10-K/A 1 d844583-1.txt FY ENDED 03/31/2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- AMENDMENT NO. 1 ON FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2002. Commission file number 1-10340 ALLOU HEALTH & BEAUTY CARE, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 11-2953972 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 50 EMJAY BOULEVARD, BRENTWOOD, NEW YORK 11717 --------------------------------------- ------------- (Address of Principal Executive Offices) (Zip Code) (631) 273-4000 Registrant's Telephone Number, Including Area Code Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------------ Class A Common Stock, par value American Stock Exchange $.001 per share 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. X . The aggregate market value of the Class A Common Stock of the registrant held by non-affiliates of the registrant on July 25, 2002 was $27,795,605. 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. As of the close of business on July 25, 2002, there were outstanding 6,136,476 shares of the registrant's Class A Common Stock and 1,200,000 shares of the registrant's Class B Common Stock. ================================================================================ TABLE OF CONTENTS Page ---- Cautionary Statement...........................................................1 PART I Item 1. Business.............................................................2 PART II Item 6. Selected Financial Data..............................................8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................10 Signature ....................................................................17 -i- UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "WE," "US," "OUR," "ALLOU" OR THE "COMPANY" INCLUDE ALLOU HEALTH & BEAUTY CARE, INC. AND OUR SUBSIDIARIES. CAUTIONARY STATEMENT CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain statements in this report, in particular "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Item 1. Business" 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- PART I ITEM 1. BUSINESS. GENERAL 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. We distribute approximately 22,000 SKUs of branded consumer products to approximately 4,200 independent retailers, and to over 140 national mass merchandisers including Sears Roebuck & Co., Wal-Mart, J.C. Penney, Target, CVS, and Walgreens. We believe that products distributed by us are sold in a total of over 15,000 retail stores. In the three fiscal years since the fiscal year ended March 31, 1999, our revenues have grown by approximately 69% through internal growth and strategic acquisitions, which have 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 PRODUCTS Distribution of Consumer Personal Care Products. In our consumer personal care products distribution business, we distribute three principal categories of products: o fragrances; o name brand health and beauty aids and health and beauty aids under our Allou brand; and o non-perishable food items. In addition, we manufacture and distribute upscale hair and skin care products. We distribute approximately 7,000 brands of prestige designer fragrances of many large manufacturers which include Ralph Lauren, Calvin Klein and Chanel. See "Manufacturers and Suppliers". We distribute approximately 8,000 brand name health and beauty aids products by such manufacturers as Colgate Palmolive, Clairol, Procter & Gamble, Johnson & Johnson and Gillette. See "Manufacturers and Suppliers". We also distribute nail polish, toothpaste, petroleum jelly and other health and beauty aids products manufactured by others and sold under our Allou brand label. We sell non-perishable packaged food items, which we purchase almost exclusively at discount prices from major food companies. This product line requires little additional operating costs to us because these items generally are pre-sold and drop-shipped directly to our customers from the vendors. Some of the fragrance and cosmetic brands that we distribute are: o Polo o Revlon o Eternity o Maybelline o Hugo o Lancome -2- Some of the fragrance and cosmetic products that we distribute are: o Perfume o Eyeshadow o Cologne o Lipstick o Nail Polish o Mascara Some of the health and beauty aids brands that we distribute are: o Pantene Pro-V shampoo o Colgate toothpaste o Johnson's Baby Lotion o Rave hairspray o Gillette Mach 3 razors o Vaseline Intensive Care lotion Some of the health and beauty aids products that we distribute are: o Antacids o Oral Antiseptics and Sprays o Baby Care o Deodorants o Cough and ColdRemedies o Shampoos Distribution of consumer personal care products accounted for approximately 77% of our revenues during the fiscal year ended March 31, 2000, 57% of our revenues for the fiscal year ended March 31, 2001 and 59% of our revenues during the fiscal year ended March 31, 2002. Distribution of Prescription Pharmaceuticals. We purchase approximately 4,000 branded pharmaceuticals from manufacturers such as Pfizer, Eli Lilly, Merck and Glaxo. We also distribute 3,000 generic prescription pharmaceutical products which are purchased from manufacturers such as Schein Pharmaceuticals, Inc., Barre National, Inc., and Sidmak Laboratories, Inc. During fiscal 1994, we acquired the capital stock of M. Sobol, Inc., which is a manufacturers' distributor of branded prescription pharmaceuticals. M. Sobol, Inc. was founded in 1928 and currently distributes pharmaceuticals to approximately 700 independent