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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Commission file number 1-10340
ALLOU HEALTHCARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 1-2953972
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
50 Emjay Boulevard, Brentwood, New York 11717
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code): (631) 273-4000
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(Former Name, if Changed Since Last Report): Allou Health & Beauty Care, Inc.
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Indicate by a 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 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 __ - --
Below are indicated the number of shares outstanding of each of the
issuer's classes of common stock:
Outstanding as of
Class November 4, 2002
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Class A Common Stock, $.001 par value per share 6,734,992
Class B Common Stock, $.001 par value per share 1,200,000
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TABLE OF CONTENTS
Page
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Cautionary Statement..........................................................1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets..........................................2
Consolidated Statements Of Income (six-month period).................3
Consolidated Statements Of Income (three-month period)...............4
Consolidated Statements Of Cash Flows................................5
Notes To Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........17
Item 4. Controls and Procedures..............................................17
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders..................18
Item 6. Exhibits and Reports on Form 8-K.....................................18
Signature.....................................................................20
Certifications................................................................21
Exhibits E-1
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "WE," "US," "OUR,"
"ALLOU" OR THE "COMPANY" INCLUDE ALLOU HEALTHCARE, 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.
-1-
ITEM 1. FINANCIAL STATEMENTS
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 March 31,
ASSETS (Unaudited) 2002
------ ---------------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $3,579,430 $1,245,521
Accounts receivable, net of allowance for doubtful accounts
of $2,277,396 and $2,297,396, respectively 110,420,413 109,655,884
Inventories 110,633,271 185,470,903
Inventory claim receivable (note 3) 86,586,909 -
Prepaid inventory purchases 12,924,580 7,707,085
Prepaid and refundable income taxes - 324,526
Other current assets 2,991,251 1,990,326
Deferred income taxes 1,316,488 1,316,488
Total current assets 328,452,342 307,710,733
PROPERTY AND EQUIPMENT, net 12,912,733 10,989,872
GOODWILL 4,086,732 4,086,732
OTHER ASSETS 1,959,368 2,077,438
DEFERRED INCOME TAXES 76,623 76,623
TOTAL ASSETS $347,487,798 $324,941,398
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Line of credit $199,695,123 $191,285,333
Current portion of long-term debt and capital leases 3,306,045 2,094,172
Accounts payable and accrued expenses 27,169,524 24,240,501
Income taxes payable 985,230 -
Total current liabilities 231,155,922 217,620,006
LONG TERM LIABILITIES:
Long-term debt and capital leases 5,559,046 3,202,435
Subordinated debt 12,381,348 11,859,348
Common stock put warrants 4,920,220 4,539,000
Deferred income tax liability 200,205 200,205
Total Long-term liabilities 23,060,819 19,800,988
TOTAL LIABILITIES 254,216,741 237,420,994
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, 6,734,992
and 6,051,397 shares issued and outstanding, respectively 6,735 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 36,284,262 33,133,207
Retained earnings 59,620,602 54,379,946
Stock receivable (2,641,742) -
TOTAL STOCKHOLDERS' EQUITY 93,271,057 87,520,404
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $347,487,798 $324,941,398
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Six Months Ended
September 30,
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2002 2001
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Revenues $314,276,811 $259,212,391
Cost of Revenues 277,786,262 228,789,517
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Gross Profit 36,490,549 30,422,874
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Operating Expenses
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Warehouse and Delivery 7,648,455 6,105,293
Selling, General and Administrative 12,722,475 11,087,496
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Total Operating Expenses 20,370,930 17,192,789
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Income From Operations 16,119,619 13,230,085
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Other Expenses
- --------------
Interest Expense - Net 7,385,964 9,194,909
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Income From Operations Before Income Taxes 8,733,655 4,035,176
Provision for Income Taxes 3,493,000 1,525,000
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NET INCOME $5,240,655 $2,510,176
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Earnings Per Common Share
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Basic $.69 $.36
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Diluted $.60 $.36
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Weighted Average Common Shares Used in Computing Per Share Amounts
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Basic 7,569,516 6,885,131
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Diluted 8,742,006 6,912,755
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The accompanying notes are an integral part of these consolidated financial
statements.
