-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WtjJR8qMqRODTNiU9C9qQwGgEWgsUf0xsvLGdPacf745QKT0mGqMXoxlyXYI9C4L TKCgqG93O/T/bMFOL3TpmA== 0000910680-99-000221.txt : 19990630 0000910680-99-000221.hdr.sgml : 19990630 ACCESSION NUMBER: 0000910680-99-000221 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLOU HEALTH & BEAUTY CARE INC CENTRAL INDEX KEY: 0000846538 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 112953972 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10340 FILM NUMBER: 99655004 BUSINESS ADDRESS: STREET 1: 50 EMJAY BLVD CITY: BRENTWOOD STATE: NY ZIP: 11717 BUSINESS PHONE: 5162734000 MAIL ADDRESS: STREET 1: 50 EMJAY BLVD CITY: BRENTWOOD STATE: NY ZIP: 11717 10-K 1 ALLOU HEALTH & BEAUTY CARE, INC. FORM 10-K - -------------------------------------------------------------------------------- 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, 1999 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 - ----------------------------------------- --------------------------- (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) 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 - -------------------- ---------------------- 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 __, 1998 was $__________. 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: __________ shares of Class A common stock and _________ shares of Class B common stock as of the close of business on June __, 1998. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's Proxy Statement relating to the Registrant's 1999 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS GENERAL We are a leading distributor of prestige brand name fragrances and cosmetics, and health and beauty aid products in metropolitan New York City, New Jersey, Connecticut, Philadelphia and Miami. We also manufacture upscale hair and skin care products for sale under private labels. We distribute approximately 22,000 SKUs of branded consumer products to over 140 national mass merchandisers including Sears, Roebuck & Co., Wal-Mart, J.C. Penney, Target, CVS, and Rite-Aid, and to approximately 4,200 independent retailers. We believe that products distributed by us are sold in a total of over 15,000 retail stores. Since our current principal stockholders acquired Allou, we have grown 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. PRODUCTS We distribute four general categories of products: o fragrances and cosmetics; o name brand health and beauty aids and health and beauty aids under our Allou brand; o prescription pharmaceuticals; and o non-perishable food items. In addition, we manufacture upscale hair and skin care products. FRAGRANCES AND COSMETICS We distribute prestige designer fragrances of many large manufacturers, which include Ralph Lauren, Calvin Klein, Estee Lauder, Lancome, Chanel, and Tommy Hilfiger. See "Manufacturers and Suppliers." Fragrance and cosmetic sales accounted for approximately 36% of our revenues during the fiscal year ended March 31, 1997, 39% of our revenues during the fiscal year ended March 31, 1998 and 40% of our revenues during the fiscal year ended March 31, 1999. Our profit margins on fragrance and cosmetic sales are typically greater than those on name brand health and beauty aids and, accordingly, we have sought to increase our sales and marketing efforts in this area. We have entered into a services and supply agreement with The Fragrance Counter to provide fragrances and cosmetics and other services until October 1999 for sales on the Internet. Some fragrance and cosmetic brands that we distribute are: o Polo o Clinique o Eternity o Estee Lauder o Hugo o Lancome Some fragrance and cosmetic products that we distribute are: o Perfume o Eyeshadow o Cologne o Lipstick o Nail Polish o Mascara HEALTH AND BEAUTY AIDS We distribute approximately 8,000 brand name health and beauty aid 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 aid products manufactured by others and sold under our Allou brand label. Some health and beauty aid 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 health and beauty aid products that we distribute are: o Antacids o Oral Antiseptics and Sprays o Baby Care o Deodorants o Cough and Cold Remedies o Shampoos PRESCRIPTION PHARMACEUTICALS During fiscal 1994, we acquired the capital stock of M. Sobol, Inc., 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. We purchase approximately 4,000 branded pharmaceuticals from such manufacturers as Pfizer, Eli Lilly, Merck and Glaxo. Additionally, we distribute 3,000 generic prescription pharmaceutical products which are purchased from manufacturers such as Schein Pharmaceuticals, Inc., Barre National, Inc., and Sidmak Laboratories, Inc. Pharmaceuticals accounted for approximately 17% of our revenues during the fiscal year ended March 31, 1997, 15% of our revenues during the fiscal year ended March 31, 1998 and 14% of our revenues during the fiscal year ended March 31, 1999. FOOD 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 since sales of non-perishable food are pre-sold and drop-shipped directly to our customers from the vendors. Non-perishable food items accounted for approximately 13% of our revenues during the fiscal year ended March 31, 1997, 9% of our revenues during the fiscal year ended March 31, 1998 and 10% of our revenues during the fiscal year ended March 31, 1999. -2- HAIR AND SKIN CARE PRODUCT MANUFACTURING 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 upscale hair and skin care products for J.C. Penney, Bath and Body Works, Sears, Roebuck & Co., Warner Bros., and Victoria's Secret. This business generates substantially higher gross profit margins than our distribution business. 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 aid products, fragrances and cosmetics for many of our competitors. We purchase approximately 8,000 brand name health and beauty aid products from such manufacturers as Procter & Gamble, Johnson & Johnson and Gillette and approximately 7,000 fragrance and cosmetic products directly from manufacturers such as Coty, a division of Pfizer, and Revlon, as well as from secondary sources. We purchase approximately 4,000 branded pharmaceuticals and 3,000 generic prescription pharmaceuticals from such manufacturers as Pfizer, Eli Lilly, Schein Pharmaceuticals, and Barre National. Additionally, we purchase nonperishable packaged food items which we purchase almost exclusively at discount prices from manufacturers such as General Mills, General Foods and Nabisco. We contract with manufacturers to produce the products which carry our 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. 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 our suppliers for products that we order from them. If the products that we have prepaid for and ordered are not shipped to us, this could have an adverse effect on our operations. To date, we have not suffered any such adverse effect. In addition, we may return health and beauty aid 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 the 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 aid products from secondary sources. There can be no assurance that these sources of product will be available in the future or that may not become the subject of legal action arising from its buying activities with respect to these products. To date, we have not been the subject of any such legal action. -3- 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 relationships with our suppliers are good. We have not experienced any interruptions in the supply of products which have had a material adverse effect on our operations. MARKETING AND SALES Sales are made by our in-house sales staff of telemarketing professionals. We pay 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 health and beauty aid catalogue and a fragrance catalogue each month containing order forms, product descriptions, the manufacturer's suggested retail price and net cost per unit or per dozen. The catalogues are mailed to each of our active customers. The catalogues also help serve the advertising needs of the manufacturers which provide us with rebates which have historically paid for the full cost of preparing, printing and mailing the catalogues. In addition to the monthly catalogues, we frequently supply our 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. OPERATIONS We maintain an approximately 144,000 square foot warehouse facility with sales and administrative offices in Brentwood, New York. The warehouse typically contains inventory for approximately three months of distribution to customers. We use a computerized data base system which enables management to monitor sales, purchases and inventory status. Historically, we have not experienced problems with product shelf lives, as 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 an approximately 80,000 square foot facility in Saugus, California and a 15,000 square foot facility in Miami, Florida. We contract with local carriers and independent trucking agents to make deliveries to our customers. From the time it is placed, a customer order will generally be shipped within 48 hours. 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 we acquired selected assets of Russ Kalvin, Inc. in October 1995, we have consolidated operations and reduced overhead, and positioned ourself 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., Warner Bros., and Victoria's Secret. We have consolidated all administrative functions of Russ Kalvin into our Brentwood, New York facility. In addition, we have 80,000 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 which 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. 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 -4- 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. 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. COMPETITION The distribution of health and beauty aid products is extremely competitive. We compete with pharmaceutical wholesalers that carry health and beauty aid 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 which distributes to its customers the assortment of fragrances, cosmetics and health and beauty aid products that we distribute. We believe that we compete on the basis of the services we provide to our customers which include quick delivery and no minimum order requirements. The distribution of fragrance and high priced cosmetic items is also very competitive. We compete to obtain our fragrances and cosmetics from manufacturers and importers who also supply competing distributors and sell directly to retailers. We compete on the basis of price and the services we provide to our customers, which include quick delivery and low minimum order requirements. In addition, we face intensive competition with respect to marketing our own brand of health and beauty aid products and the Russ Kalvin generic brand of hair and skin care products. We compete with major health and beauty aid 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. Additionally, we compete for the manufacture of our products from suppliers who also supply competitor companies. EMPLOYEES As of March 31, 1999, we employed approximately 290 persons on a full time basis, including five in executive positions, 13 in purchasing, 29 in marketing and sales, 34 in administration and accounting, and 209 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, 2000 with the National Organization of Industrial Trade Unions covering 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. -5- GOVERNMENT REGULATION The United States Food, Drug and Cosmetic Act and the Fair Packaging and Labelling Act regulate the purity and packaging of health and beauty aid products and fragrances and cosmetic products. Similar statutes are in effect in various states. Manufacturers and distributors of health and beauty aid 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 those 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 which 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 applicable regulations. ITEM 2. PROPERTIES We lease approximately 144,000 square feet of space for our principal executive offices, warehouse and distribution facilities and sales headquarters in the Brentwood Industrial Park, 50 Emjay Boulevard, Brentwood, New York 11717. We have a ten-year lease which expires on May 31, 2005, and includes a five-year option for renewal. The base annual rental of the property is approximately $500,000 with additional charges for insurance, fuel and taxes and increases during the initial term of the lease. We also lease 80,000 square feet of space in Saugus, California to manufacture and distribute hair and skin care products. The lease expires September 30, 2000 with a five-year option for renewal at a base annual rental of approximately $300,000 with additional charges for insurance, fuel, taxes and increases during the initial term of the lease. We also lease 15,000 square feet of space in Miami, Florida, which expires on June 30, 2000 at a base annual rent of approximately $45,000 for warehousing and distribution purposes. ITEM 3. LEGAL PROCEEDINGS We are a party to a number of legal proceedings in connection with claims made for goods sold, all of which are routine litigation incidental to our business. 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 Our Class A common stock is listed on the American Stock Exchange under the symbol "ALU". There is no established public trading market for our Class B common Stock. The following table sets forth the quarterly high and low sales price of the Class A common stock during our last two fiscal years: HIGH LOW ---- --- 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................. $16.00 $7.938 Quarter ending September 30, 1998............ 11.25 4.313 Quarter ending December 31, 1998............. 12.25 3.375 Quarter ending March 31, 1999................ 12.875 7.625 Quarter ending June 30, 1999 (through June 9, 1999)............. $14.25 $6.938 Holders As of June 9, 1999, there were 112 holders of record of our Class A common stock and 4 holders of record of our 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 We have not paid a dividend on our shares of Class A common stock or Class B common stock and have no present expectation of doing so in the foreseeable future. -7- ITEM 6. SELECTED FINANCIAL DATA ALLOU HEALTH & BEAUTY CARE, INC.
