UNITED STATES
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 September 30, 2001.
------------------
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 (IRS Employer Identification No.)
of incorporation or organization)
50 Emjay Boulevard, Brentwood, NY 11717
- --------------------------------- -----
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (631) 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 November 8, 2001
- ------------------------------------- ----------------
Class A Common Stock, $.001 par value 5,758,435
=========
Class B Common Stock, $.001 par value 1,200,000
=========
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and March 31, 2001 3
Consolidated Statements of Income for the Six Month
Periods Ended September 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Income for the Three Month
Periods Ended September 30, 2001 and 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Month
Periods Ended September 30, 2001 and 2000 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, March 31,
2001 2001
---- ----
(Unaudited)
Current Assets
- --------------
Cash and Cash Equivalents $ 536,113 $ 263,774
Accounts Receivable (net of allowance
for doubtful accounts of $1,817,396
and $1,337,075, respectively) 107,774,854 85,579,734
Inventories 176,862,152 176,396,785
Prepaid Inventory Purchases 8,143,590 9,187,510
Prepaid Income Taxes 1,517,899 3,042,904
Other Current Assets 2,474,716 2,996,330
Deferred Income Taxes 1,037,067 1,037,067
--------------- ---------------
Total Current Assets $298,346,391 $278,504,104
Property and Equipment, Net 9,711,929 5,672,234
Goodwill and Intangible Assets, Net 4,302,846 4,474,846
Other Assets 1,821,631 3,074,670
Deferred Income Taxes 38,312 38,312
--------------- ---------------
TOTAL ASSETS $314,221,109 $291,764,166
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities
- -------------------
Line of Credit $183,891,129 $170,674,820
Current Portion of Long-Term Debt 2,012,360 915,010
Accounts Payable 22,015,666 20,902,427
Accrued Expenses 1,060,681 2,599,894
--------------- ---------------
Total Current Liabilities $208,979,836 $195,092,151
--------------- ---------------
Long Term Liabilities
- ---------------------
Long-Term Debt 7,453,078 1,959,369
Subordinated Debt 11,551,204 11,243,060
Common Stock Put Warrants 4,117,155 4,359,925
Deferred Income Tax Liability 134,166 134,166
--------------- ---------------
Total Long Term Liabilities 23,255,603 17,696,520
--------------- ---------------
TOTAL LIABILITIES $232,235,439 $212,788,671
--------------- ---------------
Commitments and Contingencies
Stockholders' Equity
- --------------------
Preferred Stock, $.001 par value, 1,000,000 shares authorized, none issued
and outstanding.
Class A Common Stock, $.001 par value;
15,000,000 shares authorized; 5,758,435
and 5,636,484 shares issued and outstanding $ 5,758 $ 5,636
Class B Common Stock, $.001 par value;
2,200,000 shares authorized;
1,200,000 shares issued and outstanding 1,200 1,200
Additional Paid-In Capital 31,678,249 31,178,371
Retained Earnings 50,300,463 47,790,288
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 81,985,670 78,975,495
--------------- ---------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $314,221,109 $291,764,166
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
3
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For The Six Months Ended
September 30,
2001 2000
---- ----
Revenues $259,212,391 $266,915,133
Costs of Revenues 228,789,517 235,941,729
----------- -----------
Gross Profit 30,422,874 30,973,404
----------- -----------
Operating Expenses
- ------------------
Warehouse and Delivery 6,105,293 6,497,554
Selling, General and Administrative 11,087,496 10,108,375
----------- -----------
Total Operating Expenses 17,192,789 16,605,929
----------- -----------
Income From Operations 13,230,085 14,367,475
----------- -----------
Other Expenses
- --------------
Interest Expense 9,194,909 8,323,465
----------- -----------
Income From Operations Before Income Taxes 4,035,176 6,044,010
Provision for Income Taxes 1,525,000 2,150,000
----------- -----------
NET INCOME $ 2,510,176 $ 3,894,010
=========== ===========
Earnings Per Common Share
- -------------------------
Basic $.36 $.57
=== ===
Diluted $.36 $.53
=== ===
Common Shares Used in Computing Per Share Amounts
- -------------------------------------------------
Basic 6,885,131 6,788,422
========= =========
Diluted 6,912,755 7,398,908
========= =========
The accompanying notes are an integral part of these financial statements.