pharmacies in the Northeast. During fiscal 2000, we acquired the assets of Tri-State Pharmaceutical Consultants, Corp. a national distributor of branded and generic pharmaceuticals. Tri-State was founded in 1995 and currently distributes pharmaceuticals to national chains such as Rite Aid and wholesalers such as McKesson. Distribution of prescription pharmaceutical products accounted for approximately 21% of our revenues during the fiscal year ended March 31, 2000, 42% of our revenues during the fiscal year ended March 31, 2001 and 40% of our revenues during the fiscal year ended March 31, 2002. Manufacturing and Distribution of Hair and Skin Care Products. During fiscal 1996, we purchased selected assets of Russ Kalvin, Inc. This acquisition has enabled us to manufacture and distribute salon quality hair and skin care products to national mass merchandisers and independent retailers. Since 1998, we have manufactured private label upscale hair and skin care products for J.C. Penney, Bath and Body Works, Sears Roebuck & Co. and other specialty retailers. In addition, we manufacture a proprietary line of hair care and skin care products which we market under the Russ Kalvin generic brands. This business generates substantially higher gross profit margins than our distribution business. -3- Manufacture and distribution of hair and skin care products accounted for approximately 2% of our revenues during the fiscal year ended March 31, 2000, 1% of our revenues during the fiscal year ended March 31, 2001 and 1% of our revenues during the fiscal year ended March 31, 2002. Revenues from prior years were not material. MANUFACTURERS AND SUPPLIERS The products we distribute are manufactured and supplied by independent foreign and domestic companies. Many of these companies also manufacture and supply health and beauty aids products, fragrances and cosmetics for many of our competitors. We purchase approximately 8,000 brand name health and beauty aids products from such manufacturers as Procter & Gamble, Johnson & Johnson and Gillette. We also purchase approximately 7,000 fragrance and cosmetic products directly from manufacturers such as Coty and Revlon and from secondary sources. We purchase approximately 4,000 branded pharmaceuticals and 3,000 generic prescription pharmaceuticals from manufacturers such as Pfizer, Eli Lilly, Schein Pharmaceuticals, and Barre National. Additionally, we purchase non-perishable packaged food items from manufacturers such as General Mills, General Foods and Nabisco. We contract with manufacturers to produce the products which carry our Allou name brand and we manufacture our proprietary line of Russ Kalvin generic brand hair and skin care products through our wholly-owned subsidiary, Allou Personal Care Corp. We typically purchase health and beauty aids and pharmaceuticals 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, we prepay certain suppliers for products that we purchase at deep discounts. These types of purchases are opportunistic and highly dependent upon availability and price. If the products for which we have prepaid and ordered are not shipped to us, there could be an adverse effect on our operations. To date, we have not suffered any such adverse effect. In addition, we may return health and beauty aids and prescription pharmaceutical products to our suppliers for full credit if the products are damaged, their shelf life has expired, or they are otherwise not saleable. Manufacturers of prestige fragrances have historically restricted direct sales of their products in the United States primarily to prestige department stores and specialty stores. As a result, mass-market retailers have traditionally obtained prestige products from secondary sources. Historically, the secondary sources available to the mass market have been limited to: o direct distributors like us which receive products directly from fragrance manufacturers, and o distributors of prestige products manufactured by, or distributed to, foreign sources for foreign distribution, which are diverted to the United States. Under existing court decisions, there are variations in the extent to which trademark laws, copyright laws and customs regulations may restrict the importation of trademarked or copyright fragrance products through those distributors who divert prestige products to the United States without the consent of the trademark or copyright owner. As is customary in the industry, we purchase a substantial portion of our fragrance products from secondary sources. In addition, from time to time, we may take advantage of favorable buying opportunities and purchase limited amounts of health and beauty aids products from secondary sources. There can be no assurance that these sources of product will be available in the future or that we may not become the subject of legal action arising from our buying activities with respect to these products. To date, we have not been the subject of any such legal action. We have had long-term relationships with most of our suppliers. As is customary in our industry, we have not entered into written agreements with most of our suppliers. However, we believe that our -4- relationships with our suppliers are good. We have not experienced any interruptions in the supply of products that have resulted in a material adverse effect on our operations. MARKETING AND SALES Sales are made by our in-house sales staff consisting of telemarketing professionals. We pay our in-house sales persons a base