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PROSPECTUS
SEL-LEB MARKETING, INC.
5,760,000 SHARES OF COMMON STOCK,
ISSUABLE UPON THE EXERCISE OF REDEEMABLE WARRANTS
180,000 SHARES OF COMMON STOCK, ISSUABLE UPON THE EXERCISE
OF REDEEMABLE WARRANTS HELD BY CERTAIN AFFILIATES OF THE COMPANY
80,000 UNITS, EACH UNIT CONSISTING OF
THREE SHARES OF COMMON STOCK AND THREE REDEEMABLE WARRANTS,
240,000 SHARES OF COMMON STOCK INCLUDED IN SUCH UNITS
AND 240,000 SHARES OF COMMON STOCK
ISSUABLE UPON THE EXERCISE OF REDEEMABLE WARRANTS INCLUDED IN SUCH UNITS
---------------------
This Prospectus relates to (i) the sale of up to 5,760,000 shares of common
stock, par value $.01 per share (the "Common Stock"), of Sel-Leb Marketing, Inc.
(the "Company" or "Sel-Leb") which are reserved for issuance upon the exercise
of redeemable warrants, each warrant to purchase one share of Common Stock
(each, a "Warrant"), issued in connection with the Company's 1995 initial public
offering of securities (the "IPO"), (ii) the sale of up to 180,000 shares of
Common Stock which are reserved for issuance upon the exercise of Warrants held
by certain affiliates of the Company, (iii) the issuance of up to 80,000 units
(the "Units") issuable upon the exercise of the warrants (the "Underwriter's
Warrants") originally sold to Duke & Co., Inc. (the "Underwriter") in connection
with the IPO, each Unit consisting of three shares of Common Stock and three
Warrants, and (iv) up to 240,000 shares of Common Stock which are included in
the Units and up to 240,000 shares of Common Stock which are reserved for
issuance upon the exercise of the Warrants included in the Units.
Each Warrant entitles the registered holder thereof to purchase one share of
Common Stock at a price of $2.00, subject to adjustment in certain
circumstances, for a period of three years commencing July 13, 1996. The
Warrants are redeemable by the Company at any time commencing July 13, 1996 upon
notice of not less than 30 days, at a price of $.0167 per Warrant, provided that
the closing bid quotation of the Common Stock on the Nasdaq Small-Cap Market
("NASDAQ") has exceeded $3.33 per share (subject to adjustment) for a period of
20 consecutive trading days during the period in which the Warrants are
exercisable. The holders of Warrants will have the right to exercise their
Warrants until the close of business on the date fixed for redemption. See
"Description of Securities."
On July 13, 1995, the Common Stock and the Warrants began trading on NASDAQ
under the symbols "SELB" and "SELBW," respectively, and on the Boston Stock
Exchange ("BSE") under the symbols "SLL" and "SLLW," respectively. On July 10,
1996, the closing sale price of the Common Stock and Warrants on NASDAQ was
$7.50 and $5.25, respectively. See "Certain Market Information."
Concurrently with this Offering, 180,000 Warrants held by certain affiliates
of the Company (the "Selling Security Holders' Warrants") and 180,000 shares of
Common Stock (the "Selling Security Holders' Shares") issuable upon the exercise
of the Selling Security Holders' Warrants have been registered by the Company
under the Securities Act of 1933, as amended, on behalf of such individuals (the
"Selling Security Holders") pursuant to a prospectus (the "Selling Security
Holder Prospectus") included within the Registration Statement of which this
Prospectus forms a part. The Company will not receive any of the proceeds from
the sale by the Selling Security Holders of the Selling Security Holders'
Warrants or any of the Selling Security Holders' Shares issuable upon the
exercise thereof. See "Concurrent Registration of Securities."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" (COMMENCING ON PAGE 7)
AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT APPLICABLE TO AND MAY NOT BE USED FOR THE RESALE
OF THE COMMON STOCK ACQUIRED UPON EXERCISE OF THE WARRANTS.
THE DATE OF THIS PROSPECTUS IS JULY 12, 1996
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered by this Prospectus.
This Prospectus, filed as part of such Registration Statement, does not contain
all of the information set forth in, or annexed as exhibits to, the Registration
Statement, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and this offering, reference is made to the Registration Statement
including the exhibits filed therewith. The Registration Statement may be
inspected and copies may be obtained from the Public Reference Section at the
Commission's principal office, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the New York Regional Office, 7 World Trade
Center, New York, New York 10048, upon payment of the fees prescribed by the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and where the contract
or other document has been filed as an exhibit to the Registration Statement,
each such statement is qualified in all respects by such reference to the
applicable document filed with the Commission.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file reports, proxy statements and other information
with the Securities and Exchange Commission ("Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its New York Regional Office, 7 World Trade Center, New York, New
York 10048; and at its Chicago Regional Office, 500 West Madison Street,
Chicago, Illinois 60661-2511, and copies of such material can be obtained from
the Commission's Public Reference Section at prescribed rates. The Company
furnishes its shareholders with annual reports containing audited financial
statements and such other periodic reports as the Company deems appropriate or
as may be required by law.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO
READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED, THE
INFORMATION SET FORTH IN THIS PROSPECTUS GIVES EFFECT TO A THREE-FOR-ONE STOCK
SPLIT OF THE COMPANY'S COMMON STOCK, PAR VALUE $.01 PER SHARE ("COMMON STOCK"),
WHICH WAS EFFECTED IN THE FORM OF A SHARE DISTRIBUTION ON FEBRUARY 29, 1996 (THE
"SHARE DISTRIBUTION"). PURSUANT TO THE SHARE DISTRIBUTION, EACH HOLDER OF RECORD
OF COMMON STOCK ON FEBRUARY 2, 1996 RECEIVED TWO ADDITIONAL SHARES OF COMMON
STOCK FOR EACH SHARE HELD ON SUCH DATE. IN CONNECTION WITH THE SHARE
DISTRIBUTION, THE COMPANY ADJUSTED THE TERMS OF THE WARRANTS, WHICH ORIGINALLY
REPRESENTED THE RIGHT TO PURCHASE ONE SHARE OF COMMON STOCK AT AN EXERCISE PRICE
OF $6.00 PER SHARE, TO PROVIDE THAT, AS A RESULT OF THE SHARE DISTRIBUTION, EACH
WARRANT REPRESENTED THE RIGHT TO PURCHASE THREE SHARES OF COMMON STOCK AT AN
EXERCISE PRICE OF $2.00 PER SHARE. ON JUNE 6, 1996, THE COMPANY ELECTED TO
ADJUST THE NUMBER OF WARRANTS OUTSTANDING (THE "WARRANT ADJUSTMENT"). AS A
RESULT OF THE WARRANT ADJUSTMENT, EFFECTIVE JUNE 20, 1996, EACH HOLDER OF A
WARRANT ON JUNE 17, 1996 HOLDS, IN LIEU OF ONE WARRANT TO PURCHASE THREE SHARES
OF COMMON STOCK AT AN EXERCISE PRICE OF $2.00 PER SHARE, THREE WARRANTS, EACH TO
PURCHASE ONE SHARE OF COMMON STOCK AT AN EXERCISE PRICE OF $2.00 PER SHARE.
UNLESS OTHERWISE INDICATED, THE INFORMATION SET FORTH IN THIS PROSPECTUS GIVES
EFFECT TO THE WARRANT ADJUSTMENT.
THE COMPANY
The Company is primarily engaged in the distribution and marketing of
consumer merchandise to retail sellers such as mass merchandisers, discount
chain stores and electronic retailers. The Company's business presently consists
of the following activities: (i) opportunistic purchasing and secondary sourcing
(I.E., distributing merchandise on a wholesale basis outside of normal
distribution channels to retail merchants) of a broad range of name-brand and
off-brand products such as health and beauty aids, cosmetics, fragrances,
kitchen items and other household items, (ii) developing, marketing and selling
the Company's own proprietary brands of budget-line health, beauty aid and
cosmetic products, which are manufactured for the Company by contract
manufacturers, (iii) representing manufacturers and distributors as a sales
agent, on a commission basis, in connection with the sale to mass merchandise
retailers of merchandise manufactured and distributed by such third parties and
(iv) developing, marketing and selling products to be promoted by celebrity
spokespersons and sold by the Company to mass merchandise retailers, as well as
products which will "tie in" to specific television shows and be sold by the
Company on television in connection with those shows, with the intent to
thereafter sell such products to mass merchandise retailers. The Company's
strategy is to capitalize on increased consumer demand for value and convenience
resulting from the increased acceptance by consumers of mass merchandisers,
electronic retailers and other mass marketing retail outlets, as well as on the
popularity of consumer products endorsed by celebrity spokespersons.
The Company, which was incorporated under the laws of the State of New York
on September 21, 1993, consummated in July 1995 an initial public offering (the
"IPO") of units (the "IPO Units"), each IPO Unit consisting of three shares of
common stock, par value $.01 per share ("Common Stock"), and three redeemable
warrants, each to purchase one share of Common Stock (the "Warrants").
Immediately following the issuance of the IPO Units, the Common Stock and
Warrants became separately tradeable and transferable. On May 18, 1995, Linette
Cosmetics, Inc. ("Linette Cosmetics"), a corporation founded in 1985 by Harold
Markowitz, the Chairman of the Board of the Company, and Jorge Lazaro, the
Executive Vice President and Secretary of the Company, was merged with and into
the Company, with the Company as the surviving corporation (the "Linette
Merger"). Prior to the Linette Merger, all of the outstanding capital stock of
Linette Cosmetics was owned by Mr. Markowitz, Mr. Lazaro and Paul Sharp, the
President and Chief Executive Officer of the Company, who together comprised the
shareholders of the Company until the IPO. In addition, immediately prior to the
consummation of the IPO, each of Messrs. Markowitz, Sharp and Lazaro contributed
to the Company his 20% equity interest in Lea Cosmetics, Inc. ("Lea Cosmetics")
and the Company
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acquired from the remaining shareholder his 40% equity interest in Lea Cosmetics
(the "Lea Acquisition"). As a result, Lea Cosmetics became a wholly-owned
subsidiary of the Company and, on August 3, 1995, Lea Cosmetics was merged with
and into the Company, with the Company as the surviving corporation.
The Company's principal executive offices are located at 1435 51 Street,
North Bergen, New Jersey 07047, and its telephone number is (201) 864-3316.