-3-
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For The Three Months Ended
September 30,
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2002 2001
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Revenues $166,884,988 $148,981,900
Cost of Revenues 145,376,666 132,216,182
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Gross Profit 21,508,322 16,765,718
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Operating Expenses
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Warehouse and Delivery 4,523,239 3,155,443
Selling, General and Administrative 7,059,855 5,637,726
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Total Operating Expenses 11,583,094 8,793,169
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Income From Operations 9,925,228 7,972,549
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Other Expenses
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Interest Expense - Net 2,321,646 4,391,798
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Income Before Provision for Income Taxes 7,603,582 3,580,751
Provision for Income Taxes 3,041,000 1,345,000
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NET INCOME $4,562,582 $2,235,751
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Earnings Per Common Share
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Basic $.58 $.32
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Diluted $.53 $.32
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Weighted Average Common Shares Used in Computing Per Share Amounts
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Basic 7,854,140 6,933,249
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Diluted 8,556,564 6,962,865
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The accompanying notes are an integral part of these consolidated financial
statements.
-4-
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months Ended
September 30,
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2002 2001
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Cash Flows From Operating Activities
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Net Income $5,240,655 $2,510,176
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Depreciation and Amortization 772,367 677,058
Non-Cash Interest Expense 903,220 65,374
Common Stock Issued for Compensation 250,000 -0-
Changes in Operating Assets and Liabilities:
Accounts Receivable (764,529) (22,195,120)
Inventories and Inventory Claim Receivable (11,749,277) (465,367)
Prepaid Purchases and Other Assets (5,956,341) 3,186,568
Accounts Payable and Accrued Expenses 2,929,023 635,228
Income Taxes Payable 985,230 -0-
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Net Cash Used In Operating Activities (7,389,652) (15,586,083)
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Cash Flows Used in Investing Activities
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Acquisition of Property and Equipment (2,514,710) (1,762,579)
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Cash Flows From Financing Activities
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Net Increase in Amounts Due Bank 8,409,790 13,216,309
Borrowings 4,703,800 5,549,889
Repayment of Debt (1,135,316) (1,145,197)
Net Proceeds in Connection with the Exercise of Options
and Warrants 259,997 -0-
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Net Cash Provided By Financing Activities 12,238,271 17,621,001
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INCREASE IN CASH 2,333,909 272,339
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,245,521 263,774
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,579,430 $536,113
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Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $7,783,134 $10,100,509
Income Taxes $4,126,746 -0-
Non-Cash Financing Activities:
Notes Issued for Acquisition of Property and Equipment $-0- $2,686,867
Common Stock Issued for Debt Repayment $-0- $500,000
Notes Received In Connection with the Exercising
of Common Stock Options $2,641,742 -0-
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying interim consolidated financial statements of Allou
Healthcare, 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 conjunction with
the financial statements in the Company's Annual Report on Form 10-K for the
year ended March 31, 2002.
2. On September 12, 2002, at the Company's annual meeting of stockholders, the
board of directors approved changing the Company's name to Allou Healthcare,
Inc. The Company's decision to change its name is to reflect the fact that it is
focusing the majority of its business on the distribution of pharmaceutical
products.
3. On September 25-26, 2002, an extensive fire occurred at a public warehouse in
Brooklyn, New York which is used by the Company and other tenants to store
goods. The warehouse is operated by an entity unrelated to the Company. The
operator leases the warehouse facility from an entity owned by relatives of
certain officers of the Company. The Company has recorded an insurance claim
receivable of $86.6 million on its balance sheet representing the cost basis of
the lost inventory, and has filed a claim with the insurance companies in the
amount of $101 million, representing the selling price of the lost inventory. If
the Company receives the entire amount of this $101 million insurance claim, the
Company would recognize a gain of $14.4 million. In addition, the Company's
policies provide for business interruption and extra expense insurance up to a
maximum of $35 million.
