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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file no. 1-10340
ALLOU HEALTH & BEAUTY CARE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 11-2953972
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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: (516) 273-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Class A Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
The aggregate market value of the Common Stock of the Registrant
held by non-affiliates of the Registrant on June 23, 1998 was $73,120,880. Such
aggregate market value is computed by reference to the closing sales price of
the Class A Common Stock on such date. For purposes of this calculation, the
Registrant has excluded the Class B Common Stock, which is held primarily by
affiliates and is not publicly-traded.
The number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date: 4,651,155 shares of Class A
Common Stock and 1,200,000 shares of Class B Common Stock as of the close of
business on June 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement relating to the
Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
Allou Health & Beauty Care, Inc. (the "Company" or "Allou"), was
incorporated under the laws of the State of Delaware in January 1989 as the
successor to Allou Distributors, Inc. As used herein, unless the context
otherwise requires, the term "Company" refers to Allou Health & Beauty Care,
Inc. and its wholly-owned subsidiaries Allou Distributors, Inc., M. Sobol, Inc.
("Sobol"), Allou Personal Care Corp. ("Allou Personal Care") and The Fragrance
Counter, Inc. ("The Fragrance Counter").
The Company distributes national brand name health and beauty aid
("HBA") products, fragrances and cosmetics, non-perishable packaged food items
and prescription pharmaceuticals primarily to independent retailers in the New
York, New Jersey, Connecticut, Philadelphia and Miami area. The Company
purchases approximately 8,000 HBA products from such manufacturers as Procter &
Gamble Co., Johnson & Johnson and Gillette Co. and 7,000 fragrance and cosmetic
products directly from manufacturers such as Revlon, Inc. and Coty (a division
of Pfizer Inc.) and from secondary sources for sale to more than 4,200 retail
outlets including small discount chains, individual HBA suppliers and non-chain
supermarkets. Fragrance and cosmetic products are also marketed nationally to
discount chain stores such as Wal-Mart Stores, Inc. and Sears, Roebuck & Co.,
independent retail stores and pharmacies directly or through Company catalogues.
The Company also distributes approximately 50 HBA products under the trademark
"Allou Brands." Although this activity has accounted for only a small percentage
of revenues to date, the Company is expanding its marketing efforts in this
area.
In addition, the Company, through its wholly-owned subsidiary Sobol,
serves as a direct manufacturers' distributor of branded prescription
pharmaceuticals.
In October 1995, the Company purchased selected assets of Russ
Kalvin's, Inc. ("Russ Kalvin's"). The Russ Kalvin's acquisition has enabled the
Company to manufacture and distribute salon quality hair and skin care products
through its wholly-owned subsidiary, Allou Personal Care.
In April 1997, the Company launched an internet retail store under
the Fragrance Counter(TM) name. The operations of The Fragrance Counter are
conducted by the Company's subsidiary, The Fragrance Counter. The Fragrance
Counter sells fragrances from designers such as Ralph Lauren, Calvin Klein,
Versace, Estee Lauder, Chanel and Georgio Armani.
PRODUCTS
The Company distributes five general categories of products: name
brand health and beauty aids, fragrances and cosmetics, Allou Brands health and
beauty aids, food and prescription pharmaceuticals.
HBA Products
------------
The Company distributes approximately 8,000 national name brand HBA
products. Set forth below are some of the 76 different types of products
available from the Company in the national HBA line. However, specific products
may vary depending upon the merchandise which the Company is able to acquire at
a given time:
Allergy Relief Insecticides
Adhesive Strips and Bandages Liniments and Rubs
Antacids Lip Balms and Medication
Baby Needs Nail Care
Bath Preps, Talcs, Colognes Nasal Sprays, Drops & Vapors
Batteries and Flashlights Oral Antiseptics and Sprays
Candy, Gum, Mints & Food Oral Hygiene
Cotton Products and Swabs Pain Relief
Cough and Cold Remedies Razor and Blades
Denture Products Rubber Products and Gloves
Deodorants Sedatives and Awakeners
Depilatories, Ladies Shave Preparations Shampoos
Feminine Hygiene Products Shave Creams
Film, Cameras, Flashbulbs Shave Lotions and Colognes
First Aid Needs Shoe Care
Foot Care Skin Care Products
Hair Accessories Soaps
Hair Coloring Stationery and School Supplies
Hair Sprays Toothbrushes
Hosiery Toothpaste and Powders
Household Light Bulbs Vitamins and Tonics
Household Paper Products
The sales of these products accounted for approximately 33%, 33% and
35% of the Company's revenues, respectively, during the fiscal years ended March
31, 1996, 1997 and 1998.
The Company currently markets approximately 50 health and beauty aid
products under the "Allou Brands" tradename. Sales of its own products account
for only a small percentage of the Company's business, representing
approximately 1%, 1% and 1/2% of revenues during the fiscal years ended March
31, 1996, 1997 and 1998, respectively.
Fragrances and Cosmetics
------------------------
Fragrances distributed by the Company include those produced by
Faberge, Inc., Chanel, Inc. and Revlon, Inc. Among the cosmetic products are
eyeshadows, lipsticks, mascaras and skin care products produced by Revlon, Inc.,
Coty (a division of Pfizer Inc.), Lancome (a division of Cosmair, Inc.) and
Estee Lauder, Inc. See "Manufacturers and Suppliers." During the fiscal years
ended March 31, 1996, 1997 and 1998 fragrance and cosmetic sales accounted for
approximately 32%, 36% and 39% of the Company's revenues, respectively. The
profit margins on such sales are typically greater than those on name brand
health and beauty aids, and accordingly, the Company has sought to increase its
sales and marketing efforts in this area. Management has expanded it direct
sales of fragrances and cosmetics to consumers through its internet sales
subsidiary, The Fragrance Counter, located at www.fragrancecounter.com and
www.cosmeticcounter.com.
2
Food
----
The Company sells non-perishable packaged food items. These food
items, which are purchased almost exclusively at discount prices from the major
food companies, are sold to existing customers. This product line requires
little additional operating costs to the Company since sales of food are
pre-sold and drop-shipped directly to the customers from the vendors. During the
fiscal years ended March 31, 1996, 1997 and 1998, food items accounted for
approximately 17%, 13% and 9%, respectively, of the Company's revenues.
Prescription Pharmaceuticals
----------------------------
During fiscal 1994, the Company acquired the capital stock of Sobol,
a manufacturers' distributor of branded prescription pharmaceuticals. Sobol was
founded in 1928 and currently distributes pharmaceuticals to approximately 700
independent pharmacies in the Northeast. The Company purchases approximately
4,000 branded pharmaceuticals from such manufacturers as Eli Lilly and Company,
Glaxo Holdings p.l.c., Burroughs Wellcome Co. and Merck Sharp and Dohme, Inc.
Additionally, the Company distributes 3,000 generic prescription pharmaceutical
products which are purchased from manufacturers such as Schein Pharmaceuticals,
Inc., Barre National, Inc., and Sidmak Laboratories, Inc. For the fiscal years
ended March 31, 1996, 1997 and 1998, pharmaceuticals accounted for approximately
18%, 17% and 15%, respectively, of the Company's revenues.
Hair and Skin Care Products
---------------------------
During fiscal 1996, the Company purchased the selected assets of Russ
Kalvin's, which assets included accounts receivable, inventory, equipment and
intellectual property (patents, trademarks, etc.). This acquisition has enabled
the Company to manufacture and distribute salon quality hair and skin care
products to convenience stores, pharmacies and national mass merchandisers. For
the fiscal years ended March 31, 1996, 1997 and 1998, revenues generated from
the sales of such products were not material.
