SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 2002
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
50 Emjay Boulevard, Brentwood, New York 11717
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code): (631) 273-4000
Indicate by a check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No __ - --
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed under Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __ No __
Below are indicated the number of shares outstanding of each of the
issuer's classes of common stock:
Outstanding as of
Class August 12, 2002
----- -----------------
Class A Common Stock, $.001 par value per share 6,136,476
Class B Common Stock, $.001 par value per share 1,200,000
TABLE OF CONTENTS
Page
----
Cautionary Statement...........................................................1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
(Unaudited) and March 31, 2002...............................2
Consolidated Statements of Income for the Three Month
Periods Ended June 30, 2002 and June 30, 2001 (Unaudited)....3
Consolidated Statements of Cash Flows for the Three Month
Periods Ended June 30, 2002 and June 30, 2001 (Unaudited)....4
Notes to Consolidated Financial Statements (unaudited).......5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................15
Signature.....................................................................16
-i-
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "WE," "US,"
"OUR," "ALLOU" OR THE "COMPANY" INCLUDE ALLOU HEALTH & BEAUTY CARE, INC. AND OUR
SUBSIDIARIES.
CAUTIONARY STATEMENT
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995: Certain statements in this report, in
particular "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation" are "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. These statements, which may include words such as
"expect," "believe, "anticipate," "estimate," "plan," "project," "strategy" and
"intend," involve certain known and unknown risks, uncertainties and other
factors that may cause the statements to be materially different from actual
future results. These factors include, among others: the competitive environment
in the consumer health and beauty aids products industries; the availability of
financing to fund the anticipated growth of our business; changes in consumer
preferences and demographics; and the integration of any acquired business and
operations.
ALLOU HEALTH AND BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2002 March 31, 2002
------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,850,513 $ 1,245,521
Accounts receivable, net of allowance for doubtful accounts
of $2,037,396 and $2,297,396, respectively 113,423,031 109,655,884
Inventories 193,580,480 185,470,903
Prepaid inventory purchases 11,105,948 7,707,085
Prepaid and refundable income taxes -- 324,526
Other current assets 2,051,483 1,990,326
Deferred income taxes 1,316,488 1,316,488
------------ ------------
Total current assets 324,327,943 307,710,733
PROPERTY AND EQUIPMENT, net 11,672,341 10,989,872
GOODWILL 4,086,732 4,086,732
OTHER ASSETS 2,000,250 2,077,438
DEFERRED INCOME TAXES 76,623 76,623
------------ -------------
TOTAL ASSETS $342,163,889 $324,941,398
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $199,888,864 $191,285,333
Current portion of long-term debt and capital leases 2,181,019 2,094,172
Accounts payable and accrued expenses 30,514,306 24,240,501
------------ ------------
Total current liabilities 232,584,189 217,620,006
------------ ------------
LONG TERM LIABILITIES:
Long-term debt and capital leases 2,718,338 3,202,435
Subordinated debt 12,120,348 11,859,348
Common stock put warrants 6,082,334 4,539,000
Deferred income tax liability 200,205 200,205
------------ ------------
Total Long-term liabilities 21,121,225 19,800,988
------------ ------------
TOTAL LIABILITIES 253,705,414 237,420,994
------------ ------------
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,
6,104,442 and 6,051,397 shares issued and outstanding, respectively 6,104 6,051
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 33,393,152 33,133,207
Retained earnings 55,058,019 54,379,946
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 88,458,475 87,520,404
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $342,163,889 $324,941,398
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
-2-
ALLOU HEALTH & BEAUTY CARE, INC. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months Ended
June 30,
2002 2001
---- ----
Revenues $147,391,823 $110,230,491
Costs of Revenues 132,409,596 96,573,336
------------- -------------
Gross Profit 14,982,227 13,657,155
------------- -------------
Operating Expenses