In October 2002, the Company received a "reservation of rights" letter from
its primary insurance carrier claiming that the warehouse fire appeared to be
incendiary in nature. The insurance policies list the Company's senior lenders
as loss payees and may under certain circumstances obligate the insurance
companies to indemnify the senior lenders regardless of any act or omission of
the Company. The investigation by various parties as to the cause of the fire is
ongoing. If payment by the insurance companies is delayed or if the amount of
the payment is less than the sales price of the inventory, depending on the
extent of the delay and the amount of the payment, there could be a material
adverse effect on the Company's ability to finance its current operations at
current levels. The Company has retained professionals to pursue insurance
recovery.
4. 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.
-6-
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Six months ended Three months ended
September 30, September 30,
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2002 2001 2002 2001
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Basic 7,569,516 6,885,131 7,854,140 6,933,249
Assumed exercise of stock options 1,172,490 27,624 702,424 29,616
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Diluted 8,742,006 6,912,755 8,556,564 6,962,865
========= ========= ========= =========
Potentially dilutive securities excluded from
computation because they are anti-dilutive 817,325 4,128,900 1,247,850 4,128,900
========= ========= ========= =========
Net income as presented in the unaudited consolidated statements of income
is used as the numerator in the EPS calculation for both the basic and diluted
computations.
5. 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 year ending March 31, 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, 2002 and 2001 is $522,000 and $308,144 representing
such accretion. Included in interest expense for the three months ended
September 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
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 are marked to market through earnings on a quarterly basis.
The value of these warrants at September 30, 2002 is $4,920,220. Included in
interest expense for the six months ended September 30, 2002 is $381,320
representing the change in value of these warrants from April 1, 2002 through
September 30, 2002. Interest expense for the three months ended September 30,
2002 was reduced by $1,162,114 representing the change in value of these
warrants from July 1, 2002 through September 30, 2002. Interest expense for the
six months ended September 30, 2001 was 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 was reduced
by $402,770 representing the change in value of these warrants through September
30, 2001.
6. On July 12, 2002, certain officers of the Company exercised options to
purchase 598,500 shares of Class A common stock pursuant to stock options
previously granted to them. In connection with those exercises, these officers
executed promissory notes totaling $2,641,742 due three years after the date of
execution together with interest payable at 5% per annum. This amount is
reflected as a stock subscription receivable in the accompanying consolidated
balance sheets. The present terms of these notes require the value of the issued
stock to be marked to
-7-
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
market each reporting period, while the notes are outstanding, which may add to
earnings volatility. Furthermore, during the three months ended September 30,
2002, the company issued shares of common stock valued at $250,000 for employee
compensation.
7. 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 periods ended September 30,
2002 and 2001 was not material. Shipping and handling costs totaled
approximately $2,121,183 and $1,920,333, for the six months ended September 30,
2002 and 2001, respectively. Shipping and handling costs totaled approximately
$1,314,240 and $1,002,586 for the three months ended September 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 $194,000 for the
six months ended September 30, 2002.
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 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 September 30, 2002 these assets are not impaired.
-8-
ALLOU HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Six months ended Three months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported Net Earnings $5,240,655 $2,510,176 $4,562,582 $2,235,751
Add Back:
Goodwill amortization, net of tax -0- 116,400 -0- 58,200
Pro forma Net Earnings $5,240,655 $2,626,576 $4,562,582 $2,293,951
Basic net earnings per common share $.69 $.36 $.58 $.32
Goodwill amortization, net of tax -0- .02 -0- .01
Pro forma basic net earnings per common $.69 $.38 $.58 $.33
share
Diluted net earnings per common share $.60 $.36 $.53 $.32
Goodwill amortization, net of tax -0- .02 -0- .01
Pro forma diluted net earnings per common $.60 $.38 $.53 $.33
share
Weighted average common shares outstanding:
Basic 7,569,516 6,885,131 7,854,140 6,933,249
Diluted 8,742,006 6,912,755 8,556,564 6,962,865
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 has
adopted SFAS 144 as of April 1, 2002, and does not anticipate that it will have
a material impact on the Company's consolidated financial results.