MANUFACTURERS AND SUPPLIERS
The products the Company distributes are manufactured and supplied by
independent foreign and domestic companies, many of which also manufacture and
supply HBA products, fragrances and cosmetics for many of the Company's
competitors. The Company purchases approximately 8,000 HBA products from such
manufacturers as Procter & Gamble Co., Johnson & Johnson and Gillette Co. and
approximately 7,000 fragrance and cosmetic products directly from manufacturers
such as Coty (a division of Pfizer Inc.) and Revlon, Inc. and from secondary
sources. The Company contracts with manufacturers to produce the Allou Brands
products and manufactures it proprietary line of Russ Kalvin's generic brand
hair and skin care products through its wholly-owned subsidiary, Allou Personal
Care.
The Company typically purchases goods from manufacturers on open
accounts which are payable in 30 days and may receive discounts of up to 2% for
early payments.
As is customary in the industry, the Company does not have any
licensing or other supply agreements with its manufacturers or suppliers.
Therefore, any of these companies could terminate their relationship with the
Company at any time. Management believes the absence of such agreements between
the Company and its suppliers does not have a material adverse impact on the
Company, since the Company has experienced no difficulty to date in obtaining
products as needed and believes there are a number of alternate sources of
supply for virtually all of the products that it sells. However, there can be no
assurance the Company will not experience difficulties with its present
manufacturers or suppliers, such as delays in obtaining products, which could
materially adversely affect its operations or relationship with customers.
3
MARKETING AND SALES
The Company markets national brand and Allou Brand HBA products
primarily to retail outlets including small discount chains, individual HBA
suppliers and non-chain supermarkets in the New York metropolitan area,
Philadelphia, Pennsylvania and Miami, Florida. In addition, the Company markets
fragrances and cosmetics to these customers and nationally to independent
retailers, pharmacies and chain stores, including Wal-Mart Stores, Inc. and
Sears, Roebuck & Co. The Company currently has approximately 4,200 active
accounts. No single customer accounted for 10% or more of the Company's sales
during the last three fiscal years.
Sales are made by the Company's in-house sales staff of telemarketing
professionals. In-house sales persons are paid a base salary plus a commission
based on sales.
The Company publishes an HBA and a fragrance catalogue each month
containing order forms, descriptions of all products carried by the Company, the
manufacturer's suggested retail price and net cost per unit or per dozen which
are mailed to each of the Company's active customers. The catalogues also help
serve the advertising needs of the manufacturers which provide the Company with
rebates to pay for the cost of preparing, printing and mailing the catalogues.
In addition to the monthly catalogues, the Company frequently supplies its
customers with flyers advising them of items being sold at a discount. The sale
of fragrances nationally to independent stores is handled exclusively by mail
order through the catalogues.
The Company holds an annual exclusive trade show in New York City for
HBA retailers which is subsidized by manufacturers who display their wares,
introduce products and meet with customers. The Company also coordinates a
program sponsored by approximately 80 HBA retailers whereby the retailers are
provided with circulars to send to their customers, point-of-sale promotional
materials and product samples supplied by the manufacturers.
OPERATIONS
The Company maintains a 143,894 square foot warehouse facility with
sales and administrative offices in Brentwood, New York. The warehouse contains
inventory for approximately three months of distribution to customers. The
Company uses a computerized data base system which enables management to monitor
sales, purchases and inventory status. The Company has not experienced problems
with product shelf lives, as most products it sells are not perishable. HBA
products that are perishable generally can be returned to the manufacturer if
they are not sold by the expiration date.
The Company contracts with local carriers and independent trucking
agents to make deliveries to its customers' orders. From the time it is placed,
a customer's order will be delivered within 48 hours if within the metropolitan
New York City area, and within five days if out-of-state.
Work in the warehouse is cyclical and workers are trained in several
tasks so that they can be rotated to fill the jobs where they are most needed.
Since the acquisition of the selected assets of Russ Kalvin's in
October 1995, the Company has been engaged in consolidating operations and
reducing overhead at Russ Kalvin's, as well as positioning itself to market
nationally the Russ Kalvin's generic brand hair and skin care products through
its wholly-owned subsidiary, Allou Personal Care. The Company has consolidated
all administrative functions of Russ Kalvin's at the Company's Brentwood, New
York facility. In addition, the Company leases 80,000 square feet of space in
Saugus, California which is used to manufacture and distribute its proprietary
line of Russ Kalvin's generic brand hair care and skin care products.
4
MANAGEMENT INFORMATION AND CONTROL SYSTEM
The Company uses a proprietary, computerized data base management
system which collects, integrates and analyzes data concerning sales, order
processing, shipping, purchases, receiving, inventories and financial reporting.
At any given time, the Company is able to determine the quantity of each item in
inventory by brand, style, cost, list price and other characteristics.
The system enables the Company to better manage its inventories. The
system keeps a running inventory of goods on hand for each item it distributes.
When the inventory of any item drops to a certain pre-set level, a purchase
order for a set number of additional units of the item is automatically written
and after being reviewed by management, is sent to the manufacturer with the
weekly orders.
By eliminating much of the paper flow and dispensing comprehensive
information, this system has enabled the Company to reduce its
receipt-of-order-to-shipment time capability for New York City metropolitan area
customers to less than 48 hours, substantially reducing such customers need to
stock inventory, thereby saving the customer the cost of financing its inventory
requirements.
COMPETITION
The distribution of HBA products is extremely competitive. The
Company competes with pharmaceutical wholesalers that carry HBA products as an
accommodation for their customers. Many of such distributors have greater
financial and other resources than the Company. However, to the Company's
knowledge, there is no significant competitor which distributes to its customer
base of independent retail stores the assortment of HBA products that the
Company distributes. The Company believes it competes on the basis of services
rendered to its customer, including quick delivery and low minimum order
requirements.
The distribution of fragrance and high priced cosmetic items is very
competitive. The Company competes to obtain its fragrances and cosmetics from
manufacturers and importers who also supply competing distributors and sell
directly to retailers. It competes on the basis of price and services rendered
to its customers, including quick delivery and low minimum order requirements.
In addition, the Company faces intensive competition with respect to
marketing its own brand of HBA products and the Russ Kalvin's generic brand of
hair and skin care products. The Company competes with major HBA companies, as
well as hair and skin care companies, with well-established product lines, which
spend large sums for advertising and marketing and have far greater financial
and other resources than the Company. The Company also competes with these
companies for shelf space and product placement in the various retail outlets.
Additionally, the Company competes for the manufacture of its products from
suppliers who also supply these and other companies. The Company believes that
it can offer customers substantial savings on its generic products.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 240 persons
on a full time basis, including 5 in executive positions, 22 in purchasing, 65
in marketing and sales, 40 in administration and accounting, and 108 in
warehousing and receiving. Certain of the sales personnel are partially paid on
a commission basis. During peak selling seasons the Company also employs part
time personnel.
The Company is a party to a collective bargaining agreement expiring
December 14, 2000 with the National Organization of Industrial Trade Unions
covering all warehouse and receiving employees. The Company has not experienced
any work stoppages. The Company believes its relations with its employees are
satisfactory.
5
TRADENAMES AND TRADEMARKS
The Company uses the unregistered tradename "Allou Brand" on generic
products that it distributes. With the introduction of additional generic
products, the Company may adopt other unregistered tradenames and trademarks.
During fiscal 1996, the Company acquired the patents, trademarks and all other
intellectual property of Russ Kalvin's.
The Company believes that no single trademark, tradename or servicemark is
material to the Company's business as a whole.