4
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For The Three Months Ended
September 30,
2001 2000
---- ----
Revenues $148,981,900 $132,250,479
Costs of Revenues 132,216,182 117,319,728
----------- -----------
Gross Profit 16,765,718 14,930,751
----------- -----------
Operating Expenses
- ------------------
Warehouse and Delivery 3,155,443 3,355,989
Selling, General and Administrative 5,637,726 4,799,932
----------- -----------
Total Operating Expenses 8,793,169 8,155,921
----------- -----------
Income From Operations 7,972,549 6,774,830
----------- -----------
Other Expenses
- --------------
Interest Expense 4,391,798 3,906,582
----------- -----------
Income Before Provision for Income Taxes 3,580,751 2,868,248
Provision for Income Taxes 1,345,000 1,063,000
----------- -----------
NET INCOME $ 2,235,751 $ 1,805,248
=========== ===========
Earnings Per Common Share
- -------------------------
Basic $.32 $.27
=== ===
Diluted $.32 $.24
=== ===
Common Shares Used in Computing Per Share Amounts
- -------------------------------------------------
Basic 6,933,249 6,810,044
========= =========
Diluted 6,962,865 7,399,495
========= =========
The accompanying notes are an integral part of these financial statements.
5
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended
September 30,
2001 2000
---- ----
Cash Flows From Operating Activities
- ------------------------------------
Net Income $ 2,510,176 $ 3,894,010
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Depreciation and Amortization 677,058 717,439
Non-Cash Interest Expense 65,374 - 0 -
Changes in Operating Assets and Liabilities:
Accounts Receivable (22,195,120) (25,288,911)
Inventories ( 465,367) (14,898,841)
Prepaid Purchases and Other Assets 3,186,568 (12,080,059)
Accounts Payable and Accrued Expenses 635,228 6,177,952
Income Taxes Payable - 0 - ( 1,003,252)
----------- ------------
Net Cash Used In Operating Activities (15,586,083) (42,481,662)
----------- ------------
Cash Flows Used in Investing Activities
- ---------------------------------------
Acquisition of Property and Equipment ( 1,762,579) ( 732,206)
----------- ------------
Cash Flows From Financing Activities
- ------------------------------------
Net Increase in Amounts Due Bank 13,216,309 29,460,183
Borrowings 5,549,889 15,000,000
Repayment of Debt ( 1,145,197) ( 1,509,091)
Net Proceeds From Exercise of Options and Warrants - 0 - 260,283
----------- ------------
Net Cash Provided By Financing Activities 17,621,001 43,211,375
----------- ------------
INCREASE (DECREASE) IN CASH 272,339 ( 2,493)
CASH AT BEGINNING OF PERIOD 263,774 51,311
----------- ------------
CASH AT END OF PERIOD $ 536,113 $ 48,818
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $ 10,100,509 $ 7,962,403
Income Taxes - 0 - $ 3,153,252
Non-Cash Financing Activities:
Notes Issued for Acquisition of Property and Equipment $ 2,686,867 - 0 -
Common Stock Issued for Debt Repayment $ 500,000 - 0 -
During the six months ended September 30, 2001 and 2000, the Company issued notes for $8,236,756 and $15,000,000,
respectively.
The accompanying notes are an integral part of these financial statements.
6
ALLOU HEALTH & BEAUTY, CARE INC. AND SUBSIDIARIES
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, 2001. 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, 2001.
2. On September 4, 2001, the Company entered into a three year financing
agreement with Congress Financial Corp. and Citibank, N.A. for a $200,000,000
revolving credit facility. Interest is being charged at a rate of .25% per annum
above the prime rate or at the Company's option 2.75% per annum above the
Eurodollar rate. The credit facility is secured by all of the Company's assets.
Certain officers of the Company have personally guaranteed the credit facility
for a maximum of approximately $10,000,000. In addition, there are various
financial covenants with which the Company must comply. At September 30, 2001,
the Company was in compliance with all of its covenants.
3. The following table is a reconciliation of the weighted-average shares
(denominator) used in the computation of basic and diluted EPS for the statement
of operation periods presented herein.