THE OFFERING
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<S> <C>
SECURITIES OFFERED................ Up to 5,760,000 shares of Common Stock reserved for
issuance upon exercise of outstanding Warrants, up to
80,000 Units (each consisting of three shares of Common
Stock and three Warrants) issuable upon exercise of
80,000 warrants originally sold to Duke & Co., Inc. (the
"Underwriter") in connection with the IPO (the
"Underwriter's Warrants"), up to 240,000 shares of
Common Stock included in the Units underlying the
Underwriter's Warrants and up to 240,000 shares of
Common Stock reserved for issuance upon exercise of the
Warrants included in such Units. Also includes up to
180,000 shares of Common Stock reserved for issuance
upon exercise of the Selling Security Holders' Warrants.
See "Description of Securities" and "Certain
Transactions."
COMMON STOCK OUTSTANDING
Before the Offering (1)......... 7,440,000 shares
After the Offering (1)(2)....... 13,860,000 shares
WARRANTS
Exercise terms.................. Exercisable for a period of three years commencing July
13, 1996, each to purchase one share of Common Stock for
$2.00, subject to adjustment in certain circumstances.
See "Description of Securities -- Redeemable Warrants."
Expiration date................. July 12, 1999.
Redemption...................... Redeemable by the Company at any time commencing on July
13, 1996, upon notice of not less than 30 days, at a
price of $.0167 per Warrant, provided that the closing
bid quotation of the Common Stock on NASDAQ has exceeded
$3.33 per share (subject to adjustment) for a period of
20 consecutive trading days during the period in which
the Warrants are exercisable. The Warrants will be
exercisable until the close of business on the date
fixed for redemption. See "Description of Securities --
Redeemable Warrants."
USE OF PROCEEDS................... The net proceeds, if any, received by the Company upon
exercise of the Warrants (including the Selling Security
Holders' Warrants ), the Underwriter's Warrants and the
Warrants included therein will be utilized for working
capital and general corporate purposes. See "Use of
Proceeds."
RISK FACTORS...................... The securities offered hereby are speculative and
involve a high degree of risk and immediate substantial
dilution and should not be purchased by investors who
cannot afford the loss of their entire investment.
Holders of Warrants should
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carefully consider the factors set forth under the
caption "Risk Factors" before exercising the Warrants to
purchase the shares offered hereby. See "Risk Factors"
and "Dilution."
NASDAQ SYMBOLS.................... Common Stock -- "SELB".
Warrants -- "SELBW".
BSE SYMBOLS....................... Common Stock -- "SLL".
Warrants -- "SLLW".
</TABLE>
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(1) Does not include (i) 1,024,500 shares of Common Stock reserved for issuance
upon exercise of stock options granted under the Company's 1995 Stock Option
Plan (the "Stock Option Plan"); (ii) 325,500 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under the
Stock Option Plan; (iii) 80,000 shares of Common Stock reserved for issuance
upon exercise of options granted under the Company's 1995 Nonemployee
Directors' Stock Option Plan (the "Directors' Plan"); (iv) 220,000 shares of
Common Stock reserved for issuance upon exercise of options available for
future grant under the Directors' Plan; and (v) 490,689 shares of Common
Stock issuable upon exercise of a warrant granted to Jan Mirsky, previously
a consultant to, and currently the Executive Vice President -- Finance and
Chief Operating Officer of, the Company (the "Consulting Warrant"). See
"Management -- 1995 Stock Option Plan" and "-- Directors and Executive
Officers," "Certain Transactions" and "Description of Securities."
(2) Assumes (i) exercise of all outstanding Warrants (including the Selling
Security Holders' Warrants), (ii) exercise of all Underwriter's Warrants and
(iii) exercise of all Warrants included in the Units issuable upon exercise
of the Underwriter's Warrants, although there can be no assurance that any
of the foregoing will be exercised.
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
historical financial statements of the Company included elsewhere in this
Prospectus. Such information should be read in conjunction with such financial
statements, including the notes thereto.
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<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------ -----------------------------
1994 (1)(3) 1995 (2)(3) 1995 (3) 1996 (3)
-------------- -------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue.......................................... $ 10,794,294 $ 11,480,135 $ 2,354,848 $ 3,070,765
Operating income................................. $ 651,874 $ 595,157 $ 144,598 $ 141,388
Pro forma net income............................. $ 253,437 $ 341,423 $ 49,100 $ 90,543
Pro forma net income per share:
Primary........................................ $ 0.05 $ 0.05 $ 0.01 $ 0.01
Fully Diluted.................................. $ 0.05 $ 0.04 $ 0.01 $ 0.01
Pro forma weighted average number of common
shares outstanding
Primary........................................ 4,969,089 8,429,726 4,969,089 13,977,189
Fully Diluted.................................. 4,969,089 8,491,491 4,969,089 14,154,955
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(4)
------------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET INFORMATION:
Current assets..................................................................... $ 5,850,375 $ 18,590,375
Current liabilities................................................................ $ 1,665,669 $ 1,665,669
Working capital.................................................................... $ 4,184,706 $ 16,924,706
Total assets....................................................................... $ 6,444,599 $ 19,184,599
Total liabilities.................................................................. $ 1,665,669 $ 1,665,669
Shareholders' equity............................................................... $ 4,778,930 $ 17,518,930
</TABLE>
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(1) Restated to include the results of operations of the Company and Linette
Cosmetics for the twelve-month period ended December 31, 1994 and of Lea
Cosmetics for the twelve-month period ended September 30, 1994.
(2) Includes the results of operations of the Company and Linette Cosmetics for
the twelve-month period ended December 31, 1995 and of Lea Cosmetics for the
fifteen-month period ended December 31, 1995. The results of operations of
Lea Cosmetics for the three-month period from October 1, 1994 to December
31, 1994 included in the statement of operations for 1995 were not material.
(3) Prior to the Linette Merger, the Company and Linette Cosmetics were treated
as S Corporations, with earnings taxed for federal and certain state income
tax purposes directly to their respective shareholders. Pro forma financial
information includes a pro forma adjustment for income taxes treated on a C
Corporation basis.
(4) Gives effect to the sale of 5,940,000 shares of Common Stock upon the
exercise of outstanding Warrants (including the Selling Security Holders'
Warrants), and the sale of 240,000 shares of Common Stock upon the exercise
of the Underwriters' Warrants and 240,000 shares of Common Stock upon
exercise of the Warrants included therein, resulting in net proceeds to the
Company of $12,740,000 (after deducting expenses of the offering other than
solicitation fees, if any, to be paid to the Underwriter in connection with
the exercise of the Warrants). See "Warrant Solicitation."
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RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK, INCLUDING, BUT NOT NECESSARILY LIMITED TO, THE RISK FACTORS DESCRIBED
BELOW, AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD THE LOSS OF HIS
ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT IN THE
COMPANY, SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS INHERENT IN AND AFFECTING
THE BUSINESS OF THE COMPANY AND THIS OFFERING.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING BUT NOT LIMITED TO GENERAL TRENDS IN THE RETAIL INDUSTRY,
THE ABILITY OF THE COMPANY TO SUCCESSFULLY IMPLEMENT ITS EXPANSION PLANS,
CONSUMER ACCEPTANCE OF ANY PRODUCTS DEVELOPED AND SOLD BY THE COMPANY, AND THE
ABILITY OF THE COMPANY TO DEVELOP ITS "CELEBRITY" PRODUCT BUSINESS.
DEPENDENCE ON CERTAIN CUSTOMERS. The Company's ten largest customers
accounted for approximately 83% and 69% of the Company's net sales during the
three-month period ended March 31, 1996 and the year ended December 31, 1995,
respectively. During the three-month period ended March 31, 1996, BJ's Wholesale
Club accounted for approximately 36% of the Company's sales, and during the year
ended December 31, 1995, BJ's Wholesale Club and Ames Department Stores
accounted for approximately 26% and 11%, respectively, of the Company's sales.
The Company believes that it has good relationships with its customers, and
that, as a consequence of its strong and, in many instances, long-term
relationships with many of such customers, they will continue to do business
with the Company. However, the Company has no long-term contracts with any of
its customers, all of which purchase products from the Company pursuant to
individually placed purchase orders. Therefore, there can be no assurance that
the Company's customers, including any of its largest customers, will continue
to purchase merchandise from the Company, and the loss of a significant volume
of purchases from a number of its customers could have a material adverse effect
on the Company's business and results of operations. In addition, although the
Company has sold substantially all merchandise acquired by it through
opportunistic purchases in each of the last three fiscal years, there can be no
assurance that the Company, which typically purchases merchandise before it has
arranged for customers for such merchandise, will be able to obtain customers
for all such merchandise acquired by it in the future, or that if it is able to
secure such customers, sales to such customers will yield acceptable profit
margins. See "Business -- General."
DEPENDENCE ON THIRD-PARTY MANUFACTURERS AND SUPPLIERS. The Company makes
opportunistic purchases of merchandise from manufacturers as well as from
secondary sources such as wholesalers, retailers, financially distressed
businesses and duty-free distributors. The Company purchases such merchandise
through individually placed purchase orders and does not have any contracts with
any such suppliers, depending, instead, on its ongoing relationships and prior
dealings with such suppliers to obtain merchandise at favorable prices when it
becomes available for sale to secondary suppliers. Although the Company believes
that its relationships with its suppliers are good and that it would be able to
locate other sources of merchandise in the event of the loss of one or more of
such suppliers, there can be no assurance that the Company will not experience
delays or other difficulties in obtaining merchandise, which could have a
material adverse effect on the Company's business and results of operations. See
"Business -- General -- Opportunistic Purchasing and Secondary Sourcing
Archives."
To date, all of the Company's proprietary brand name budget-line health,
beauty aid and cosmetic products sold under the Linette-Registered Trademark-,
Vea-Registered Trademark- and Zia-Registered Trademark- brand names and all
packaging therefor have been manufactured and supplied by third parties in
accordance with the Company's specifications. The Company purchases all
materials for its products (including raw materials and packaging) through
individually placed purchase orders to various suppliers, who deliver the
products to LPD Packaging, Inc., a manufacturer engaged by the Company; such
manufacturer, in turn, provides filling and packaging services, performs quality
control, distributes the finished products and, if necessary,
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warehouses such products. During the year ended December 31, 1995 and the
three-month period ended March 31, 1996, the Company paid $616,640 and $120,165,
respectively, to this manufacturer for such services. Although the Company
believes that its manufacturer has the capacity to produce volumes of products
sufficient to meet the Company's foreseeable needs, there can be no assurance of
such. Furthermore, although the Company believes that it has a good relationship
with this manufacturer and that the Company will continue to obtain its finished
products to be sold under the Linette-Registered Trademark-,
Vea-Registered Trademark- and Zia-Registered Trademark- brand names from such
manufacturer in the foreseeable future, the Company does not have a written
contract with this manufacturer and there can therefore be no assurance of such.