GOVERNMENT REGULATION
The United States Food, Drug and Cosmetic Act and the Fair Packaging
and Labelling Act regulate, among other things, the purity and packaging of HBA
products and fragrances and cosmetic products. Similar statutes are in effect in
various states. Manufacturers and distributors of HBA products are also subject
to the jurisdiction of the Federal Trade Commission with respect to such matters
as advertising content and other trade practices. To the Company's knowledge, it
only deals with manufacturers and manufactured products in a manner which
complies with such regulations and who periodically submit their products to
independent laboratories for testing. However, the failure by the Company's
manufacturers or suppliers to comply with applicable government regulations
could result in product recalls that could adversely affect the Company's
relationships with its customers. In addition, the extent of potentially adverse
government regulations which might arise from future legislation or
administrative action cannot be predicted.
ITEM 2. PROPERTIES
The Company leases approximately 143,894 square feet of space for its
principal executive offices, warehouse and distribution facilities and sales
headquarters in the Brentwood Industrial Park, 50 Emjay Boulevard, Brentwood,
New York 11717, under a ten-year lease which expires on May 31, 2005, and
includes a five-year option for renewal, at a base annual rental of $546,797.20,
with additional charges for insurance, fuel and taxes and increases during the
initial term of the lease. The Company leases 80,000 square feet of space in
Saugus, California, which is used to manufacture and distribute hair and skin
care products. The proposed term of the lease is five years with a five-year
option for renewal at a base annual rental of $300,000 with additional charges
for insurance, fuel, taxes and increases during the initial term of the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings as either
plaintiff or defendant in connection with claims made for goods sold, all of
which are considered routine litigation incidental to the business of the
Company.
No legal proceedings were terminated during the fiscal quarter ended
March 31, 1998 (other than routine litigation incidental to the business of the
Company).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Report,
no matters were submitted to a vote of security holders through the solicitation
of proxies or otherwise.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
- ------------------
The Company's Class A Common Stock is listed on the American Stock
Exchange under the symbol "ALU". There is no established public trading market
for the Company's Class B Common Stock.
The following table sets forth the quarterly high and low sales price
of the Class A Common Stock during the Company's last two fiscal years:
HIGH LOW
FISCAL YEAR ENDED MARCH 31, 1997:
Quarter ending June 28, 1996...........................$7.000 $6.625
Quarter ending September 30, 1996...................... 6.875 4.875
Quarter ending December 31, 1996....................... 7.312 5.750
Quarter ending March 31, 1997.......................... 6.937 6.125
FISCAL YEAR ENDED MARCH 31, 1998:
Quarter ending June 30, 1997...........................$7.125 $5.000
Quarter ending September 30, 1997...................... 8.250 6.750
Quarter ending December 31, 1997....................... 8.187 7.375
Quarter ending March 31, 1998.......................... 8.875 7.125
FISCAL YEAR ENDING MARCH 31, 1999:
Quarter ending June 30, 1998
(through June 23, 1998)..........................$16.000 $7.937
Holders
- -------
As of June 23, 1998, there were 110 holders of record of the
Company's Class A Common Stock and 4 holders of record of the Company's Class B
Common Stock. Based upon conversations with brokers, Management believes that
there are in excess of 1,000 beneficial owners of the Class A Common Stock.
Dividends
- ---------
The Company has not paid a dividend on its shares of Class A Common
Stock or Class B Common Stock and has no present expectation of doing so in the
foreseeable future.
7
ITEM 6. SELECTED FINANCIAL DATA
ALLOU HEALTH & BEAUTY CARE, INC.
YEAR ENDED MARCH 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (In thousands, except for per share data)
Revenues ..................... $301,756 $285,311 $273,322 $237,542 $205,520
Costs of revenues ............ 262,601 250,843 241,734 208,906 181,372
-------- -------- -------- -------- --------
Gross profit ................. 39,155 34,468 31,588 28,636 24,148
Warehouse and delivery expense 9,317 8,592 8,063 6,864 5,391
Selling, general and
administrative expense ..... 14,458 12,766 11,894 10,250 10,226
-------- -------- -------- -------- --------
Income from operations ....... 15,380 13,110 11,631 11,522 8,531
Interest and other ........... 8,470 6,567 5,513 3,956 2,609
-------- -------- -------- -------- --------
Income before income taxes ... 6,910 6,543 6,118 7,566 5,922
-------- -------- -------- -------- --------
Net income ................... $ 4,280 $ 4,059 $ 3,757 $ 4,681 $ 3,738
======== ======== ======== ======== ========
Net income per common share(1)
Basic .................... $ .74 $ .71 $ .66 $ .84 $ .94
======== ======== ======== ======== ========
Diluted .................. $ .72 $ .70 $ .65 $ .80 $ .78
======== ======== ======== ======== ========
AS OF MARCH 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital ........... $ 43,959 $ 42,052 $ 37,557 $ 36,193 $ 32,094
Total assets .............. 178,384 161,348 126,185 106,214 84,770
Total long-term liabilities 1,354 1,841 560 814 895
Total liabilities ......... 125,771 113,121 82,016 66,038 50,743
Stockholders' equity ...... 52,613 48,227 44,168 40,176 34,027
- ---------------------
(1) Net income per common share for fiscal 1997 and prior periods have been
restated in accordance with Financial Accounting Standards No. 128,
"Earnings Per Share, which requires presentation of basic earnings per
share and diluted earnings per share.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
-----------------------------------
Revenues for the fiscal year ended March 31, 1998 ("fiscal 1998")
were $301,756,467 representing a 5.8% increase over revenues of $285,311,441 for
the fiscal year ended March 31, 1997 ("fiscal 1997"), which resulted from
increased revenues from certain segments of the Company's business as described
below. The increased demand for the Company's products resulted from an expanded
customer base and increases in same store sales.
Contributions to this increase in revenues by product segment is as
follows: Health and beauty aids increased 12.8% in fiscal 1998 compared to
fiscal 1997 due to increases in same store sales. Prestige designer fragrances
grew 14% in fiscal 1998 compared to fiscal 1997 due to an increase in same store
sales and an expanded customer base, thus increasing the volume of products
sold. Nationally advertised branded non-perishable food products decreased 22%
in fiscal 1998, when compared to fiscal 1997. This segment of Allou's business
is categorized by the Company's ability to purchase off-price, non-perishable
branded foods. During fiscal 1998 demand out-paced supply resulting in an
increase in the price that Allou would have to pay for merchandise which it
would distribute. Management decided to limit sales in this segment of its
business to a level which would result in improved profit margins. Sales of
prescription pharmaceuticals remain relatively constant when compared to the
prior year. In each segment of the Company's businesses, revenues are recognized
at the time merchandise is shipped to the customer, either directly by the
Company or, in the case of food products, drop-shipped by third parties on
behalf of the Company.
Cost of goods sold decreased as a percentage of revenues to 87.0% for
fiscal 1998 from 87.9% for fiscal 1997. This decrease in the cost of goods sold
resulted primarily from improved profit margins associated with the distribution
of fragrance products.
Warehouse and delivery expenses, selling and general and
administrative expenses increased as a percentage of revenues to 7.9% for fiscal
1998 from 7.5% for fiscal 1997. This increase was due, in part, to increased
expenses associated with the Company's wholly-owned subsidiary Allou Personal
Care and advertising expenditures relating to the Company's internet sales
subsidiary, The Fragrance Counter.
Inventories increased by approximately $15,869,556 or 16.4% in fiscal
1998 from $96,661,103 in fiscal 1997. This increase in inventory was
attributable to merchandise purchased in anticipation of increased sales.
Interest expense as a percentage of revenues increased to 2.8% for
fiscal 1998 from 2.3% for fiscal 1997 due to increased borrowings at a higher
rate.
Net income for fiscal 1998 was $4,280,210, which was an 5.5% increase
over the net income for fiscal 1997 of $4,058,535, due primarily to the factors
discussed above.