Six Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Basic 6,885,131 6,788,422 6,933,249 6,810,044
Effect of Dilutive Securities:
Stock options 27,624 610,486 29,616 589,451
--------- --------- --------- ---------
Diluted 6,912,755 7,398,908 6,962,865 7,399,495
========= ========= ========= =========
Potentially dilutive securities
excluded from computation
because they are anti-dilutive 4,128,900 720,479 4,128,900 935,479
========= ========== ========= ==========
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
ALLOU HEALTH & BEAUTY, CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. During fiscal 2001, the Company issued to an institutional investor an
aggregate of $15,000,000 of 12% senior subordinated notes due July 2005 and
seven year warrants to purchase an aggregate of 1,700,000 shares of the
Company's Class A Common Stock at $4.50 per share. The exercise price of the
warrants is subject to increase if the Company meets certain earnings and
revenue targets. In the event that these warrants have not been converted to
common stock, the investor may have the right, under certain circumstances,
presently to be based on financial results for the years ending March 31, 2002
and 2003, to put the warrants to the Company after five years at a price of $8
per warrant. These warrants were initially valued at $4,314,006 using the
Black-Sholes Pricing Model. The initial value of the warrants was established as
a discount to the subordinated debt, and this discount is being accreted over
the life of the subordinated notes. Included in interest expense for the six
months ended September 30, 2001 is $308,144 representing such accretion.
Included in interest expense for the three months ended September 30, 2001 is
$154,072 representing such accretion.
The value of these contingent put warrants has been reflected as a
liability in the accompanying consolidated balance sheets. In accordance with
Emerging Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", the warrants will be marked to market through earnings on a quarterly
basis. The value of these warrants at September 30, 2001 is $4,117,155. Interest
expense for the six months ended September 30, 2001 has been reduced by $242,770
representing the change in the value of these warrants from April 1, 2001
through September 30, 2001. Interest expense for the three months ended
September 30, 2001 has been reduced by $402,770 representing the change in value
of these warrants through September 30, 2001.
5. In accordance with EITF Issue No. 00-10 "Accounting for Shipping and Handling
Revenues and Costs", the Company's shipping and handling costs, billed to
customers, are included in revenue. The purpose of this issue discussion was to
clarify the classification of shipping and handling revenues and costs. The
consensus reached was that all shipping and handling billed to customers should
be recorded as revenue. Accordingly, the Company records its shipping and
handling amounts within net sales and operating expenses. Shipping and handling
billed to customers and included in revenues for the three months ended
September 30, 2001 and 2000 was not material. Shipping and handling costs
totaled approximately $1,920,333 and $2,737,987, for the six months ended
September 30, 2001 and 2000, respectively. Shipping and handling costs totaled
approximately $1,002,586 and $1,632,510 for the three months ended September 30,
2001 and 2000, respectively.
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended, requires the recognition of all derivative instruments
as either assets or liabilities in the statement of financial position measured
at fair value. The impact of adoption did not have a material effect on the
Company's financial position.
8
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The EITF has reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives". This consensus addresses when sales incentives and
discounts should be recognized, as well as where the related revenues and
expenses should be classified in a registrant's financial statements. Issue No.
00-14 will become effective in our fiscal 2002 fourth quarter. The Company does
not anticipate the impact of adoption of the EITF to have an impact on its
consolidated financial results.
The EITF has reached a consensus on issue No. 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products". The consensus provides guidance on the
income statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. Issue No. 00-25 will become effective in our
fiscal 2002 fourth quarter . The Company does not anticipate the impact of
adoption of the EITF to have an impact on its consolidated financial results.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt FAS 142 effective April 1, 2002.
The Company is currently evaluating the effect that adoption of the provisions
of FAS 142 that are effective April 1, 2002 will have on its results of
operations and financial position.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 will be effective for financial
statements of fiscal years beginning after December 15, 2001. The Company
expects to adopt this statement for its fiscal year ending March 31, 2003, and
does not anticipate that it will have a material impact on the Company's
consolidated financial results.
6. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company's chief
operating decision maker is its Chief Executive Officer. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or a different customer
base.