In the event the Company were to experience difficulties with or the loss of
services of its present manufacturer, the Company believes that it would be able
to retain the services of other manufacturers; however, there can be no
assurance that such services could be retained on a timely basis or on terms as
favorable as those with its present manufacturer. Likewise, although the Company
has experienced no difficulty in obtaining necessary products, supplies and
packaging from its suppliers and believes that it could obtain items of the same
quantity and quality from other suppliers, in the event the Company were to
experience difficulties with any of its present suppliers, the Company might be
unable to obtain such items on a timely basis. The loss of either the Company's
present manufacturer or any of its present suppliers, or any significant delays
in obtaining another manufacturer or other suppliers in the event of any such
loss, could have an adverse effect on the Company's business and results of
operations. See "Business -- General -- Sale of Proprietary Brand Name
Products."
To date, all merchandise sold by the Company in connection with the "Jackie
Collins" line of products has been purchased by the Company from third-party
manufacturers and distributors, both in the United States and abroad. In
addition, the Company currently anticipates that all products developed by it as
television program "tie-in" products pursuant to its agreement with Direct
Access Group/Television Production Partners ("Direct Access"), as well as other
celebrity-endorsed products, if any, developed by the Company, will be purchased
from third-party manufacturers. Typically, the Company develops or will develop
the design of the celebrity-endorsed products in conjunction with the celebrity
who is to promote such products, and will develop the design of any television
"tie-in" products in conjunction with Direct Access. Once the product has been
developed, the Company will arrange for the manufacture of the product by a
third-party manufacturer according to the Company's design specifications;
however, the Company does not enter into long-term contracts with such third
parties, but instead purchases (and currently anticipates that it will in the
future continue to purchase) such merchandise through individually placed
purchase orders. Accordingly, the Company is dependent on the ability of its
manufacturers to meet its design and quality specifications. Although the
Company believes that, in the event it were to experience difficulties with or
the loss of services of any of such manufacturers, it would be able to engage
other manufacturers who could be retained by the Company and meet its production
requirements on a timely basis, there can be no assurance of such. The loss of
any of such manufacturers, or any significant delays in obtaining other
manufacturers in the event of any such loss, could have an adverse effect on the
Company's business and results of operations. See "Business -- General --
Development of 'Celebrity' Products."
RISKS ASSOCIATED WITH PUBLIC TRENDS IN THE RETAIL INDUSTRY. The retail
industry is significantly affected by many factors, including changes in the
national economy or in regional and local economies, changes in consumer
preferences and confidence in the overall economy, increases in the number of
retail operations and intense competition in the retail industry generally. In
addition, factors such as inflation may have a greater effect on the retail
industry than on other industries. Furthermore, several retail firms, including
retail customers of the Company, have filed for bankruptcy protection and there
can be no assurance of their continued existence or of the continued existence
of any of the Company's retail customers. During the past three years, the
Company has written off an immaterial amount of receivables as a result of these
bankruptcies. The loss of a significant number of the Company's customers could
have a material adverse effect on the business and results of operations of the
Company. See "-- Dependence on Certain Customers."
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RISK OF LOSS OF CERTAIN PRODUCTS. The Company currently warehouses all of
the raw materials used in connection with its proprietary brand name health,
beauty aid and cosmetics products, as well as the finished products, at LPD
Packaging, Inc.'s warehouses. Accordingly, the Company is subject to the risk of
the loss of all or a portion of such inventory, either as a result of theft,
fire or otherwise. Although the Company maintains insurance which would cover
any such losses (including losses associated with business interruptions) and
believes that, in the event of a complete or significant loss, it would be able
to replace such inventory (i.e., by purchasing materials from other sources and,
if necessary, retaining the services of another manufacturer) within a period of
approximately two to three months, the Company is subject to the risk of loss of
customers during such period. See "Business -- General -- Sale of Proprietary
Brand Name Products," "-- Insurance" and "-- Property."
RISKS ASSOCIATED WITH EXPANSION PLANS; DEPENDENCE ON NEW PRODUCT
INTRODUCTIONS AND MARKET ACCEPTANCE TO IMPLEMENT EXPANSION PLANS. As part of
the Company's strategy of taking advantage of the growth in mass merchandising
and value retailing, the Company will seek to continue introducing its own brand
name health, beauty aid and cosmetic products, thereby providing the Company
with an ongoing supply of products and making the Company less reliant on third
party and/or opportunistic sources of merchandise. The success of the Company's
expansion plan is dependent upon its ability to identify and develop products
that can be successfully sold to retail chains and other mass merchandisers at
acceptable profit margins. There can be no assurance that the Company will be
able to successfully develop and introduce new products under its own brand
names, that any such products will meet with consumer acceptance in the
marketplace or that any such products will be sold at acceptable profit margins.
In addition, the Company may seek to obtain rights to additional proprietary
lines either by acquisition or through licensing or other arrangements. However,
as of the date hereof, the Company has no agreements, understandings or
commitments related thereto, and there can be no assurance that any such
acquisition opportunities will become available, that the Company would be
successful in acquiring any such rights on favorable terms, or that the Company
would be successful in marketing and selling any product lines so acquired by
it. See "Business -- General -- Sale of Proprietary Brand Name Products."
The Company is also seeking to expand the "celebrity" product area of its
business, including by marketing and distributing in the traditional retail
market celebrity merchandise which is originally offered for sale on television
or by developing products to be promoted by celebrities and sold directly in
such traditional markets. The success of the Company's expansion plan is
dependent on the Company's ability to retain the services of celebrities and to
develop products to be endorsed by such celebrities which will meet with
consumer acceptance. The Company has previously developed a line of products
endorsed by best-selling author Jackie Collins which were sold on Home Shopping
Network in 1994 and 1995, is currently selling directly into the traditional
retail market a line of "Jackie Collins Wild" fragrances and is currently in the
process of developing a line of bath products and jewelry for Ms. Collins for
sale by the Company to mass market merchandisers. There can be no assurance that
the Company will be able to sell additional amounts of such fragrances in the
future, that it will be able to successfully develop and/or promote any other
products for Ms. Collins, that the Company will be able to retain the services
of other celebrities in the future or successfully develop and/or promote any
products for any other celebrities whose services are retained by the Company or
that any such products so developed for Ms. Collins or any other celebrities
will meet with consumer acceptance or generate any significant revenues. See
"Business -- General -- Development of 'Celebrity' Products."
Pursuant to its agreement with Direct Access, the Company has been granted
the exclusive right to develop and sell cosmetics, fragrances and spa items in
connection with "tie-in" product programs developed by Direct Access for
television networks and producers. Such product programs are expected to involve
the development of products which "tie in" to characters, activities and/or
themes of a specific television show. The agreement with Direct Access also
provides that the Company will be entitled to sell any merchandise developed by
it for any of such television shows through other retail
9
<PAGE>
distribution channels, provided that the Company pays a royalty in connection
therewith at a negotiated amount. As of the date hereof, the Company has been
authorized to develop and act as the exclusive manufacturer and distributor of a
cosmetic, fragrance and skin care line to be sold in connection with the CBS
daytime drama THE YOUNG AND THE RESTLESS. However, as of the date hereof, Direct
Access has not secured air time for the promotion and sale of such products, and
there can be no assurance that it will be successful in doing so or that, if
such air time is secured, the products will meet with consumer acceptance. There
can also be no assurance that Direct Access will be able to successfully
negotiate with any other television networks or producers for the development of
other program product "tie-ins" or that Direct Access will be able to secure air
time during which any such products can be marketed and sold. See "Business --
General -- Development of 'Celebrity' Products."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. The proceeds to the Company
from the exercise of the Warrants (including the Selling Security Holders'
Warrants), the Underwriter's Warrants and the Warrants included therein, net of
the expenses of this offering (other than solicitation fees, if any, to be paid
to the Underwriter in connection with the exercise of Warrants), will be
approximately $12,740,000 assuming that all such Warrants, Underwriter's
Warrants and Warrants included therein are exercised. The Company has been
advised by the Underwriter that it currently intends to exercise all of the
Underwriter's Warrants at such time as such Underwriter's Warrants become
exercisable, thereby resulting in proceeds to the Company (before deducting
expenses) of $600,000. Management anticipates that the proceeds of this
offering, if any, will be allocated to working capital and general corporate
purposes. Accordingly, the Company's management will have broad discretion as to
the application of such proceeds. See "Use of Proceeds" and "Warrant
Solicitation."
COMPETITION. The areas of business in which the Company engages are highly
competitive businesses. The secondary sourcing business is characterized by
intense competition, both in the products sold and in the retaining of
relationships with suppliers and customers. With respect to its ability to
obtain merchandise, the Company competes with other secondary sources, as well
as with wholesale distributors and retailers. The Company believes that its
ability to purchase a broad array of merchandise at competitive prices is
critical to its success. With respect to sales to its customers, the Company
competes with other secondary suppliers of merchandise, as well as with
manufacturers who sell directly to retail merchandisers. In addition, with
respect to products sold under the Company's Linette-Registered Trademark-,
Vea-Registered Trademark- and Zia-Registered Trademark- brand names, the Company
competes with other manufacturers at the retail store level for shelf space and
promotional space. Many of the Company's existing or potential competitors are
well established companies and have or will have substantially greater
financial, marketing and other resources than the Company. The Company believes
that it competes on the basis of value, product assortment and availability,
service to customers and reputation, as well as on the basis of its
long-standing and well-established relationships with both its suppliers and
customers. Although the Company believes that it will be able to compete
effectively on the basis of such factors, there can be no assurance of such.