FISCAL 1997 COMPARED TO FISCAL 1996
-----------------------------------
Revenues for fiscal 1997 were $285,311,441, representing a 4.4%
increase over revenues of $273,322,102 for the fiscal year ended March 31, 1996
("fiscal 1996"), which resulted from increased revenues from certain segments of
the Company's business as described below. The increased demand for the
Company's products resulted from an expanded customer base and increases in same
store sales.
Contributions to this increase in revenues by product segment is as
follows: Health and beauty aids increased 5.4% in fiscal 1997 compared to fiscal
1996 due to increases in same store sales. Prestige designer fragrances grew
9
18.8% in fiscal 1997 compared to fiscal 1996 due to an increase in same store
sales and an expanded customer base, thus increasing the volume of products
sold. Nationally advertised branded non-perishable food products decreased 24%
in fiscal 1997, when compared to fiscal 1996. This segment of Allou's business
is categorized by the Company's ability to purchase off-price, non-perishable
branded foods. During fiscal 1997 demand out-paced supply resulting in an
increase in the price that Allou would have to pay for merchandise which it
would distribute. Management decided to limit sales in this segment of its
business to a level which would result in improved profit margins. Sales of
prescription pharmaceuticals remain relatively constant when compared to the
prior year. In each segment of the Company's businesses, revenues are recognized
at the time merchandise is shipped to the customer, either directly by the
Company or, in the case of food products, drop-shipped by third parties on
behalf of the Company.
Cost of goods sold decreased as a percentage of revenues to 87.9% for
fiscal 1997 from 88.4% for fiscal 1996. This decrease in the cost of goods sold
results from improved profit margins associated with the distribution of
fragrance products.
Toward the end of fiscal 1997, certain opportunities arose for the
purchase of fragrance products which are only available to the Company at
unpredictable intervals. Fragrance products are purchased from secondary sources
of supply. This method of purchasing requires the Company to pre-pay for these
products in advance of delivery in order to ensure product delivery. Since the
merchandise corresponding to the pre-payments was not received during fiscal
1997, neither inventory valuation nor cost of goods sold was affected for the
period.
Warehouse and delivery expenses, selling and general and
administrative expenses increased as a percentage of revenues to 7.5% for fiscal
1997 from 7.3% for fiscal 1996. This increase was due, in part, to increased
expenses associated with the Company's purchase of its wholly-owned subsidiary
Allou Personal Care.
Inventories increased by approximately $25.0 million or 35% in fiscal
1997 from $72.0 in fiscal 1996. This increase in inventory is attributable to
merchandise purchased in anticipation of increased sales.
Interest expense as a percentage of revenues increased to 2.3% for
fiscal 1997 from 2.0% for fiscal 1996 due to increased borrowings at a higher
rate.
Net income for fiscal 1997 was $4,058,535, which is an 8.0% increase
over the net income for fiscal 1996 of $3,756,686, due primarily to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its working capital requirements from internally
generated funds and from a financing agreement with a consortium of banks led by
the First National Bank of Boston for financing the Company's accounts
receivable and inventory. As of March 31, 1998, the Company had $110,596,761
outstanding under its $145,000,000 bank line of credit. The loan is
collateralized by the Company's inventory and accounts receivable. Interest on
the loan balance is payable monthly at 3/8% above the prime rate or 2% above the
Eurodollar rate at the option of the Company. The effective interest rate
charged to the Company at March 31, 1998 was 7.89%, which was based on a
combination of 2% above the Eurodollar rate and 3/8% above the prime rate. The
Company utilizes cash generated from operations to reduce short-term borrowings,
which in turn acts to increase loan availability consistent with the Company's
financing agreement.
The Company's accounts receivable decreased to $44,117,911 for fiscal
1998 from $48,424,882 for fiscal 1997 representing an decrease of 8.9% due to
customers who had previously paid the Company an average of 60 days at March 31,
1997 paying the Company in an amount of 52 days at March 31, 1998.
10
The Company has minimal capital investment requirements and any
significant capital expenditures are financed through long-term lease agreements
and would not adversely impact cash flow. The Company believes that, except for
The Fragrance Counter, its internally generated funds and its current and future
bank line of credit will be sufficient to meet its anticipated cash and capital
needs through the fiscal year ending March 31, 1999. The Company is seeking
means of providing financing for The Fragrance Counter that are independent of
its revolving line of credit. In April, May and June 1998, Messrs. Victor
Jacobs, Herman Jacobs and Jack Jacobs collectively loaned an aggregate of $3
million on an unsecured basis to The Fragrance Counter (the "Bridge Financing").
Amounts loaned under the Bridge Financing accrue interest at the rate of 8-3/4%
per annum and become due and payable in October 1998.
INFLATION AND SEASONALITY
Inflation has not had any significant adverse effects on the
Company's business and the Company does not believe it will have any significant
effect on its future business. The Company's fragrance business is seasonal,
with greater sales during the Christmas season than in other seasons. The
Company's other product lines are not seasonal.
YEAR 2000
The Company does not expect that the cost to modify or replace
software that it uses so that such software will properly recognize dates beyond
December 31, 1999 ("year 2000 compliance") will be material. The Company has
initiated formal communications with its significant vendors and customers to
determine the extent that year 2000 compliance issues of such parties may affect
the Company. There can be no guarantee that the systems of such other companies
will be timely converted, or that their conversion will be compatible with
information included in the Company's systems, without a material adverse effect
on the Company's business, financial condition or results of operations.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this time is set forth in the Financial
Statements, commencing on page F-1 included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III (Items 10,11,12 and 13) is
incorporated by reference to such information as it will be included in the
Registrant's definitive Proxy Statement with respect to the Registrant's 1997
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report.
1. Financial Statements
Page
----
Report of Independent Auditor........................F-1
Consolidated Balance Sheet--March 31, 1998 and 1997..F-2
Consolidated Statement of Operations--Years ended March
31, 1998, 1997 and 1996..............................F-3
Consolidated Statement of Shareholders' Equity--Years
ended March 31, 1998, 1997 and 1996..................F-4
Consolidated Statement of Cash Flows--Years ended March
31, 1998, 1997 and 1996..............................F-5
Notes to Consolidated Financial Statements...........F-6
2. Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts and
Reserve..............................................S-1
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the last
fiscal quarter of the period covered by this Report.
(c) Exhibits.
The following Exhibits are filed as a part of this Report:
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1996 Commission File No. 1-10340
and incorporated herein by reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3b to Registration
Statement No. 33-26981 on Form S-1 ("Registrant's Form S-1"), and
incorporated herein by reference).
10.1 Employment Contract dated as of August 1, 1995 between the Registrant
and Victor Jacobs (filed as Exhibit 10.1 to Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996
Commission File No. 1-10340 ("1996 10-K") and incorporated herein by
reference).
10.2 Employment Contract dated as of August 1, 1995 between Registrant and
Herman Jacobs (filed as Exhibit 10.2 to Registrant's 1996 10-K and
incorporated herein by reference).
13
10.3 Employment Contract dated as of August 1, 1995 between the Registrant
and Jack Jacobs (filed as Exhibit 10.3 to Registrant's 1996 10-K and
incorporated herein by reference).
10.4 Employment Contract dated as of June 30, 1996 between the Registrant
and Ramon Montes (filed as Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1996
Commission File No. 1-10340 and incorporated herein by reference).
10.5 Amended and Restated 1989 Incentive Stock Option Plan (filed as
Exhibit 10(e) to Registrant's Annual Report on From 10-K for the
fiscal year ended March 31, 1990 Commission File No. 1-10340 and
incorporated herein by reference).
