,844
========== ========== ========== ==========
Reconciliation of weighted
average number of shares
outstanding to amount used
in earnings per share calculation:
Weighted average number of 5,755,138 5,752,225 5,756,840 5,752,225
shares outstanding
Add: Shares issuable from 193,021 1,596 221,447 - 0 -
---------- ---------- ---------- ----------
assumed exercise of options
and warrants
Total Common Stock And 5,948,159 5,753,821 5,978,287 5,752,225
========== ========== ========== ==========
Equivalents
Earnings per common share $ .37 $ .33 $ .21 $ .19
========== ========== ========== ==========
</TABLE>
23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000846538
<NAME> ALLOU HEALTH & BEAUTY CARE, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 62,194
<SECURITIES> 0
<RECEIVABLES> 56,404,663
<ALLOWANCES> 958,418
<INVENTORY> 100,864,536
<CURRENT-ASSETS> 166,999,193
<PP&E> 7,038,426
<DEPRECIATION> 3,412,181
<TOTAL-ASSETS> 174,965,511
<CURRENT-LIABILITIES> 122,620,388
<BONDS> 0
0
0
<COMMON> 5,760
<OTHER-SE> 50,483,641
<TOTAL-LIABILITY-AND-EQUITY> 174,965,511
<SALES> 148,196,799
<TOTAL-REVENUES> 148,196,799
<CGS> 129,200,439
<TOTAL-COSTS> 129,200,439
<OTHER-EXPENSES> 11,438,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,978,595
<INCOME-PRETAX> 3,579,720
<INCOME-TAX> 1,363,000
<INCOME-CONTINUING> 2,216,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,216,720
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