9
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's reportable operating segments are:
a) Wholesale distribution of cosmetics, fragrances, health and beauty
aids and non-perishable food products.
b) Wholesale distribution of pharmaceuticals.
c) Manufacturing of hair and skin care products.
The Company evaluates the performance of its segments based on segment
profit, which includes the overhead charges directly attributable to the segment
and excludes certain expenses, which are managed outside the reportable
segments. Corporate expenses such as income taxes are being allocated to the
wholesale distribution segment only.
Segment data for the six months ended September 30, 2001 and 2000 was as
follows:
Wholesale Pharmaceuticals
Distribution Distribution Manufacturing Consolidated
------------ ------------ ------------- ------------
Six months ended September 30, 2001
Revenue $147,636,290 $107,206,169 $ 4,369,932 $259,212,391
Depreciation and Amortization 502,558 8,250 166,250 677,058
Income (Loss) From Operations
Before Taxes 767,355 3,776,865 ( 509,044) 4,035,176
Segment Assets 243,887,067 59,704,161 10,629,881 314,221,109
Six months ended September 30, 2000
Revenue $154,501,151 $109,293,728 $ 3,120,254 $266,915,133
Depreciation and Amortization 610,907 27,182 79,350 717,439
Income (Loss) From Operations
Before Taxes 2,653,819 4,610,573 ( 1,220,382) 6,044,010
Segment Assets 256,497,547 45,563,315 10,174,675 312,235,537
Segment data for the three months ended September 30, 2001 and 2000 was as
follows:
Wholesale Pharmaceuticals
Distribution Distribution Manufacturing Consolidated
------------ ------------ ------------- ------------
Three months ended September 30, 2001
Revenue $ 92,128,495 $ 55,467,510 $ 1,385,895 $148,981,900
Depreciation and Amortization 265,530 4,125 84,875 354,530
Income (Loss) From Operations
Before Taxes 3,724,266 618,716 ( 762,231) 3,580,751
Segment Assets 243,887,067 59,704,161 10,629,881 314,221,109
Three months ended September 30, 2000
Revenue $ 80,104,113 $ 50,083,234 $ 2,063,132 $132,250,479
Depreciation and Amortization 328,843 14,966 39,674 383,483
Income (Loss) From Operations
Before Taxes 736,229 1,919,886 212,133 2,868,248
Segment Assets 256,497,547 45,563,315 10,174,675 312,235,537
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
A. RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues for the six months ended September 30, 2001 were $259,212,391,
representing a 2.9% decrease over revenues of $266,915,133 for the six
months ended September 30, 2000.
This decrease in revenues was attributable to a decrease in sales
volume for the segments of the Company's business described below.
Contributions to revenues by product segment were as follows:
Sales of Allou Distributors, Inc., the Company's wholly-owned
subsidiary, which distributes brand name health and beauty aids,
prestige designer fragrances, nationally advertised non-perishable
branded food products decreased 4.4% when compared to sales in the same
period of the prior year. This decrease is largely due to a decrease in
the sales of nationally advertised non-perishable branded food products
because of smaller quantities of promotionally priced non-perishable
food products available from our vendors during this period. We also
had a small decrease in the sales of prestige designer fragrances
during the period which together with the decrease in the sales of
nationally advertised non-perishable branded food products, resulted in
a net decrease in sales of 4.4% for this segment of our business.
Sales of pharmaceutical products decreased 2.1% when compared to the
same period of the prior year. This decrease in revenues is due to
decreases in the acquisition of pharmaceutical products during this
period which resulted from financing reductions of the Company's
revolving credit facility. This financing reduction was necessitated by
the Company's former lenders in order to accommodate the Company's
request for an extension to its revolving line of credit which expired
on May 7, 2001. The Company has closed a $200 million revolving credit
facility on September 4, 2001, with Congress Financial Corp. and
Citibank, N.A. This new credit facility should, in the future,
alleviate the causes that resulted in a short fall of pharmaceutical
sales in this period.
Gross profit as a percentage of revenues for the six months ended
September 30, 2001 increased to 11.7% from 11.6% when compared to the
same period in the prior year. This small increase in gross profit as
percentage of sales is due to improved gross profit margins in various
business segments.
