SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1998.
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 number 1-10340
ALLOU HEALTH & BEAUTY CARE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2953972
- --------------------------------------------------------------------------------
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
50 Emjay Boulevard, Brentwood, NY 11717
- --------------------------------------------------------------------------------
(Address of principal executive offices with Zip Code)
Registrant's Telephone Number Including Area Code: (516) 273-4000
- --------------------------------------------------------------------------------
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 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, 1999
----- ----------------
Class A Common Stock, $.001 par value . . . . . . . . . . 5,313,047
=========
Class B Common Stock, $.001 par value . . . . . . . . . . 1,200,000
=========
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
----
PART I. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31,1998
(unaudited) and March 31, 1998.................................3
Consolidated Statement of Income & Retained
Earnings (unaudited) For the Nine Month Periods
Ended December 31, 1998 and 1997...............................4
Consolidated Statement of Income & Retained
Earnings (unaudited) For the Three Month Periods
Ended December 31, 1998 and 1997...............................5
Consolidated Statement of Cash Flows (unaudited) For
the Nine Month Period Ended December 31, 1998 and 1997.........6
Notes to Consolidated Financial Statements (unaudited).......... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................11
SIGNATURES....................................................................12
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<PAGE>
<TABLE>
<CAPTION>
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS December 31, March 31,
1998 1998
------------ ---------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 446,024 $ 46,675
Accounts Receivable (less allowance for
doubtful accounts of $1,251,474 at December 31,
1998 and $371,475 at March 31, 1998) 70,192,427 44,117,911
Inventories 125,000,894 112,530,659
Other Current Assets 9,455,705 11,680,718
------------ ------------
Total Current Assets $205,095,050 $168,375,963
Property & Equipment, Less Accumulated
Depreciation 4,246,140 3,613,223
Other Assets 5,344,690 6,395,110
------------ ------------
TOTAL ASSETS $214,685,880 $178,384,296
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities
Amounts Due Bank $130,988,246 $110,596,761
Current Portion of Long-Term Debt 685,352 645,233
Accounts Payable and Accrued Expenses 19,732,072 13,174,949
------------ ------------
Total Current Liabilities $151,405,670 $124,416,943
------------ ------------
Long Term Liabilities
Long-Term Debt, Less Current Portion $ 881,517 $ 1,354,462
Deferred Income Taxes 1,140,000 - 0-
------------ ------------
Total Long Term Liabilities 2,021,517 1,354,462
------------ ------------
TOTAL LIABILITIES $153,427,187 $125,771,405
------------ ------------
Commitments & Contingencies
Stockholders' Equity
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;
5,313,047 and 4,569,850 shares issued and outstanding at December 31,
1998 and
March 31, 1998 $ 5,313 $ 4,570
Class B Common Stock, $.001 par value;
2,200,000 shares authorized
1,200,000 shares issued and outstanding
at December 31 1998 and March 31, 1998 1,200 1,200
Additional Paid-In Capital 29,709,276 23,582,240
Retained Earnings 31,542,904 29,024,881
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 61,258,693 52,612,891
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $214,685,880 $178,384,296
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(unaudited)
For The Nine Months Ended
December 31,
1998 1997
----------------- --------------
<S> <C> <C>
Revenues $247,844,933 $224,546,239
Costs of Revenues 214,297,079 194,896,715
----------- -----------
Gross Profit 33,547,854 29,649,524
------------ ------------
Operating Expenses
Warehouse & Delivery 7,722,319 7,027,188
Selling, General & Administrative 16,885,726 10,687,764
------------ ------------
Total Expenses 24,608,045 17,714,952
------------ ------------
Income From Operations 8,939,809 11,934,572
------------- ------------
Other Charges (Credits)
Interest 7,829,938 6,206,561
Other ( 4,380) ( 11,131)
Gain on Sale of Minority Interest
in Subsidiary (3,000,000) - 0 -
--------- ----------
Total 4,825,558 6,195,430
--------- ---------
Income Before Income Taxes 4,114,251 5,739,142
Provision for Income Taxes 1,596,228 2,200,390
----------- -----------
NET INCOME 2,518,023 3,538,752
------------- -------------
RETAINED EARNINGS - BEGINNING 29,024,881 24,744,671