Warehouse and Delivery 3,125,216 2,949,849
Selling, General and Administrative 5,662,620 5,449,770
------------- -------------
Total Expenses 8,787,836 8,399,619
------------- -------------
Income From Operations 6,194,391 5,257,536
------------- -------------
Other Expenses
Interest Expense (5,064,318) (4,803,111)
------------- -------------
Income Before Provision for Income Taxes 1,130,073 454,425
Provision for Income Taxes 452,000 180,000
------------- -------------
NET INCOME $ 678,073 $ 274,425
============== ==============
Earnings Per Common Share
Basic $.09 $.04
============== ==============
Diluted $.08 $.04
============== ==============
Weighted Average Common Shares Outstanding
Basic 7,281,768 6,836,484
============== ==============
Diluted 8,904,996 6,862,485
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
ALLOU HEALTH & BEAUTY CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
June 30,
2002 2001
---- ----
Cash Flows From Operating Activities
- ------------------------------------
Net Income $ 678,073 $ 274,425
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Depreciation and Amortization 389,534 322,530
Amortization of Discount on Subordinated Debt 261,000 154,072
Non-Cash Change in Value of Contingent Put Warrants 1,543,334 160,000
Decrease (Increase) In Assets:
Accounts Receivable (3,767,147) (2,552,077)
Inventories (8,109,577) (7,202,794)
Prepaid Purchases and Other Assets (3,151,065) 5,380,281
Increase (Decrease) In Liabilities:
Accounts Payable and Accrued Expenses 6,273,805 1,472,076
----------- -----------
Net Cash Used In Operating Activities (5,882,043) (1,991,487)
----------- -----------
Cash Flows Used in Investing Activities
- ---------------------------------------
Acquisition of Property and Equipment (979,244) (817,478)
----------- -----------
Net Cash Used In Investing Activities (979,244) (817,478)
----------- -----------
Cash Flows From Financing Activities
- ------------------------------------
Net Increase in Amounts Due Bank 8,603,531 507,325
Borrowings - Long Term Debt 160,000 2,482,571
Repayment of Debt (557,250) (360,386)
Net Proceeds From Exercise of Options 259,998 -0-
----------- -----------
Net Cash Provided By Financing Activities 8,466,279 2,629,510
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,604,992 (179,455)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,245,521 263,774
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,850,513 $ 84,319
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $ 3,533,104 $ 4,893,089
Income Taxes $ 2,070,746 $ -0-
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
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 accounting
principles generally accepted in the United States of America consistent in all
material respects with those applied in the Annual Report on Form 10-K for the
year ended March 31, 2002. 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, 2002.
2. 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 income periods presented herein.
June 30,
2002 2001
---- ----
Basic 7,281,768 6,836,484
Assumed exercise of stock options 1,623,228 26,001
--------- -----------
Diluted 8,904,996 6,862,485
========= =========
Potentially dilutive securities excluded from
computation because they are anti-dilutive 417,325 4,288,900
========== =========
Net income as presented in the consolidated statements of income is
used as the numerator in the EPS calculation for both the basic and diluted
computations.
3. 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, 2003
and 2004, 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-Scholes 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 three
months ended June 30, 2002 and 2001 is $261,000 and $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
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock", the warrants are marked
to market through earnings on a quarterly basis. The value of these warrants at
June 30, 2002 is $6,082,234. Included in interest expense for the three months
ended June 30, 2002 and 2001 is $1,543,334 and $160,000 representing the change
in the value of these warrants through June 30, 2002.
-5-
ALLOU HEALTH & BEAUTY, CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. The Company records its shipping and handling amounts billed to customers
within revenues and its shipping and handling costs within warehouse and
delivery expenses. Shipping and handling billed to customers included in
revenues for the three months ended June 30, 2002 and 2001, were not material.
Shipping and handling costs totaled approximately $806,943 and $917,747, for the
three months ended June 30, 2002 and 2001, respectively.