YEARS ENDED MARCH 31, ---------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Revenues......................................... $237,542 $273,322 $285,311 $301,756 $337,389 Costs of revenues................................ 208,906 241,734 250,843 262,601 291,681 ------- ------- ------- ------- ------- Gross profit..................................... 28,636 31,588 34,468 39,155 45,708 Warehouse and delivery expense................... 6,864 8,063 8,592 9,317 10,525 Selling, general and administrative expense...... 10,250 11,894 12,766 14,458 25,767 ------- ------- ------- ------- ------- Income from operations........................... 11,522 11,637 13,110 15,380 9,416 Interest and other............................... 3,956 5,513 6,567 8,470 7,167 ------- ------- ------- ------- ------- Income before income taxes....................... 7,566 6,118 6,543 6,910 2,249 ------- ------- ------- ------- ------- Net income....................................... $4,681 $3,757 $ 4,059 $ 4,280 $1,348 ======= ======= ======= ======= ======= Net income per common share(1) Basic $ .22 $ .74 $ .71 $ .66 $ .84 ======= ======= ======= ======= ======= Diluted $ .20 $ .72 $ .70 $ .65 $ .80 ======= ======= ======= ======= ======= OTHER DATA: Depreciation and amortization.................... 413 525 667 688 833 EBITDA........................................... 11,956 12,167 13,824 16,081 13,258 Capital expenditures............................. 1,452 1,483 626 553 891 Ratio of earnings to fixed charges............... 2.90 2.10 1.99 1.81 1.22 BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents........................ 126 144 77 47 400 Total assets..................................... 106,214 126,185 161,348 178,384 219,907 Total long-term liabilities, including current maturities.................................... 1,059 782 2,382 2,000 1,432 Stockholders' equity............................. 40,176 44,168 48,227 52,613 60,336
(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 1999 COMPARED TO FISCAL 1998 REVENUES. Revenues for the fiscal year ended March 31, 1999 increased $35.6 million or 12% to $337.3 million, as compared to $301.8 million for the fiscal year ended March 31, 1998, which resulted from increased revenues from certain segments of our business as described below. The increased demand for our products resulted from an expanded customer base and increases in same store sales. Contributions to this increase in revenues by product segment is as follows: health and beauty aids increased 17% in fiscal 1999 compared to fiscal 1998 due to increases in same store sales. Prestige designer fragrances grew 19% in fiscal 1999 compared to fiscal 1998 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 33% in fiscal 1999, when compared to fiscal 1998. This segment of our business is categorized by our ability to purchase off-price, non-perishable branded foods. During fiscal 1999 demand outpaced supply resulting in an increase in the price that we would have to pay for merchandise which we would distribute. We decided to limit sales in this segment of our business to a level which would result in improved profit margins. Sales of prescription pharmaceuticals remained relatively constant in fiscal 1999 when compared to the prior year. COST OF GOODS SOLD. Cost of goods sold for the fiscal year ended March 31, 1999 decreased as a percentage of revenues to 86.4% from 87.0% for the fiscal year ended March 31, 1998. This decrease in the cost of goods sold resulted primarily from improved profit margins associated with the distribution of fragrance products. WAREHOUSE, DELIVERY, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Warehouse, Delivery, Selling, General and Administrative expenses for the fiscal year ended March 31, 1999 increased $12.5 million or 52.6% to $36.3 million, as compared to $23.8 million for the fiscal year ended March 31, 1998. This increase was due to increased marketing expenses associated with our wholly-owned internet subsidiary, The Fragrance Counter, Inc. which amounted to approximately $10.0 million. On April 23, 1999 we sold a controlling interest of The Fragrance Counter to private investors lead by the Sudbury Group. We received $11,296,584 in cash and $8.9 million in interest bearing notes. As a result of this transaction we retain a 13% interest in The Fragrance Counter. Through a supply and service agreement we will continue to act as a vendor and fulfillment center to The Fragrance Counter. We realized an approximate profit of $10.0 million as a result of the sale which will be reflected in our financial statements for the quarter ending June 30, 1999. INTEREST EXPENSE. Interest expense for the fiscal year ended March 31, 1999 increased $1.7 million or 20% to $10.2 million, as compared to $8.5 million for the fiscal year ended March 31, 1998 due to increased borrowings at a higher rate. NET INCOME. As a result of the foregoing, our net income for the fiscal year ended March 31, 1999 decreased $2.9 million or 68.5% to $1.3 million, as compared to $4.3 million for the fiscal year ended March 31, 1998 due primarily to the factors discussed above. FISCAL 1998 COMPARED TO FISCAL 1997 REVENUES. Revenues for the fiscal year ended March 31, 1998 were $301.8 million representing a 5.8% increase over revenues of $285.3 million for the fiscal year ended March 31, 1997, which resulted from increased revenues from certain segments of our business as described below. The increased demand for our products resulted from an expanded customer base and increases in same store sales. -9- 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 as compared to fiscal 1997. This segment of our business is categorized by our ability to purchase off-price, non-perishable branded foods. During fiscal 1998 demand outpaced supply resulting in an increase in the price that we would have to pay for merchandise which we would distribute. We decided to limit sales in this segment of our business to a level which would result in improved profit margins. Sales of prescription pharmaceuticals remained relatively constant in fiscal 1998 compared to the prior year. COST OF GOODS SOLD. 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, DELIVERY, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Warehouse, Delivery, Selling, 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 our manufacturing operations and advertising expenditures relating to The Fragrance Counter. INTEREST EXPENSE. 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. Net income for fiscal 1998 was $4.3 million which was a 5.5% increase over the net income for fiscal 1997 of $4.1 million due primarily to the factors discussed above. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash increased $353,415 to $400,090 at March 31, 1999 from $46,675 at the beginning of the fiscal year. The cash increase reflects accounts receivable payments received that were not applied to our loan balance of March 31, 1999. Our working capital increased $8.2 million to $5.2 million at March 31, 1999 from $44.0 million at March 31, 1998, primarily due to an increase in accounts receivable and inventories less an increased amount due the bank, accounts payable and accrued expenses. At March 31, 1999 we had $123,371,228 in borrowings and approximately $21,628,772 million of unused credit under our $145 million credit facility. Our new credit facility is secured by a security interest in certain of our assets and properties including the capital stock of certain of our subsidiaries. We require capital principally to grow the business through acquisition, expansion of current operations, to pay off debt, and for general operating purposes. We currently estimate capital expenditures of approximately $1.0 million per annum are required to adequately maintain our current operations. Our primary sources of liquidity are expected to be cash flows from operations and our financing agreement with a consortium of banks let by the First National Bank of Boston for financing our accounts receivable and inventory under our $145,000,000 bank line of credit. The loan is collaterized by our 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 our option. The effective interest rate charged to us at March 31, 1999 was 7.65% which was based on a combination of 2% above the Eurodollar rate and 3/8% above the prime rate. We utilize cash generated from -10- operations to reduce short-term borrowings, which in turn acts to increase loan availability consistent with our financing agreement. Based upon current levels of operations and anticipated growth, we expect that sufficient cash flows will be generated from operations so that, combined with other financing alternatives available, a new credit facility, and other refinancing opportunities we will be able to meet all of our debt service, capital expenditure and working capital requirements. Operations for the year ended March 31, 1999, excluding non-cash charges for depreciation and amortization and deferred income taxes, provided cash of $3.0 million. Other changes in assets and liabilities resulting from operating activities for the year ended March 31, 1999 used cash of $20.3 million, resulting in net cash used in operating activities of $17.3 million. Investing activities, which principally consisted of acquisitions of property, plant and equipment, resulted in a use of cash of $891,390 for the year ended March 31, 1999. For the year ended March 31, 1999, financing activities provided cash of $18.6 million, principally consisting of increased borrowing and issuance of common stock. YEAR 2000 We do not expect that the cost to modify or replace software that we use, so that our software will properly recognize dates beyond December 31, 1999, will be material. If we are not successful in implementing any necessary changes to our software, we expect to then develop contingency plans to address any matters not corrected in a timely manner. We have initiated formal communications with our significant vendors and customers to determine the extent that the needs of those parties to modify their software to properly recognize dates beyond December 31, 1999 may affect us. There can be no guarantee that the systems of those other companies will be timely converted. Furthermore, there is no assurance that their conversion will be compatible with information included in our systems, without a material adverse effect on our business, financial condition or results of operations. To the extent that responses to such communications with our vendors are unsatisfactory, we expect to take steps to ensure that our vendors' have demonstrated that they have made the necessary modifications to their software. 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. -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 our definitive Proxy Statement with respect to our 1999 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, 1999 and 1998................................F-2 Consolidated Statement of Operations -- Years ended March 31, 1999, 1998 and 1997........................................................................F-3 Consolidated Statement of Shareholders' Equity -- Years ended March 31, 1999, 1998 and 1997..............................................................F-4 Consolidated Statement of Cash Flows -- Years ended March 31, 1999, 1998 and 1997........................................................................F-5 Selected Financial Data .............................................................F-6 Notes to Consolidated Financial Statements...........................................F-7 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, 1998 between the Registrant and Victor Jacobs. *10.2 Employment Contract dated as of August 1, 1998 between Registrant and Herman Jacobs. -13- Exhibit No. Description - ---------- ----------- *10.3 Employment Contract dated as of August 1, 1998 between the Registrant and Jack Jacobs. 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. (titled as Exhibit 10.14 to the Registrant's 1998 10-K and incorportated herein by reference). 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. (titled as Exhibit 10.15 to the Registrant's 1998 10-K and incorportated herein by reference). 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). -14- Exhibit No. Description - ---------- ----------- 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 & Company, P.C. *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 28, 1999 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 Chief Executive June 28, 1999 - ----------------------------------- Officer Victor Jacobs /s/ Herman Jacobs President and Director June 28, 1999 - ----------------------------------- Herman Jacobs /s/ David Shamilzadeh Chief Financial Officer, Chief Accounting June 28, 1999 - ----------------------------------- Officer and Director David Shamilzadeh /s/ Jack Jacobs Director June 28, 1999 - ----------------------------------- Jack Jacobs /s/ Ramon Montes Director June 28, 1999 - ----------------------------------- Ramon Montes /s/ Sol Naimark Director June 28, 1999 - ----------------------------------- Sol Naimark /s/ Jeffrey Berg Director June 28, 1999 - ----------------------------------- Jeffrey Berg
