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 DECEMBER 31,
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 [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class February 5, 1997
- ------------------------------------- ----------------
Class A Common Stock, $.001 par value 4,559,850
Class B Common Stock, $.001 par value 1,200,000
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended December 31, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 1997
(unaudited) and March 31, 1997..................................4
Consolidated Statement of Income and Retained Earnings
(unaudited) For the Nine Months Ended December 31, 1997
and 1996........................................................5
Consolidated Statement of Income & Retained Earnings
(unaudited) For the Three Months Ended December 31, 1997
and 1996........................................................6
Consolidated Statement of Cash Flows (unaudited)
For the Nine Month Periods Ended December 31, 1997 and 1996.....7
Notes to Consolidated Financial Statements (unaudited)...........8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................20
SIGNATURES....................................................................21
EXHIBIT INDEX.................................................................22
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
3
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ------------
<S> <C> <C>
Current Assets
Cash...........................................................$ 214,417 $ 76,531
Accounts Receivable (less allowance for doubtful
accounts of $791,809 at December 31, 1997 and $555,682
at March 31, 1997 (Notes 1 & 5).......................... 49,134,350 48,424,882
Inventories (Notes 1 & 5)...................................... 112,106,445 96,661,103
Other Current Assets (Note 2).................................. 14,320,797 8,168,603
------------ ------------
Total Current Assets................................$175,776,009 $153,331,119
Fixed Assets, Less Accumulated Depreciation
(Notes 1 & 3)................................................ 3,599,354 3,642,758
Other Assets (Note 4)......................................... 4,601,809 4,373,918
------------ ------------
TOTAL ASSETS........................................$183,977,172 $161,347,795
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Amounts Due Bank (Note 5)......................................$114,050,879 $ 96,740,253
Current Portion of Long-Term Debt (Note 6)..................... 639,613 540,500
Accounts Payable and Accrued Expenses (Note 7)................. 15,988,724 13,998,641
Income Taxes Payable........................................... 5,922 -0-
------------ ------------
Total Current Liabilities................................$130,685,138 $111,279,394
------------ ------------
Long Term Liabilities
Long-Term Debt, Less Current Portion (Note 6).................. 1,480,601 1,841,470
------------ ------------
Total Long Term Liabilities.............................. 1,480,601 1,841,470
------------ ------------
TOTAL LIABILITIES...................................$132,165,739 $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, $.001 par value;
10,000,000 shares authorized and 4,559,850 and
4,552,225 issued and outstanding at December 31,
1997 and March 31, 1997, respectively.......................$ 4,560 $ 4,552
Class B Common Stock, $.001 par value; 2,200,000 authorized
at December 31, 1997 and March 31, 1997, respectively,
1,200,000 issued and outstanding at December 31, 1997 and
March 31, 1997..............................................$ 1,200 $ 1,200
Additional Paid-In Capital..................................... 23,522,250 23,476,508
Retained Earnings.............................................. 28,283,423 24,744,671
------------ ------------
TOTAL STOCKHOLDERS' EQUITY.......................... 51,811,433 48,226,931
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY............$183,977,172 $161,347,795
============ ============
</TABLE>
The accompanying notes are an integral part of
this financial statement.
4
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For The Nine Months Ended
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues ................................................. $224,546,239 $211,453,748
Costs of Revenues ........................................ 194,896,715 186,592,527
------------ ------------
Gross Profit .................................... 29,649,524 24,861,221
------------ ------------
Operating Expenses
Warehouse & Delivery ................................. 7,027,188 6,350,775
Selling, General & Administrative .................... 10,687,764 9,166,287
------------ ------------
Total Expenses .................................. 17,714,952 15,517,062
------------ ------------
Income From Operations .......................... 11,934,572 9,344,159
------------ ------------
Other Charges (Credits)
Interest ............................................ 6,206,561 4,827,435
Other ................................................ (11,131) (26,914)
------------ ------------
Total ........................................... 6,195,430 4,800,521
------------ ------------
Income Before Income Taxes ...................... 5,739,142 4,543,638
Provision for Income Taxes (Note 10) ................. 2,200,390 1,729,812
------------ ------------
NET INCOME ............................ 3,538,752 2,813,826
------------ ------------
RETAINED EARNINGS - BEGINNING OF PERIOD 24,744,671 20,686,136
------------ ------------
RETAINED EARNINGS - END OF PERIOD ..... $ 28,283,423 $ 23,499,962
============ ============
Net Income Per Common Share: (Notes 1 & 11)
Basic Earnings Per Share ........................ $ .61 $ .49
============ ============
Diluted Earnings Per Share ...................... $ .60 $ .49
============ ============
</TABLE>
The accompanying notes are an integral part of
this financial statement.