10.6 1991 Stock Option Plan (filed as Exhibit 10(e)(1) to Registrant's
Post-Effective Amendment No. 1 to Registrant's Form S-1 and
incorporated herein by reference).
10.7 1992 Stock Option Plan (filed as Exhibit 10(e)(2) to Registrant's
Annual Report on From 10-K for the fiscal year ended March 31, 1993
Commission File No. 1-10340 and incorporated herein by reference).
10.8 1995 Nonqualified Stock Option Plan (filed as Exhibit A to
Registrant's 1996 Definitive Proxy Statement on Schedule 14A
Commission File No. 1-10340 and incorporated herein by reference).
10.9 1996 Stock Option Plan (filed as Exhibit B to Registrant's 1996
Definitive Proxy Statement on Schedule 14A Commission File No.
1-10340 and incorporated herein by reference).
10.10 Lease Agreement dated December 8, 1993 between Allou Distributors,
Inc. and Brentwood Distribution Co. (filed as Exhibit 10(f) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 Commission File No. 1-10340 ("1995 Form 10-K") and
incorporated herein by reference).
10.11 Lease Agreement dated March 4, 1980 between Registrant and Pueblo
Supermarkets, Inc. (filed as Exhibit 10g to Registrant's Form S-1 and
incorporated herein by reference).
10.12 Lease Agreement dated January 1, 1993 between M. Sobol, Inc. and
Simon and Barbara J. Mandell (filed as Exhibit 10(g) to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1994
Commission File No. 1-10340 ("1994 Form 10-K") and incorporated
herein by reference).
10.13 Agreement dated December 13, 1994 between Allou Distributors, Inc.
and the National Organization of Industrial Trade Unions (filed as
Exhibit 10(i) to the Registrant's 1995 Form 10-K and incorporated
herein by reference).
*10.14 Agreement dated December 15, 1997 between Allou Distributors, Inc.
and Local No. 1.
*10.15 Third Restated and Amended Revolving Credit and Security Agreement
dated October 22, 1997 among BankBoston, N.A., IBJ Schroder Bank &
Trust Company, Sanwa Business Credit Corporation, LaSalle Business
Credit, Inc., Bank Leumi Trust Company of New York, The Dime Savings
Bank of New York, FSB, The First National Bank of Maryland, Key
Corporate Capital, Inc.
10.16 Master Lease Finance Agreement dated as of April 24, 1996 between
BankBoston Leasing Inc. and Allou Distributors, Inc. (filed as
Exhibit 10.14 to Registrant's 1996 10-K and incorporated herein by
reference).
21 Subsidiaries of the Registrant (filed as Exhibit 21 to Registrant's
1996 10-K and incorporated herein by reference).
14
*23 Consent of Mayer Rispler & Co.
*27 Financial Data Schedule
- ----------------
* Filed herewith
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLOU HEALTH & BEAUTY CARE, INC.
By: /s/ Victor Jacobs
--------------------------
Victor Jacobs,
Chairman of the Board and
Chief Executive Officer
Dated: June 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Victor Jacobs Chairman of the Board and June 29, 1998
- -------------------------- Chief Executive Officer
Victor Jacobs
/s/ Herman Jacobs President and Director June 29, 1998
- --------------------------
Herman Jacobs
/s/ David Shamilzadeh Chief Financial Officer, June 29, 1998
- -------------------------- Chief Accounting
David Shamilzadeh Officer and Director
/s/ Jack Jacobs Director June 29, 1998
- --------------------------
Jack Jacobs
Director
- --------------------------
Ramon Montes
/s/ Sol Naimark Director June 29, 1998
- --------------------------
Sol Naimark
/s/ Jeffrey Berg Director June 29, 1998
- --------------------------
Jeffrey Berg
INDEPENDENT AUDITORS' REPORT
Board of Directors & Stockholders:
Allou Health & Beauty Care, Inc.
Brentwood, New York
We have audited the accompanying consolidated balance sheet of Allou
Health & Beauty Care, Inc. as of March 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Allou Health and Beauty Care, Inc.
at March 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended March 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Mayer Rispler & Company, P.C.
June 18, 1998
New York, New York
F-1
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
------
March 31, March 31,
1998 1997
------------ ------------
Current Assets
- --------------
Cash .......................................... $ 46,675 $ 76,531
Accounts Receivable (less allowance for
doubtful accounts of $371,475 at March 31,
1998 and $555,682 at March 31, 1997 .......... 44,117,911 48,424,882
Inventories ................................... 112,530,659 96,661,103
Other Current Assets .......................... 11,680,718 8,168,603
------------ ------------
Total Current Assets .................... $168,375,963 $153,331,119
Property and Equipment, Less Accumulated
Depreciation ................................. 3,613,223 3,642,758
Other Assets .................................. 6,395,110 4,373,918
------------ ------------
TOTAL ASSETS .......................... $178,384,296 $161,347,795
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities
- -------------------
Amounts Due Bank .............................. $110,596,761 $ 96,740,253
Current Portion of Long-Term Debt ............. 645,233 540,500
Accounts Payable and Accrued Expenses ......... 13,174,949 13,998,641
------------ ------------
Total Current Liabilities ........................ $124,416,943 $111,279,394
------------ ------------
Long Term Liabilities
- ---------------------
Long-Term Debt, Less Current Portion .......... 1,354,462 1,841,470
------------ ------------
Total Long Term Liabilities ............. 1,354,462 1,841,470
------------ ------------
TOTAL LIABILITIES ..................... $125,771,405 $113,120,864
------------ ------------
Commitments & Contingencies
Stockholders' Equity
- --------------------
Preferred Stock, $.001 par value,
1,000,000 shares authorized, none issued
and outstanding
Class A Common Stock, $.001
par value; 10,000,000 shares authorized;
4,569,850 and 4,552,225 shares issued
and outstanding at March 31, 1998
and 1997 ...................................... $ 4,570 $ 4,552
Class B Common Stock, $.001 par value;
2,200,000 shares authorized;
1,200,000 issued and outstanding at
March 31, 1998 and 1997 ....................... 1,200 1,200
Additional Paid-In Capital ....................... 23,582,240 23,476,508
Retained Earnings ................................ 29,024,881 24,744,671
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ....................... 52,612,891 48,226,931
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ......... $178,384,296 $161,347,795
============ ============
The accompanying notes are an integral part of this financial statement.
F-2
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended March 31,
1998 1997 1996
---- ---- ----
Revenues ........................... $ 301,756,467 $ 285,311,441 $ 273,322,102
Costs of Revenues .................. 262,600,862 250,843,851 241,734,316
------------- ------------- -------------
Gross Profit .................... 39,155,605 34,467,590 31,587,786
------------- ------------- -------------
Operating Expenses
Warehouse & Delivery ............ 9,317,132 8,592,051 8,062,827
Selling, General & Administrative 14,458,182 12,765,898 11,893,687
------------- ------------- -------------
Total Operating Expenses .. 23,775,314 21,357,949 19,956,514
------------- ------------- -------------
Income From Operations .... 15,380,291 13,109,641 11,631,272
------------- ------------- -------------
Other Charges (Credits)
Interest Expense ................ 8,482,859 6,614,797 5,524,543
Other ........................... (13,168) (47,804) (11,204)
------------- ------------- -------------
Total ..................... 8,469,691 6,566,993 5,513,339
------------- ------------- -------------
Income Before Income Taxes 6,910,600 6,542,648 6,117,933
Provision for Income Taxes ......... 2,630,390 2,484,113 2,361,247
------------- ------------- -------------
NET INCOME ................ $ 4,280,210 $ 4,058,535 $ 3,756,686
============= ============= =============
Net Income Per Common Share:
Basic $ .74 $ .71 $ .66
============= ============= =============
Diluted $ .72 $ .70 $ .65
============= ============= =============
The accompanying notes are an integral part of this financial statement.