INDEPENDENT AUDITORS' REPORT ---------------------------- Board of Directors & Stockholders: Allou Health & Beauty Care, Inc. Brentwood, New York We have audited the accompanying consolidated balance sheets of Allou Health & Beauty Care, Inc. as of March 31, 1999 and 1998 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 1999, in conformity with generally accepted accounting principles. /s/ MAYER RISPLER & COMPANY, P.C. June 2, 1999 New York, New York F-1
ALLOU HEALTH AND BEAUTY CARE, INC. CONSOLIDATED BALANCE SHEETS ASSETS - ------ March 31, March 31, 1999 1998 ---- ---- Current Assets - -------------- Cash $ 400,090 $ 46,675 Accounts Receivable (less allowance for doubtful accounts of $1,615,965 at March 31, 1999 and $371,475 at March 31, 1998) 50,162,450 44,117,911 Inventories 122,917,911 112,530,659 Prepaid Purchases 24,682,481 9,816,237 Other Current Assets 12,876,642 1,864,481 ------------ ------------ Total Current Assets $211,039,574 $168,375,963 Property and Equipment, Less Accumulated Depreciation 3,839,906 3,613,223 Other Assets 5,027,901 6,395,110 ------------ ------------ TOTAL ASSETS $219,907,381 $178,384,296 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities Amounts Due Bank $123,371,228 $110,596,761 Current Portion of Long-Term Debt 707,652 645,233 Accounts Payable and Accrued Expenses 33,936,223 13,174,949 Deferred Income Taxes 832,000 - 0 - ------------ ------------ Total Current Liabilities $158,847,103 $124,416,943 ------------ ------------ Long Term Liabilities Long-Term Debt, Less Current Portion 724,234 1,354,462 ------------ ------------ Total Long Term Liabilities 724,234 1,354,462 ------------ ------------ TOTAL LIABILITIES $159,571,337 $125,771,405 ------------ ------------ Commitments and Contingencies Stockholders' Equity Preferred Stock, $.001 par value, 1,000,000 shares authorized, none issued and outstanding. Class A Common Stock, $.001 par value; 15,000,000 and 10,000,000 shares authorized; 5,339,122 and 4,569,850 shares issued and outstanding at March 31, 1999 and March 31, 1998 $ 5,339 $ 4,570 Class B Common Stock, $.001 par value; 2,200,000 shares authorized; 1,200,000 shares issued and outstanding at March 31, 1999 and March 31, 1998 1,200 1,200 Additional Paid-In Capital 29,956,769 23,582,240 Retained Earnings 30,372,736 29,024,881 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 60,336,044 52,612,891 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $219,907,381 $178,384,296 ============ ============
The accompanying notes are an integral part of these financial statements. F-2
ALLOU HEALTH AND BEAUTY CARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended March 31, 1999 1998 1997 ---- ---- ---- Revenues $337,389,261 $301,756,467 $285,311,441 Costs of Revenues 291,681,302 262,600,862 250,843,851 ------------ ------------ ------------ Gross Profit 45,707,959 39,155,605 34,467,590 ------------ ------------ ------------ Operating Expenses Warehouse and Delivery 10,524,534 9,317,132 8,592,051 Selling, General and Administrative 25,767,425 14,458,182 12,765,898 ------------ ------------ ------------ Total Operating Expenses 36,291,959 23,775,314 21,357,949 ------------ ------------ ------------ Income From Operations 9,416,000 15,380,291 13,109,641 ------------ ------------ ------------ Other Charges (Credits) - ----------------------- Interest Expense 10,176,243 8,482,859 6,614,797 Other (9,098) (13,168) (47,804) Gain on Sale of Minority Interest in Subsidiary (3,000,000) - 0 - - 0 - ------------- ------------- ------------- Total 7,167,145 8,469,691 6,566,993 ------------- ------------- ------------- Income Before Income Taxes 2,248,855 6,910,600 6,542,648 Provision for Income Taxes 901,000 2,630,390 2,484,113 ------------- ------------- ------------- NET INCOME $ 1,347,855 $ 4,280,210 $ 4,058,535 ============= ============= ============= Net Income Per Common Share: Basic $.22 $.74 $.71 === === === Diluted $.20 $.72 $.70 === === === Shares Used in Computing Earnings Per Common Share: Basic 6,061,431 5,757,328 5,752,225 ========= ========= ========= Diluted 6,800,143 5,972,392 5,809,082 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-3
ALLOU HEALTH AND BEAUTY CARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 1999, 1998 AND 1997 Common Additional Retained Stock Paid In Capital Earnings Total ------ --------------- -------- ----- Balance, March 31, 1996 $5,752 $23,476,508 $20,686,136 $44,168,396 Net Income - 0 - - 0 - 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 - 0 - 105,750 Net Income - 0 - - 0 - 4,280,210 4,280,210 ------- ----------- ----------- ----------- Balance, March 31, 1998 $5,770 $23,582,240 $29,024,881 $52,612,891 Net Proceeds From Exercise of Options 102 701,852 - 0 - 701,954 Issuance of Common Stock 667 5,672,677 - 0 - 5,673,344 Net Income - 0 - - 0 - 1,347,855 1,347,855 ------- ----------- ----------- ----------- Balance, March 31, 1999 $6,539 $29,956,769 $30,372,736 $60,336,044 ======= =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4
ALLOU HEALTH AND BEAUTY CARE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, 1999 1998 1997 ---- ---- ---- Cash Flows From Operating Activities - ------------------------------------ Net Income $ 1,347,855 $ 4,280,210 $ 4,058,535 Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities: Depreciation and Amortization 832,613 687,604 666,508 Deferred Income Taxes 832,000 - 0 - (30,422) Decrease (Increase) In Assets: Accounts Receivable (6,044,539) 4,306,971 (14,461,052) Inventories (10,387,252) (15,869,556) (24,970,782) Other Assets (24,679,102) (5,638,365) 4,160,904 Increase (Decrease) In Liabilities: Accounts Payable and Accrued Expenses 20,761,274 (823,692) 3,573,638 ---------- ----------- ----------- Net Cash Used In Operating Activities (17,337,151) (13,056,828) (27,002,671) ---------- ----------- ----------- Cash Flows From Investing Activities - ------------------------------------ Acquisition of Property and Equipment ( 891,390) (553,011) (626,255) ----------- ----------- ----------- Cash Flows From Financing Activities - ------------------------------------ Net Increase in Amounts Due Bank 12,774,467 13,856,508 25,931,152 Borrowings 108,704 215,771 2,010,376 Repayment of Debt (676,513) (598,046) (380,189) Net Proceeds from Exercise of Options and Issuance of Common Stock 6,375,298 105,750 - 0 - ----------- ------------ ------------ Net Cash Provided By Financing Activities 18,581,956 13,579,983 27,561,339 ----------- ------------ ------------ NET INCREASE (DECREASE) IN CASH 353,415 (29,856) (67,587) CASH AT BEGINNING OF YEAR 46,675 76,531 144,118 ------------ ------------- ------------ CASH AT END OF YEAR $ 400,090 $ 46,675 $ 76,531 ============ ============= ============ Supplemental Disclosures of Cash Flow Information: Cash Paid For: Interest $10,162,264 $ 8,364,098 $ 6,438,593 Income Taxes $ 1,474,304 $ 2,773,345 $ 2,302,293
The Company issued equipment notes for $108,704, $215,771 and $2,010,376 during the years ended March 31, 1999, 1998 and 1997, respectively. The accompanying notes are an integral part of these financial statements. F-5
SELECTED FINANCIAL DATA ALLOU HEALTH & BEAUTY CARE INC. INCOME STATEMENT DATA: Year Ended March 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands, except for per share data) Revenues $337,389 $301,756 $285,311 $273,322 $237,542 Costs of revenues 291,681 262,601 250,843 241,734 208,906 -------- -------- --------- -------- -------- Gross profit 45,708 39,155 34,468 31,588 28,636 Warehouse and delivery expense 10,525 9,317 8,592 8,063 6,864 Selling, general and administrative expense 25,767 14,458 12,766 11,894 10,250 --------- -------- --------- -------- -------- Income from operations 9,416 15,380 13,110 11,631 11,522 Interest and other 7,167 8,470 6,567 5,513 3,956 --------- --------- --------- -------- -------- Income before income taxes 2,249 6,910 6,543 6,118 7,566 --------- --------- --------- -------- -------- Net income $ 1,348 $ 4,280 $ 4,059 $ 3,757 $ 4,681 ========= ========= ========= ======== ======== Net income per common share 1 Basic $ .22 $ .74 $ .71 $ .66 $ .84 ========= ========= ========= ======== ======== Diluted $ .20 $ .72 $ .70 $ .65 $ .80 ========= ========= ========= ======== ======== BALANCE SHEET DATA: As of March 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Working capital $ 52,192 $ 43,959 $ 42,052 $ 37,557 $ 36,193 Total assets 219,907 178,384 161,348 126,185 106,214 Total long-term liabilities 724 1,354 1,841 560 814 Total liabilities 159,571 125,771 113,121 82,016 66,038 Stockholders' equity 60,336 52,613 48,227 44,168 40,176
- -------- 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. F-6 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 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. On June 23, 1998, the Company purchased certain assets of Direct Fragrance, Inc., a telemarketer of fragrances located in Florida for $2,761,671. The assets include inventories, property and equipment and intangibles. The accompanying financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. 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 manufactures hair and skin care products. The Company sells these products primarily to retailers throughout the United States. REVENUE RECOGNITION - The Company recognizes revenue at the time the products are shipped to the customer. FAIR VALUE OF FINANCIAL INSTRUMENTS - The recorded amounts of financial assets and liabilities at March 31, 1999 and 1998 approximate fair value due to the relatively short period of time between origination of the instruments and their expected realization, 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. 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. Concentration of credit risk with respect to trade accounts receivable is limited due to the number of entities and the size of those entities comprising the Company's customer base. INVENTORIES - Inventories, which consist of finished goods, are stated at the lower of average cost or market. 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. GOODWILL - Goodwill representing the excess of the purchase price over the fair value of net assets acquired is being amortized using the straight-line method, over periods ranging from fifteen to forty years. INCOME TAXES - The provision for income taxes is determined in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years (see note 12). F-7 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EARNINGS PER SHARE - Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares (see note 13). 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. 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. Because the Company does not employ derivatives, management believes that the adoption of the new Statement will have no effect on earnings or the financial position of the Company. 