salary plus a commission based on sales and gross margins. Sales are also made by sales account representatives who make on-site visits to our customers. We publish a monthly health and beauty aids catalogue and a quarterly fragrance catalogue containing order forms, product descriptions, the manufacturer's suggested retail price and net cost per unit or per dozen. These catalogues are mailed to each of our active customers. They also help serve the advertising needs of the manufacturers who provide us with rebates that have historically paid for the full cost of preparing, printing and mailing the catalogues. In addition to the catalogues, we frequently supply our customers with flyers advising them of items that are being sold at a discount. The sale of fragrances nationally to independent stores is handled exclusively by mail order through the catalogues. OPERATIONS We maintain a facility in Brentwood, New York of approximately 157,000 square feet that includes warehouse space and our sales and administrative offices. The warehouse typically contains, on a blended basis, inventory for approximately four months of distribution to customers. We maintain these levels of inventory in order to provide our customers with the convenience of one stop shopping privileges. We use a computerized data base system which enables our management to monitor sales, purchases and inventory status. Historically, we have not experienced problems with product shelf lives, because most products we sell are not perishable. Those products that are perishable generally can be returned to the manufacturer if they are not sold by the expiration date. We also lease a facility in Saugus, California of approximately 52,800 square feet and a facility in Miami, Florida of approximately 10,000 square feet. See "Item 2. Properties". We contract with local carriers and independent trucking agents to make deliveries to our customers. A customer order will generally be shipped within 48 hours from the time it is placed. 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. We have positioned ourselves to market and manufacture quality hair and skin care products to major retailers such as J.C. Penney, Bath and Body Works, Sears Roebuck, & Co. and other specialty retailers. In addition, we have 52,800 square feet of leased space in Saugus, California which is used to manufacture and distribute upscale private label hair and skin care products for major retailers. MANAGEMENT INFORMATION AND CONTROL SYSTEM We use a proprietary, computerized database management system that collects, integrates and analyzes data concerning sales, order processing, shipping, purchases, receiving, inventories and financial reporting. At any given time, we are able to determine the quantity of each item in inventory by brand, style, cost, list price and other characteristics. The computerized system enables us to better manage our inventories. It keeps a running inventory of goods on hand for each item we distribute. 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 directly to the manufacturer. -5- Our system also provides our telemarketing professionals with immediate product availability and gross margin information on-screen when receiving customer orders. This system allows us to provide our customers with real-time inventory and pricing information and to ship orders within 48 hours of receipt, which allows our customers to better manage their inventory. We have engaged J.D. Edwards & Company, a software technology provider, to upgrade our EDP systems. The implementation of this technology will provide the technological infrastructure required to meet our goals for future growth. COMPETITION The distribution of consumer personal care products and the distribution of prescription pharmaceutical products are both extremely competitive businesses. Among others, our competitors include pharmaceutical wholesalers who carry consumer personal care products as an accommodation for their customers. Many of these wholesalers have greater financial and other resources than we do. However, to our knowledge, there is no significant competitor that distributes to its customers the assortment of consumer personal care products (including fragrances, cosmetics and health and beauty aids products) that we distribute. We believe that we compete on the basis of price and on the basis of the services we provide to our customers, which include quick delivery and low minimum order requirements. In order to maintain our margins, we compete to obtain our fragrances and cosmetics at the best possible prices from manufacturers and importers who also supply competing distributors and sell directly to retailers. In addition, we face intensive competition with respect to marketing our own brand of Allou health and beauty aids products and the Russ Kalvin generic brand of hair and skin care products. We compete with major health and beauty aids companies, as well as hair and skin care companies who have well-established product lines, spend large sums for advertising and marketing and have far greater financial and other resources than we do. We also compete with these companies for shelf space and product placement in various retail outlets. EMPLOYEES As of March 31, 2002, we employed approximately 300 persons on a full time basis, including 5 in executive positions, 13 in purchasing, 51 in marketing and sales, 89 in administration and accounting and 142 in warehouse and receiving. Some of our sales