F-3
ALLOU HEALTH & BEAUTY CARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Additional
Common Paid In Retained
Stock Capital Earnings Total
----------- ----------- ----------- -----------
Balance, March 31, 1995 .. $ 5,662 $23,241,098 $16,929,450 $40,176,210
Net Proceeds from Exercise
of Options ............. 90 235,410 -- 235,500
Net Income ............... -- -- 3,756,686 3,756,686
----------- ----------- ----------- -----------
Balance, March 31, 1996 .. $ 5,752 $23,476,508 $20,686,136 $44,168,396
Net Income ............... -- -- 4,058,535 4,058,535
----------- ----------- ----------- -----------
Balance, March 31, 1997 .. $ 5,752 $23,476,508 $24,744,671 $48,226,931
Net Proceeds From Exercise
of Options ............. 18 105,732 -- 105,750
Net Income ............... -- -- 4,280,210 4,280,210
----------- ----------- ----------- -----------
Balance, March 31, 1998 .. $ 5,770 $23,582,240 $29,024,881 $52,612,891
=========== =========== =========== ===========
The accompanying notes are an integral part of this financial statement.
F-4
ALLOU HEALTH & BEAUTY CARE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended March 31,
1998 1997 1996
---- ---- ----
Cash Flows From Operating Activities
- ------------------------------------
Net Income ....................................... $ 4,280,210 $ 4,058,535 $ 3,756,686
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Depreciation and Amortization .................... 687,604 666,508 562,529
Decrease (Increase) In Assets:
Accounts Receivable .............................. 4,306,971 (14,461,052) (5,490,810)
Inventories ...................................... (15,869,556) (24,970,782) (14,419,611)
Other Assets ..................................... (5,638,365) 4,160,904 1,342,875
Increase (Decrease) In Liabilities:
Accounts Payable & Accrued Expenses .............. (823,692) 3,573,638 98,938
Income Taxes Payable ............................. -- (30,422) (555,887)
------------ ------------ ------------
Net Cash Used In Operating Activities ............ (13,056,828) (27,002,671) (14,705,280)
------------ ------------ ------------
Cash Flows From Investing Activities
- ------------------------------------
Acquisition of Fixed Assets ...................... (553,011) (626,255) (1,947,844)
------------ ------------ ------------
Cash Flows From Financing Activities
- ------------------------------------
Net Increase in Amounts Due Bank ................. 13,856,508 25,931,152 16,680,621
Borrowings ....................................... 215,771 2,010,376 --
Repayment of Debt ................................ (598,046) (380,189) (245,116)
Net Proceeds from Exercise of Options ............ 105,750 -- 235,500
------------ ------------ ------------
Net Cash Provided By Financing Activities ........ 13,579,983 27,561,339 16,671,005
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH ....... (29,856) (67,587) 17,881
CASH AT BEGINNING OF YEAR ............. 76,531 144,118 126,237
------------ ------------ ------------
CASH AT END OF YEAR ................... $ 46,675 $ 76,531 $ 144,118
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest ......................................... $ 8,364,098 $ 6,438,593 $ 5,464,832
Income Taxes ..................................... $ 2,773,345 $ 2,302,293 $ 3,243,631
The Company issued equipment notes for $215,771 and $2,010,376 during the years
ended March 31, 1998 and 1997, respectively.
The accompanying notes are an integral part of this financial statement.
F-5
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION:
Allou Health & Beauty Care, Inc. (the "Company") was incorporated on
January 20, 1989 under the laws of the state of Delaware, on which date it
acquired all of the outstanding shares of Allou Distributors, Inc. in exchange
for 1,200,000 shares of its Class B Common Stock, thus making it a wholly-owned
subsidiary.
Effective April 1, 1993, the Company acquired all of the outstanding
shares of M. Sobol, Inc., a wholesaler of pharmaceutical products in a
transaction accounted for under the purchase method. The purchase price was
$1,472,382.
On October 2, 1995, the Company purchased certain assets of Russ
Kalvin Inc., a manufacturer of hair care products located in southern California
for $2,296,735. These assets included accounts receivable, inventory, equipment
and intangibles. The Company manufactures and distributes these products through
wholly-owned subsidiaries.
The accompanying financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions have
been eliminated.
B. DESCRIPTION OF OPERATIONS:
The Company is engaged in the business of distributing brand name
health and beauty aids, cosmetics, fragrances, grocery products and
pharmaceuticals. The Company also distributes generic brand health and beauty
aids and hair care products. The Company sells these products to retailers
throughout the United States.
C. REVENUE RECOGNITION:
The Company recognizes revenue at the time the products are shipped
to the customer.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's financial instruments approximates
cost due to their short term nature, or, in the case of notes payable, because
the notes are at interest rates competitive with those that would be available
to the Company in the current market environment.
E. CONCENTRATION OF CREDIT RISK:
The Company extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
F. INVENTORIES:
Inventories, which consists of finished goods, are stated at the
lower of average cost or market.
F-6
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. PROPERTY & EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided
for over the estimated useful lives of the assets by use of straight-line and
accelerated methods.
H. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of the revenues and expenses during the
reported period. Actual results could differ from those estimates.
I. STOCK BASED COMPENSATION:
The Company accounts for stock options as prescribed by APB Opinion
No. 25 and includes pro forma information in the stock options footnote, as
permitted by Statement of Financial Accounting Standards No. 123.
J. RECENT ACCOUNTING PRONOUNCEMENTS:
The financial accounting standards board has issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. Both statements are effective for fiscal
years beginning after December 15, 1997. The financial statements for fiscal
1998 are not affected since the Company did not generate any revenues, expenses,
gains and losses that have been excluded from net income but are included in
comprehensive income and the Company does not maintain separate operating
segments as defined under SFAS No. 131.
2. OTHER CURRENT ASSETS:
Included in other current assets at March 31, 1998 and 1997 are
$9,816,237 and $6,091,422, respectively, of prepayments on merchandise.
3. PROPERTY AND EQUIPMENT:
March 31, March 31, Estimated
1998 1997 Useful Lives
---- ---- ------------
Machinery & Equipment ......... $1,904,604 $1,765,908 5 years
Furniture, Fixtures &
Office Equipment .............. 2,575,258 2,295,084 5-10 years
Transportation Equipment ...... -- 96,750 3-5 years
Leasehold Improvements ........ 2,714,254 2,578,957 10-33 years
---------- ----------
7,194,116 6,736,699
Less: Accumulated Depreciation 3,580,893 3,093,941
---------- ----------
$3,613,223 $3,642,758
========== ==========
Depreciation expense for the years ended March 31, 1998, 1997 and
1996 amounted to $582,546, $608,644 and $509,665, respectively.
F-7
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OTHER ASSETS:
Included in other assets are the following:
(a) Goodwill, net of amortization of $1,696,279 in fiscal 1998 and
$1,763,143 in fiscal 1997 created upon the purchase of the shares of M. Sobol
Inc., the Company's wholly-owned subsidiary, and the purchase of selected assets
of Russ Kalvin Inc. (Note 1-A). The goodwill is being amortized over forty years
and fifteen years, respectively. Amortization expense for the years ended March
31, 1998, 1997 and 1996, amounted to $105,058, $57,864 and $52,884,
respectively.
(b) Officers loans of $3,557,433 in fiscal 1998 and $2,056,364 in
fiscal 1997, which bear interest at 8% per annum.
5. AMOUNTS DUE BANK:
The Company has a secured line of credit with a consortium of banks.