------------ ------------
RETAINED EARNINGS - ENDING $ 31,542,904 $ 28,283,423
============ ============
Net Income Per Common Share:
Basic $.43 $.61
=== ===
Diluted $.39 $.60
=== ===
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(unaudited)
For The Three Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Revenues $89,542,944 $76,349,440
Costs of Revenues 77,705,738 65,696,276
---------- ----------
Gross Profit 11,837,206 10,653,164
---------- ----------
Operating Expenses
Warehouse & Delivery 6,643,164 2,561,002
Selling, General & Administrative 2,802,866 3,706,039
----------- ----------
Total Expenses 9,446,030 6,267,041
----------- ----------
Income From Operations 2,391,176 4,386,123
----------- ----------
Other Charges (Credits)
Interest 2,817,201 2,227,966
Other (4,380) (1,265)
Gain on Sale of Minority Interest
in Subsidiary (3,000,000) - 0 -
Total ( 187,179) 2,226,701
Income Before Income Taxes 2,578,355 2,159,422
Provision for Income Taxes 994,228 837,390
----------- -----------
NET INCOME 1,584,127 1,322,032
RETAINED EARNINGS - BEGINNING OF PERIOD 29,958,777 26,961,391
---------- ----------
RETAINED EARNINGS - END OF PERIOD $31,542,904 $28,283,423
========== ==========
Net Income Per Common Share:
Basic Earnings Per Share $ .27 $ .23
=========== ==========
Diluted Earnings Per Share $ .24 $ .22
=========== ==========
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
ALLOU HEALTH & BEAUTY CARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For The Nine Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $2,518,023 $3,538,752
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Depreciation and Amortization 584,820 527,508
Deferred Income Taxes 1,140,000 - 0 -
Decrease (Increase) In Assets:
Accounts Receivable (26,074,516) (709,468)
Inventories (12,470,235) (15,445,342)
Prepaid Purchases and Other Assets 3,150,284 (6,430,233)
Increase (Decrease) In Liabilities:
Accounts Payable and Accrued Expenses 6,557,127 1,990,083
Income Taxes Payable - 0 - 5,922
Net Cash Used In Operating Activities (24,594,497) (16,522,778)
---------- ----------
Cash Flows Used in Investing Activities
Acquisition of Fixed Assets (1,082,592) (433,956)
--------- -------
Cash Flows From Financing Activities
Net Increase in Amounts Due Bank 20,381,485 17,310,626
Borrowings 108,704 215,771
Repayment of Debt (541,530) (477,527)
Sale of Capital Stock 6,127,779 45,750
----------- ---------
Net Cash Provided By Financing
Activities 26,076,438 17,094,620
---------- ----------
INCREASE IN CASH 399,349 137,886
CASH AT BEGINNING OF PERIOD 46,675 76,531
-------- -----------
CASH AT END OF PERIOD $ 446,024 $ 214,417
=========== =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $7,583,564 $6,085,565
Income Taxes $1,474,304 $2,122,890
</TABLE>
During the nine months ended December 31, 1998 and 1997, the Company issued
equipment notes for $108,704 and $215,771, respectively.
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
ALLOU HEALTH & BEAUTY CARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying interim consolidated financial statements of Allou
Health & Beauty Care Inc. (the Company) have been prepared in
conformity with generally accepted accounting principles consistent in
all material respects with those applied in the Annual Report on Form
10-K for the year ended March 31, 1998. The interim financial
information is unaudited, but reflects all normal adjustments which
are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. The interim
financial statements should be read in connection with the financial
statements in the Company's Annual Report on Form 10-K for the year
ended March 31, 1998.
2. On June 23, 1998, the Company purchased certain assets of Direct
Fragrance, Inc., a telemarketer of fragrances located in Florida for
$2,761,671. The assets include inventories, fixed assets and
intangibles.
3. On April 27, 1998, certain officers of the Company advanced cash of
$3,000,000 to The Fragrance Counter Inc., a wholly owned subsidiary of
the Company, and received a note for $3,000,000 at an interest rate of
8.75% per annum with a maturity date of October 27, 1998. The note was
convertible into a 17.65% equity interest in common stock of The
Fragrance Counter Inc. if the note was not repaid by the due date.
Additionally, these officers received warrants to purchase a 17.65%
equity interest in The Fragrance Counter Inc. at a cost of $3,000,000
for a period of five years. On October 27, 1998 in lieu of repayment,
these officers received a 17.65% equity interest in the common stock of
The Fragrance Counter Inc. Allou Health and Beauty Care Inc. retains
82.35% of the shares outstanding. As a result of this transaction, the
Company recognized a gain of $3,000,000 and has provided for related
deferred taxes of $1,140,000.