5
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
For The Three Months Ended
December 31,
1997 1996
----------- -----------
Revenues ......................................... $76,349,440 $65,657,248
Costs of Revenues ................................ 65,696,276 57,298,533
----------- -----------
Gross Profit ............................... 10,653,164 8,358,715
----------- -----------
Operating Expenses
Warehouse & Delivery ....................... 2,561,002 2,094,724
Selling, General & Administrative .......... 3,706,039 3,015,821
----------- -----------
Total Expenses ........................ 6,267,041 5,110,545
----------- -----------
Income From Operations ................ 4,386,123 3,248,170
----------- -----------
Other Charges (Credits)
Interest ................................... 2,227,966 1,735,944
Other ...................................... (1,265) (8,896)
----------- -----------
Total ................................. 2,226,701 1,727,048
----------- -----------
Income Before Income Taxes ............ 2,159,422 1,521,122
Provision for Income Taxes ................. 837,390 586,807
----------- -----------
NET INCOME ............................ 1,322,032 934,315
RETAINED EARNINGS - BEGINNING OF PERIOD 26,961,391 22,565,647
----------- -----------
RETAINED EARNINGS - END OF PERIOD ..... $28,283,423 $23,499,962
=========== ===========
Net Income Per Common Share: (Notes 1&11)
Basic Earnings per Share ............... $ .23 $ .16
=========== ===========
Diluted Earnings Per Share ............. $ .22 $ .16
=========== ===========
The accompanying notes are an integral part of
this financial statement.
6
<PAGE>
ALLOU HEALTH & BEAUTY CARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For The Nine Months Ended
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income ...................................... $ 3,538,752 $ 2,813,826
Adjustments to Reconcile Net Income to Net Cash Used in
Operating Activities:
Depreciation and Amortization ................... 527,508 455,215
Decrease (Increase) In Assets:
Accounts Receivable ............................. (709,468) (360,977)
Inventories ..................................... (15,445,342) (25,826,444)
Prepaid Purchases and Other Assets .............. (6,430,233) (1,500,628)
Increase (Decrease) In Liabilities:
Accounts Payable and Accrued Expenses ........... 1,990,083 9,043,352
Income Taxes Payable ............................ 5,992 -0-
------------ ------------
Net Cash Used In Operating Activities ..... (16,522,778) (15,375,656)
------------ ------------
Cash Flows Used in Investing Activities
Acquisition of Fixed Assets ..................... (433,956) (597,717)
------------ ------------
Cash Flows From Financing Activities
Net Increase in Amounts Due Bank ................ 17,310,626 14,288,612
Borrowings ...................................... 215,771 2,010,376
Repayment of Debt ............................... (477,527) (383,029)
Proceeds from Exercise of Options ............... 45,750 -0-
------------ ------------
Net Cash Provided By Financing Activities . 17,094,620 15,915,959
------------ ------------
INCREASE (DECREASE) IN CASH ......... 137,886 (57,414)
CASH AT BEGINNING OF PERIOD ......... 76,531 144,118
------------ ------------
CASH AT END OF PERIOD ............... $ 214,417 $ 86,704
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest .................................. $ 6,085,565 $ 4,706,028
Income Taxes .............................. $ 2,122,890 $ 1,662,293
</TABLE>
During the nine months ended December 31, 1997 and 1996, the Company issued
notes for $215,771 and $2,010,376, respectively.
The accompanying notes are an integral part of
this financial statement.
7
<PAGE>
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.