The financing agreement provides for advances of up to 85% of eligible
receivables and 60% of eligible inventories with aggregate maximum advances of
$145,000,000, with a $15,000,000 sublimit for overadvances. Interest on the loan
balance is payable monthly at 3/8% above the prime rate or 2% above the
Eurodollar rate, at the option of the Company. The loan is collateralized by the
Company's accounts receivable and inventories and the overadvances are
guaranteed by the Company's principal stockholders. In addition, the Company is
required to abide by certain financial covenants. The effective interest rate
charged to the Company at March 31, 1998 and 1997 was 7.89% and 8.37%,
respectively.
6. LONG-TERM DEBT:
Long-term debt consists of:
(a) Notes collateralized by certain of the Company's equipment and
leasehold improvements, payable in aggregate monthly installments of
approximately $49,200, which include interest at rates varying from 3/8% above
the prime rate to 3.36% above the treasury rate. At March 31, 1998, principal
balance outstanding was $1,689,157.
(b) A loan payable to the previous stockholder of M. Sobol, Inc. (see
Note 1-A). Interest payable on the declining principal balance has been
calculated at 5.45% per annum, through April 1, 2000. At March 31, 1998
principal balance outstanding was $310,538. The aggregate long-term debt is
payable as follows:
Year Ending
March 31,
1999 $ 645,233
2000 677,138
2001 579,336
2002 97,988
-----------
$ 1,999,695
===========
F-8
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
March 31, March 31,
1998 1997
----------- -----------
Accounts Payable, Purchases ................ $10,270,572 $12,066,836
Selling, General & Administrative
Expenses Payable ........................ 1,722,656 928,967
Accrued Interest Payable to Bank ........... 669,194 550,433
Accrued Payroll ............................ 512,527 452,405
----------- -----------
$13,174,949 $13,998,641
=========== ===========
8. COMMITMENTS AND CONTINGENCIES:
A. OPERATING LEASES:
The Company is obligated under real property operating leases
expiring through May 2005. Additionally, commencing on October 2, 1995, in
connection with the operations of its wholly-owned hair care products
subsidiaries, the Company entered into a five year real property operating lease
for space located in California. As of March 31, 1998, total minimum annual
rentals, excluding additional payments for real estate taxes and certain
expenses, are as follows:
Year Ending
March 31,
---------
1999 $ 879,314
2000 878,684
2001 768,749
2002 625,939
2003 625,939
2004-2006 1,356,200
Rent expense for the years ended March 31, 1998, 1997 and 1996
amounted to $895,879, $896,910 and $744,505, respectively.
B. UNION CONTRACT:
The Company has an agreement with the National Organization of
Industrial Trade Unions which terminates on December 14, 2000. The agreement
covers all warehouse and receiving employees, excluding supervisory personnel.
C. DEFINED CONTRIBUTION PLAN:
Effective April 1, 1996, the Company established a non-contributory
defined contribution plan (401k) for substantially all employees not covered
under collective bargaining agreements.
F-9
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. EMPLOYMENT AGREEMENTS:
The Company has three year employment agreements with three of its
officers which expire July 31, 1998. These agreements provide for each to
receive an annual salary of $300,000 and a bonus of 3% of the first $2,000,000,
2% of the next $1,000,000 and 1% of the remaining increase over the Company's
prior year earnings before interest and taxes. For the years ended March 31,
1998 and 1997, these three officers received bonuses aggregating $206,482 and
$145,221, respectively. For the year ended March 31, 1996, these three officers
received no bonus.
Effective September 30, 1996, the Company entered into a three year
employment agreement with a fourth officer, providing for an annual salary of
$225,000 and a $75,000 bonus.
E. LETTERS OF CREDIT:
At March 31, 1998, the Company had an irrevocable standby letter of
credit in the sum of $75,000 expiring June 2, 1998.
F. LEGAL PROCEEDINGS:
The Company is a party to a number of legal proceedings as either
plaintiff or defendant, all of which are considered routine litigation
incidental to the business of the Company.
9. STOCK OPTION PLANS:
The Company has adopted Stock Option Plans which provide for the
granting of stock options to certain employees and directors. An aggregate of
2,800,000 shares of common stock are reserved for issuance under the Plans.
Incentive stock options are granted at no less than fair market value of the
shares on the date of grant. Options granted to individuals owning more than 10%
of the voting power of the Company's capital stock are granted at 110% of the
fair market value at the date of grant.
Option activity for the years ended March 31, 1998, 1997, and 1996
was as follows:
1998 1997 1996
---------- ---------- ----------
Options outstanding at beginning of year 1,381,150 1,184,500 1,176,950
Granted ........................... 1,136,100 375,000 136,550
Exercised ......................... (17,625) -- (90,500)
Cancelled ......................... (463,600) (178,350) (38,500)
---------- ---------- ----------
Options outstanding at end of year ..... 2,036,025 1,381,150 1,184,500
========== ========== ==========
Option price range at end of year.......$5.80 to $10.00 $5.80 to $10.00 $5.75 to $10.00
The Company has adopted the disclosure only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation." If the Company had elected to
recognize compensation costs based on the fair value at the date of grant for
awards in fiscal 1997 and 1996 consistent with the provisions of SFAS No. 123,
net income per common share would have been reduced to the following pro forma
amounts:
F-10
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31,
1998 1997
---------- ----------
Net Income -- Pro Forma ....................... $4,060,011 $3,582,793
Earnings Per Common Share -- Pro Forma ........ $ .68 $ .62
The pro forma amounts are not indicative of anticipated future
disclosures because SFAS 123 does not apply to options granted before fiscal
1996.
The weighted average fair value at date of grant for options granted
during fiscal 1998 and 1997 was $2.43 and $1.50, respectively, and were
estimated using the Black-Scholes option pricing model. The following
assumptions were applied: no dividend yield; expected volatility rates of 31%
and 25%; risk free interest rates approximating 6% and 5%; and expected lives of
5 years and 3.3 years, respectively.
10. STOCKHOLDERS' EQUITY:
On September 11, 1996, the stockholders of the Company approved an
increase on the number of authorized shares of Class B Common Stock from
1,700,000 to 2,200,000 shares. The number of authorized shares of Class A Common
Stock is currently 10,000,000 shares. The Company is also authorized to issue
1,000,000 shares of preferred stock. Holders of Class A Common Stock and Class B
Common Stock share pro rata in all dividends declared by the Board of Directors.
The holders of Class A Common Stock and Class B Common Stock are entitled to one
and five votes per share, respectively, for every matter on which the
stockholders of the Company are entitled to vote. Each share of Class B Common
Stock is convertible at the option of the holder into one share of Class A
Common Stock. All outstanding shares of Class A Common Stock and Class B Common
Stock are freely transferable, subject to applicable law.
11. PROVISION FOR INCOME TAXES:
March 31,
1998 1997 1996
---------- ---------- ----------
Income Before Income Taxes .......... $6,910,600 $6,542,648 $6,117,933
========== ========== ==========
Federal Income Tax ................. $2,153,045 $2,072,291 $1,959,880
State Income Taxes ................. $ 477,345 411,822 401,367
---------- ---------- ----------
Total Provision for Income Taxes ..... $2,630,390 $2,484,113 $2,361,247
========== ========== ==========
The following is a reconciliation of the statutory income tax rate to
the total effective tax rates:
March 31,
1998 1997 1996
---- ---- ----
Federal Statutory Income Tax Rate ............. 34.0% 34.0% 34.0%
Increase in Tax Rates Resulting from:
State Income Taxes, Net of Federal Tax
Benefits .................................... 5.3% 5.3% 6.0%
Net Operating Loss Carryforward from
Subsidiary ................................... (1.2%) (1.3%) (1.4%)
---- ---- ----
Total Effective Tax Rates ............. 38.1% 38.0% 38.6%
==== ==== ====
F-11
ALLOU HEALTH & BEAUTY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 31, 1998, net operating loss carryforwards of approximately
$55,000 are available to offset future earnings. These losses were generated by
the Company's subsidiary M. Sobol Inc., prior to its acquisition by the Company,
and as such are limited to $85,000 per year as per Internal Revenue Service
regulations.