Effective April 2002, the Company adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 141" and "SFAS No. 142", respectively). These statements established
financial accounting and reporting standards for acquired goodwill and other
intangible assets. Specifically, the standards address how acquired intangible
assets should be accounted for both at the time of acquisition and after they
have been recognized in the financial statements. The provisions of SFAS No. 141
apply to all business combinations initiated after June 30, 2001. In accordance
with SFAS No. 142, intangible assets, including purchased goodwill, must be
evaluated for impairment. Those intangible assets that will continue to be
classified as goodwill or as other intangibles with indefinite lives are no
longer amortized. Effective April 1, 2002, the Company has adopted the
provisions of SFAS 142, which reduced amortization charges by $97,000.
In accordance with SFAS No. 142, the Company completed its transitional
impairment testing of intangible assets during the first quarter of fiscal 2003.
That effort, and preliminary assessments of our identifiable intangible assets,
indicated that little or no adjustment would be required upon adoption of this
pronouncement. The impairment testing is performed in two steps: (i) the
determination of impairment, based upon the fair value of a reporting unit as
compared to its carrying value, and (ii) if there is an impairment, this step
measures the amount of impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. The Company has determined
that as of June 30, 2002 these assets are not impaired.
-6-
The following table presents pro forma net earnings and earnings per share
data restated to include the retroactive impact of the adoption of SFAS No. 142.
Three Months Ended Three Months Ended
June 30, June 30,
2002 2001
---- ----
Reported Net Earnings $ 678,073 $ 274,425
Add Back:
Goodwill amortization, net of tax - 0 - 58,200
Pro forma Net Earnings $ 678,073 $ 332,625
Basic net earnings per common share $ .09 $ .04
Goodwill amortization, net of tax - 0 - .01
------------- ---------------
Pro forma net earnings $ .09 $ .05
============== ==============
Diluted net earnings per common share $ .08 $ .04
Goodwill amortization, net of tax - 0 - $ .01
-------------- ---------------
Pro forma net earnings $ .08 $ .05
============== ==============
Weighted average common shares outstanding:
Basic 7,281,768 6,836,484
Diluted 8,904,996 6,862,485
5.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.
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 including interest and income taxes are being
allocated to the wholesale distribution segment only.
-7-
ALLOU HEALTH & BEAUTY, CARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment data for the three months ended June 30, 2002 and 2001 was as follows:
Wholesale Pharmaceuticals
Distribution Distribution Manufacturing Consolidated
------------ --------------- ------------- ------------
Three months ended June 30, 2002
Revenue $ 90,529,243 $56,018,703 $ 843,877 $147,391,823
Depreciation and Amortization 281,759 4,125 103,650 389,534
Income (Loss) From Operations
Before Taxes 1,361,854 936,962 (1,168,743) 1,130,073
Segment Assets 278,483,757 55,443,261 8,236,871 342,163,889
Three months ended June 30, 2001
Revenue $ 55,507,795 $51,738,659 $ 2,984,037 $110,230,491
Depreciation and Amortization 265,530 4,125 52,875 322,530
Income (Loss) From Operations
Before Taxes ( 2,956,911) 3,158,149 253,187 454,425
Segment Assets 239,190,549 50,160,218 9,248,747 298,599,514
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
We distribute consumer personal care products and prescription
pharmaceuticals on a national basis. We also manufacture upscale hair and skin
care products for sale under private labels. Our consumer personal care products
distribution business includes prestige brand name designer fragrances, brand
name health and beauty aids products and non-perishable packaged food items. Our
prescription pharmaceuticals distribution business includes both brand name and
generic pharmaceutical products. For the three months ended June 30, 2002, our
revenues have grown by approximately 34% through internal growth when compared
to the same period in the prior year, which has enabled us to expand our product
offerings, enter into new geographic markets, add new customers and cross-sell
existing and new product lines to our diversified customer base.