8
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
G. Earnings Per Share:
The Company has adopted Financial Accounting Board (FASB) SFAS No. 128
"Earnings Per Share." This statement replaces the requirement of presenting
primary and fully diluted earnings per share with a presentation of basic EPS
and diluted EPS for all periods presented in financial statements which include
periods ended after December 15, 1997.
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 December 31, 1997 are $12,286,811 of
prepayments on merchandise.
3. PROPERTY AND EQUIPMENT:
December 31, March 31, Estimated
1997 1997 Useful Lives
---------- ---------- ------------
Machinery & Equipment $1,944,223 $1,765,908 5 years
Furniture, Fixtures & Office Equipment 2,415,784 2,295,084 5-10 years
Transportation Equipment 96,750 96,750 3-5 years
Leasehold Improvements 2,713,898 2,578,957 10-33 years
---------- ----------
7,170,655 6,736,699
Less: Accumulated Depreciation 3,571,301 3,093,941
---------- ----------
$3,599,354 $3,642,758
========== ==========
9
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Depreciation expense for the nine months ended December 31, 1997 and 1996
amounted to $477,360 and $404,317, respectively. Depreciation expense for the
three months ended December 31, 1997 and 1996 amounted to $159,120 and $94,613,
respectively.
4. OTHER ASSETS:
Included in other assets is $1,712,995 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 $2,118,967 of interest-bearing officers' loans. The goodwill is
being amortized over forty years and fifteen years, respectively. Amortization
expense for the nine months ended December 31, 1997 and 1996, amounted to
$50,148 and $50,898, respectively. Amortization expense for the three months
ended December 31, 1997 and 1996 amounted to $16,716 and $9,466, 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 of $145,000,000,
with 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
December 31, 1997 was 8.04%, 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 $49,200, 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:
10
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ending
March 31,
1998 (three months) $ 120,619
1999 645,134
2000 677,138
2001 579,336
2002 97,987
-----------
$ 2,120,214
===========
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
December 31, March 31,
1997 1997
----------- -----------
Cost of Revenues $13,881,267 $12,066,836
Selling, General & Administrative 1,087,346 928,967
Interest - Bank 682,769 550,433
Payroll 337,342 452,405
----------- -----------
$15,988,724 $13,998,641
=========== ===========
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 December 31, 1997, total minimum annual rentals, excluding
additional payments for real estate taxes and certain expenses, are as follows:
Year Ending
March 31,
---------
1998 (three months) $ 213,799
1999 852,797
2000 858,797
2001 768,749
2002 625,939
2003-2006 1,982,139
Rent expense for the nine months ended December 31, 1997 and 1996 amounted
to $680,555 and $669,184, respectively. Rent expense for the three months ended
December 31, 1997 and 1996 amounted to $220,259 and $223,499 respectively.
11
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. Union:
The Company has an agreement with the National Organization of Industrial
Trade Unions which terminates on December 14, 2000. 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 December 31, 1997, the Company had 2,046,025
of outstanding options at prices ranging from $5.80 to $10.00. As of December
31, 1996, the Company had 1,184,500 of outstanding options at prices ranging
from $5.75 the $10.00.
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 nine months ended December 31, 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:
December 31, December 31,
1997 1996
------------ ------------
Net Income - Pro Forma $ 2,389,636 $ 2,813,826
Earnings Per Common Share - Pro Forma $ .41 $ .42
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 nine months ended December 31, 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.
12
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 nine months ended
December 31, 1997, these three officers received a total bonus of $148,857. For
the nine months ended December 31, 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 June 30, 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.