12. EARNINGS PER SHARE:
The Company adopted Statement of Financial Accounting Standard No.
128 ("SFAS"), "Earnings per Share". SFAS 128 replaces the presentation of
earnings per share ("EPS") with a presentation of basic EPS based upon the
weighted-average number of common shares for the period. It also requires dual
presentation of basic and diluted EPS for companies with "complex capital
structures", as defined. EPS for the current and prior periods has been
presented in conformity with the provisions of SFAS 128. The following table is
a reconciliation of the weighted-average shares (denominator) used in the
computation of basic and diluted EPS for the statement of operations periods
presented herein.
Year Ended March 31,
1998 1997 1996
---- ---- ----
Basic ................................ 5,757,328 5,752,225 5,669,907
Assumed exercise of stock options .... 215,064 56,857 94,864
--------- --------- ---------
Diluted .............................. 5,972,392 5,809,082 5,764,771
========= ========= =========
Net income as presented in the consolidated statement of operations
is used as the numerator in the EPS calculation for both the basic and diluted
computations.
Options to purchase 415,300, 548,400 and 478,250 shares for the years
ended March 31, 1998, 1997 and 1996, respectively were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price of the common shares.
13. RELATED PARTY TRANSACTIONS:
The Company purchases from, and on occasion, sells to various
entities that are controlled by some of the Company's officers. For the years
ended March 31, 1998, 1997 and 1996, purchases from related parties amounted to
$4,443,634, $1,705,355 and $1,735,661, respectively.
F-12
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Diluted
Earnings Per
Gross Net Common
Quarters Ended Revenues Profit Income Share
- -------------- -------- ------ ------ -----
June 30, 1997 $64,855,684 $ 9,706,275 $ 987,970 $ .16
June 30, 1996 $68,958,061 $ 8,130,446 $ 802,667 $ .14
September 30, 1997 $83,341,115 $ 9,290,085 $ 1,228,750 $ .21
September 30, 1996 $76,838,439 $ 8,372,060 $ 1,076,844 $ .19
December 31, 1997 $76,349,440 $10,653,164 $ 1,322,032 $ .22
December 31, 1996 $65,657,248 $ 8,358,715 $ 934,315 $ .16
March 31, 1998 $77,210,228 $ 9,506,081 $ 741,458 $ .12
March 31, 1997 $73,857,693 $ 9,606,369 $ 1,244,709 $ .21
F-13
SCHEDULE VIII
-------------
ALLOU HEALTH & BEAUTY CARE, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column C Column D
Column A Column B Additions Deductions Column E
-------- -------- --------- ---------- --------
Balance at Charged to Write off of Balance
Beginning costs and uncollectible at end
Description of period expenses accounts of period
----------- --------- -------- -------- ---------
March 31, 1996
Allowance for Doubtful Accounts $286,165 $412,000 $324,275 $373,890
March 31, 1997
Allowance for Doubtful Accounts $373,890 $560,000 $378,208 $555,682
March 31, 1998
Allowance for Doubtful Accounts $555,682 $695,225 $879,432 $371,475
S-1
Index to Exhibits
Exhibit
No. Description Page
- ------- ----------- ----
3.1 Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1996
Commission File No. 1-10340 and incorporated herein by
reference).
3.2 By-Laws of the Registrant (filed as Exhibit 3b to
Registration Statement No. 33-26981 on Form S-1
("Registrant's Form S-1"), and incorporated herein by
reference).
10.1 Employment Contract dated as of August 1, 1995 between the
Registrant and Victor Jacobs (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996 Commission File No. 1-10340
("1996 10-K") and incorporated herein by reference).
10.2 Employment Contract dated as of August 1, 1995 between
Registrant and Herman Jacobs (filed as Exhibit 10.2 to
Registrant's 1996 10-K and incorporated herein by
reference).
10.3 Employment Contract dated as of August 1, 1995 between the
Registrant and Jack Jacobs (filed as Exhibit 10.3 to
Registrant's 1996 10-K and incorporated herein by
reference).
10.4 Employment Contract dated as of June 30, 1996 between the
Registrant and Ramon Montes (filed as Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 Commission File No. 1-10340
and incorporated herein by reference).
10.5 Amended and Restated 1989 Incentive Stock Option Plan
(filed as Exhibit 10(e) to Registrant's Annual Report on
From 10-K for the fiscal year ended March 31, 1990
Commission File No. 1-10340 and incorporated herein by
reference).
10.6 1991 Stock Option Plan (filed as Exhibit 10(e)(1) to
Registrant's Post-Effective Amendment No. 1 to
Registrant's Form S-1 and incorporated herein by
reference).
10.7 1992 Stock Option Plan (filed as Exhibit 10(e)(2) to
Registrant's Annual Report on From 10-K for the fiscal
year ended March 31, 1993 Commission File No. 1-10340 and
incorporated herein by reference).
10.8 1995 Nonqualified Stock Option Plan (filed as Exhibit A to
Registrant's 1996 Definitive Proxy Statement on Schedule
14A Commission File No. 1-10340 and incorporated herein by
reference).
10.9 1996 Stock Option Plan (filed as Exhibit B to Registrant's
1996 Definitive Proxy Statement on Schedule 14A Commission
File No. 1-10340 and incorporated herein by reference).
10.10 Lease Agreement dated December 8, 1993 between Allou
Distributors, Inc. and Brentwood Distribution Co. (filed
as Exhibit 10(f) to Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1995 Commission
File No. 1-10340 ("1995 Form 10-K") and incorporated
herein by reference).
10.11 Lease Agreement dated March 4, 1980 between Registrant and
Pueblo Supermarkets, Inc. (filed as Exhibit 10g to
Registrant's Form S-1 and incorporated herein by
reference).
Exhibit
No. Description Page
- ------- ----------- ----
10.12 Lease Agreement dated January 1, 1993 between M. Sobol,
Inc. and Simon and Barbara J. Mandell (filed as Exhibit
10(g) to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994 Commission File No.
1-10340 ("1994 Form 10-K") and incorporated herein by
reference).
10.13 Agreement dated December 13, 1994 between Allou
Distributors, Inc. and the National Organization of
Industrial Trade Unions (filed as Exhibit 10(i) to the
Registrant's 1995 Form 10-K and incorporated herein by
reference).
*10.14 Agreement dated December 15, 1997 between Allou
Distributors, Inc. and Local No. 1.
*10.15 Third Restated and Amended Revolving Credit and Security
Agreement dated October 22, 1997 among BankBoston, N.A.,
IBJ Schroder Bank & Trust Company, Sanwa Business Credit
Corporation, LaSalle Business Credit, Inc., Bank Leumi
Trust Company of New York, The Dime Savings Bank of New
York, FSB, The First National Bank of Maryland, Key
Corporate Capital, Inc.
10.16 Master Lease Finance Agreement dated as of April 24, 1996
between BankBoston Leasing Inc. and Allou Distributors,
Inc. (filed as Exhibit 10-14 to Registrant's 1996 10-K and
incorporated herein by reference).
21 Subsidiaries of the Registrant (filed as Exhibit 21 to
Registrant's 1996 10-K and incorporated herein by
reference).
*23 Consent of Mayer Rispler & Co.
*27 Financial Data Schedule
- ----------------
* Filed herewith