8. 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 HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment data for the six months ended September 30, 2002 and 2001 was as
follows:
Wholesale Pharmaceuticals
Distribution Distribution Manufacturing Consolidated
------------ ------------ ------------- ------------
Six months ended September 30, 2002
Revenue $197,551,110 $111,255,723 $5,469,978 $314,276,811
Depreciation and Amortization 558,518 6,549 207,300 772,367
Income (Loss) From Operations Before Taxes 8,408,132 1,253,656 (928,133) 8,733,655
Segment Assets 293,652,457 41,296,767 12,538,574 347,487,798
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
Segment data for the three months ended September 30, 2002 and 2001 was as
follows:
Wholesale Pharmaceuticals
Distribution Distribution Manufacturing Consolidated
------------ ------------ ------------- ------------
Three months ended September 30, 2002
Revenue $107,021,867 $55,237,020 $4,626,101 $166,884,988
Depreciation and Amortization 276,759 2,424 103,650 382,833
Income From Operations
Before Taxes 7,046,278 316,694 240,610 7,603,582
Segment Assets 293,652,457 41,296,767 12,538,574 347,487,798
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
-10-
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 six months ended September 30, 2002,
our revenues have grown by approximately 21% 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
63% of our revenues during the six months ended September 30, 2002, and 57% of
our revenues for the six months ended September 30, 2001. Distribution of
prescription pharmaceutical products accounted for approximately 35% of our
revenues during the six months ended September 30, 2002, and 41% of our revenues
during the six months ended September 30, 2001. Manufacture and distribution of
hair and skin care products accounted for approximately 1.7% of our revenues
during the six months ended September 30, 2002 and 1.7% of our revenues for the
six months ended September 30, 2001. Our operating results for the six months
ended September 30, 2002 and 2001 expressed as a percentage of sales were as
follows:
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
(Amounts may not add due to rounding)
2002 2001
---- ----
Net sales 100.0% 100.0%
Costs of goods sold 88.4% 88.3%
---------------- --------------
Gross profit 11.6% 11.7%
Warehouse & delivery expenses 2.4% 2.4%
Selling, general and administrative
expenses 4.0% 4.3%
---------------- --------------
Operating income 5.1% 5.1%
Net interest expense 2.4% 3.5%
---------------- --------------
Income before income tax 2.8% 1.5%
Income tax provision 1.1% 0.6%
---------------- --------------
Net income 1.7% 1.0%
-11-
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Amounts may not add due to rounding)
2002 2001
---- ----
Net sales 100.0% 100.0%
Costs of goods sold 88.1% 88.7%
Gross profit 12.9% 11.3%
Warehouse & delivery expenses 2.7% 2.1%
Selling, general and administrative
expenses 4.2% 3.8%
Operating income 5.9% 5.4%
Net interest expense 1.4% 2.9%
Income before income tax 4.6% 2.4%
Income tax provision 1.8% 0.9%
Net income 2.7% 1.5%
THE SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 2001
Revenues. Revenues for the six months ended September 30, 2002 increased
$55.1 million to $314.3 million, representing a 21.2% gain as compared to
revenues of $259.2 million for the six months ended September 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 34% for the six months
ended September 30, 2002 compared to the same period in fiscal 2001, due to
increases in same store sales and an expanded customer base. Sales of
prescription pharmaceuticals increased 3.7% in the comparable period. This
increase in revenues is due to increases in same store sales. Our manufacturing
subsidiary had a 18% decrease in revenues for the six months ended September 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 six months ended September 30, 2002 was
$36.5 million, representing a 19.9% increase over gross profit of $30.4 million
for the same period in the prior year. Gross profit as a percentage of sales
decreased to 11.6% for the six months ended September 30, 2002 from 11.7% 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 period when
compared to our other segments.
Warehouse, Delivery, Selling, General and Administrative Expenses.