Warehouse, delivery, selling, general and administrative expenses
increased as a percentage of sales to 6.6% for the six months ended
September 30, 2001, from 6.2% when compared to the same period of the
prior year. This increase as a percentage of sales is due to increased
sales expenses associated with our pharmaceutical subsidiary without a
corresponding increase in sales due to the reasons discussed above.
Inventories increased by approximately $465,000 or 0.2% at September
30, 2001 when compared to the fiscal year ended March 31, 2001. This
increase in inventory was attributable to merchandise purchased in
anticipation of increased sales.
11
Interest expense for the six months ended September 30, 2001 increased
10.5% when compared to the six months ended September 30, 2000. This
increase was a result of higher borrowings at an increased rate and the
accretion of discounts associated with the subordinated debt, and with
the change in value of the warrants associated with the subordinated
debt. Additionally, the accretion of discounts associated with the
original warrants issued in connection with the Company's subordinated
debt and the change in the fair value of the warrants based on the
Black-Scholes calculation method which for the current quarter was
positive and for the first quarter ended June 30, 2001, was negative.
For the six months ended September 30, 2001, the fair market valuation
for the Company's warrants were approximately the same.
Net income for the six months ended September 30, 2001 was $2,510,176.
For the same period in the prior year net income was $3,894,010.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues for the three months ended September 30, 2001 were
$148,981,900, representing a 13% increase over revenues of $132,250,479
for the three months ended September 30, 2000.
This 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 has
together caused an increase in the volume of products sold.
Contributions to this increase in revenues by product segment were as
follows:
Sales of Allou Distributors, Inc., the Company's wholly-owned
subsidiary, which distributes brand name health and beauty aids,
prestige designer fragrances, nationally advertised non-perishable
branded food products increased 15% when compared to sales in the same
period of the prior year, due to an increase in the sales of health and
beauty aids and prestige designer fragrances.
Sales of pharmaceutical products increased 10.8% when compared to the
same period of the prior year.
Gross profit as a percentage of sales remained at 11.3% for the three
months ended September 30, 2001 when compared to the three months ended
September 30, 2000.
Warehouse, delivery, selling, general and administrative expenses
decreased as a percentage of sales to 5.9% for the three months ended
September 30, 2001 from 6.2% when compared to the same periods of the
prior year. This decrease in operating expenses is due to increased
revenues without a proportional increase in expenses.
Interest expenses for the three months ended September 30, 2001
remained at 3% when compared to the same period of the prior year. This
was a result of increased borrowings at a higher rate for the first two
months of the quarter. During the month of September, we realized a
sharp reduction in our interest expense due to a rate reduction from
our new line of credit co-arranged by Congress Financial Corp and
Citibank, N.A. which was consummated on September 4, 2001.
Additionally, the accretion of discounts associated with the original
warrants issued in connection with the Company's subordinated debt and
the change in the fair value of the warrants based on the Black-Scholes
calculation method which for the current quarter was positive and for
the first quarter ended June 30, 2001, was negative. For the six months
ended September 30, 2001, the fair market valuation for the Company's
warrants were approximately the same.
12
Net income for the three months ended September 30, 2001 was
$2,235,751, representing a 33% increase over net income of $1,805,248
for the comparable period in 2000. The increase in net income was due
to primarily for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES.
The Company meets its working capital requirements from internally
generated funds and from a financing agreement entered into on
September 4, 2001 with a consortium of banks led by Congress Financial
Corporation and Citibank, N.A. for financing the Company's accounts
receivable and inventory. As of September 30, 2001, the Company had
$183,891,129 outstanding under its $200 million bank line of credit.
The loan is secured by substantially all of the Company's assets and
the assets of the Company's subsidiaries. Interest on the loan balance
is payable at .25% per annum above the prime rate or 2.75% per annum
above the Eurodollar rate at the option of the Company. The effective
interest rate charged to the Company under its financing agreement with
its former consortium of banks, for the period beginning July 1, 2001
through September 3, 2001, was 8.2%. The effective rate of interest for
the period beginning September 4, 2001 through September 30, 2001 under
its current financing agreement with Congress Financial Corp and
Citibank N.A. entered into on September 4, 2001, was 6.9%. 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. During the second quarter of
fiscal year 2000 ended September 30 the Company issued to RFE
Investment Partners an institutional investor $15,000,000 principal
amount of 12% senior subordinated notes due 2005 and 1,700,000 seven
year warrants to purchase the Company's Class A Common Stock at $4.50
per share. The warrants are subject to a put option; under certain
circumstances, as defined, the investor has the right to put the
warrants to Allou after year five at a price of $8.00 per warrant.