personnel are partially paid on a commission basis. During peak selling seasons we also employ part-time personnel. We are a party to a collective bargaining agreement expiring December 14, 2003 with the National Organization of Industrial Trade Unions that covers 85 of our warehouse and receiving employees. We have not experienced any work stoppages. We believe our relations with our employees are satisfactory. TRADENAMES AND TRADEMARKS We use the unregistered tradename for our brand "Allou Brand" on generic products that we distribute. With the introduction of additional generic products, we may adopt other unregistered tradenames and trademarks. During fiscal 1996, we acquired the patents, trademarks and all other intellectual property of Russ Kalvin, Inc. We believe that no single trademark, tradename or servicemark is material to our business as a whole. -6- GOVERNMENT REGULATION The United States Food, Drug and Cosmetic Act and the Fair Packaging and Labeling Act regulate the purity and packaging of health and beauty aids products and fragrances and cosmetic products. Similar statutes are in effect in various states. Manufacturers and distributors of health and beauty aids products are also subject to the jurisdiction of the Federal Trade Commission with respect to matters such as advertising content and other trade practices. To our knowledge, we only distribute products produced by manufacturers who comply with these regulations and who periodically submit their products to independent laboratories for testing. However, the failure by our manufacturers or suppliers to comply with applicable government regulations could result in product recalls that could adversely affect our relationships with our customers. In addition, the extent of potentially adverse government regulations which might arise from future legislation or administrative action cannot be predicted. Some of the products that we manufacture contain alcohol and certain active ingredients that are regulated by the Bureau of Alcohol, Tobacco and Firearms and the Food and Drug Administration. We have obtained the appropriate licenses from these agencies in order to comply with all applicable regulations. -7- PART II ITEM 6. SELECTED FINANCIAL DATA.
Years Ended March 31, 2002 2001 2000 1999(1) 1998(1) -------- -------- -------- -------- -------- Revenues $564,151 $548,147 $421,047 $334,175 $301,092 Costs of revenues 500,890 482,590 367,964 289,637 262,237 -------- -------- -------- -------- -------- Gross profit 63,261 65,557 53,083 44,538 38,855 Warehouse and delivery expense 12,918 15,121 12,307 10,279 9,288 Selling, general and administrative expense 23,066 21,946 18,520 14,707 13,264 -------- -------- -------- -------- -------- Income from operations 27,277 28,490 22,256 19,552 16,303 Interest and other 16,370 24,444 10,874 9,647 8,470 -------- -------- -------- -------- -------- Income before income taxes 10,907 4,046 11,382 9,905 7,833 -------- -------- -------- -------- -------- Discontinued operations, net of income taxes - - 7,916 (4,599) (576) -------- -------- -------- -------- -------- Net income $ 6,590 $ 2,458 $ 14,959 $ 1,348 $ 4,280 ======== ======== ======== ======== ======== Net income per common share Basic: Operations $ .95 $ .36 $ 1.05 $ .98 $ .84 Discontinued operations - - 1.17 (.76) (.10) -------- -------- -------- -------- -------- $ .95 $ .36 $ 2.22 $ .22 $ .74 ======== ======== ======== ======== ======== Diluted: Operations $ .91 $ .34 $ .97 $ .87 $ .81 Discontinued Operations - - 1.08 (.67) (.09) -------- -------- -------- -------- -------- $ .91 $ .34 $ 2.05 $ .20 $ .72 ======== ======== ======== ======== ========
BALANCE SHEET DATA: As of March 31, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Cash $ 1,246 $ 264 $ 51 $ 400 $ 47 Working capital 90,091 83,412 64,725 52,192 43,959 Total assets 324,941 291,764 259,219 219,907 178,384 Total long-term liabilities 19,801 17,697 1,640 724 1,354 Total liabilities 237,421 212,789 183,062 159,571 125,771 Stockholders' equity 87,520 78,975 76,157 60,336 52,613
-------------------- (1) As a result of our sale of our majority interest in The Fragrance Counter Inc., the statements of income for the prior years have been restated to segregate the net results of continued and discontinued operations. -8- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- Year ended March 31, 2002 -------------- Revenues $110,230,491 $148,981,900 $163,306,563 $141,632,306 $564,151,260 Net income (loss) $ 274,425 $ 2,235,751 $ 1,991,522 $ 2,087,960 $ 6,589,658 ============ ============ ============ ============ ============ Earnings per common share - basic Basic $ .04 $ .32 $ .29 $ .29 $ .94 ----- ----- ----- ----- ----- Earnings per common share - diluted Diluted $ .04 $ .32 $ .28 $ .24 $ .88 ----- ----- ----- ----- ----- ------------------------------------------------------------------------------------------------------------------------------------ Year ended March 31, 2001 -------------- Revenues $134,664,654 $132,250,479 $140,652,706 $140,579,114 $548,146,953 Net income (loss) $ 2,088,762 $ 1,805,248 $ 1,110,741 $ (2,546,384) $ 2,458,367 ============ ============ ============ ============ ============ Earnings per common share - basic Basic $ .31 $ .27 $ .16 $ (.38) $ .36 ----- ----- ----- ------- ----- Earnings per common share - diluted Diluted $ .29 $ .24 $ .16 $ (.35) $ .34 ----- ----- ----- ------- -----
Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal the annual earnings per common share. -9- ITEM 7. 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. In the three fiscal years since the fiscal year ended March 31, 1999, our revenues have grown by approximately 69% through internal growth and strategic acquisitions, which have 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 77% of our revenues during the fiscal year ended March 31, 2000, 57% of our revenues for the fiscal year ended March 31, 2001 and 59% of our revenues during the fiscal year ended March 31, 2002. Distribution of prescription pharmaceutical products accounted for approximately 21% of our revenues during the fiscal year ended March 31, 2000, 42% of our revenues during the fiscal year ended March 31, 2001 and 40% of our revenues during the fiscal year ended March 31, 2002. Manufacture and distribution of hair and skin care products accounted for approximately 2% of our revenues during the fiscal year ended March 31, 2000, 1% of our revenues during the fiscal year ended March 31, 2001 and 1% of our revenues during the fiscal year ended March 31, 2002. Our operating results for fiscal years 2002, 2001 and 2000 expressed as a percentage of sales were as follows:
FISCAL YEAR ENDED MARCH 31 2002 2001 2000 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Costs of goods sold 88.8 88.0 87.4 ----- ----- ----- Gross profit 11.2 12.0 12.6 Warehouse & delivery expenses 2.3 2.8 2.9 Selling, general and administrative expenses 4.0 4.0 4.4 ----- ----- ----- Operating income 4.9 5.2 5.3 Net interest expense 2.9 3.4 2.6 Provision for losses on asset impairments - 1.0 - ----- ----- ----- Total other expense, net 2.9 4.5 2.6 Income before income tax 2.0 0.7 2.7 Income tax provision 0.8 0.3 1.0 Gain from discontinued operations - - 1.9 ----- ----- ----- Net income 1.2% 0.4% 3.6%
-10- FISCAL 2002 COMPARED TO FISCAL 2001 Revenues. Our sales are composed almost entirely of sales of prestige brand name designer fragrances, brand name health and beauty aids products, prescription pharmaceuticals, non-perishables packaged food items, and upscale hair and skin care products. Revenues for the fiscal year ended March 31, 2002 increased $16.0 million to $564.1 million, representing a 3.0% gain as compared to revenues of $548.1 million for the fiscal year ended March 31, 2001. This increase resulted from increased revenues from most segments of our business, as described below. Distribution of prescription pharmaceutical products for the fiscal year ended March 31, 2002, however, decreased $5.2 million to $223.3 million. The increased demand for our products resulted from increases in same store sales. We made no acquisitions during the fiscal year ended March 31, 2002. Contributions to the increase in revenues during this period by product segment are as follows. Sales of brand name health and beauty aids, prestige designer fragrances and non-perishable food products, increased 6.7% in fiscal 2002 compared to fiscal 2001, due to increases in same store sales. Sales of prescription pharmaceuticals decreased 2.3% in fiscal 2002 when compared to fiscal 2001. This decrease in revenues is due to decreases in purchasing of pharmaceutical products during the first half of fiscal 2002, which resulted from financing reductions in the earlier part of the year in our former revolving credit facility with a consortium of banks led by Fleet Capital Corp. This financing reduction was required by our former lenders in order to accommodate our request for an extension to the former revolving credit facility which expired on May 7, 2001. We closed a new $200 million revolving credit facility on September 4, 2002 with a consortium of banks led by Congress Financial Corporation and Citibank, N.A. This new credit facility permitted us to resume our normal level of pharmaceutical purchases, which in turn has alleviated the shortfall of related sales in this period. Sales of products manufactured by us ("Manufacturing Sales") increased 2.8% in fiscal 2002 when compared to fiscal 2001. Manufacturing Sales are not material. Gross Profit. Gross profit for the fiscal year ended March 31, 2002 was $63.3 million representing a $2.3 million decrease over gross profit of $65.6 million for the fiscal year ended March 31, 2001. This decrease in gross profit is due in part to promotional sales of pharmaceutical products that were subject to expire within six months. We determined that it was economically favorable to discount these products rather than to wait for the expiration date before returning the expired products to the manufacturers. Also, certain customers requested that their orders be shipped at their own cost. We typically pay freight charges and add the charge to the customer invoice. The request by certain customers to directly pay their freight charges caused a reduction in the selling price for these products by the amount of the freight charges. This reduction in selling price caused a reduction in gross profit and a corresponding reduction in warehouse and delivery expenses, with no effect on net income. Additionally, sales of pharmaceutical products have historically lower gross profit margins than health and beauty aids, fragrances or cosmetics. Thus, as pharmaceutical products become a greater percentage of our sales, the impact of such sales will result in lower blended gross profit margins. Sales of prescription pharmaceuticals, however, decreased 2.3% in fiscal 2002 when compared to fiscal 2001. Warehouse, Delivery, Selling, General and Administrative