2. OTHER CURRENT ASSETS: Included in other current assets at March 31, 1999 are the following: (a) Loans to officers of $1,750,000 with interest being charged commensurate with the bank line of credit which was 7.16% at March 31, 1999. (b) Insurance reimbursement receivable of $6,835,812 for fire damage sustained on February 19, 1999. The Company has filed a claim in excess of $11,000,000 representing damaged inventories at its gross selling price. These financial statements reflect the damaged inventories at average cost only. (c) Prepaid advertising and marketing contracts totaling $1,393,333, which represent payment in advance of services performed. F-8 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT: Property and equipment consists of: March 31, March 31, Estimated 1999 1998 Useful Lives ---- ---- ------------ Machinery and Equipment $1,989,344 $1,904,604 5 years Furniture, Fixtures and Office Equipment 3,234,679 2,575,258 5-10 years Leasehold Improvements 2,861,482 2,714,254 10-33 years --------- --------- 8,085,505 7,194,116 Less: Accumulated Depreciation 4,245,599 3,580,893 --------- --------- $3,839,906 $3,613,223 ========== ========== Depreciation expense for the years ended March 31, 1999, 1998 and 1997 amounted to $664,706, $582,546 and $608,644, respectively. 4. OTHER ASSETS: Included in other assets are the following: a) Goodwill, net of amortization of $2,120,040 in fiscal 1999 and $1,696,279 in fiscal 1998 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. and Direct Fragrance Inc. Amortization expense for the years ended March 31, 1999, 1998 and 1997, amounted to $76,239, $66,864 and $57,864, respectively. b) Loans to officers of $2,016,665 in fiscal 1999 and $3,557,433 in fiscal 1998, which bear interest commensurate with the bank line of credit which was 7.16% at March 31, 1999 and 7.89% at March 31, 1998. 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 rates charged to the Company at March 31, 1999 and 1998 were 7.16% and 7.89%, respectively. F-9 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $53,145, which include interest at rates varying from 3/8% above the prime rate to 3.36% above the three year treasury rate. At March 31, 1999, the principal balance outstanding was $1,219,423. (b) A loan payable to the previous stockholder of M. Sobol, Inc. Interest is payable on the declining principal balance at 5.45% per annum, through April 1, 2000. At March 31, 1999 the principal balance outstanding was $212,462. The aggregate long-term debt is payable as follows: Year Ending March 31, --------- 2000 $ 707,652 2001 622,860 2002 101,374 ---------- $1,431,886 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of: March 31, March 31, 1999 1998 ---- ---- Accounts Payable, Purchases $28,669,375 $10,270,572 Selling, General & Administrative Expenses 3,995,110 1,722,656 Accrued Bank Interest 683,173 669,194 Accrued Payroll 588,565 512,527 ------------ ------------ $33,936,223 $13,174,949 8. COMMITMENTS AND CONTINGENCIES: 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 a facility located in California. As of March 31, 1999, total minimum annual rentals, excluding additional payments for real estate taxes and certain expenses, are as follows: F-10 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Year Ending March 31, -------- 2000 $878,684 2001 768,749 2002 625,939 2003 625,939 2004 625,939 2005-2006 730,261 Rent expense for the years ended March 31, 1999, 1998 and 1997 amounted to $1,074,675, $895,879 and $896,910, respectively. Rent expense for the year ended March 31, 1999 includes $144,271 paid for the Company's premises in Florida where rent is being paid on a month to month basis. 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. DEFINED CONTRIBUTION PLAN - Effective April 1, 1996, the Company established a defined contribution plan (401k) for substantially all employees not covered under collective bargaining agreements. All employees over the age of 21, with at least one year of service to the Company, can contribute from 2% to 15% of their gross salaries limited to Internal Revenue Service regulations. Contributions by the Company are optional. For the years ended March 31, 1999, 1998 and 1997, the Company did not contribute to this plan. EMPLOYMENT AGREEMENTS - The Company has three year employment agreements with three of its officers, which expire July 31, 2001. These agreements provide for each officer 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 year ended March 31, 1999, these officers received no bonus. For the years ended March 31, 1998 and 1997, such bonuses aggregated $206,482 and $145,221, respectively. 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. 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. CONTRACTS - The Company was obligated under contracts with internet portals, through its subsidiary The Fragrance Counter Inc., beginning April 1, 1998 and expiring through December 31, 2001, totaling $16,829,000. With the sale of a majority interest of The Fragrance Counter Inc. on April 23, 1999, as disclosed in note 16, these contracts are no longer an obligation of the Company. F-11 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 activities for the years ended March 31, 1999, 1998, and 1997 were as follows: 1999 1998 1997 ---- ---- ---- Options outstanding at beginning of year 2,036,025 1,381,150 1,184,500 Granted 559,750 1,136,100 375,000 Exercised (102,605) (17,625) - 0 - Cancelled (3,750) (463,600) (178,350) ---------- --------- --------- Options Outstanding at end of year 2,489,420 2,036,025 1,381,150 ========== ========= ========= Option price range at end of year $5.80 to $7.70 $5.80 to $10.00 $5.80 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 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123, net income per common share would have been reduced to the following pro forma amounts: March 31, March 31, March 31, 1999 1998 1997 ---- ---- ---- Net Income - Pro Forma $963,648 $4,060,011 $3,582,793 Earnings Per Common Share - Pro Forma $.14 $.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 1999, 1998 and 1997 was $1.51, $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 42%, 31% and 25%; Risk free interest rates approximating 4%, 6% and 5% and expected lives of 5 years, 4 years and 2.3 years, respectively. F-12 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY: On September 11, 1996, the stockholders of the Company approved an increase in the number of authorized shares of Class B Common Stock from 1,700,000 to 2,200,000 shares. On September 15, 1998, the stockholders of the Company approved an increase in the number of authorized shares of Class A common stock from 10,000,000 to 15,000,000 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. On December 15, 1998, the Company sold 666,667 shares of its Class A common stock at $9 per share in a private placement offering, which were registered on January 26, 1999. Net proceeds to the Company from the offering after deduction of associated expenses were $5,673,344. This sale included the sale of Warrants which were exercisable into a variable number of shares of Class A Common Stock if the market price fell below 115% ($10.35) of the sale price during three exercise periods which began 30 days after the effective date. As a result of the market price fluctuations of the Company's stock during these periods, the Company is obligated to issue an additional 79,876 shares of its Class A Common Stock in connection with the private placement. During the current period, employees of the Company exercised 102,605 of stock options, which resulted in net proceeds to the Company of $701,954. 11. SALE OF A MINORITY INTEREST: On April 27, 1998, certain officers of the Company advanced cash of $3,000,000 to The Fragrance Counter Inc., then a wholly owned subsidiary of the Company, and received a note for $3,000,000 bearing interest of 8.75% per annum with a maturity date of October 27, 1998. The note was convertible into a 17.5% equity interest in common stock of The Fragrance Counter Inc. if the note was not repaid by the due date. Additionally, these officers received warrants to purchase a 17.5% equity interest in The Fragrance Counter Inc. at a cost of $3,000,000 for a period of five years. On October 27, 1998 in lieu of repayment, these officers received a 17.5% equity interest in common stock of The Fragrance Counter Inc. Allou Health and Beauty Care Inc. retains 82.5% of the shares outstanding. As a result of this transaction, the Company recognized a gain of $3,000,000. F-13 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES: The components of income tax expense are summarized as follows: Years Ended March 31, 1999 1998 1997 ---- ---- ---- Current: Federal $ (17,000) $2,153,045 $2,072,291 State 86,000 477,345 411,822 -------- ---------- ---------- 69,000 2,630,390 2,484,113 -------- --------- ---------- Deferred: Federal 704,000 - 0 - - 0 - State 128,000 - 0 - - 0 - -------- ---------- ----------- 832,000 - 0 - - 0 - -------- ---------- ----------- Total $901,000 $2,630,390 $2,484,113 ======== ========= =========== The following is a reconciliation of the statutory income tax rate to the total effective tax rates:
Years Ended March 31, 1999 1998 1997 ---- ---- ---- 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 7.2% 5.3% 5.3% Net Operating Loss Carryforward from Subsidiary (1.2%) (1.2%) (1.3%) ----- ----- ----- Total Effective Tax Rates 40.0% 38.1% 38.0% ===== ===== ===== Deferred tax assets (liabilities) are comprised of the following: March 31, 1999 1998 ---- ---- Allowance for Uncollectible Accounts Receivable $ 256,000 $ - 0 - Gain on Sale of Minority Interest in Subsidiary (1,088,000) - 0 - --------- ---------- Net Deferred Tax Liability $ (832,000) $ - 0 - ========== ==========
F-14 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At March 31, 1999, net operating loss carryforwards of approximately $94,000 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. 13. EARNINGS PER SHARE: The Company accounts for earnings per share in accordance with Statement of Financial Accounting Standard No. 128, "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, 1999 1998 1997 ---- ---- ---- Basic 6,061,431 5,757,328 5,752,225 Assumed exercise of stock options 738,712 215,064 56,857 ---------- --------- ---------- Diluted 6,800,143 5,972,392 5,809,082 ========== ========= ========= 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. For the year ended March 31, 1999, all outstanding stock options were included in the computation of diluted earnings per share. For the years ended March 31, 1998 and 1997, options to purchase 415,300 and 548,400 shares, 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. 14. RELATED PARTY TRANSACTIONS: The Company purchases inventories from various entities that are controlled by certain of the Company's officers. For the years ended March 31, 1999, 1998 and 1997, purchases from related parties amounted to $5,867,482, $4,443,634 and $1,705,355, respectively., with $8,838,312 of prepaid purchases at March 31, 1999. 15. SEGMENT DATA: Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is its Chief Executive Officer. The operating segments of the Company are managed separately because each segment represents a strategic business unit that offers different products or a different customer base. F-15 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's reportable operating segments includes: a) Wholesale distribution of cosmetics, fragrances, health and beauty aids and non-perishable food products. b) Wholesale distribution of pharmaceuticals. c) Manufacturing of hair and skin care products. d) Sales of fragrances through the internet. The accounting policies of the Company's operating segments are the same as those described in Note 1 Summary of Significant Accounting Policies. The Company evaluates the performance of its segments based on segment profit, which includes the overhead charges directly attributable to the segment and excludes certain expenses, which are managed outside the reportable segments. Corporate expenses including interest and income taxes are being allocated to the wholesale distribution segment only. Operating segment data for each of the three years in the period ended March 31, 1999 was as follows:
Internet Wholesale Pharmaceuticals Sales Intersegment Distribution Distribution Manufacturing Operations Transactions Consolidated ------------- --------------- ------------- ---------- ------------ ------------ Year Ended March 31, 1999 - ------------------------- Revenue $292,004,548 $46,961,918 $1,867,979 $3,214,111 $(6,659,295) $337,389,261 Depreciation and Amortization 624,514 14,189 106,079 87,831 - 0 - 832,613 Income (Loss) From Operations 20,758,050 424,208 (1,630,531) (10,135,727) - 0 - 9,416,000 Segment Assets 200,889,277 12,744,061 2,252,195 4,021,848 - 0 - 219,907,381 Year Ended March 31, 1998 Revenue $256,603,011 $45,856,322 $1,661,073 $664,250 $(3,028,189) $301,756,467 Depreciation and Amortization 569,757 23,329 94,518 - 0 - - 0 - 687,604 Income (Loss) From Operations 16,905,035 413,980 (1,016,410) (922,314) - 0 - 15,380,291 Segment Assets 166,793,002 8,836,726 2,002,601 751,967 - 0 - 178,384,296 Year Ended March 31, 1997 Revenue $234,482,864 $48,906,547 $1,922,030 $ - 0 - $ - 0 - $285,311,441 Depreciation and Amortization 578,015 27,236 61,257 - 0 - - 0 - 666,508 Income (Loss) From Operations 13,725,130 84,189 (699,678) - 0 - - 0 - 13,109,641 Segment Assets 148,608,984 10,802,877 1,935,934 - 0 - - 0 - 161,347,795
F-16 ALLOU HEALTH AND BEAUTY CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENT: On April 23, 1999, the Company sold 69% of its interest in The Fragrance Counter Inc. for net proceeds of $11,296,584 in cash and $8,900,000 in notes, bearing interest at prime plus .375%. $400,000 is due in July, 1999 plus accrued interest and $8,500,000 is due in April, 2000 plus accrued interest. The Company retains a 13% minority interest. 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Diluted Net Earnings (Loss) Gross Income Per Common Quarters Ended Revenues Profit (Loss) Share - -------------- -------- ------ ------- --------------- June 30, 1998 $68,634,713 $10,343,797 $ 697,152 $ .11 June 30, 1997 $64,855,684 $ 9,706,275 $ 987,970 $ .16 September 30, 1998 $89,667,276 $11,366,851 $ 236,744 $ .04 September 30, 1997 $83,341,115 $ 9,290,085 $ 1,228,750 $ .21 December 31, 1998 $89,542,944 $11,837,206 $ 1,584,127 $ .24 December 31, 1997 $76,349,440 $10,653,164 $ 1,322,032 $ .22 March 31, 1999 $89,544,328 $12,160,105 $ (1,170,164) $(.15) March 31, 1998 $77,210,228 $9,506,081 $ 741,458 $ .12
F-17 Schedule VIII ------------- ALLOU HEALTH & BEAUTY CARE, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E --------- -------- Additions Deductions -------- --------- ---------- Balance at Charged to Write off of Balance Beginning costs and uncollectible at end Description of period expenses accounts of period ----------- ---------- ---------- ------------- --------- 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 March 31, 1999 Allowance for Doubtful Accounts $371,475 $1,465,000 $220,510 $1,615,965
S-1 INDEX TO EXHIBITS ----------------- 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, 1998 between the Registrant and Victor Jacobs. *10.2 Employment Contract dated as of August 1, 1998 between Registrant and Herman Jacobs. *10.3 Employment Contract dated as of August 1, 1998 between the Registrant and Jack Jacobs. 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). Exhibit No. Description - ---------- ----------- 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 (filed as Exhibit 10.14 to the Registrant's 1998 Form 10-K and incorporated herein by reference). 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. (filed as Exhibit 10.15 to the Registrant's 1998 Form 10-K and incorporated herein by reference). 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 & Company, P.C. *27 Financial Data Schedule - ---------------- * Filed herewith EX-10.1 2 EMPLOYMENT AGREEMENT & VICTOR JACOBS EMPLOYMENT AGREEMENT AGREEMENT made as of August 1, 1998 between ALLOU HEALTH & BEAUTY CARE, INC., a Delaware corporation with offices at 50 Emjay Boulevard, Brentwood, New York 11717 ("Company"), and VICTOR JACOBS, residing at 176 Penn Street, Brooklyn, New York 11211 ("Employee"). W I T N E S S E T H : WHEREAS, Employee has been employed by the Company and has rendered substantial services to the Company; and WHEREAS, the Company believes that the contributions that have been made and can continue to be made by Employee toward the success of the business of the Company are valuable and wishes to retain the services of Employee for its benefit; and WHEREAS, the Company desires to continue to retain the services of Employee as its Chairman of the Board and Chief Executive Officer; and WHEREAS, Employee is willing to continue as such upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Company and Employee agree as follows: 1. Term. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions herein contained for a term commencing August 1, 1998 (the "Commencement Date") and terminating on July 31, 2001 ("Original Term") unless sooner terminated as herein provided (the "Term"). 2. Employment Duties. (a) During the Term, Employee shall serve as the Chairman of the Board and Chief Executive Officer of the Company and Employee shall have such responsibilities, powers and duties as are substantially consistent with his present responsibilities, powers and duties. Employee shall be subject to the reasonable direction of the Board of Directors of the Company. Employee agrees that during the Term he will devote his full time and attention during regular business hours to the business and affairs of the Company except during vacation periods and periods of illness or incapacity. Notwithstanding the foregoing and so long as his activities do not interfere with the performance of his duties hereunder, Employee will be permitted to acquire, own or deal in securities or other investments except that, without the prior written consent of the Company's Board of Directors, Employee may not invest in any business which has business relations or competes with the Company or any of its subsidiaries or affiliates unless the securities of such business are listed on a national securities exchange or traded in the over-the-counter market and the interest of Employee does not exceed one (1%) percent of the outstanding securities of any class of that business. In addition, nothing contained herein shall prevent Employee from serving as a director or trustee of any corporation or other organization, and in any other capacity with any non-commercial enterprise, PROVIDED THAT such service does not materially interfere with the performance of his duties hereunder and such business or organization does not compete with the Company or any of its subsidiaries or affiliates. (b) It is understood that, except for limited business travel which shall be only such as is reasonably required for him to perform his duties hereunder, Employee's duties under this paragraph 2 are performed at the Company's principal executive office in Brentwood, New York. - 2 - 3. Compensation and Benefits. (a) For the full, prompt and faithful performance of all of the duties and services to be performed by Employee hereunder, the Company agrees to pay Employee a salary ("Base Salary") at the rate of Three Hundred Thousand Dollars ($300,000) per year, payable in equal semi-monthly installments or in such other manner as shall be mutually agreeable to Employee and the Company. The Company's Board of Directors may, in its discretion, at any time and from time to time, increase such Base Salary for Employee and grant Employee other compensation, including bonuses, in addition to that provided for hereunder. Employee's compensation shall be reviewed at least once each year. Any increase in Base Salary or other compensation shall in no way limit or reduce any other obligation of the Company under this Agreement. (b) As additional compensation, Employee shall receive a sum equal to: (i) three percent (3%) of the amount of any increase in the Company's earnings before interest and taxes ("EBIT") (as hereinafter defined) at the end of each fiscal year during the term of this Agreement as compared to the EBIT for the prior fiscal year (an "Increase") for amounts of such Increase up to $2,000,000; (ii) two percent (2%) of the amount of any Increase that is greater than $2,000,000 but less than or equal to $3,000,000; and (iii) one percent (1%) of the amount of any Increase exceeding $3,000,000. For the purposes of this Agreement, "EBIT" shall be the annual earnings of the Company for the fiscal year computed before any charges for interest expense and any federal, state or other taxes relating to income, and shall be determined in accordance with generally accepted accounting principles by the certified public accountants regularly employed by the Company whose determination shall be binding on the parties. The computation of "EBIT" shall be made as soon as practicable after the end of each fiscal year and may be paid in full after the end of each fiscal year. If at the end of any fiscal year, the - 3 - Company's EBIT does not exceed the EBIT for the prior fiscal year, Employee shall not receive any additional compensation as set forth in this section 3(b). (c) In addition to the compensation provided for herein, Employee shall be entitled to participate in any bonus, incentive compensation, retirement, profit-sharing, medical payment, disability, health or life insurance and other benefit arrangements which may be or become available to executives of the Company. (d) Throughout the Original Term, the Company shall continue to provide Employee with life insurance with the beneficiary thereof to be designated by Employee in an amount not less than that in effect for Employee at the date hereof and shall pay all premiums due thereunder. (e) Employee shall be entitled to reimbursement, not less frequently than monthly, for expenses reasonably incurred by him in furtherance of the business of the Company and in the performance of his duties hereunder, on an accountable basis with such substantiation as the Company may at the time require from its senior executive officers. (f) During the Term, Employee shall be entitled to continue to receive the fringe benefits and perquisites presently provided for him by the Company. In order to enable Employee to most effectively perform his duties hereunder, the Company will provide Employee with the use of an automobile to be comparable and equivalent to the price category car presently used by Employee, under a two-year replacement program, and payment of all expenses associated therewith. (g) Employee shall be entitled to four (4) weeks of vacation in each twelve (12) month period during the Term, to be taken at such times as may be mutually and reasonably agreed upon by the Company and Employee. - 4 - 4. Termination upon Death. The Term shall terminate on the date of Employee's death, except that Employee's Base Salary shall be paid to his estate for a period of one (1) year after the date of his death. If Employee was entitled to receive any bonus, incentive or similar form of compensation under any arrangement with the Company which was to be based upon a period extending beyond the date of Employee's death, payment of a portion thereof, equal to the amount which would have been payable for the full period in which death occurs, multiplied by a fraction, the numerator of which is the number of days in such period through the date of death and the denominator of which is the total number of days in the full period, shall be made at the time it would have been made in accordance with such arrangement. 