Distribution of consumer personal care products accounted for
approximately 61% of our revenues during the three months ended June 30, 2002,
and 50% of our revenues for the three months ended June 30, 2001. Distribution
of prescription pharmaceutical products accounted for approximately 38% of our
revenues during the three months ended June 30, 2002, and 47% of our revenues
during the three months ended June 30, 2001. Manufacture and distribution of
hair and skin care products accounted for approximately 0.6% of our revenues
during the three months ended June 30, 2002, and 2.7% of our revenues for the
three months ended June 30, 2001. Our operating results for the three months
ended June 30, 2002 and 2001 expressed as a percentage of sales were as follows:
FOR THE THREE MONTHS ENDED JUNE 30,
2002 2001
---- ----
Net sales 100.0% 100.0%
Costs of goods sold 89.8 87.6
----- -----
Gross profit 10.2 12.4
Warehouse & delivery expenses 2.1 2.7
Selling, general and administrative expenses 3.9 4.9
----- -----
Operating income 4.2 4.8
Net interest expense 3.4 4.4
----- -----
Income before income tax 0.8 0.4
Income tax provision 0.3 0.2
----- -----
Net income 0.5% 0.2%
THE THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2001
REVENUES. Revenues for the three months ended June 30, 2002 increased
$37.2 million to $147.4 million, representing a 33.7% gain as compared to
revenues of $110.2 million for the three months ended June 30, 2001. This
increase resulted from increased revenues from certain segments of our business
as described below. The increased demand for our products resulted from an
expanded customer base and increases in same store sales.
Contributions to this increase in revenues by product segment are as
follows: sales of brand name health and beauty aids, prestige designer
fragrances and non-perishable food products, increased 63% for the three months
ended June 30, 2002 compared to the same period in fiscal 2001, due to increases
in same store
-9-
sales and an expanded customer base. Sales of prescription pharmaceuticals
increased 8.3% in the comparable period. This increase in revenues is due to
increases in same store sales. Our manufacturing subsidiary had a 72% decrease
in revenues for the three months ended June 30, 2002 as compared to the
comparable period in the prior year. This decrease was due to the change in the
timing of demand for the private label products. In addition, we recently
reached an agreement with a major consumer manufacturing company to produce
under private label approximately $10.0 million in revenues which will be
shipped over the next 12 months.
GROSS PROFIT. Gross profit for the three months ended June 30, 2002 was
$15.0 million, representing a 9.7% increase over gross profit of $13.7 million
for the same period in the prior year. Gross profit as a percentage of sales
decreased to 10.2% for the three months ended June 30, 2002 from 12.4% when
compared to the same period in the prior year. This decrease is due to sales of
pharmaceutical products having lower gross profit margins in this quarter when
compared to our other segments.
WAREHOUSE, DELIVERY, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Warehouse, delivery, selling, general and administrative expenses for the three
months ended June 30, 2002 increased $388,217 to $8.8 million from $8.4 million
in the prior year. Warehouse, delivery, selling, general and administrative
expenses decreased as a percentage of revenues to 6.0% for the three months
ended June 30, 2002 from 7.6% when compared to the same period in the prior
year. This decrease as a percentage of revenues is due in part to reduced
freight costs and improved efficiencies in warehouse operations and reduced
costs associated with outside bonded warehouses, as well as the effect of fixed
selling and administrative expenses over a larger sales base.
INTEREST EXPENSE. Interest expense as a percentage of revenues for the
three months ended June 30, 2002 decreased to 3.4% from 4.4% for the same period
in the prior year. This decrease was due to a decrease in interest rates offset
by the accretion of discounts associated with the original value of the warrants
associated with the subordinated debt and, to a larger extent, by the change in
the fair market value of the warrants based on the Black-Scholes calculation
method which for the three months ended June 30, 2002 was approximately $1.5
million. The adjustment for the change of approximately $1.5 million was
primarily due to the market price of our Common Stock at June 30, 2002 which was
$7.80. As of June 30, 2002, the fair market value for our warrants was
approximately $6.0 million.
NET INCOME. Our net income for the three months ended June 30, 2002
increased $403,648, or 147%, to $678,073 as compared to $274,425 for the same
period in the prior year. This increase in net income is due in part to an
increase in operating income due to increased sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased approximately $1.6 million to $2.8 million at June 30,
2002 from $1.2 million at the beginning of the fiscal year. Our cash balance was
higher due to cash receipts on the last day of the quarter which were not
remitted to offset our loan balance until after June 30, 2002.