Warehouse, delivery, selling, general and administrative expenses for the six
months ended September 30, 2002 increased $3.2 million to $20.4 million from
$17.2 million in the prior year. Warehouse, delivery, selling, general and
administrative expenses decreased as a percentage of revenues to 6.4% for the
six months ended September 30, 2002 from 6.7% when
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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 six
months ended September 30, 2002 decreased to 2.4% from 3.5% 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 by the change in the fair market value
of the warrants based on the Black-Scholes calculation method which for the six
months ended September 30, 2002 was approximately $0.4 million. This adjustment
for the change of approximately $0.4 million was primarily due to the market
price of our Common Stock at September 30, 2002, which was $4.29. As of
September 30, 2002, the fair market value for our warrants was approximately
$4.9 million.
Net Income. Our net income for the six months ended September 30, 2002
increased $2,730,479, or 108.8%, to $5,240,655 as compared to $2,510,176 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.
THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenues. Revenues for the three months ended September 30, 2002 increased
$17.9 million to $166.9 million, representing a 12.1% gain as compared to
revenues of $149.0 million for the three months ended September 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 16.1% for the three months
ended September 30, 2002 compared to the same period in fiscal 2001, due to
increases in same store sales and an expanded customer base. Sales of
prescription pharmaceuticals were flat when compared to the same period in the
prior year. Our manufacturing subsidiary had a 234% increase in revenues for the
three months ended September 30, 2002 as compared to the comparable period in
the prior year. This increase was due to 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 9 months.
Gross Profit. Gross profit for the three months ended September 30, 2002
was $21.5 million, representing a 28.3% increase over gross profit of $16.8
million for the same period in the prior year. Gross profit as a percentage of
sales increased to 12.9% for the three months ended September 30, 2002 from
11.3% when compared to the same period in the prior year. This increase is due
to increasing sales of fragrance products which have higher 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 September 30, 2002 increased $2,789,925 to $11.6 million from $8.8
million in the prior year. Warehouse, delivery, selling, general and
administrative expenses increased as a percentage of revenues to 6.9% for the
three months ended September 30, 2002 from 5.9% when compared to the same period
in the prior year. This increase as a percentage of revenues is due in part to
increased costs associated with our manufacturing subsidiary resulting from R&D
expenses due to new hires and costs due to increased freight expense.
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Interest Expense. Interest expense as a percentage of revenues for the
three months ended September 30, 2002 decreased to 1.4% from 3.0% for the same
period in the prior year. This decrease was due to a decrease in interest rates
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
September 30, 2002 was approximately $1.2 million offset by the accretion of
discounts associated with the original value of the warrants associated with the
subordinated debt. This adjustment for the change of approximately $1.2 million
during this quarter was primarily due to the market price of our Common Stock at
September 30, 2002, which was $4.29. As of September 30, 2002, the fair market
value of our warrants was approximately $4.9 million.
Net Income. Our net income for the three months ended September 30, 2002
increased $2,236,831 or 104%, to $4,562,582 as compared to $2,235,751 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 and the remainder is due to
interest savings noted above.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased approximately $2.3 million to $3.6 million at September 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 September 30, 2002.
Operations for the six months ended September 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 $7.2 million. This
amount was offset by changes in assets and liabilities resulting from operating
activities for the six months ended September 30, 2002, which used cash of $14.6
million, resulting in net cash used in operating activities of $7.4 million.
Investing activities, which principally consisted of acquisitions of property,
plant and equipment, resulted in a use of cash of $2.5 million for the six
months ended September 30, 2002. For the six months ended September 30, 2002,
financing activities provided cash of $12.2 million, principally consisting of
increased borrowing and issuance of common stock from the exercise of options.
At September 30, 2002, we had $199.7 million in borrowings and
approximately $321,971 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 $7.2 million to approximately
$97.3 million at September 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.
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 September 30, 2002, we
had $199,695,123 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 September 30, 2002 was 4.63%. We utilize cash
generated from operations to reduce short-term borrowings which in turn acts to
increase loan availability consistent with our financing agreement.
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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 during the six
months ending September 30, 2002 of these warrants resulted in non-cash interest
of approximately $.4 million, which was primarily due to the market price of our
Common Stock at September 30, 2002.