Expenses. Warehouse, delivery, selling, general and administrative expenses for the fiscal year ended March 31, 2002 decreased $1.1 million to $36 million from $37.1 million in the prior year. This reduction resulted from a $2.2 million reduction in warehouse and delivery expenses, from $15.1 million in fiscal 2001 to $12.9 million in fiscal 2002, partially offset by a $1.1 million increase in selling, general and administrative expenses. Warehouse, delivery, selling, general and administrative expenses decreased as a percentage of revenues to 6.3% for the fiscal year ended March 31, 2002 from 6.8% in the prior fiscal year. This decrease as a percentage of revenues is due to in part to reduced freight costs and improved efficiencies in warehouse operations and reduced costs associated with an outside bonded warehouse. -11- Interest Expense. Interest expense as a percentage of revenues for the fiscal year ended March 31, 2002 decreased to 2.9% from 3.4% for the same period in the prior year. This decrease was due to a decrease in interest rates offset by both the accretion of the discount to the subordinated debt, and the change in the fair market value of the warrants, which are being valued using the Black-Scholes Pricing Model. Included in interest expense for the fiscal year ended March 31, 2002 was $179,075, which represented the change in the value of these warrants. As of March 31, 2002, the fair market value for our warrants was $4,539,000. Net Income. Our net income for the fiscal year ended March 31, 2002 increased $4.1 million to $6.6 million, or 168%, as compared to $2.5 million for the fiscal year ended March 31, 2001. This increase in net income is due in part to a decrease in operating expenses, a reduction in interest expense and the absence of a loss on interest in internet investments which last year totaled $5.6 million. FISCAL 2001 COMPARED TO FISCAL 2000 Revenues. Revenues for the fiscal year ended March 31, 2001 increased $127.1 million to $548.1 million, representing a 30.2% gain as compared to revenues of $421.0 million for the fiscal year ended March 31, 2000. This increase resulted from a blended increase in revenues from the segments of our business, as described below. The increased demand for our products resulted from increases in same store sales. Contributions to the increase in revenues during this period by segment are as follows. Sales of brand name health and beauty aids, prestige designer fragrances and non-perishable food products, decreased 4.3% in fiscal 2001 compared to fiscal 2000, due to decreases in same store sales. Sales of prescription pharmaceuticals increased 160% in fiscal 2001 when compared to fiscal 2000. This increase is largely due to increased sales resulting from our acquisition of Tri-State Pharmaceutical Consultants Corporation which was consummated during the fourth quarter of fiscal year 2000. This acquisition has enabled the company to become a national distributor of prescription pharmaceuticals thereby expanding our customer base resulting in a substantial increase in sales. Cost of Goods Sold. Cost of goods sold for the fiscal year ended March 31, 2001 increased as a percentage of revenues to 88.0% from 87.4% for the fiscal year ended March 31, 2000. This increase in the cost of goods sold resulted primarily from decreased profit margins associated with the distribution of pharmaceutical products. Warehouse, Delivery, Selling, General and Administrative Expenses. Warehouse, Delivery, Selling, General and Administrative expenses for the fiscal year ended March 31, 2001 increased $6.2 million to $37.0 million, or 6.8% of sales, as compared to expenses of $30.8 million or 7.3% of sales for the fiscal year ended March 31, 2000. This increase was largely due to marketing, delivery and warehouse expenses associated with our wholly-owned pharmaceutical and manufacturing subsidiaries. Interest Expense. Interest expense for the fiscal year ended March 31, 2001 increased $7.9 million to $18.8 million, or 3.4% as a percentage of sales, as compared to $10.9 million, or 2.6% as a percentage of sales, for the fiscal year ended March 31, 2000. This increase was due to increased borrowings at a higher rate and non-cash interest from the warrant discount accretion of approximately $600,000. Net Income. Our net income for the fiscal year ended March 31, 2001 decreased $12.5 million to $2.5 million or 83.6% as compared to $14.9 million for the fiscal year ended March 31, 2000. This decrease in net income resulted in part from the fact that the prior period included a gain of approximately $7.9 million, or $1.08 per diluted share, on the sale of our interest in our Internet subsidiary during the first quarter of fiscal 2000, and also from loss during the fiscal year ended March 31, 2001 on our Internet investments totaling $5,642,678 which management determined had become permanently impaired, thus -12- electing to recognize a loss on the investment during this period. This loss was included in our financial statements with the other expenses set forth in the line item "Interest and other." In addition, an increase in interest expense of approximately 72% contributed to these decreased earnings. Net income for fiscal 2001 was $2,458,367, or 34 cents per diluted share, when compared to $14,959,185, or $2.05 per diluted share, for the same period a year earlier. LIQUIDITY AND CAPITAL RESOURCES Our working capital increased $6.61 million to $90.0 million at March 31, 2002 from $83.4 million at