In connection with its "celebrity" products business, the Company competes
or will compete with manufacturers and marketing organizations that seek out
celebrities to endorse products and assist in marketing programs for their
merchandise. In addition, the Company believes that virtually all celebrities
have agents who can negotiate directly with retailers in order to secure
marketing contracts on their behalf. The Company believes that it competes on
the basis of its ability to design products which are consistent with the
celebrities' respective preferences and characters and to provide such products
to retailers at competitive prices. Furthermore, although the Company is not
aware of any other entities which currently manufacture, market or develop
television "tie-in" products to be sold on television during the airing of the
related program, the Company believes that any such products developed by the
Company will compete with other products sold in the electronic retailing market
(including through television infomercials and interactive television shopping
networks), as well as other products sold in the traditional retail market which
relate to characters or
10
<PAGE>
themes of television shows or movies. The Company believes that it will compete
on the basis of the unique nature of such television "tie-in" products, as well
as on its ability to provide such products at competitive prices.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The success of the Company is
largely dependent on the personal efforts of Harold Markowitz, its Chairman of
the Board, Paul Sharp, its President and Chief Executive Officer, Jan Mirsky,
its Executive Vice President -- Finance and Chief Operating Officer, Jack
Koegel, its Vice Chairman, and Jorge Lazaro, its Executive Vice President. In
particular, the future success of the Company's celebrity products line of
business is dependent on the efforts of Mr. Markowitz, who has to date been
primarily responsible for developing relationships with various celebrities.
Although the Company has entered into an employment agreement with each of
Messrs. Markowitz, Sharp, Mirsky, Koegel and Lazaro, each of which agreements
provides that the employee shall devote substantially all of such employee's
working time and attention to the Company, the loss of services of any of such
individuals could have a material adverse effect on the Company's business and
prospects. See "Management."
CONTROL BY MANAGEMENT AND CURRENT SHAREHOLDERS. As of the date of this
Prospectus, Messrs. Markowitz, Sharp, Mirsky, Koegel and Lazaro, each of whom is
an officer and director of the Company, beneficially own, in the aggregate,
approximately 64.7% of the outstanding Common Stock (assuming no exercise of the
Warrants, the Underwriter's Warrants or the Warrants included therein or of
options or warrants held by persons other than Messrs. Markowitz, Sharp, Mirsky,
Koegel and Lazaro). Accordingly, in the event such shareholders were to act in
concert with respect to the Company's operations, they would be in a position to
cause an increase in the authorized capital or cause the dilution, merger or
sale of assets of the Company, and generally control the affairs of the Company.
Assuming that all of the Warrants, Underwriter's Warrants and Warrants included
therein are exercised, Messrs. Markowitz, Sharp, Mirsky, Koegel and Lazaro will
beneficially own, in the aggregate, approximately 37.0% of the outstanding
Common Stock (assuming no exercise of any other options or warrants other than
those held by such individuals). Although such shareholders would not represent,
in the aggregate, a majority of the voting securities of the Company, their
significant beneficial holdings would enable them to exercise substantial
influence over the Company. See "Principal Shareholders."
INSURANCE AND POTENTIAL LIABILITY. While no material product liability
claims have been made against the Company in the past, as a distributor of
merchandise, including health and beauty aids, cosmetics, fragrances and
household items, the Company could be exposed to possible liability claims from
others for personal injury or property damage due to design or manufacturing
defects or otherwise. The Company maintains a product liability insurance policy
that has a $1,000,000 per occurrence limit and a $2,000,000 aggregate limit, and
a $3,000,000 umbrella liability insurance policy to cover claims in excess of
the limits of its products liability insurance. In addition, the Company
believes that the suppliers from whom it purchases such merchandise, including
the manufacturers thereof, maintain adequate levels of product liability
insurance. Although the Company believes that its product liability insurance
coverage is adequate in light of prior experience and future expectations, there
can be no assurance of such. In addition, the Company maintains other insurance,
including insurance relating to property and personal injury, similar, the
Company believes, to that maintained by comparable retail businesses and in
amounts which the Company currently considers adequate. Nevertheless, a
partially or completely uninsured claim against the Company, if successful and
of sufficient magnitude, could have a material adverse effect on the Company.
See "Business -- Insurance."
RISK OF ELIMINATION OF SUPPLY OF PRESTIGE FRAGRANCES. The Company believes
that a portion of the prestige fragrances purchased by it may include
trademarked products manufactured in foreign countries and trademarked products
manufactured in the United States that may have been sold to foreign
distributors. From time to time, United States trademark owners and their
licensees and trade associations have initiated litigation or administrative
agency proceedings seeking to halt the importation into the United States of
such foreign manufactured or previously exported trademarked
11
<PAGE>
products. Although the Company is not currently the subject of any such legal or
administrative actions, and is not aware of any such threatened legal or
administrative actions, there can be no assurance that the Company's business
activities will not become the subject of such actions in the future, or that
future judicial, legislative or administrative agency action will not limit or
eliminate some or all of the secondary sources of supply of prestige fragrances
used by the Company. However, the Company believes that any future limitation on
or elimination of its sources of supply of prestige fragrances for sale to its
customers would not have a material adverse effect on the Company, although
there can be no assurance of such.
IMMEDIATE AND SUBSTANTIAL DILUTION. This offering involves an immediate and
substantial dilution of $.76 per share (or 38%) to investors receiving shares of
Common Stock in this offering upon the exercise of Warrants, Underwriter's
Warrants or the Warrants included therein. See "Dilution."
NO DIVIDENDS. The Company has not paid any dividends to date, other than a
dividend paid in 1995 to those individuals who constituted the Company's
shareholders prior to the IPO, which dividend was paid in connection with the
termination of the Company's status as an S Corporation. It is the Company's
intention to retain earnings, if any, to finance the operation and expansion of
its business and, therefore, it does not expect to pay cash dividends in the
foreseeable future. See "Management's Discussion and Analysis or Plan of
Operation," "Certain Transactions" and "Description of Securities -- Dividends."
ELIMINATION OF LIABILITY OF DIRECTORS AND OFFICERS. The Company's
Certificate of Incorporation eliminates the liability of a director of the
Company for monetary damages for breach of duty as a director, subject to
certain exceptions. In addition, the Certificate of Incorporation provides for
the Company to indemnify, under certain conditions, directors and officers of
the Company against all expenses, liabilities and losses reasonably incurred by
such persons in connection therewith. The foregoing provisions may reduce the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from suing directors for breaches of their duty
of care, even though such an action, if successful, might otherwise benefit the
Company and its shareholders. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Upon the consummation
of this offering, the Company will have 13,860,000 shares of Common Stock
outstanding (assuming no exercise of outstanding options or warrants other than
the Warrants (including the Selling Security Holders' Warrants), the
Underwriter's Warrants and the Warrants included therein), of which 9,000,000
shares of Common Stock will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the remaining 4,860,000 shares of Common Stock outstanding are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, and in the future may only be sold pursuant to a
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. Concurrently with this offering, an aggregate of 180,000 of such
restricted shares are being registered by the Company under the Securities Act
pursuant to the Selling Security Holder Prospectus included within the
Registration Statement of which this Prospectus forms a part. In addition,
commencing in October 1995, an aggregate of 4,500,000 restricted shares became
eligible for sale under Rule 144, subject to certain volume limitations
prescribed by Rule 144 and to the contractual restrictions described below. The
balance of the restricted shares will become eligible for sale under Rule 144,
subject to the volume limitations prescribed by Rule 144, commencing in July
1997. The Company has granted Mr. Mirsky certain demand and "piggyback"
registration rights (subject to certain limitations) with respect to the shares
of Common Stock issuable upon exercise of the Consulting Warrant. In connection
with the IPO and at the request of the Underwriter, Mr. Mirsky waived such
rights for a period of eighteen months commencing July 13, 1995. In addition, in
connection with the IPO, the Company also granted the Underwriter demand and
piggyback registration rights with respect to the 240,000 shares of Common Stock
and 240,000 Warrants issuable upon exercise of the Underwriter's Warrants and
the 240,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Underwriter's Warrants. The 480,000
12
<PAGE>
shares of Common Stock underlying the Underwriter's Warrants have been included
in the Registration Statement of which this Prospectus forms a part. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or even the availability of such shares for sale will have on the market
prices prevailing from time to time. While all of the Company's officers and
directors, and certain shareholders of the Company, have agreed not to sell or
otherwise dispose of any of their shares of Common Stock (an aggregate of
4,860,000 shares (including the 180,000 shares included in the Selling Security
Holder Prospectus)) for a period of eighteen months commencing July 13, 1995
without the prior written consent of the Underwriter (other than pursuant to
private transfers in which the transferee agrees to abide by the same
restriction), and Mr. Mirsky has waived the registration rights granted to him
under the Consulting Warrant for a period of eighteen months commencing July 13,
1995 (and, as a director and officer of the Company is subject to the
aforementioned restriction during such eighteen-month period on sales of any
shares of Common Stock issuable upon exercise of his warrant), the possibility
that substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and the Warrants
and could impair the Company's ability to raise capital through the sale of its
equity securities. See "Certain Transactions," "Description of Securities" and
"Shares Eligible for Future Sale."
INABILITY TO EXERCISE WARRANTS. The Company intends to qualify the sale of
the securities offered hereby in a limited number of states. Although certain
exemptions in the securities laws of certain states might permit Warrants to be
transferred to purchasers in states other than those in which the Warrants were
initially qualified, the Company will be prevented from issuing Common Stock in
such other states upon the exercise of the Warrants unless an exemption from
qualification is available or unless the issuance of Common Stock upon exercise
of the Warrants is qualified. The Company is under no obligation to seek, and
may decide not to seek or may not be able to obtain, qualification of the
issuance of such Common Stock in all of the states in which the ultimate
purchasers of the Warrants reside. In such a case, the Warrants held will expire
and have no value if such Warrants cannot be sold. Accordingly, the market for
the Warrants may be limited because of these restrictions. Further, a current
prospectus covering the Common Stock issuable upon exercise of the Warrants must
be in effect before the Company may accept Warrant exercises. There can be no
assurance the Company will be able to have a prospectus in effect when this
Prospectus is no longer current, notwithstanding the Company's commitment to use
its reasonable best efforts to do so. See "Description of Securities --
Redeemable Warrants."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time commencing on July 13, 1996, upon notice of
not less than 30 days, at a price of $.0167 per Warrant, provided the closing
bid quotation of the Common Stock on NASDAQ has exceeded $3.33 (subject to
adjustment) for a period of 20 consecutive trading days during the period in
which the Warrants are exercisable. Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
then-current market price when they might otherwise wish to hold the Warrants,
or to accept the redemption price, which is likely to be substantially less than
the market value of the Warrants at the time of redemption. See "Certain Market
Information" and "Description of Securities -- Redeemable Warrants."