Our accounts receivable increased to $110,420,413 as at September 30, 2002
from $109,655,884 as at March 31, 2002, representing an increase of 0.7%. This
increase is due to an increase in sales.
Inventories (including the amount classified as insurance claim receivable
of approximately $86 million) increased by approximately $11.7 million, or 6.3%
for the six months ended September 30, 2002 when compared to the fiscal year
ended March 31, 2002. This increase in inventory was 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 anticipated that
such arrangements would be in place during the quarter ending September 30,
2002, or shortly thereafter. However, due to a warehouse fire that occurred at
the Evergreen Warehouse Corp., a public warehouse located at 40 Noll Street in
Brooklyn, New York, on September 25-26, 2002, these discussions with certain
financial institutions have been temporarily suspended pending resolution of the
insurance claims. The Company carries insurance with several insurance companies
covering property damage caused by fire. The coverage consists of various
insurance policies with different terms and conditions. The Company has recorded
an insurance claim receivable of $86.6 million on its balance sheet representing
the cost basis of the lost inventory. In addition, the Company has filed a claim
with the insurance companies in the amount of $101 million representing the
selling price of the lost inventory. Additionally, the Company's policies
provide for business interruption and extra expense insurance up to a maximum of
$35 million.
In October 2002, the Company received a reservation of rights letter from
its primary insurance carrier claiming that the warehouse fire appeared to be
incendiary in nature. The insurance policies list the company's senior lenders
as loss payees and may under certain circumstances obligate the insurance
companies to indemnify the senior lenders regardless of any act or omission of
the Company. The investigation by various parties as to the cause of the fire is
ongoing. If payment by the insurance companies is delayed or if the amount of
the payment is less than the sales price of the inventory, depending on the
extent of the delay and the amount of the payment, there could be a material
adverse effect on the Company's ability to finance its current operations at
current levels. The Company has retained professionals to pursue insurance
recovery.
Based upon current levels of operations we expect that sufficient cash flow will
be generated from operations so that we will be able to meet all of our debt
service, capital expenditure and working capital requirements for the next
twelve months.
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
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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.
If payment by the insurance companies of our insurance claim relating to
the warehouse fire is delayed or if the amount of the payment is less than the
sales price of the inventory, depending on the extent of the delay and the
amount of the payment, there could be a material adverse effect on the Company's
ability to finance its current operations at current levels
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 $194,000.
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 September 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.
Six Months Ended September 30 Three Months Ended September 30
2002 2001 2002 2001
---- ---- ---- ----
Reported Net Earnings $5,240,655 $2,510,176 $ 4,562,582 $2,235,751
Add Back: Goodwill amortization, net of -0- 116,400 -0- 58,200
tax
Pro forma Net Earnings $5,240,655 $2,626,576 $ 4,562,582 $2,293,951
Basic net earnings per common share .69 .36 .58 .32
Goodwill amortization, net of tax -0- .02 -0- .01
Pro forma net earnings .69 .38 .58 .33
Diluted net earnings per common share .60 .36 .53 .32
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Goodwill amortization, net of tax -0- .02 -0- .01
Pro forma net earnings .60 .38 .53 .33
Weighted average common shares outstanding:
Basic 7,569,516 6,885,131 7,854,140 6,933,249
Diluted 8,742,006 6,912,755 8,556,564 6,962,865
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.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring.): Statement No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. The provisions of Statement No. 146 are effective for exit or disposal
activities initiated after December 31, 2002 and thus will become effective for
the Company on January 1, 2003. The adoption of Statement 146 is not currently
expected to have a material effect on the financial position, results of
operations or cash flows of the Company upon adoption.
In December 2001, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 01-6, "Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others". The SOP applies to any entity that lends to or finances
the activities of others, and specifies accounting and disclosure requirements
for entities that extend trade credit to customers and also provides specific
guidance for other types of transactions specific to certain financial
institutions. The SOP is effective for the Company beginning April 1, 2003 and
the Company does not believe the recognition and measurement provisions within
this SOP will result in a change in practice for is trade receivables or any
other activities of the Company. The SOP also provides certain presentation and
disclosure changes for entities with trade receivables as part of the objective
of requiring consistent accounting and reporting for like transactions, which
the Company intends to include in its disclosures upon adoption.