March 31, 2001, primarily due to an increase in accounts receivable and inventories. In addition, included in this increase in working capital was an increase in our cash and cash equivalents from $263,774 at March 31, 2001 to $1,245,521 at March 31, 2002. Our capital requirements relate primarily to the purchase of inventory, the carrying of customer accounts receivable, the investment in capital equipment and the acquisition of businesses. During the fiscal year ended March 31, 2002, our accounts receivable increased by 28.1%, or $24.0 million, from $85.6 million to $109.6 million; our inventories increased by 5.1%, or $9.1 million, from $176.4 million to $185.5 million; and our property and equipment increased by 94%, or $5.3 million, from $5.7 million to $11.0 million. We made no acquisitions of businesses during the fiscal year ending March 31, 2002. However, we believe that there are significant opportunities to add to our distribution businesses through acquisitions, particularly in the prescription pharmaceutical distribution industry. We will seek to identify attractive acquisition candidates that we believe will complement our current business. We meet our working capital requirements from internally generated funds and from a $200 million line of credit with a consortium of banks led by Congress Financial Corporation and Citibank, N.A. entered into on September 4, 2001 and which expires on September 4, 2004. The purpose of this credit facility is to finance our accounts receivable and inventory. As at March 31, 2002, we had $191,285,333 outstanding under our 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 March 31, 2002 was 4.6%. We utilize cash generated from operation to reduce short-term borrowings which in turn acts to increase loan availability consistent with our financing agreement. The financing agreement contains various covenants that limit or restrict, among other things, subject to certain exceptions, the incurrence of indebtedness, the creation of liens, transactions with affiliates, investments and acquisitions, mergers, consolidations, dissolutions, asset sales, dividends, redemptions and certain other transactions and business activities. Financial performance covenants include minimum net worth, EBITDA, and current ratio requirements. At March 31, 2002, we were in compliance with all financial performance covenants. Substantially all of our borrowings under the credit facility bear interest at floating rates. Therefore, our financial condition and results of operations will be affected by changes in prevailing interest rates. We believe that, based on anticipated levels of operations, cash flow from operations, together with other available sources of funds, including additional borrowings under our credit facility, will be adequate for at least the next 12 months to fund our debt service, capital expenditure and working capital requirements. However, in order to consummate acquisitions of additional businesses, it will be necessary for us to obtain additional financing, and we cannot be certain adequate additional financing will be available to us for this purpose on satisfactory terms. During the quarter ended September 30 of fiscal year 2000 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 -13- $4.50 per share. The warrants are subject to a future contingent put option; under certain circumstances as defined the investor has the right to put the warrants to us after year five at a price of $8.00 per warrant. As noted above, our accounts receivable increased to $109,655,884 as at March 31, 2002 from $85,579,734, as at March 31, 2001, representing an increase of 28.1%. The increase in accounts receivable is due to increased sales and the fact that customers who had been paying us on an average of 55 days during the fiscal year ending March 31, 2001 have been paying us on an average of 71 days during the fiscal year ended March 31, 2002. We believe this change is largely due to economic conditions. In addition, our cash and cash equivalents increased from $263,774 at March 31, 2001 to $1,245,521 at March 31, 2002 and our inventories increased by approximately $9.1 million, or 5.1%, for the fiscal year ended March 31, 2002 compared to the fiscal year ended March 31, 2001. This increase in inventory is in anticipation of increased sales during fiscal 2003. Operations for the fiscal year ended March 31, 2002, excluding non-cash charges for items such as depreciation and amortization, deferred income taxes, and asset impairment, provided cash of $8.9 million. Other changes in assets and liabilities resulting from operating activities for the fiscal year ended March 31, 2002 used cash of $26.5 million, resulting in net cash used in operating activities of $17.4 million. Investing activities, which principally consisted of acquisitions of property, plant and equipment, resulted in a use of cash of $3.7 million for the fiscal year ended March 31, 2002. For the fiscal year ended March 31, 2002, financing activities provided cash of $22.1 million, principally consisting of increased borrowing and issuance of common stock from the exercise of stock options. CRITICAL ACCOUNTING POLICIES This management discussion and analysis is based on our consolidated financial statements which are prepared using certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. While we believe that these accounting policies, and management's judgments and estimates, are reasonable, actual future events can and often