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:
December 31,
1997 1996
---------- ----------
Income Before Income Taxes $5,739,142 $4,543,638
========== ==========
Federal Income Tax $1,817,045 $1,441,291
State Income Taxes 383,345 288,521
---------- ----------
Total Provision for Income Taxes $2,200,390 $1,729,812
========== ==========
The following is a reconciliation of the statutory income tax rate to the
total effective tax rates: December 31,
13
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 4.3% 4.1%
---- ----
Total Effective Tax Rates 38.3% 38.1%
==== ====
At December 31, 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. EARNINGS PER SHARE:
A reconciliation of the numerators and denominators used in the
computations of basic and diluted earnings per share are as follows:
14
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED DECEMBER 31,
1997 1996
---- ----
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominators) Amounts (Numerator) Denominators Amounts
----------- -------------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income available to
common stockholders $3,538,752 5,755,118 $.61 $2,813,826 5,752,225 $.49
==== ====
EFFECT OF DILUTIVE
SECURITIES
Stock options 161,838 7,722
---------- ---------- ---------- ----------
DILUTED EPS
Net income available to
common stockholders and
assumed conversions $3,538,752 5,916,956 $.60 $2,813,826 5,759,947 $.49
========== ========== ==== ========== ========== ====
For the Three Months Ended December 31,
1997 1996
---- ----
BASIC EPS
Net income available to
common stockholders $1,322,032 5,759,850 $.23 $ 934,315 5,752,225 $.16
==== ====
EFFECT OF DILUTIVE
SECURITIES
Stock Options 265,729 9,659
---------- ---------- ---------- ----------
DILUTED EPS
Net income available to
common stockholders and
assumed conversions $1,322,032 6,025,579 $.22 $ 934,315 5,761,884 $.16
========== ========== ==== ========== ========== ====
</TABLE>
Options to purchase 864,800 shares at prices ranging from $7.19 - $10.00 at
December 31, 1997, and options to purchase 636,209 shares at prices ranging from
$7.70 - $10.00 were not included in the computation of diluted earnings per
share because the option exercise price was greater than the average market
price of the common shares.
12. RELATED PARTY TRANSACTIONS:
For the nine months ended December 31, 1997 and 1996, purchases from
related parties amounted to $3,204,541 and $385,193 respectively, and prepaid
purchases amounted to $4,359,880 at December 31, 1997.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
A. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31,
1997 AND 1996
Revenues for the nine months ended December 31, 1997 were
$224,546,239, representing a 6.2% increase over revenues of
$211,453,748 for the nine months ended December 31, 1996.
Contributions to this increase in revenues by product segment
were as follows:
o Health and beauty aids increased 15.8% when compared to
the same period in the previous year. This increase in
revenues was due to an increase in same store sales and
an expanded customer base.
o Prestige designer fragrances grew 12.8% when compared to
the same period in the prior year due to an expanded
customer base and increases in same store sales, which
together caused an increase in the volume of products
sold.
o Nationally advertised non-perishable branded food
products decreased 16.8% 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 reduce revenues within this segment of its business
over the foreseeable future while focusing its resources
on those non-perishable branded food products which
carry higher gross profit margins.
o The 6.1% decrease in sales of pharmaceutical items
within the Company's wholly-owned subsidiary, M. Sobol,
Inc., when compared to the same period in the prior
year, was a direct result of managements 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 are marked by higher gross profit margins.
Gross profit as a percentage of revenues increased to 13.2%
for the nine months ended December 31, 1997 when compared to
11.8% for the same period in the
16
<PAGE>
previous year. This increase was primarily due to higher
profit margins associated with the increased sales of the
Company's fragrance products at higher unit prices.
Warehouse, delivery, selling, general and administrative
expenses increased as a percentage of sales to 7.9% for the
nine months ended December 31, 1997 from 7.3% when compared to
the same period in the prior year. This increase in operating
expenses was 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 attributed to the formation of its wholly-owned
subsidiary, Allou Personal Care Corporation, a manufacturer
and distributor of hair and skin care products.
Interest expense as a percentage of sales for the nine months
ended December 31, 1997 increased to 2.8% from 2.3% in the
nine months ended December 31, 1996. This increase was due to
higher borrowing levels.
Net income for the nine months ended December 31, 1997 was
$3,538,752 representing a 25.8% increase over the net income
of $2,813,826 for the comparable period in 1996. The increase
in net income was due primarily to improved margins.
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996.
Revenues for the three months ended December 31, 1997 were
$76,349,440, representing a 16.3% increase over revenues of
$65,657,248 for the three months ended December 31, 1996.
The increase in revenues was 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 have together caused an increase in
the volume of products sold.