At June 30 2002, we had $199.9 million in borrowings and approximately
$100,000 of unused credit under our $200 million credit facility. Our credit
facility is secured by a security interest in certain of our assets and
properties, including the capital stock of certain of our subsidiaries.
Our working capital increased approximately $1.6 million to
approximately $91.7 million at June 30, 2002 from approximately $90.1 million at
March 31, 2002, primarily due to an increase in accounts receivable and
inventories offset by higher related borrowings.
-10-
We meet our 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 our accounts receivable and inventory. As of June 30, 2002, we had
$199,888,864 outstanding under our $200 million bank line of credit. The credit
facility is secured by a security interest in most of our assets. 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 our option. The effective rate of interest
charged to us at June 30, 2002 was 4.65%. We utilize cash generated from
operations to reduce short-term borrowings which in turn acts to increase loan
availability consistent with our financing agreement.
During the quarter ended September 30 of fiscal year 2001, we issued to
RFE Investment Partners, an institutional investor, $15,000,000 principal amount
12% Senior Subordinated notes due 2005 and seven year warrants exercisable to
purchase 1,700,000 shares of our Class A common stock at $4.50 per share. The
warrants are subject to a future put option; under certain circumstances, as
defined, the investor has the right to put the warrants us after year five at a
price of $8.00 per warrant. The change in the fair market value of these
warrants resulted in a non-cash interest charge of approximately $1.5 million,
which was primarily due to the market price of our Common Stock at June 30,
2002.
Our accounts receivable increased to $113,423,031 as at June 30, 2002
from $109,655,884 as at March 31, 2002, representing an increase of 3.4%. This
increase is due to an increase in sales.
Inventories increased by approximately $8.1 million, or 4.4% for the
three months ended June 30, 2002 when compared to the fiscal year ended March
31, 2002. This increase in inventory is in anticipation of increased sales
during fiscal 2003.
In order for us to continue our growth, it will be necessary for us to
obtain additional financing. We have had discussions with certain financial
institutions concerning additional financing arrangements, and anticipate that
such arrangements will be in place during the quarter ending September 30, 2002,
or shortly thereafter. Based upon current levels of operations and anticipated
growth, we expect that sufficient cash flow will be generated from operations so
that, combined with other financing sources, we will be able to meet all of our
debt service, capital expenditure and working capital requirements for the next
twelve months.
Operations for the three months ended June 30, 2002, excluding non-cash
charges for depreciation and amortization, the change in the fair market value
of the warrants, and deferred income taxes, provided cash of $2.9 million. This
amount was offset by changes in assets and liabilities resulting from operating
activities for the three months ended June 30, 2002, which used cash of $8.8
million, resulting in net cash used in operating activities of $5.9 million.
Investing activities, which principally consisted of acquisitions of property,
plant and equipment, resulted in a use of cash of $979,244 for the three months
ended June 30, 2002. For the three months ended June 30, 2002, financing
activities provided cash of $8.5 million, principally consisting of increased
borrowing and issuance of common stock from the exercise of options.
CRITICAL ACCOUNTING POLICIES
This management discussion and analysis is based on our consolidated
financial statements which are prepared using certain critical accounting
policies that require management to make judgments and estimates that are
subject to varying degrees of uncertainty. While we believe that these
accounting policies, and management's judgments and estimates, are reasonable,
actual future events can and often do result in outcomes that can be materially
different from management's current judgments and estimates. We believe that
-11-
the accounting policies and related matters described in the paragraphs below
are those that depend most heavily on management's judgments and estimates.
RESERVES FOR UNCOLLECTIBLE ACCOUNTS. At June 30, 2002, our accounts
receivable balance was $113.4 million. Our accounting policy is to reserve for
the accounts receivable of specific customers based on our assessment of certain
customers' financial condition. We make these assessments using our knowledge of
the industry and our past experiences. This policy is based on our past
collection experience. During the three months ended June 30, 2002, we decreased
our reserve for uncollectible accounts by approximately $260,000, bringing the
total of that reserve to approximately $2.0 million at June 30, 2002. We did not
write off any receivables during the three months ended June 30, 2002.