4. On December 15, 1998, the Company sold 666,667 shares of its Class A
common stock at $9 per share in a private placement. These shares were
registered on a Registration Statement on Form S-3 which was declared
effective by the Securities and Exchange Commission on January 26,
1999. Net proceeds to the Company from the offering after deduction of
associated expenses were approximately $5,600,000. This sale includes
the sale of Warrants which are exercisable into a variable number of
shares of Class A Common Stock if the market price falls below 115%
($10.35) of the sale price during the applicable exercise periods which
begin 30 days after the effective date.
5. Earnings per share (EPS) for the current and prior period has been
presented in conformity with the provisions of SFAS 128. The following
table is a reconciliation of the weighted-average shares (denominator)
used in the computation of basic and diluted EPS for the periods
presented herein.
Nine Months Ended
December 31,
1998 1997
---- ----
Basic 5,867,040 5,755,118
Assumed exercise of stock options 621,061 161,838
---------- ----------
Diluted 6,488,101 5,916,956
========= =========
Three Months Ended
December 31,
1998 1997
---- ----
Basic 5,960,387 5,759,850
Assumed exercise of stock options 508,577 265,729
---------- ----------
Diluted 6,468,964 6,025,579
========= =========
Net income as presented in the consolidated statement of operations is
used as the numerator in the EPS calculation for both the basic and diluted
computations.
-7-
<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, 1998 AND 1997.
Revenues for the nine months ended December 31, 1998 were
$247,844,933 representing an 10% increase over revenues of
$224,546,239 for the nine months ended December 31, 1997.
Contributions To this increase in revenues by product segment is
as follows:
Health and beauty aids increased 12% 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.
Prestige designer fragrances grew 25% when compared to the same
period in the prior year due to an expanded customer base and
increases in same store sales and revenue contributions from the
Company's wholly-owned subsidiary Direct Fragrances, Inc. which
together has caused an increase in the volume of products sold.
Nationally advertised non-perishable branded food products
decreased 39% 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.
The 0.2% 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
management's decision to de-emphasize sales of branded
pharmaceuticals which are characterized by limited operating
margins. The Company combines all sales of its branded
pharmaceutical products to its customers 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 13.5% for
the nine months ended December 31, 1998 when compared to 13.2%
for the same period in the 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 9.9% for the nine months
ended December 31, 1998 from 7.9% 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 advertising
expenses associated with its wholly-owned subsidiary, The
Fragrance Counter, Inc. an internet retailer of prestige designer
fragrances and cosmetics.
Inventories increased by approximately $12.5 million or 11% at
December 31, 1998 when compared to the fiscal year ended March
31, 1998. This increase in inventory was attributable to
merchandise purchased in anticipation of increased sales.
-8-
<PAGE>
Interest expenses as a percentage of sales for the nine months
ended December 31, 1998 increased to 3.2% from 2.8% in the nine
months ended December 31, 1997. This increase is due to higher
borrowing levels.
Net income for the nine months ended December 31, 1998 was
$2,518,019 representing a 29% decrease over the net income of
$3,538,752 for the comparable period in 1997. The decrease in net
income is due to expenses associated with the Company's
wholly-owned subsidiary, The Fragrance Counter, Inc. an internet
retailer of prestige designer fragrances and cosmetics,
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997.
Revenues for the three months ended December 31, 1998 were
$89,542,944 representing a 17% increase over revenues of
$76,349,440 for the three months ended December 31, 1997.
The 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:
Health and beauty aides increased 26% when compared to the same
period in the previous year. This increase in revenue is due to
an increase in same store sales volume and an expanded customer
base.
Prestige designer fragrances grew 23% when compared to the same
period in the prior year due to increases in same store sales and
an expanded customer base and revenue contributions from the
Company's wholly-owned subsidiary, Direct Fragrances, Inc. which
together has caused an increase in the volume of products sold.
Nationally advertised non-perishable branded food products
decreased 22% 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.