5. Disability. If during the Term Employee shall, because of physical or mental illness or incapacity, become totally unable to perform, or in the judgment of the Company evidenced by a resolution adopted in good faith by a majority of its Board of Directors unable adequately to perform, the duties and services required of him pursuant to paragraph 2(a) for a period of one hundred eighty (180) consecutive days, the Company may, upon at least ninety (90) days prior written notice given at any time after the expiration of such one hundred eighty (180) day period to Employee of its intention to do so, accelerate the end of the Term to such date as may be set forth in such notice; PROVIDED, HOWEVER, that the end of the Term shall not be accelerated and the Term shall remain in full force and effect if Employee shall have resumed the full-time performance of his duties hereunder prior to the effective date of such proposed termination of the Term. In case of such acceleration of the end of the Term, Employee shall be entitled to receive, and the Company agrees to pay, his Base Salary for a period of one (1) year after the date of his termination due to disability and a pro rata portion of the amount of any bonus, incentive or similar form of compensation which - 5 - he would have otherwise been entitled to for the period in which the acceleration of the end of the Term occurs. 6. Confidential Information. All confidential information which Employee may now know or which hereby may become known to Employee relating to the business of the Company or any customer or supplier of the Company shall not be disclosed by Employee to any other person or entity either during the Term or thereafter. Such confidential information shall be returned to the Company upon termination of Employee's employment. 7. Non-Competition. (a) Employee agrees that during the Term and for a period of one (1) year after the termination of his employment with the Company, he will not (i) engage in or have any interest in any person, firm or corporation which engages, directly or indirectly, in competition with the Company or its subsidiaries or affiliates in the United States, in the sale of products or services of the type in which Employee has been directly involved during the Term in or have any interest in any person, firm or company which engages, directly or indirectly, in competition with the Company or its subsidiaries or affiliates in the United States for the business of any entity which was a customer of the Company or its subsidiaries or affiliates at any time during the Term or (ii) solicit any employees of the Company or any of its parents, subsidiaries or affiliates to leave their employ. (b) For the purposes of this paragraph 7, Employee will be deemed directly or indirectly engaged in a business if he participates in such business as a proprietor, partner, joint venturer, shareholder, director, officer, lender, manager, employee, consultant, adviser or agent or if he in any way controls such business. Employee shall not for purposes of this paragraph 7 be deemed a shareholder or lender if he holds less than one (1%) of the outstanding securities of any class of any publicly- or privately-owned corporation engaged in the same or similar business to that - 6 - of the Company or its subsidiaries or affiliates, PROVIDED THAT Employee shall not be in a control position (individually or as part of a group) with regard to such corporation. (c) In the event of a breach or threatened breach by Employee of any of the provisions of this paragraph 7, the Company shall be entitled, upon establishing the existence of such breach or threatened breach, to an injunction to be issued by any tribunal of competent jurisdiction to restrain Employee from committing or continuing any such violation. In any proceeding for an injunction and upon any motion for temporary or permanent injunction, Employee agrees that his ability to answer in damages shall not be a bar or be interposed as a defense to the granting of such temporary or permanent injunction against him. Employee acknowledges that the Company will not have an adequate remedy at law in the event of any breach by him as aforesaid and that the Company may suffer irreparable damage and injury in the event of such a breach by him. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedy or remedies available to the Company, including, without limitation, the recovery of damages from Employee. 8. Representation by Employee. Employee represents and warrants that he has not entered into any other agreement or understanding which is inconsistent with the execution of this Agreement or which in any way will prevent full compliance by him with the terms of this Agreement. 9. Assignability. This Agreement may not be assigned by Employee and all of its terms and conditions shall be binding upon and inure to the benefit of Employee and his heirs and legal representatives and the Company and its successors and assigns. Successors of the Company shall include, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company whether by merger, consolidation, purchase, lease or otherwise and such successor shall thereafter be deemed the "Company" for purposes hereof. - 7 - 10. Notices. All notices, requests, demands and other communications provided for hereby shall be in writing and shall be deemed to have been duly given when delivered personally, sent by facsimile transmission (with receipt confirmed) or two days after being sent by registered or certified mail, return receipt requested, to the party entitled thereto at the address first above written or to such changed address as the addressee may have given by a similar notice. 11. Modification. This Agreement may be modified or amended only by an instrument in writing signed by Employee and the Company and any provision hereof may be waived only by an instrument in writing signed by the party hereto against whom any such waiver is sought to be enforced. 12. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision contained herein. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 14. Captions. The captioned headings here convenience of reference only and are not intended to be construed to have any substantive effect. - 8 - IN WITNESS WHEREOF, the parties hereto have this Agreement as of the date first above written. ALLOU HEALTH & BEAUTY CARE, INC. /s/ Herman Jacobs By: ------------------------------------- Name: Herman Jacobs Title: President /s/ VICTOR JACOBS ------------------------------------- VICTOR JACOBS - 9 - EX-10.2 3 EMPLOYMENT AGREEMENT & HERMAN JACOBS EMPLOYMENT AGREEMENT AGREEMENT made as of August 1, 1998 between ALLOU HEALTH & BEAUTY CARE, INC., a Delaware corporation with offices at 50 Emjay Boulevard, Brentwood, New York 11717 ("Company"), and HERMAN JACOBS, residing at 116 Rutledge Street, Brooklyn, New York 11211 ("Employee"). W I T N E S S E T H : WHEREAS, Employee has been employed by the Company and has rendered substantial services to the Company; and WHEREAS, the Company believes that the contributions that have been made and can continue to be made by Employee toward the success of the business of the Company are valuable and wishes to retain the services of Employee for its benefit; and WHEREAS, the Company desires to continue to retain the services of Employee as its President and Chief Operating Officer; and WHEREAS, Employee is willing to continue as such upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Company and Employee agree as follows: 1. Term. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions herein contained for a term commencing August 1, 1998 (the "Commencement Date") and terminating on July 31, 2001 ("Original Term") unless sooner terminated as herein provided (the "Term"). 2. Employment Duties. (a) During the Term, Employee shall serve as the President and Chief Operating Officer of the Company and Employee shall have such responsibilities, powers and duties as are substantially consistent with his present responsibilities, powers and duties. Employee shall be subject to the reasonable direction of the Board of Directors of the Company. Employee agrees that during the Term he will devote his full time and attention during regular business hours to the business and affairs of the Company except during vacation periods and periods of illness or incapacity. Notwithstanding the foregoing and so long as his activities do not interfere with the performance of his duties hereunder, Employee will be permitted to acquire, own or deal in securities or other investments except that, without the prior written consent of the Company's Board of Directors, Employee may not invest in any business which has business relations or competes with the Company or any of its subsidiaries or affiliates unless the securities of such business are listed on a national securities exchange or traded in the over-the-counter market and the interest of Employee does not exceed one (1%) percent of the outstanding securities of any class of that business. In addition, nothing contained herein shall prevent Employee from serving as a director or trustee of any corporation or other organization, and in any other capacity with any non-commercial enterprise, PROVIDED THAT such service does not materially interfere with the performance of his duties hereunder and such business or organization does not compete with the Company or any of its subsidiaries or affiliates. (b) It is understood that, except for limited business travel which shall be only such as is reasonably required for him to perform his duties hereunder, Employee's duties under this paragraph 2 are performed at the Company's principal executive office in Brentwood, New York. - 2 - 3. Compensation and Benefits. (a) For the full, prompt and faithful performance of all of the duties and services to be performed by Employee hereunder, the Company agrees to pay Employee a salary ("Base Salary") at the rate of Three Hundred Thousand Dollars ($300,000) per year, payable in equal semi-monthly installments or in such other manner as shall be mutually agreeable to Employee and the Company. The Company's Board of Directors may, in its discretion, at any time and from time to time, increase such Base Salary for Employee and grant Employee other compensation, including bonuses, in addition to that provided for hereunder. Employee's compensation shall be reviewed at least once each year. Any increase in Base Salary or other compensation shall in no way limit or reduce any other obligation of the Company under this Agreement. (b) As additional compensation, Employee shall receive a sum equal to: (i) three percent (3%) of the amount of any increase in the Company's earnings before interest and taxes ("EBIT") (as hereinafter defined) at the end of each fiscal year during the term of this Agreement as compared to the EBIT for the prior fiscal year (an "Increase") for amounts of such Increase up to $2,000,000; (ii) two percent (2%) of the amount of any Increase that is greater than $2,000,000 but less than or equal to $3,000,000; and (iii) one percent (1%) of the amount of any Increase exceeding $3,000,000. For the purposes of this Agreement, "EBIT" shall be the annual earnings of the Company for the fiscal year computed before any charges for interest expense and any federal, state or other taxes relating to income, and shall be determined in accordance with generally accepted accounting principles by the certified public accountants regularly employed by the Company whose determination shall be binding on the parties. The computation of "EBIT" shall be made as soon as practicable after the end of each fiscal year and may be paid in full after the end of each fiscal year. If at the end of any fiscal year, the - 3 - Company's EBIT does not exceed the EBIT for the prior fiscal year, Employee shall not receive any additional compensation as set forth in this section 3(b). (c) In addition to the compensation provided for herein, Employee shall be entitled to participate in any bonus, incentive compensation, retirement, profit-sharing, medical payment, disability, health or life insurance and other benefit arrangements which may be or become available to executives of the Company. (d) Throughout the Original Term, the Company shall continue to provide Employee with life insurance with the beneficiary thereof to be designated by Employee in an amount not less than that in effect for Employee at the date