INVENTORY OBSOLESCENCE ESTIMATES. We take physical inventories in each
of our significant warehouse locations at or near the end of each fiscal year.
Inventories at the balance sheet dates are valued using the lower of average
cost (with average cost determined using the first-in, first-out method) or
market reduced by estimated inventory obsolescence losses for the period between
the last physical inventory and the balance sheet date. These estimates are
based on an inventory analysis of the movement and expiration dates of specific
inventory items. In addition, we may return health and beauty aids and
prescription pharmaceutical products to our suppliers for full credit if the
products are damaged, their shelf life has expired, or they are otherwise not
saleable.
INVENTORIES. Inventories are principally purchased rather than
manufactured. They are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method. We record adjustments
to the value of inventory based upon forecasted sales projections, and the
physical condition (e.g., age and quality) of the inventories. These adjustments
are estimates, which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer inventory
levels or competitive conditions differ from our expectations.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is
recorded at cost and is depreciated on straight-line and accelerated methods
over the estimated useful lives of such assets. Changes in circumstances such as
technological advances or changes in our capital strategy can result in the
actual useful lives differing from our estimates. In those cases where we
determine that the useful life of property, plant and equipment should be
shortened, we would depreciate the net book value in excess of the salvage value
over its revised remaining useful life thereby increasing depreciation expense.
Factors such as changes in the planned use of fixtures or software or closing of
facilities could result in shortened useful lives.
LONG LIVED ASSETS. Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," requires management judgments regarding the future
operating and disposition plans for marginally performing assets, and estimates
of expected realizable values for assets to be sold. The application of SFAS 121
has significantly affected the amount and timing of charges to operating results
in recent years.
GOODWILL. We review goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount of any such asset may not be
recoverable. The estimate of cash flow is based upon, among other things,
certain assumptions about expected future operating performance. Our estimates
of undiscounted cash flow may differ from actual cash flow due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows is less than the carrying value, we would recognize an impairment
loss, measured as the amount by which the carrying value exceeds the fair value
of the asset.
-12-
INCOME TAXES. Our effective tax rate and the tax bases of our assets
and liabilities reflect our best estimate of the ultimate outcome of tax audits.
Valuation allowances are established where expected future taxable income does
not support the realization of the deferred tax assets. Considerable management
judgment is also necessary in estimating future taxable income. Assumptions used
in these estimates are consistent with internal forecasts.
VALUATION OF CONTINGENT PUT WARRANTS. The contingent put warrants
associated with the subordinated debt are being valued on a quarterly basis
using the Black-Scholes Pricing Model. This model is subject to change in our
stock price, as well as the potential that the warrants will become exercisable
due to market conditions, and the change in risk free interest rates.
FACTORS THAT COULD IMPACT OUR FINANCIAL CONDITION
SUBSTANTIAL DEFAULTS IN PAYMENT OR A MATERIAL REDUCTION IN PURCHASES OF
OUR PRODUCTS BY LARGE CUSTOMERS COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND LIQUIDITY. In recent years, a
significant portion of our revenue growth has been with a limited number of
large customers. Any defaults in payment or a material reduction in purchases
from us by these large customers could have a significant negative impact on our
financial condition, results of operations and liquidity.
OUR BUSINESS COULD BE HINDERED IF WE ARE UNABLE TO COMPLETE AND
INTEGRATE ACQUISITIONS SUCCESSFULLY. An element of our strategy is to identify,
pursue and consummate acquisitions that either expand or complement our
business. Integration of acquisitions involves a number of risks, including the
diversion of management's attention to the assimilation of the operations of
businesses we have acquired; difficulties in the integration of operations and
systems and the realization of potential operating synergies; the assimilation
and retention of the personnel of the acquired companies; challenges in
retaining the customers of the combined businesses; and potential adverse
effects on operating results. If we are unable to successfully complete and
integrate strategic acquisitions in a timely manner, our business and our growth
strategies could be negatively affected.