The Company's accounts receivable increased to $107,774,854 at
September 30, 2001 from $101,142,869 at September 30, 2000,
representing an increase of 6.6%. This increase in accounts receivable
was due to increased sales.
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 its internally generated funds and its current and future
bank line of credit will be sufficient to meet its anticipated cash and
capital needs through the fiscal year ending March 31, 2002.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued
statements of Financial Accounting Standards No. 141. Business
combinations ("FAS 141") and No. 142 Goodwill and Other Intangible
Assets ("FAS 142"). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase
method. Under FAS 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with maximum
life). The amortization provisions of FAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt FAS 142 effective April 1, 2002. The
Company is currently evaluating the effect that adoption of the
provisions of FAS 142 that are effective April 1, 2002 will have on its
results of operations and financial position.
In August 2001, the Financial Accounting standards board issued SFAS
No. 144, "Accounting for the Impairment or disposal of Long-Lived
Assets". This statement addresses financial accounting and reporting
for the impairment of disposal of long-lived assets. SFAS No. 144 will
be effective for financial statements of fiscal years beginning after
December 15, 2001. The Company expects to adopt this statement for our
fiscal year ending March 31, 2003, and do not anticipate that it will
have a material impact on the company's consolidated financial results.
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.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is a three year revolving
credit agreement that it entered into on September 4, 2001 and which
will expire on September 3, 2004. The Company is affected by market
risk exposure primarily through the effect of changes in interest rates
on amounts payable by the Company under its revolving credit agreement
changes in these factors cause fluctuations in the Company's net income
and cash flows the agreement allows the Company maximum borrowings of
$200 million. The Company also has a term loan of $15 million, under a
subordinated debt agreement at September 30, 2001 approximately $183.9
million was outstanding under the revolving credit agreement. The
agreement bears interest at the bank's base rate of 1/4 of 1% above the
prime rate or 2.75% above the Eurodollar rate at the Company's option.
If the amount owing under the company's revolving credit agreement
remained at the current quarter level for an entire year and the prime
rate increased or decreased respectively, by 1% then the Company would
pay or save, respectively, an additional $1.8 million in interest that
year.
The Company entered into a 5 year term loan in the form of subordinated
debt during the second quarter of fiscal year 2000 ended September 30.
The company issued to RFE Investment Partners, an institutional
investor, 15,000,000 principal amount of 12% Senior Subordinated notes
due 2005 and 1,700,000 seven year warrants to purchase the Company's
Class A Common Stock at $4.50 per share. The warrants are subject to a
put option under which the investor has the right to put the warrants
to Allou, under certain circumstances defined after five years at
a price of $8.00 per warrant.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
The following Exhibit is filed as a part of this report:
Exhibit No. Description
- ----------- -----------
10.1 Loan and Security Agreement dated September 4, 2001 by and
among M. Sobol, Inc., Allou Distributors, Inc., Direct
Fragrances, Inc., Stanford Personal Care Manufacturing,
Inc., as Borrowers, and Allou Health & Beauty Care, Inc.,
Allou Personal Care Corp., HBA National Sales Corp., HBA
Distributors, Inc., Pastel Cosmetic & Beauty Aids, Inc.,
Trans World Grocers, Inc., Russ Kalvin Personal Care Corp.
and Core Marketing, Inc., as Guarantors, the financial
institutions from time to time parties thereto as lenders,
whether by execution of the Loan and Security Agreement or
an Assignment and Acceptance, and Congress Financial
Corporation, as Agent and Arranger, and Citibank, N.A., as
Documentation Agent and Co-Arranger.
(b) Reports on Form 8-K
None.
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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/ David Shamilzadeh
------------------------------------
David Shamilzadeh
President and Principal Accounting Officer
Dated: November 14, 2001
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