EXERCISE PRICE ARBITRARILY DETERMINED. The exercise price and other terms
of the Warrants were determined by negotiation between the Company and the
Underwriter and are not necessarily related to the Company's assets, book value
or financial condition, and may not be indicative of the actual value of the
Company.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM; RISKS RELATING TO
LOW-PRICED STOCKS. The Company's Common Stock and Warrants are listed on
NASDAQ. In order to continue to be listed on NASDAQ, however, the Company must
maintain $2,000,000 in total assets, a $200,000 market value of the public float
and $1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00 per share; provided,
however, that if the Company falls below such minimum bid price, it will remain
eligible for continued inclusion in
13
<PAGE>
NASDAQ if the market value of the public float is at least $1,000,000 and the
Company has $2,000,000 in capital and surplus. The failure to meet these
maintenance criteria in the future may result in the delisting of the Company's
securities from NASDAQ. In such event, trading, if any, in the Common Stock and
Warrants would thereafter be conducted in the over-the-counter markets through
the so-called "pink sheets" or the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's securities could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, difficulty in obtaining accurate
quotations as to the market value of the securities and reductions in the
security analysts' and the news media's coverage of the Company. Delisting of
the Company's securities may result in lower prices for the Company's securities
than might otherwise prevail. See "Description of Securities -- NASDAQ and
Boston Stock Exchange Listing."
In addition, if the Common Stock were to become delisted from trading on
NASDAQ and the trading price of the Common Stock were to fall below $5.00 per
share, trading in the Common Stock would also be subject to the requirements of
certain rules promulgated under the Exchange Act which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-NASDAQ equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in the Common Stock
and Warrants, which could severely limit the market liquidity of the Common
Stock and Warrants, the ability of purchasers in this offering to sell the
Common Stock and Warrants in the secondary market and the Company's ability to
obtain additional financing.
USE OF PROCEEDS
The proceeds received by the Company upon exercise of the Warrants
(including the Selling Security Holders' Warrants), the Underwriter's Warrants
and the Warrants included therein, net of expenses of the offering (other than
solicitation fees, if any, to be paid to the Underwriter in connection with the
exercise of Warrants), will be $12,740,000, assuming that all of such Warrants,
Underwriter's Warrants and Warrants included therein are exercised. There can be
no assurance as to the number of Warrants, if any, or Underwriter's Warrants or
Warrants included therein, if any, which will be exercised. However, the Company
has been advised by the Underwriter that the Underwriter currently intends to
exercise all of the Underwriter's Warrants at such time as such Underwriter's
Warrants become exercisable, thereby resulting in proceeds to the Company
(before deducting expenses) of $600,000. Management anticipates that the net
proceeds of this offering, if any, will be allocated to working capital and
general corporate purposes. In addition, management of the Company anticipates
that, upon receipt of the net proceeds of this offering, a portion of such
proceeds will be used to repay any amounts then outstanding under the Company's
revolving line of credit agreement with United Jersey Bank. As of the date of
this Prospectus, the Company has an aggregate principal amount of $225,000
outstanding under this line of credit. See "Management's Discussion and Analysis
or Plan of Operation."
The proceeds allocated to working capital and general corporate purposes
will be applied, to the extent necessary, to the Company's current operations.
14
<PAGE>
CERTAIN MARKET INFORMATION
The shares of Common Stock of the Company commenced trading on the Nasdaq
Small Capitalization Market under the symbol "SELB" on July 13, 1995. The range
of high and low reported closing sales prices for the Common Stock as reported
by Nasdaq since the commencement of trading were as follows:
<TABLE>
<CAPTION>
HIGH (1) LOW (1)
----------- -----------
<S> <C> <C>
FISCAL YEAR 1995
Third Quarter........................................................................ $ 3.17 $ 2.71
Fourth Quarter....................................................................... $ 5.50 $ 2.81
FISCAL YEAR 1996
First Quarter........................................................................ $ 7.00 $ 4.67
Second Quarter....................................................................... $ 8.00 $ 6.44
</TABLE>
- ------------------------
(1) All share prices with respect to dates prior to the Share Distribution have
been adjusted to give effect to the Share Distribution. All share prices
have been rounded to the nearest cent.
The prices set forth above reflect inter dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
On July 10, 1996, as reported by the Company's transfer agent, shares of
Common Stock were held by 16 persons, based on the number of record holders,
including several holders who are nominees for an undetermined number of
beneficial owners.
DILUTION
The difference between the exercise price of the Warrants and the adjusted
net tangible book value per share of Common Stock after this offering, assuming
exercise for cash of all Warrants (including the Selling Security Holders'
Warrants), Underwriter's Warrants and Warrants included therein, constitutes the
dilution to investors in this offering. Net tangible book value per share on any
given date is determined by dividing the net tangible book value (total tangible
assets less total liabilities) of the Company on such date by the number of
shares of Common Stock outstanding on such date.
At March 31, 1996, the net tangible book value of the Company was
$4,505,189, or $.61 per share of Common Stock. After giving effect to the sale
by the Company of 5,940,000 shares of Common Stock upon the exercise of
outstanding Warrants (including the Selling Selling Security Holders' Warrants),
240,000 shares of Common Stock upon the exercise of the Underwriter's Warrants
and 240,000 shares of Common Stock upon the exercise of the Warrants included
therein, and the receipt of the net proceeds therefrom, the net tangible book
value at March 31, 1996 would have been $17,245,189, or $1.24 per share of
Common Stock, representing an immediate increase in net tangible book value of
$.63 per share to existing shareholders and an immediate dilution of $.76 (38%)
per share to those who exercise Warrants. The following table illustrates the
foregoing information with respect to dilution on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock upon exercise of Warrants (1)............ $ 2.00
Net tangible book value per share before offering........................... $ .61
Increase per share attributable to investors in this offering (2)(3)........ $ .63
Adjusted net tangible book value after offering.......................................... $ 1.24
---------
Dilution to investors in this offering................................................... $ .76
---------
---------
</TABLE>
- ------------------------
(1) Before deducting solicitation fees, if any, to be paid to the Underwriter in
connection with the exercise of Warrants. See "Warrant Solicitation."
(2) Assumes no exercise of other outstanding options or warrants.
(3) Includes proceeds from the sale of 240,000 shares of Common Stock upon the
exercise of the Underwriter's Warrants at an average price of $2.50 per
share.
15
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1996, the capitalization of
the Company (i) on a historical basis and (ii) as adjusted to give retroactive
effect to the issuance and sale of the securities offered hereby and the
anticipated application of the estimated net proceeds therefrom. This
information should be read in conjunction with the Company's financial
statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(1)
------------- --------------
(UNAUDITED)
<S> <C> <C>
Long-term debt, less current portion..................................... $ -0- $ -0-
------------- --------------
Total long-term debt................................................... -0- -0-
------------- --------------
Shareholders' equity
Common stock, par value $0.01 per share, 40,000,000 shares authorized,
7,440,000 shares issued and outstanding (actual) and 13,860,000 shares
issued and outstanding (as adjusted).................................. 74,400 138,600
Additional paid-in capital............................................. 4,183,464 16,859,264
Retained earnings........................................................ 521,066 521,066
------------- --------------
Total shareholders' equity............................................... 4,778,930 17,518,930
------------- --------------
Total capitalization..................................................... $ 4,778,930 $ 17,518,930
------------- --------------
------------- --------------
</TABLE>
- ------------------------
(1) Gives effect to the sale of 5,940,000 shares of Common Stock upon the
exercise of outstanding Warrants (including the Selling Security Holders'
Warrants), and the sale of 240,000 shares of Common Stock upon exercise of
the Underwriters' Warrants and 240,000 shares of Common Stock upon exercise
of the Warrants included therein, resulting in net proceeds to the Company
of $12,740,000 (after deducting expenses of the offering other than
solicitation fees, if any, to be paid to the Underwriter in connection with
the exercise of the Warrants). See "Warrant Solicitation."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1995 and for the
years ended December 31, 1995 and 1996 is derived from the Company's financial
statements, audited by Goldstein Golub Kessler & Company, P.C., included
elsewhere in this Prospectus. The data as of March 31, 1996 and for the
three-month periods ended March 31, 1995 and 1996 is derived from the Company's
unaudited financial statements included elsewhere in this Prospectus, which, in
the opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information set
forth herein. This data should be read in conjunction with the financial
statements of the Company, including their respective notes and "Management's
Discussion and Analysis or Plan of Operation."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ ------------------------------
1994 (1)(3) 1995 (2)(3) 1995 (3) 1996 (3)
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue....................................... $ 10,794,294 $ 11,480,135 $ 2,354,848 $ 3,070,765
Operating income.............................. $ 651,874 $ 595,157 $ 144,598 $ 141,388
Pro forma net income.......................... $ 253,437 $ 341,423 $ 49,100 $ 90,543
Pro forma net income per share:
Primary..................................... $ 0.05 $ 0.05 $ 0.01 $ 0.01
Fully Diluted............................... $ 0.05 $ 0.04 $ 0.01 $ 0.01
Pro forma weighted average number of common
shares outstanding
Primary..................................... 4,969,089 8,429,726 4,969,089 13,977,189
Fully Diluted............................... 4,969,089 8,491,491 4,969,089 14,154,955
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(4)
------------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Current assets................................................................... $ 5,850,375 $ 18,590,375
Current liabilities............................................................ $ 1,665,669 $ 1,665,669
Working capital................................................................ $ 4,184,706 $ 16,924,706
Total assets................................................................... $ 6,444,599 $ 19,184,599
Total liabilities.............................................................. $ 1,665,669 $ 1,665,669
Shareholders' equity........................................................... $ 4,778,930 $ 17,518,930
</TABLE>
- ------------------------
(1) Restated to include the results of operations of the Company and Linette
Cosmetics for the twelve-month period ended December 31, 1994 and of Lea
Cosmetics for the twelve-month period ended September 30, 1994.
(2) Includes the results of operations of the Company and Linette Cosmetics for
the twelve-month period ended December 31, 1995 and of Lea Cosmetics for the
fifteen-month period ended December 31, 1995. The results of operations of
Lea Cosmetics for the three-month period from October 1, 1994 to December
31, 1994 included in the statement of operations for 1995 were not material.
(3) Prior to the Linette Merger, the Company and Linette Cosmetics were treated
as S Corporations, with their earnings taxed for federal and certain state
income tax purposes directly to their respective shareholders. Pro forma
financial information includes a pro forma adjustment for income taxes
treated on a C Corporation basis.