Sales of prescription pharmaceuticals decreased 9% when compared
to the same period of the prior year, as a direct result of
management's decision to de-emphasize sales of branded
pharmaceuticals which are characterized by limited operating
margins. The Company combines all sales of its branded
pharmaceutical products to its customers 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 sales decreased to 13.2% for the
three months ended December 31, 1998 from 14% as compared to the
three months ended December 31, 1997. This decrease is
principally attributable to lower gross profit margins associated
with the Company's fragrance products which were promoted for
holiday sales.
Warehouse, delivery, selling, general and administrative expenses
as a percentage of sales for the three months ended December 31,
1998 increased to 10.5% from 8.2% for the same period in the
prior year. The increase is attributable to marketing costs
associated with the Company's wholly-owned subsidiary The
Fragrance Counter, Inc. an internet retailer of prestige designer
fragrances and cosmetics products.
Interest expenses as a percentage of sales for the three months
ended December 31, 1998 increased to 3.1% from 2.9% in the
comparable period of the prior year, representing higher
borrowings.
-9-
<PAGE>
Net income for the three months ended December 31, 1998 was
$1,584,123 representing a 19.8% increase over net income of
$1,322,032 for the comparable period in 1997. This increase in
net income is due primarily to a one-time gain of net income
which occurred when the Jacob's family converted into equity a
note in the amount of $3 million due to the Jacob's family from
the Company's wholly owned subsidiary, The Fragrance Counter,
Inc. As a result Allou Health & Beauty Care, Inc. has reduced its
ownership in The Fragrance Counter, Inc. to 82.35%
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, 1998, the Company had $130,988,246 outstanding under
its $145,000,000 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 December 31,
1998 was 7.57% 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.
The Company's accounts receivable has increased to $70,192,427 at
December 31, 1998 from $49,134,350 at December 31, 1997. This
increase in accounts receivable is due to increased sales for the
period and collections of receivables turning at 69 days as
compared to 57 days during the three months ended December 31,
1997.
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.
INFLATION AND SEASONALITY
Inflation has not had any significant adverse effects on the
Company's business and the Company does not believe it will have
any significant effect on its future business. The Company's
fragrance business is seasonal, with greater sales during the
Christmas season than in other seasons. The Company's other
product lines are not seasonal.
YEAR 2000
The Company does not expect that the cost to modify or replace
software that it uses, so that such software will properly
recognize dates beyond December 31, 1999 ("Year 2000
Compliance"), will be material. If the Company is not successful
in implementing the necessary Year 2000 changes, it expects to
then develop contingency plans to address any matters not
corrected in a timely manner. The Company has initiated formal
communications with its significant vendors and customers to
determine the extent that Year 2000 Compliance issues of such
parties may affect the Company. There can be no guarantee that
the systems of such other companies will be timely converted, or
that their conversion will be compatible with information
included in the Company's systems, without a material adverse
effect on the Company's business, financial condition or results
of operations. To the extent that responses to such
communications with the Company's vendors are unsatisfactory, the
Company expects to take steps to ensure that its vendors'
products have demonstrated Year 2000 Compliance.
-10-
<PAGE>
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit Description
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended December 31, 1998.
-11-
<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.
/s/ Herman Jacobs
-------------------------------------
Herman Jacobs
President and Chief Operating Officer
/s/ David Shamilzadeh
------------------------------------
David Shamilzadeh
Chief Financial Officer
Dated: February 16, 1999
-12-
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27.1 Financial Data Schedule
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000846538
<NAME> Allou Health & Beauty Care
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 446,024
<SECURITIES> 0
<RECEIVABLES> 71,443,901
<ALLOWANCES> 1,251,474
<INVENTORY> 125,000,894
<CURRENT-ASSETS> 205,095,050
<PP&E> 8,276,708
<DEPRECIATION> 4,030,568
<TOTAL-ASSETS> 214,685,880
<CURRENT-LIABILITIES> 151,405,670
<BONDS> 0
0
0
<COMMON> 6,513
<OTHER-SE> 61,252,180
<TOTAL-LIABILITY-AND-EQUITY> 214,685,880
<SALES> 247,844,933
<TOTAL-REVENUES> 247,844,933
<CGS> 214,297,079
<TOTAL-COSTS> 24,608,045
<OTHER-EXPENSES> (3,004,380)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,829,938
<INCOME-PRETAX> 4,114,251
<INCOME-TAX> 1,596,228
<INCOME-CONTINUING> 2,518,023
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,518,023
<EPS-PRIMARY> .43
<EPS-DILUTED> .39
</TABLE>