hereof and shall pay all premiums due thereunder. (e) Employee shall be entitled to reimbursement, not less frequently than monthly, for expenses reasonably incurred by him in furtherance of the business of the Company and in the performance of his duties hereunder, on an accountable basis with such substantiation as the Company may at the time require from its senior executive officers. (f) During the Term, Employee shall be entitled to continue to receive the fringe benefits and perquisites presently provided for him by the Company. In order to enable Employee to most effectively perform his duties hereunder, the Company will provide Employee with the use of an automobile to be comparable and equivalent to the price category car presently used by Employee, under a two-year replacement program, and payment of all expenses associated therewith. (g) Employee shall be entitled to four (4) weeks of vacation in each twelve (12) month period during the Term, to be taken at such times as may be mutually and reasonably agreed upon by the Company and Employee. - 4 - 4. Termination upon Death. The Term shall terminate on the date of Employee's death, except that Employee's Base Salary shall be paid to his estate for a period of one (1) year after the date of his death. If Employee was entitled to receive any bonus, incentive or similar form of compensation under any arrangement with the Company which was to be based upon a period extending beyond the date of Employee's death, payment of a portion thereof, equal to the amount which would have been payable for the full period in which death occurs, multiplied by a fraction, the numerator of which is the number of days in such period through the date of death and the denominator of which is the total number of days in the full period, shall be made at the time it would have been made in accordance with such arrangement. 5. Disability. If during the Term Employee shall, because of physical or mental illness or incapacity, become totally unable to perform, or in the judgment of the Company evidenced by a resolution adopted in good faith by a majority of its Board of Directors unable adequately to perform, the duties and services required of him pursuant to paragraph 2(a) for a period of one hundred eighty (180) consecutive days, the Company may, upon at least ninety (90) days prior written notice given at any time after the expiration of such one hundred eighty (180) day period to Employee of its intention to do so, accelerate the end of the Term to such date as may be set forth in such notice; PROVIDED, HOWEVER, that the end of the Term shall not be accelerated and the Term shall remain in full force and effect if Employee shall have resumed the full-time performance of his duties hereunder prior to the effective date of such proposed termination of the Term. In case of such acceleration of the end of the Term, Employee shall be entitled to receive, and the Company agrees to pay, his Base Salary for a period of one (1) year after the date of his termination due to disability and a pro rata portion of the amount of any bonus, incentive or similar form of compensation which - 5 - he would have otherwise been entitled to for the period in which the acceleration of the end of the Term occurs. 6. Confidential Information. All confidential information which Employee may now know or which hereby may become known to Employee relating to the business of the Company or any customer or supplier of the Company shall not be disclosed by Employee to any other person or entity either during the Term or thereafter. Such confidential information shall be returned to the Company upon termination of Employee's employment. 7. Non-Competition. (a) Employee agrees that during the Term and for a period of one (1) year after the termination of his employment with the Company, he will not (i) engage in or have any interest in any person, firm or corporation which engages, directly or indirectly, in competition with the Company or its subsidiaries or affiliates in the United States, in the sale of products or services of the type in which Employee has been directly involved during the Term in or have any interest in any person, firm or company which engages, directly or indirectly, in competition with the Company or its subsidiaries or affiliates in the United States for the business of any entity which was a customer of the Company or its subsidiaries or affiliates at any time during the Term or (ii) solicit any employees of the Company or any of its parents, subsidiaries or affiliates to leave their employ. (b) For the purposes of this paragraph 7, Employee will be deemed directly or indirectly engaged in a business if he participates in such business as a proprietor, partner, joint venturer, shareholder, director, officer, lender, manager, employee, consultant, adviser or agent or if he in any way controls such business. Employee shall not for purposes of this paragraph 7 be deemed a shareholder or lender if he holds less than one (1%) of the outstanding securities of any class of any publicly- or privately-owned corporation engaged in the same or similar business to that - 6 - of the Company or its subsidiaries or affiliates, PROVIDED THAT Employee shall not be in a control position (individually or as part of a group) with regard to such corporation. (c) In the event of a breach or threatened breach by Employee of any of the provisions of this paragraph 7, the Company shall be entitled, upon establishing the existence of such breach or threatened breach, to an injunction to be issued by any tribunal of competent jurisdiction to restrain Employee from committing or continuing any such violation. In any proceeding for an injunction and upon any motion for temporary or permanent injunction, Employee agrees that his ability to answer in damages shall not be a bar or be interposed as a defense to the granting of such temporary or permanent injunction against him. Employee acknowledges that the Company will not have an adequate remedy at law in the event of any breach by him as aforesaid and that the Company may suffer irreparable damage and injury in the event of such a breach by him. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedy or remedies available to the Company, including, without limitation, the recovery of damages from Employee. 8. Representation by Employee. Employee represents and warrants that he has not entered into any other agreement or understanding which is inconsistent with the execution of this Agreement or which in any way will prevent full compliance by him with the terms of this Agreement. 9. Assignability. This Agreement may not be assigned by Employee and all of its terms and conditions shall be binding upon and inure to the benefit of Employee and his heirs and legal representatives and the Company and its successors and assigns. Successors of the Company shall include, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company whether by merger, consolidation, purchase, lease or otherwise and such successor shall thereafter be deemed the "Company" for purposes hereof. - 7 - 10. Notices. All notices, requests, demands and other communications provided for hereby shall be in writing and shall be deemed to have been duly given when delivered personally, sent by facsimile transmission (with receipt confirmed) or two days after being sent by registered or certified mail, return receipt requested, to the party entitled thereto at the address first above written or to such changed address as the addressee may have given by a similar notice. 11. Modification. This Agreement may be modified or amended only by an instrument in writing signed by Employee and the Company and any provision hereof may be waived only by an instrument in writing signed by the party hereto against whom any such waiver is sought to be enforced. 12. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision contained herein. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 14. Captions. The captioned headings here convenience of reference only and are not intended to be construed to have any substantive effect. IN WITNESS WHEREOF, the parties hereto have this Agreement as of the date first above written. ALLOU HEALTH & BEAUTY CARE, INC. By: /s/ Victor Jacobs --------------------------------- Name: Victor Jacobs Title: Chief Executive Officer - 8 - /s/ HERMAN JACOBS ---------------------------- HERMAN JACOBS - 9 - EX-10.3 4 EMPLOYMENT AGREEMENT & JACK JACOBS EMPLOYMENT AGREEMENT AGREEMENT made as of August 1, 1998 between ALLOU HEALTH & BEAUTY CARE, INC., a Delaware corporation with offices at 50 Emjay Boulevard, Brentwood, New York 11717 ("Company"), and JACK JACOBS, residing at 562 Bedford Avenue, Brooklyn, New York 11211 ("Employee"). W I T N E S S E T H : WHEREAS, Employee has been employed by the Company and has rendered substantial services to the Company; and WHEREAS, the Company believes that the contributions that have been made and can continue to be made by Employee toward the success of the business of the Company are valuable and wishes to retain the services of Employee for its benefit; and WHEREAS, the Company desires to continue to retain the services of Employee as its Vice President of Purchasing and Secretary; and WHEREAS, Employee is willing to continue as such upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Company and Employee agree as follows: 1. Term. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions herein contained for a term commencing August 1, 1998 (the "Commencement Date") and terminating on July 31, 2001 ("Original Term") unless sooner terminated as herein provided (the "Term"). 2. Employment Duties. (a) During the Term, Employee shall serve as the Vice President of Purchasing and Secretary of the Company and Employee shall have such responsibilities, powers and duties as are substantially consistent with his present responsibilities, powers and duties. Employee shall be subject to the reasonable direction of the Board of Directors of the Company. Employee agrees that during the Term he will devote his full time and attention during regular business hours to the business and affairs of the Company except during vacation periods and periods of illness or incapacity. Notwithstanding the foregoing and so long as his activities do not interfere with the performance of his duties hereunder, Employee will be permitted to acquire, own or deal in securities or other investments except that, without the prior written consent of the Company's Board of Directors, Employee may not invest in any business which has business relations or competes with the Company or any of its subsidiaries or affiliates unless the securities of such business are listed on a national securities exchange or traded in the over-the-counter market and the interest of Employee does not exceed one (1%) percent of the outstanding securities of any class of that business. In addition, nothing contained herein shall prevent Employee from serving as a director or trustee of any corporation or other organization, and in any other capacity with any non-commercial enterprise, PROVIDED THAT such service does not materially interfere with the performance of his duties hereunder and such business or organization does not compete with the Company or any of its subsidiaries or affiliates. (b) It is understood that, except for limited business travel which shall be only such as is reasonably required for him to perform his duties hereunder, Employee's duties under this paragraph 2 are performed at the Company's principal executive office in Brentwood, New York. - 2 - 3. Compensation and Benefits. (a) For the full, prompt and faithful performance of all of the duties and services to be performed by Employee hereunder, the Company agrees to pay Employee a salary ("Base Salary") at the rate of Three Hundred Thousand Dollars ($300,000) per year, payable in equal semi-monthly installments or in such other manner as shall be mutually agreeable to Employee and the Company. The Company's Board of Directors may, in its