Contributions to this increase in revenues by product segment
was as follows:
o Health and beauty aids increased 12% when compared to
the same period in the previous year. This increase in
revenue was due to an increase in same store sales
volume and an expanded customer base.
o Prestige designer fragrances grew 25% when compared to
the same period in the prior year due to increases in
same store sales and an expanded
17
<PAGE>
customer base which together has caused an increase in
the volume of products sold.
o Nationally advertised non-perishable branded food
products increased 7% when compared to the same period
in the prior year due to an increase in the volume of
products offered to the Company by its vendors for
resale. This trend is not expected to continue.
o Sales of prescription pharmaceuticals increased 6% when
compared to the same period in the prior year, due to an
expanded customer base.
Gross profit as a percentage of sales increased to 14% for the
three months ended December 31, 1997 from 12.7% compared to
the three months ended December 31, 1996. This increase was
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
December 31, 1997 increased to 8.2% from 7.8% for the same
period in the prior year. The increase is attributable to
costs attributed to the Company's wholly-owned subsidiary,
Allou Personal Care Corp., a manufacturer and distributor of
hair and skin care products.
Interest expense as a percentage of sales for the three months
ended December 31, 1997 increased to 2.9% from 2.6% in the
comparable period of the prior year, representing higher
borrowings.
Net income for the three months ended December 31, 1997 was
$1,322,032, representing a 41.5% increase over net income of
$934,315 for the comparable period in 1996. This increase in
net income was due to the above factors.
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 December 31, 1997, the Company has $114,050,879
outstanding under its $145,000,000 bank line of credit. The
loan is collateralized 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 December 31, 1997 was 8.04%, which was based
on a combination of 2% above the Eurodollar rate and 3/8%
above the prime rate. The Company utilizes cash
18
<PAGE>
generated from operations to reduce short-term borrowings,
which in turn acts to increase loan availability consistent
with the Company's financing agreement.
The Company's accounts receivable has increased to $49,134,350
at December 31, 1997 from $34,324,807 at December 31, 1996.
This increase in accounts receivable was due to increased
sales for the three months ended December 31, 1997 and
collections of receivables turning at 57 days as compared to
49 days during the three months ended December 31, 1996.
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 ended March 31, 1999.
Forward Looking Statements
- --------------------------
This report may include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are typically
identified by the words "believe," "expect," "intend" "estimate" and similar
expressions. Those statements may appear in this report and include statements
regarding the intent of the Company or its directors or officers with respect
to, among other things: (i) trends affecting the Company's financial condition
or results of operations and (ii) the Company's business and growth strategies.
Any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
projected, expressed or implied in the forward-looking statements as a result of
various factors ("Cautionary Statements"), including but not limited to the
following: (i) public trends in the fragrance, cosmetics, non-perishable
packaged foods, salon-quality hair and skin care products and prescription
pharmaceuticals markets, (ii) the Company's dependence on certain key personnel,
(iii) actions of the Company's competitors, (iv) the Company's reliance on bank
financing and (v) general business and economic conditions. The Company does not
undertake to revise any forward-looking statements. All subsequent written or
oral forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
Cautionary Statements.
19
<PAGE>
PART II
OTHER INFORMATION
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 December 31, 1997.
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: February 17, 1998
21
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page Number
27.1 Financial Data Schedule
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000846538
<NAME> ALLOU HEALTH & BEAUTY CARE, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 214,417
<SECURITIES> 0
<RECEIVABLES> 49,926,159
<ALLOWANCES> 791,809
<INVENTORY> 112,106,445
<CURRENT-ASSETS> 175,776,009
<PP&E> 7,170,655
<DEPRECIATION> 3,571,301
<TOTAL-ASSETS> 183,977,172
<CURRENT-LIABILITIES> 130,685,138
<BONDS> 0
0
0
<COMMON> 5,760
<OTHER-SE> 51,805,673
<TOTAL-LIABILITY-AND-EQUITY> 183,977,172
<SALES> 224,546,239
<TOTAL-REVENUES> 224,546,239
<CGS> 194,896,715
<TOTAL-COSTS> 194,896,715
<OTHER-EXPENSES> 17,703,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,206,561
<INCOME-PRETAX> 5,739,142
<INCOME-TAX> 2,200,390
<INCOME-CONTINUING> 3,538,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,538,752
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.60
</TABLE>