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(4) Gives effect to the sale of 5,940,000 shares of Common Stock upon the
exercise of the outstanding Warrants (including the Selling Security
Holders' Warrants), and the sale of 240,000 shares of Common Stock upon
exercise of the Underwriters' Warrants and 240,000 shares of Common Stock
upon exercise of the Warrants included therein, resulting in net proceeds to
the Company of $12,740,000 (after deducting expenses of this offering other
than solicitation fees, if any, to be paid to the Underwriter in connection
with the exercise of the Warrants). See "Warrant Solicitation."
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion and analysis of the Company's results of
operations, liquidity and financial condition should be read in conjunction with
the financial statements of the Company included elsewhere in this Prospectus
and the related notes thereto.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTH PERIOD
ENDED MARCH 31, 1995
Net sales for the three months ended March 31, 1996 were $3,070,765 compared
to $2,354,848 for the three months ended March 31, 1995, representing an
increase of 30%. This increase in net sales resulted from increases in both the
sales of the Company's own proprietary brand name line of beauty aids and
cosmetics and sales of merchandise acquired in connection with the Company's
opportunistic purchasing business.
Cost of sales increased from $1,777,363 for the three month period in 1995
to $2,283,866 for the same period in 1996. However, the cost of goods sold
decreased as a percentage of sales from 75.5% in 1995 to 74.4% in 1996,
reflecting increased sales of the Company's proprietary brand name line of
beauty aids and cosmetics, which products generally have a higher profit margin
than other merchandise sold by the Company. The gross profit margins of the
Company are subject to fluctuation due to varying profit margins applicable to
the particular merchandise acquired by the Company in connection with its
opportunistic purchasing business.
Selling, general and administrative ("SG&A") expenses increased from
$432,887 in 1995 to $645,511 in 1996. The principal components of SG&A are
payroll, rent, commissions, insurance, legal, accounting and other fees paid to
third parties and travel and promotional expenses. The increase in SG&A expenses
in 1996 resulted primarily from the increased payroll and travel expenses
incurred by the Company in connection with its growth and increases in other
expenses resulting from its status as a public company.
As a result of the increase in the cost of sales and the increase in SG&A
expenses, total operating expenses increased from $2,210,250 in 1995 to
$2,929,377 in 1996.
As a result of the increase in operating expenses, operating income
decreased from $144,598 in 1995 to $141,388 in 1996. The increase in interest
income of $9,902 in 1996 compared to $-0- in 1995 and the decrease in interest
expense from $37,953 in 1995 to $12,243 in 1996 resulted in an increase in
income before provision for income tax of $106,645 in 1995 to $139,048 in 1996.
The pro forma net income reflects an adjustment to the earnings of the Company
for income taxes as if the Company's S Corporation status had terminated at the
beginning of the period.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Net sales for the fiscal year ended December 31, 1995 were $11,286,114
compared to $10,401,907 for the fiscal year ended December 31, 1994,
representing an increase of 9%. This increase in net sales resulted primarily
from sales of the Company's own proprietary brand name line of beauty aids and
cosmetics.
Income from commissions decreased from $392,387 in fiscal year 1994 to
$194,021 in fiscal year 1995 as a result of the Company's increased emphasis on
the sale of its own branded products and the resulting decrease in its sales on
a commission basis of products manufactured and distributed by third parties.
Cost of sales increased from $8,314,521 in 1994 to $8,868,566 in 1995.
However, the cost of goods sold decreased as a percentage of sales from 79.9% in
1994 to 78.6% in 1995, reflecting increased sales
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of the Company's proprietary brand name line of beauty aids and cosmetics and
increased sales of prestige fragrances, which products generally have a higher
profit margin than other merchandise sold by the Company.
SG&A expenses increased from $1,827,889 in 1994 to $2,016,412 in 1995. The
increase in SG&A expenses in 1995 resulted primarily from the increased
professional fees incurred by the Company in connection with the IPO and its
status as a public company and increased payroll expenses resulting from the
Company's having hired additional employees following the IPO.
As a result of the increase in the cost of sales and the increase in SG&A
expenses, total operating expenses increased from $10,142,420 in 1994 to
$10,884,978 in 1995.
As a result of the decrease in the amount of commission income and the
increase in the Company's operating expenses, operating income decreased from
$651,874 in 1994 to $595,157 in 1995.
Other income (expense) included income of $101,489 for the year 1995 and a
net expense of $71,392 for the year 1994. Other income in 1995 was primarily
comprised of proceeds of approximately $49,000 resulting from the settlement of
an insurance claim and restitution by a former employee in the amount of
$52,000. The expense in 1994 of approximately $71,000 represents a one-time
charge for settlement of an insurance claim including the amount of $23,000 of
loss not covered by the insurance settlement, fees paid to the insurance
adjuster and other expenses.
The provision for income taxes of $70,000 in 1994 primarily represents taxes
owed by Lea Cosmetics, which was taxed as a C Corporation. During 1994, Linette
Cosmetics and the Company were operated as S Corporations, and earnings of these
companies during such period were taxed for federal and certain other income tax
purposes directly to their shareholders. Upon the consummation of the Linette
Merger, the Company ceased being an S Corporation and, accordingly, became
subject to federal and state income taxes. The provision for income taxes of
$234,000 in 1995 reflects taxes owed by the Company with respect to earnings of
the Company during the period following the termination of its status as an S
Corporation.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, the Company completed the IPO, in which it sold an aggregate of
920,000 IPO Units, with each IPO Unit consisting of three shares of Common Stock
and three Warrants, at a price of $5.00 per IPO Unit for gross proceeds of
$4,600,000.
After deducting fees and expenses of the IPO of approximately $1,274,000,
the net proceeds of the IPO were used to repay $850,000 of loans outstanding
under the Company's then existing borrowing arrangement with a bank and a
$250,000 note (the "Bridge Note") which had been issued to a bridge investor
(the "Bridge Investor") in connection with certain bridge financing secured by
the Company. The remaining $2,226,000 was added to working capital.
In connection with the Company's IPO, the balance of loans to the Company by
related parties, which was $769,000 at such time, was reduced by $300,000. The
debt of $300,000 was converted into conversion units (equivalent to the IPO
Units) (the "Conversion Units") at the rate of $5.00 per Conversion Unit for an
aggregate of 60,000 Conversion Units, consisting of an aggregate of 180,000
shares of Common Stock and 180,000 Warrants (which Warrants constitute the
Selling Security Holders' Warrants). The remaining $469,000 was scheduled to be
repaid by the Company with interest at an annual rate of 8% on January 20, 1997
out of available working capital, if available, on such terms as were to be
determined by the board of directors of the Company. On March 21, 1996, the
Company repaid such remaining balance at a discount of $46,900 and increased
additional paid-in capital by a corresponding amount.
Prior to the consummation of the Linette Merger, the Company and Linette
Cosmetics were treated as S Corporations. As a result, earnings of such
companies during such period were taxed for federal and certain state income tax
purposes directly to the shareholders of the companies. On May 17, 1995, the
Company declared a distribution payable to the shareholders of such companies
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prior to the Linette Merger in an amount equal to the taxes payable on earnings
of the Company during the period of its S Corporation status (the "S Corporation
Distribution"), which distribution was payable following the consummation of the
IPO after the amount thereof had been determined. In September and October of
1995, the Company paid S Corporation Distributions in the aggregate amount of
approximately $156,250.
In May 1995, the Company borrowed, for working capital purposes and to pay a
portion of the expenses of the IPO, an aggregate of $250,000 (the "Bridge
Financing") from the Bridge Investor, an accredited investor unaffiliated with
the Company or any of its executives or directors. In connection with the Bridge
Financing, the Company issued to the Bridge Investor (i) the Bridge Note, which
bore interest at the rate of 8% per annum and was due and payable on the earlier
of the consummation of the IPO or November 23, 1995 and (ii) 1,000,000 warrants
(the "Bridge Warrants"), each of which was exercisable until November 23, 1995
and entitled the holder thereof to purchase three shares of Common Stock at an
exercise price of $2.00 per share. Upon the consummation of the IPO, each Bridge
Warrant automatically converted into a warrant having the same terms as the
Warrants. The Company used a portion of the proceeds of the IPO to repay the
entire principal amount of the Bridge Note, plus accrued interest thereon.
On November 6, 1995, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with United Jersey Bank (the "Lender") pursuant to which
it obtained a revolving line of credit for general working capital purposes in
an aggregate principal amount up to $2,000,000, subject to a borrowing base
limitation. The line of credit bears interest at fluctuating rates per annum
based on the "Prevailing Base Rate" (as defined in the Loan Agreement) of the
Lender. As of the date hereof, the Company has an aggregate principal amount of
$225,000 outstanding under this line of credit. Any funds borrowed by the
Company under the Loan Agreement are secured primarily by the inventory and
receivables of the Company. The Loan Agreement terminates on May 31, 1997.
Although the Company anticipates that it will renew the Loan Agreement upon its
termination, there can be no assurance that the Loan Agreement will be renewed
at such time.
At March 31, 1996, the Company had working capital of $4,184,706 and cash
and short-term investments of $72,388.
The Company anticipates that the proceeds of this offering, which will
increase the Company's available working capital and cash, together with
anticipated cash flow from the Company's operations, will be sufficient to
satisfy the Company's cash requirements for at least twelve months. In the event
the Company's plans change (due to unanticipated expenses or difficulties or
otherwise), or if the proceeds of this offering and projected cash flow
otherwise prove insufficient to fund operations, the Company could be required
to seek additional financing sooner than currently anticipated. Except for the
Loan Agreement, which expires on May 31, 1997, the Company has no current
arrangements with respect to, or sources of, additional financing. Accordingly,
there can be no assurance that additional financing will be available to the
Company when needed, on commercially reasonable terms, or at all. The Company's
inability to obtain such additional financing could have a material adverse
effect on the Company's long-term liquidity and on the proposed business
expansion plans of the Company.