discretion, at any time and from time to time, increase such Base Salary for Employee and grant Employee other compensation, including bonuses, in addition to that provided for hereunder. Employee's compensation shall be reviewed at least once each year. Any increase in Base Salary or other compensation shall in no way limit or reduce any other obligation of the Company under this Agreement. (b) As additional compensation, Employee shall receive a sum equal to: (i) three percent (3%) of the amount of any increase in the Company's earnings before interest and taxes ("EBIT") (as hereinafter defined) at the end of each fiscal year during the term of this Agreement as compared to the EBIT for the prior fiscal year (an "Increase") for amounts of such Increase up to $2,000,000; (ii) two percent (2%) of the amount of any Increase that is greater than $2,000,000 but less than or equal to $3,000,000; and (iii) one percent (1%) of the amount of any Increase exceeding $3,000,000. For the purposes of this Agreement, "EBIT" shall be the annual earnings of the Company for the fiscal year computed before any charges for interest expense and any federal, state or other taxes relating to income, and shall be determined in accordance with generally accepted accounting principles by the certified public accountants regularly employed by the Company whose determination shall be binding on the parties. The computation of "EBIT" shall be made as soon as practicable after the end of each fiscal year and may be paid in full after the end of each fiscal year. If at the end of any fiscal year, the - 3 - Company's EBIT does not exceed the EBIT for the prior fiscal year, Employee shall not receive any additional compensation as set forth in this section 3(b). (c) In addition to the compensation provided for herein, Employee shall be entitled to participate in any bonus, incentive compensation, retirement, profit-sharing, medical payment, disability, health or life insurance and other benefit arrangements which may be or become available to executives of the Company. (d) Throughout the Original Term, the Company shall continue to provide Employee with life insurance with the beneficiary thereof to be designated by Employee in an amount not less than that in effect for Employee at the date hereof and shall pay all premiums due thereunder. (e) Employee shall be entitled to reimbursement, not less frequently than monthly, for expenses reasonably incurred by him in furtherance of the business of the Company and in the performance of his duties hereunder, on an accountable basis with such substantiation as the Company may at the time require from its senior executive officers. (f) During the Term, Employee shall be entitled to continue to receive the fringe benefits and perquisites presently provided for him by the Company. In order to enable Employee to most effectively perform his duties hereunder, the Company will provide Employee with the use of an automobile to be comparable and equivalent to the price category car presently used by Employee, under a two-year replacement program, and payment of all expenses associated therewith. (g) Employee shall be entitled to four (4) weeks of vacation in each twelve (12) month period during the Term, to be taken at such times as may be mutually and reasonably agreed upon by the Company and Employee. - 4 - 4. Termination upon Death. The Term shall terminate on the date of Employee's death, except that Employee's Base Salary shall be paid to his estate for a period of one (1) year after the date of his death. If Employee was entitled to receive any bonus, incentive or similar form of compensation under any arrangement with the Company which was to be based upon a period extending beyond the date of Employee's death, payment of a portion thereof, equal to the amount which would have been payable for the full period in which death occurs, multiplied by a fraction, the numerator of which is the number of days in such period through the date of death and the denominator of which is the total number of days in the full period, shall be made at the time it would have been made in accordance with such arrangement. 5. Disability. If during the Term Employee shall, because of physical or mental illness or incapacity, become totally unable to perform, or in the judgment of the Company evidenced by a resolution adopted in good faith by a majority of its Board of Directors unable adequately to perform, the duties and services required of him pursuant to paragraph 2(a) for a period of one hundred eighty (180) consecutive days, the Company may, upon at least ninety (90) days prior written notice given at any time after the expiration of such one hundred eighty (180) day period to Employee of its intention to do so, accelerate the end of the Term to such date as may be set forth in such notice; PROVIDED, HOWEVER, that the end of the Term shall not be accelerated and the Term shall remain in full force and effect if Employee shall have resumed the full-time performance of his duties hereunder prior to the effective date of such proposed termination of the Term. In case of such acceleration of the end of the Term, Employee shall be entitled to receive, and the Company agrees to pay, his Base Salary for a period of one (1) year after the date of his termination due to disability and a pro rata portion of the amount of any bonus, incentive or similar form of compensation which - 5 - he would have otherwise been entitled to for the period in which the acceleration of the end of the Term occurs. 6. Confidential Information. All confidential information which Employee may now know or which hereby may become known to Employee relating to the business of the Company or any customer or supplier of the Company shall not be disclosed by Employee to any other person or entity either during the Term or thereafter. Such confidential information shall be returned to the Company upon termination of Employee's employment. 7. Non-Competition. (a) Employee agrees that during the Term and for a period of one (1) year after the termination of his employment with the Company, he will not (i) engage in or have any interest in any person, firm or corporation which engages, directly or indirectly, in competition with the Company or its subsidiaries or affiliates in the United States, in the sale of products or services of the type in which Employee has been directly involved during the Term in or have any interest in any person, firm or company which engages, directly or indirectly, in competition with the Company or its subsidiaries or affiliates in the United States for the business of any entity which was a customer of the Company or its subsidiaries or affiliates at any time during the Term or (ii) solicit any employees of the Company or any of its parents, subsidiaries or affiliates to leave their employ. (b) For the purposes of this paragraph 7, Employee will be deemed directly or indirectly engaged in a business if he participates in such business as a proprietor, partner, joint venturer, shareholder, director, officer, lender, manager, employee, consultant, adviser or agent or if he in any way controls such business. Employee shall not for purposes of this paragraph 7 be deemed a shareholder or lender if he holds less than one (1%) of the outstanding securities of any class of any publicly- or privately-owned corporation engaged in the same or similar business to that - 6 - of the Company or its subsidiaries or affiliates, PROVIDED THAT Employee shall not be in a control position (individually or as part of a group) with regard to such corporation. (c) In the event of a breach or threatened breach by Employee of any of the provisions of this paragraph 7, the Company shall be entitled, upon establishing the existence of such breach or threatened breach, to an injunction to be issued by any tribunal of competent jurisdiction to restrain Employee from committing or continuing any such violation. In any proceeding for an injunction and upon any motion for temporary or permanent injunction, Employee agrees that his ability to answer in damages shall not be a bar or be interposed as a defense to the granting of such temporary or permanent injunction against him. Employee acknowledges that the Company will not have an adequate remedy at law in the event of any breach by him as aforesaid and that the Company may suffer irreparable damage and injury in the event of such a breach by him. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedy or remedies available to the Company, including, without limitation, the recovery of damages from Employee. 8. Representation by Employee. Employee represents and warrants that he has not entered into any other agreement or understanding which is inconsistent with the execution of this Agreement or which in any way will prevent full compliance by him with the terms of this Agreement. 9. Assignability. This Agreement may not be assigned by Employee and all of its terms and conditions shall be binding upon and inure to the benefit of Employee and his heirs and legal representatives and the Company and its successors and assigns. Successors of the Company shall include, without limitation, any corporation or corporations acquiring directly or indirectly all or substantially all of the assets of the Company whether by merger, consolidation, purchase, lease or otherwise and such successor shall thereafter be deemed the "Company" for purposes hereof. - 7 - 10. Notices. All notices, requests, demands and other communications provided for hereby shall be in writing and shall be deemed to have been duly given when delivered personally, sent by facsimile transmission (with receipt confirmed) or two days after being sent by registered or certified mail, return receipt requested, to the party entitled thereto at the address first above written or to such changed address as the addressee may have given by a similar notice. 11. Modification. This Agreement may be modified or amended only by an instrument in writing signed by Employee and the Company and any provision hereof may be waived only by an instrument in writing signed by the party hereto against whom any such waiver is sought to be enforced. 12. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision contained herein. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 14. Captions. The captioned headings here convenience of reference only and are not intended to be construed to have any substantive effect. IN WITNESS WHEREOF, the parties hereto have this Agreement as of the date first above written. ALLOU HEALTH & BEAUTY CARE, INC. By: /s/ Victor Jacobs -------------------------------------- Name: Victor Jacobs Title: Chief Executive Officer - 8 - /s/ JACK JACOBS ------------------------------------ JACK JACOBS - 9 - EX-23 5 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23 ---------- CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Allou Health & Beauty Care, Inc. Brentwood, New York We hereby consent to the inclusion in the Allou Health & Beauty Care, Inc.'s Annual Report on Form 10-K for the year ended March 31, 1999 of our report dated June 2, 1999 related to the consolidated financial statements and schedules of Allou Health & Beauty Care, Inc. and subsidiaries. /S/ MAYER RISPLER & COMPANY, P.C. Certified Public Accountants June 29, 1999 New York, New York EX-27.1 6 FINANCIAL DATA SCHEDULE
5 0000846538 ALLOU HEALTH & BEAUTY CARE, INC. 12-MOS 12-MOS MAR-31-1999 MAR-31-1998 APR-01-1998 APR-01-1997 MAR-31-1999 MAR-31-1998 400,090 46,675 0 0 51,778,415 44,489,386 1,615,965 371,475 122,917,911 112,530,659 211,039,574 168,375,963 8,085,505 7,194,116 4,245,599 3,580,893 219,907,381 178,384,296 158,847,103 124,416,943 0 0 0 0 0 0 6,539 5,770 60,329,505 52,607,121 219,907,381 178,384,296 337,389,261 301,756,467 337,389,261 301,756,467 291,681,302 262,600,862 36,291,959 23,775,314 (3,009,098) (13,168) 0 0 10,176,243 8,482,859 2,248,855 6,910,600 901,000 2,630,390 1,347,855 4,280,210 0 0 0 0 0 0 0 0 .22 .74 .20 .72
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