CRITICAL ACCOUNTING POLICIES
As disclosed in the annual report on Form 10-K for the fiscal year ended
March 31, 2002, the discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements. These judgments can be subjective and complex, and consequently
actual results could differ from those estimates. Our
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most critical accounting policies relate to reserves for uncollectible accounts;
inventory and obsolescence; property, plant, equipment and long-lived assets;
goodwill; income taxes; and the valuation of our contingent put warrants. Since
March 31, 2002, there have been no changes related to our critical accounting
policies.
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.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Within the 90-day period
prior to the filing date of this report, the Company carried out an evaluation,
under the supervision and with the participation of management of the Company,
including the Company's Chief Executive Officer and Principal Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on the Company's evaluation, the Company's Chief
Executive Officer and Principal Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
(b) Changes in Internal Controls. Since the date of the evaluation described
above, there have not been any significant changes in the Company's internal
accounting controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 12, 2002, the Company's annual meeting of stockholders was
held (the "Meeting"). At the Meeting, the stockholders approved the following
four matters:
First, the election of Messrs. Victor Jacobs, Herman Jacobs, David
Shamilzadeh, Jack Jacobs, Sol Naimark, Jeffrey Berg and Stuart Glasser as
directors of the Company to serve until the next annual meeting of stockholders
and until their successors shall have been duly elected and qualified. The
number of votes cast for or withheld was as follows:
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VOTES
-----
FOR WITHHELD
--- --------
Victor Jacobs 10,742,394 761,515
Herman Jacobs 10,744,104 759,805
David Shamilzadeh 10,750,004 753,905
Jack Jacobs 10,751,704 752,205
Sol Naimark 10,867,665 636,244
Jeffrey Berg 10,859,650 644,259
Stuart Glasser 10,855,516 648,393
Second, the approval of the Company's Second Amended and Restated 1996
Stock Option Plan. There were 10,104,160 votes cast "for" the matter, 1,357,514
votes cast "against" the matter and 42,235 abstentions.
Third, the ratification of the selection of KPMG LLP as the Company's
independent auditors for the fiscal year ending March 31, 2003. There were
11,421,579 votes cast "for" the matter, 71,695 votes cast "against" the matter
and 10,635 abstentions.
Fourth, the approval of an amendment to the Company's restated certificate
of incorporation to change the name of the Company. There were 11,364,805 votes
cast "for" the matter, 104,029 votes cast "against" the matter and 35,075
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following Exhibits are filed as a part of this report:
Exhibit No. Description
----------- -----------
3.1 Certificate of Amendment to the Company's Restated Certificate of
Incorporation, as filed with the Secretary of State of the State
of Delaware on September 12, 2002 (the "September 12 Certificate
of Amendment").
3.2 Certificate of Correction to the September 12 Certificate of
Amendment, as filed with the Secretary of State of the State of
Delaware on October 3, 2002.
(b) Reports on Form 8-K
During the quarter for which this report is filed, the Company filed: (i) a
report on Form 8-K dated (date of earliest event reported) August 14, 2002,
reporting under Item 9 - Regulation FD; and (ii) a report on Form 8-K dated
(date of earliest event reported) September 26, 2002, reporting under Item 5 -
Other Events. No financial statements were filed with these Reports on Form 8-K.
-19-
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: November 13, 2002 ALLOU HEALTHCARE, INC.
By: /s/ David Shamilzadeh
------------------------------------------
Name: David Shamilzadeh
Title: President, Principal Financial
Officer and Principal Accounting
Officer
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CERTIFICATE
I, Herman Jacobs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allou Healthcare,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Herman Jacobs
-----------------------------------
Herman Jacobs
Chief Executive Officer
(Principal Executive Officer)
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CERTIFICATE
I, David Shamilzadeh, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allou Healthcare,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ David Shamilzadeh
---------------------------------------
David Shamilzadeh
President, Principal Financial Officer
and Principal Accounting Officer
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