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BUSINESS
GENERAL
The Company is primarily engaged in the distribution and marketing of
consumer merchandise to retail sellers such as mass merchandisers, discount
chain stores and electronic retailers. The Company's business presently consists
of the following activities: (i) opportunistic purchasing and secondary sourcing
(I.E., distributing merchandise on a wholesale basis outside of normal
distribution channels to retail merchants) of a broad range of name-brand and
off-brand products such as health and beauty aids, cosmetics, fragrances,
kitchen items and other household items, (ii) developing, marketing and selling
the Company's own proprietary brands of budget-line health, beauty aid and
cosmetic products, which are manufactured for the Company by contract
manufacturers, (iii) representing manufacturers and distributors as a sales
agent, on a commission basis, in connection with the sale to mass merchandise
retailers of merchandise manufactured and distributed by such third parties and
(iv) developing, marketing and selling products to be promoted by celebrity
spokespersons and sold by the Company to mass merchandise retailers, as well as
products which will "tie in" to specific television shows and be sold by the
Company on television in connection with those shows, with the intent to
thereafter sell such products to mass merchandise retailers. The Company's
strategy is to capitalize on increased consumer demand for value and convenience
resulting from the increased acceptance by consumers of mass merchandisers,
electronic retailers and other mass marketing retail outlets, as well as on the
popularity of consumer products endorsed by celebrity spokespersons.
The Company, which was incorporated under the laws of the State of New York
in September 1993, consummated the IPO in July 1995. Pursuant to the Linette
Merger, which was consummated on May 18, 1995, Linette Cosmetics, a corporation
founded in 1985 by Harold Markowitz, the Chairman of the Board of the Company,
and Jorge Lazaro, the Executive Vice President and Secretary of the Company, was
merged with and into the Company, with the Company as the surviving corporation.
Prior to the Linette Merger, all of the outstanding capital stock of Linette
Cosmetics was owned by Mr. Markowitz, Mr. Lazaro and Paul Sharp, the President
and Chief Executive Officer of the Company, who together comprised the
shareholders of the Company until the IPO. In addition, immediately prior to the
consummation of the IPO, the Company consummated the Lea Acquisition, pursuant
to which each of Messrs. Markowitz, Sharp and Lazaro contributed to the Company
his 20% equity interest in Lea Cosmetics and the Company acquired from the
remaining shareholder his 40% equity interest in Lea Cosmetics. As a result, Lea
Cosmetics became a wholly-owned subsidiary of the Company and, on August 3,
1995, Lea Cosmetics was merged with and into the Company, with the Company as
the surviving corporation.
OPPORTUNISTIC PURCHASING AND SECONDARY SOURCING ACTIVITIES. The Company
acts as a secondary sourcer of a broad range of name-brand and off-brand
merchandise, including health and beauty aids, cosmetics, fragrances, kitchen
items and other household products. The Company acquires its merchandise in
negotiated purchases either directly from consumer goods manufacturers or from
wholesalers, retailers, financially distressed businesses, duty-free
distributors and other secondary sources located both in the United States and,
to a limited extent, in Europe, and sells the merchandise to retail chains and
other mass merchandisers located throughout the United States and, more
recently, in Canada. During the year ended December 31, 1995, the Company
purchased merchandise from over 50 different suppliers and sold the merchandise
to over 30 different retailers, including, among others, BJ's Wholesale Club
(which accounted for approximately 26% of the Company's net sales in 1995), Ames
Department Stores (which accounted for approximately 11% of the Company's net
sales in 1995) and Bill's Dollar Stores and Hills Department Stores (each of
which accounted for between 4% and 5% of the Company's net sales in 1995). The
Company believes that its longstanding relationships with many of its suppliers
and customers are important to the secondary sourcing activities of the Company,
and that its relationship with its suppliers and customers are good.
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In connection with its distribution activities, the Company has the ability
to repackage merchandise acquired by it or to provide other value-added services
at the request of a customer. For example, if the Company were to acquire
merchandise which had been packaged by the manufacturer as a four-pack item
(I.E., four items to the package), the Company could, if requested by the
customer, repackage the item as a ten-pack item prior to delivery of the
merchandise to the customer. Likewise, at a customer's request, the Company has
the ability to package several different items together to create a gift or
bonus package. The Company believes that its ability to provide such value-added
services allows it to service the ongoing needs of its customers and to enhance
its sales and customer relations.
Because the Company focuses on the opportunistic acquisition of merchandise
(other than designer fragrances) such as purchases of closed-out, overstocked
and/or change-of-packaging brand name items, the Company is generally able to
purchase such merchandise at a discount below wholesale cost. The Company then
sells the merchandise to discount retailers and other mass merchandisers who
seek to purchase products at discount prices in order to supplement their normal
inventory purchases or for special promotions. The merchandise is sold at prices
that are above the Company's cost, although at prices that are still generally
below wholesale. Although the Company typically purchases merchandise before it
has located customers for such merchandise, it has sold substantially all
merchandise acquired by it in each of the last three fiscal years.
The Company purchases the name-brand and off-brand merchandise which it
sells to retailers from over 50 suppliers, including consumer goods
manufacturers, wholesalers, retailers, financially distressed businesses,
duty-free distributors and other secondary sources. The Company is continually
seeking to locate new sources of merchandise. Generally, the Company will be
contacted by a manufacturer or other supplier when such supplier has excess
merchandise that is available for resale through the secondary market;
alternatively, the Company will also contact a supplier if it becomes aware that
the supplier has merchandise which it desires to sell. Although certain
suppliers may have provided a majority or all of a particular type of product or
particular category of merchandise, no supplier accounted for more than 10% of
the Company's total merchandise purchases for the year ended December 31, 1995
other than Stealth International, which accounted for approximately 10% of such
total purchases. During the year ended December 31, 1995, substantially all of
the Company's secondary sourcing merchandise was purchased from domestic
suppliers, with the remainder being purchased from suppliers located in Europe.
The Company believes that the loss of any one of its suppliers would not have a
material adverse effect on the Company and that alternative sources of
merchandise are readily available in all existing product categories as well as
additional product categories.
All merchandise is purchased by the Company from its suppliers through
individually placed purchase orders. The Company does not have any contractual
relationships with any of its suppliers and depends, instead, on its ongoing
relationships and prior dealings with such suppliers to obtain merchandise at
favorable prices when it becomes available to secondary suppliers. The Company
believes that such ongoing relationships with its suppliers have resulted from
its prior dealings with such suppliers, in many cases over a period of years,
and its reliability and strength as a customer. Several of the Company's
principals have been involved in the opportunistic purchasing business for more
than 20 years and have developed many on-going contacts with suppliers.
Currently, all purchasing and pricing decisions with respect to the
Company's opportunistic purchasing activities are made by Messrs. Markowitz,
Sharp and Lazaro, who locate sources of merchandise and determine whether any
given product will be suitable for wholesale distribution to mass merchandise
retailers or other customers. Generally, the Company believes that it has the
ability to sell all merchandise that is acquired by it. The Company has credit
arrangements with substantially all of its existing suppliers, thereby allowing
the Company to purchase merchandise on account. Generally, such credit
arrangements allow the Company to purchase merchandise with payment generally
due 30 days after the purchase.
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The Company also acts as a wholesale distributor of prestige, designer
fragrances. Historically, manufacturers of such fragrances have sold their
products primarily to leading department stores. As a result, mass merchandisers
have traditionally only been able to obtain such items from secondary sources
such as the Company. Typically, the Company purchases these fragrances from
other secondary sources such as export and import companies, duty-free
distributors and department stores which are liquidating their excess inventory.
Unlike other merchandise which is acquired by the Company at prices that are
significantly below wholesale, the Company purchases the prestige fragrances at
above-wholesale prices (although still well below their normal retail price).
The Company, in turn, sells such items to mass merchandisers. The Company
believes that sales of such fragrances will continue to constitute a portion of
its sales, although there can be no assurance of such.
The Company believes that a portion of the prestige fragrances purchased by
it may include trademarked products manufactured in foreign countries and
trademarked products manufactured in the United States that may have been sold
to foreign distributors. From time to time, United States trademark owners and
their licensees and trade associations have initiated litigation or
administrative agency proceedings seeking to halt the importation into the
United States of such foreign manufactured or previously exported trademarked
products. Although the Company is not currently the subject of any such legal or
administrative actions, and is not aware of any such threatened legal or
administrative actions, there can be no assurance that the Company's business
activities will not become the subject of such actions in the future, or that
future judicial, legislative or administrative agency action will not limit or
eliminate some or all of the secondary sources of supply of prestige fragrances
used by the Company. However, the Company believes that any future limitation on
or elimination of its sources of supply for prestige fragrances for sale to its
customers would not have a material adverse effect on the Company, although
there can be no assurance of such.
SALE OF PROPRIETARY BRAND NAME PRODUCTS. The Company is also currently
engaged in the development, marketing and sale of its own proprietary brand name
budget-line health, beauty aid and cosmetic products. Prior to the Lea
Acquisition, many of such products were developed and sold by Lea Cosmetics and
purchased by the Company, who in turn sold such products to many of the mass
merchandisers included in its customer base. The Company's beauty aid and
cosmetic products include budget-line lipsticks, lip pencils, nail polishes and
eye pencils, which are manufactured in a variety of colors and are sold under
the Linette-Registered Trademark-, Vea-Registered Trademark- and
Zia-Registered Trademark- brand names (and, in the past, under the "Lea" brand
name) to retail chains and other mass merchandisers located throughout the
United States. All of the Company's proprietary beauty aid and cosmetic products
and all packaging therefor are manufactured and supplied by third parties in
accordance with the Company's specifications. The Company purchases all
materials for these products (including raw materials and packaging) through
individually placed purchase orders to various suppliers. The Company has credit
arrangements with such suppliers that allow it to purchase merchandise on credit
with payment generally due 30 days after purchase. To date, the Company has not
experienced any shortages of or difficulties in obtaining the raw materials used
in its products or the materials used for the packaging of its products.
Furthermore, the Company believes that alternate sources of supply for such
materials are readily available and that the loss of any one of its suppliers
would not have a material adverse effect. The Company believes that it has good
relationships with the suppliers of raw materials and packaging for its
proprietary products.
Typically, all materials purchased by the Company for its proprietary beauty
aid and cosmetic products are delivered directly by the suppliers to the
Company's contract manufacturer, which is presently LPD Packaging, Inc., a
manufacturer engaged by the Company to provide filling and packaging services,
perform quality control, distribute the finished products and, if necessary,
warehouse the products. All products are manufactured pursuant to the Company's
specifications on a purchase order basis. Although the Company believes that its
contract manufacturer has the capacity to produce volumes of the Company's
products sufficient to meet the Company's foreseeable needs,there can be no
assurance of such. Furthermore, although the Company believes that it has a good
relationship with this manufacturer and that the Company will continue to obtain
its finished
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beauty aid and cosmetic products from such manufacturer in the foreseeable
future, the Company does not have a written contract with this manufacturer and
there can therefore be no assurance of such. In the event the Company were to
experience difficulties with or the loss of services of its present
manufacturer, the Company believes that it would be able to retain the services
of other manufacturers; however, there can be no assurance that such services
could be retained on a timely basis or on terms as favorable as those with its
present manufacturer.