WE WILL REQUIRE ADDITIONAL FINANCING TO COMPLETE ACQUISITIONS. If we
are not able to secure additional financing on terms we consider acceptable to
us, we will not be able to execute on our business and growth strategies. In
addition, if we experience rapid growth, we may require additional funds to
expand our operations or enlarge our organization through acquisitions of
complementary businesses.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective April 2002, we adopted SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 141" and "SFAS
No. 142", respectively). These statements established financial accounting and
reporting standards for acquired goodwill and other intangible assets.
Specifically, the standards address how acquired intangible assets should be
accounted for both at the time of acquisition and after they have been
recognized in the financial statements. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. In accordance with SFAS
No. 142, intangible assets, including purchased goodwill, must be evaluated for
impairment. Those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives are no longer amortized.
Effective April 1, 2002, the Company has adopted the provisions of SFAS 142,
which reduced amortization charges by $97,000.
-13-
In accordance with SFAS No. 142, we completed our transitional impairment
testing of intangible assets during the first quarter of fiscal 2003. That
effort, and preliminary assessments of our identifiable intangible assets,
indicated that little or no adjustment would be required upon adoption of this
pronouncement. The impairment testing is performed in two steps: (i) the
determination of impairment, based upon the fair value of a reporting unit as
compared to its carrying value, and (ii) if there is an impairment, this step
measures the amount of impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. The Company has determined
that as of June 30, 2002 these assets are not impaired.
The following table presents pro forma net earnings and earnings per share
data restated to include the retroactive impact of the adoption of SFAS No. 142.
Three Months Ended Three Months Ended
June 30, June 30,
2002 2001
---- ----
Reported Net Earnings $ 678,073 $ 274,425
Add Back:
Goodwill amortization, net of tax - 0 - 58,200
Pro forma Net Earnings $ 678,073 $ 332,625
Basic net earnings per common share $ .09 $ .04
Goodwill amortization, net of tax - 0 - .01
------------- --------------
Pro forma net earnings $ .09 $ .05
============== =============
Diluted net earnings per common share $ .08 $ .04
Goodwill amortization, net of tax - 0 - $ .01
-------------- -------------
Pro forma net earnings $ .08 $ .05
============== =============
Weighted average common shares outstanding:
Basic 7,281,768 6,836,484
Diluted 8,904,996 6,862,485
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. This statement is effective for
financial statements issued
for fiscal years beginning after June 15, 2002. We believe adoption of SFAS 143
will not have a material effect on our financial position or results of
operations.
In August 2001, FASB 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. We expect to adopt this statement for the
fiscal year ending March 31, 2003, and do not anticipate that it will have a
material impact on our consolidated financial results.
-14-
INFLATION AND SEASONALITY
Inflation has not had any significant adverse effects on our business
and we do not believe it will have any significant effect on our future
business. Our fragrance business is seasonal, with greater sales during the
Christmas season than in other seasons. Our other product lines are not
seasonal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk related to the variable interest rate on
our line of credit. Interest on the loan balance is payable at .25% per annum
above the prime rate or, at our option, 2.75% per annum above the Eurodollar
rate. We do not practice derivative trading in the form of interest rate swaps.
Currently, our international operations are not material and,
therefore, the risk related to foreign currency exchange rates is not material.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
None.
(b) REPORTS ON FORM 8-K:
During the quarter for which this Report on Form 10-Q is filed, the
Company filed a Report on Form 8-K, as amended by a Report on Form 8-K/A, dated
(date of earliest event reported) June 6, 2002, reporting under Item 4 - Changes
in Registrant's Certifying Accountant. No financial statements were filed with
this Report on Form 8-K, as amended by a Report on Form 8-K/A.
-15-
SIGNATURE
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.
Date: August 14, 2002 ALLOU HEALTH & BEAUTY CARE, INC.
By: /s/ David Shamilzadeh
-------------------------
Name: David Shamilzadeh
Title: President, Principal Financial
Officer and Principal Accounting
Officer
-16-