do result in outcomes that can be materially different from management's current judgments and estimates. We believe that the accounting policies and related matters described in the paragraphs below are those that depend most heavily on management's judgments and estimates. Reserves for Uncollectible Accounts. At March 31, 2002, our accounts receivable balance was $109.6 million. Our accounting policy is to reserve for the accounts receivable of specific customers based on our assessment of certain customers' financial condition. We make these assessments using our knowledge of the industry and our past experiences. This policy is based on our past collection experience. During the fiscal year ended March 31, 2002 we added approximately $960,000 to our reserve for uncollectible accounts, bringing the total of that reserve to approximately $2.3 million at March 31, 2002. We did not write off any receivables during the fiscal year ended March 31, 2002. Inventory Obsolescence Estimates. We take physical inventories in each of our significant warehouse locations at or near the end of each fiscal year. Inventories at the balance sheet dates are valued using the lower of average cost (with average cost determined using the first-in, first-out method) or market reduced by estimated inventory obsolescence losses for the period between the last physical inventory and the balance sheet date. These estimates are based on an inventory analysis of the movement and expiration dates of specific inventory items. In addition, we may return health and beauty aids and prescription pharmaceutical products to our suppliers for full credit if the products are damaged, their shelf life has expired, or they are otherwise not saleable. Inventories. Inventories are principally purchased rather than manufactured. They are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. We record adjustments to the value of inventory based upon forecasted sales projections, and the physical condition (e.g., age and quality) of the inventories. These adjustments are estimates, which could vary -14- significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations. Property, Plant and Equipment. Property, plant and equipment is recorded at cost and is depreciated on straight-line and accelerated methods over the estimated useful lives of such assets. Changes in circumstances such as technological advances or changes in our capital strategy can result in the actual useful lives differing from our estimates. In those cases where we determine that the useful life of property, plant and equipment should be shortened, we would depreciate the net book value in excess of the salvage value, over its revised remaining useful life thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could result in shortened useful lives. Long Lived Assets. Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires management judgments regarding the future operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold. The application of SFAS 121 has significantly affected the amount and timing of charges to operating results in recent years. Goodwill. Goodwill is reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. If the sum of the undiscounted cash flows is less than the carrying value, we would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. Income Taxes. Our effective tax rate and the tax bases of our assets and liabilities reflect our best estimate of the ultimate outcome of tax audits. Valuation allowances are established where expected future taxable income does not support the realization of the deferred tax assets. Considerable management judgment is also necessary in estimating future taxable income. Assumptions used in these estimates are consistent with internal forecasts. Valuation of Contingent Put Warrants. The contingent put warrants associated with the subordinated debt are being valued on a quarterly basis using the Black Scholes Pricing Model. This model is subject to change in our stock price, as well as the potential that the warrants will become exercisable, due to market conditions, and the change in risk free interest rates. FACTORS THAT COULD IMPACT OUR FINANCIAL CONDITION Substantial defaults in payment or a material reduction in purchases of our products by large customers could have a significant negative impact on our financial condition and results of operations and liquidity. In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During the year ended March 31, 2002, sales to our ten largest customers accounted for approximately 47% of our total revenues. 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 -15- 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. 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, FASB issued statements of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS 142 effective April 1, 2002. We have determined that the adoption of the provisions of SFAS 142 will not have a material effect on our results of operations and financial position, other than the potential discontinuation of certain amortization expenses. In June 2001, the 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, the 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. -16- SIGNATURE 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/ David Shamilzadeh ------------------------------------------------ Name: David Shamilzadeh Title: President, Principal Financial Officer, Principal Accounting Officer and Director Dated: July 31, 2002 -17-