As part of the Company's strategy of taking advantage of the growth in mass
merchandising and value retailing, the Company will seek to continue introducing
its own brand name products, thereby providing the Company with a supply of
products and making the Company less reliant on third party and/or opportunistic
sources of merchandise. The Company may also seek to acquire rights to
additional proprietary product lines through licensing or other arrangements,
although there can be no assurance of such.
COMMISSION SALES. In addition to establishing its own sources of
merchandise, the Company also acts as a sales agent for other manufacturers and
distributors of merchandise which is sold in the mass merchandise market. In
September 1994, the Company entered into a five-year agreement with Clyde
Duneier, Inc. ("Duneier"), a manufacturer and distributor of fine jewelry,
pursuant to which the Company acts as the exclusive sales agent for Duneier for
its Ames Department Store account, in consideration for which the Company is
paid a fixed annual fee and royalty payments on net sales over certain specified
amounts. The Company currently anticipates that, in light of its present plans
to develop and sell more of its proprietary brand name products, the Company may
not enter into any additional arrangements pursuant to which it would sell, on a
commission basis, products that are manufactured and distributed by third
parties. In addition, there can be no guaranty that the Company's agreement with
Duneier will be renewed upon the expiration of such agreement in September 1999.
DEVELOPMENT OF "CELEBRITY" PRODUCTS. The Company believes that the
increasing popularity of consumer products endorsed by celebrities may provide
significant future opportunities for the Company. Accordingly, the Company is
seeking to develop products for promotion by celebrity spokespersons, which
products will be sold by the Company to mass merchandising and electronic
retailers. In this connection, the Company will seek to enter into agreements
with celebrities for whom it believes it will be able to successfully develop
products which will have consumer appeal.
In November 1993, the Company entered into an agreement with Jackie Collins,
the best-selling author of such novels as HOLLYWOOD WIVES, ROCK STAR, SINNERS
and LADY BOSS. Pursuant to this agreement, the Company developed a line of
"Jackie Collins" products (including fragrances, costume jewelry, accessories,
sunglasses and belts) which were sold to Home Shopping Network and promoted by
Ms. Collins on Home Shopping Network in four appearances in 1994 and one
appearance in 1995. The Company believes that, based on its success in
developing products for Ms. Collins in connection with such appearances and the
strength of her appeal to consumers, there is significant opportunity for the
Company to develop products to be promoted by Ms. Collins and sold in the
traditional retail market. Accordingly, the Company has developed a line of
"Jackie Collins Wild" fragrances, which were launched by the Company into the
retail market in October 1995. The Company is also currently in the process of
developing a line of bath products and jewelry for Ms. Collins for sale by the
Company to mass market merchandisers. However, there can be no assurance that
the Company will be able to sell any additional amounts of such fragrances, that
it will be able to successfully develop and/or promote any other products for
Ms. Collins or that any of the products so developed will meet with consumer
acceptance or generate any significant revenues.
In November 1995, the Company entered into an agreement with Direct Access
Group/Television Production Partners ("Direct Access") pursuant to which Direct
Access has granted the Company the exclusive right to develop and sell
cosmetics, fragrances and spa items in connection with "tie-in" product programs
developed by Direct Access for television networks and producers. Such product
programs involve the development of products which "tie in" to characters,
activities and/or themes of
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a specific television show. Pursuant to its agreement with Direct Access, the
Company has been authorized to develop and act as the exclusive manufacturer and
distributor of a cosmetic, fragrance and skin care line to be known as "Jabot
for the Young and Restless Generation," which was inspired by and will be sold
in connection with, the CBS daytime drama THE YOUNG AND THE RESTLESS. It is
anticipated that such products, as well as any other products developed by the
Company pursuant to the agreement, will be sold on a telemarketing basis during
the airing of the "tie-in" show. The Agreement also provides that the Company
will also be entitled to sell any merchandise developed by it for any of such
television shows through other retail distribution channels, provided that the
Company pays a royalty in connection therewith at a negotiated amount either to
Direct Access or to the television producer or network for which such
merchandise has been developed. The exclusive right granted to the Company to
develop products for Direct Access will be for a term of 24 months, commencing
upon the airing of the first television show on which merchandise is offered for
sale. The Company has advanced $50,000 to Direct Access in order to secure the
grant of its exclusive right. As of the date hereof, Direct Access has not
secured air time for the promotion and sale of the "Jabot" products, and there
can be no assurance of such. In addition, there can be no assurance that Direct
Access will be able to successfully negotiate with any television networks or
producers for the development of other program product "tie-ins" or that Direct
Access will be able to secure air time during which any such products can be
marketed and sold.
The Company has also entered into agreements with other celebrities (or with
entities with which such celebrities are affiliated or personal service
corporations representing such celebrities), including actress Barbara Eden,
fashion designer Albert Nipon and Best Buddies, a charitable organization
founded by Anthony Kennedy Shriver. To date, the Company has not developed any
products for any of such celebrities, and there can be no assurance that the
Company will develop any such products in the future.
Although the Company is seeking to develop the "celebrity" product area of
its business, including by marketing and distributing in the traditional retail
market merchandise which is originally offered for sale on television or by
developing products to be promoted by celebrities and sold directly in such
traditional markets, there can be no assurance that the Company will be
successful in its endeavors. To date, the Company has not generated a
significant amount of revenues from such celebrity products, and there can be no
assurance that it will be able to successfully develop any such products or that
any such products developed by the Company will meet with consumer acceptance.
In addition, except as described above, as of the date hereof the Company has no
agreements, understandings or commitments related to such plan of development.
COMPETITION
The areas of business in which the Company engages are highly competitive
businesses. The secondary sourcing business is characterized by intense
competition, both in the products sold and in the retaining of relationships
with suppliers and customers. With respect to its ability to obtain merchandise,
the Company competes with other secondary sources, as well as with wholesale
distributors and retailers. The Company believes that its ability to purchase a
broad array of merchandise at competitive prices is critical to its success.
With respect to sales to its customers, the Company competes with other
secondary suppliers of merchandise, as well as with manufacturers who sell
directly to retail merchandisers. In addition, with respect to products sold
under the Company's Linette-Registered Trademark-, Vea-Registered Trademark- and
Zia-Registered Trademark- brand names, as well as the Company's other brand
names, the Company competes with other manufacturers at the retail store level
for shelf space and promotional space. Many of the Company's existing or
potential competitors are well established companies and have or will have
substantially greater financial, marketing and other resources than the Company.
The Company believes that it competes on the basis of value, product assortment
and availability, service to customers and reputation, as well as on the basis
of its long-standing and well-established relationships with both its suppliers
and customers. Although the Company believes that it will be able to compete
effectively on the basis of such factors, there can be no assurance of such.
26
<PAGE>
In connection with its "celebrity" products business, the Company competes
or will compete with manufacturers and marketing organizations that seek out
celebrities to endorse products and assist in marketing programs for their
merchandise. In addition, the Company believes that virtually all celebrities
have agents who can negotiate directly with retailers in order to secure
marketing contracts on their behalf. The Company believes that it competes on
the basis of its ability to design products which are consistent with the
celebrities' respective preferences and characters and to provide such products
to retailers at competitive prices. Furthermore, although the Company is not
aware of any other entities which currently manufacture, market or develop
television "tie-in" products to be sold on television in connection with the
related program, the Company believes that any such products developed by the
Company will compete with other products sold in the electronic retailing market
(including through television infomercials and interactive television shopping
networks), as well as other products sold in the traditional retail market which
relate to characters or themes of television shows or movies. The Company
believes that it will compete on the basis of the unique nature of such
television "tie-in" products, as well as on its ability to provide such products
at competitive prices.
TRADEMARK AND SERVICEMARK PROTECTION
To date, products developed by the Company (and by Linette Cosmetics prior
to the Linette Merger and Lea Cosmetics prior to the Lea Acquisition) have been
sold under the Linette-Registered Trademark-, Vea-Registered Trademark- and
Zia-Registered Trademark- trademarks and the "Lea" mark. The Company has
registered the Linette-Registered Trademark-, Vea-Registered Trademark- and
Zia-Registered Trademark- trademarks with the United States Patent and Trademark
Office (the "Trademark Office"). However, there can be no assurance that these
marks do not or will not violate the proprietary rights of others, that such
marks would be upheld if challenged or that the Company would not be prevented
from using its trademarks. The Company has not applied for a trademark
registration of the "Lea" mark and has been advised that a trademark application
for the "Lea" mark was filed with the Trademark Office by an unrelated entity
for use in connection with the sale of skin care and other cosmetic products.
The Company has ceased using such mark and does not intend to market its
products using such mark in the future. The Company believes that, because the
proprietary brand-name products sold by the Company are "budget" items whose
appeal to consumers is based primarily on price, packaging and color assortment
rather than on the product's name, the Company's inability to use any given mark
should not have a material adverse effect on the Company. Although no claims
have been made to date against the Company alleging that the use of the "Lea"
mark violates the rights of any other party, there can be no assurance that such
mark does not violate the proprietary rights of any other party.
The Company has also applied to the Trademark Office for the registration of
the trademark "Jackie Collins Wild," the trademark under which the Company sells
a fragrance developed for Ms. Collins. In addition, the Company has also applied
to the Trademark Office to register certain other trademarks which it intends to
use in the future in connection with its own proprietary brand name products,
and intends to register other brand names chosen by the Company for its own line
of products. However, there can be no assurance that the Company will be able to
register any such marks.
The owner of the Jabot-Registered Trademark- trademark has granted to Direct
Access a license to use such trademark in connection with the "Jabot" line of
products to be developed and sold in connection with the CBS daytime drama THE
YOUNG AND THE RESTLESS. Pursuant to such license, Direct Access has the right to
grant to the Company, and accordingly has granted to the Company, a license to
use such trademark in connection with the "Jabot for the Young and Restless"
line of products to be developed and sold by the Company pursuant to its
arrangement with Direct Access.
PERSONNEL
The Company currently employs 14 full-time employees and approximately 25
part-time employees (the exact number of which fluctuates from time to time
based on the Company's needs), who are hired by the Company primarily to
repackage products and perform other similar services. All of the
27
<PAGE>
Company's full-time employees are paid on a salaried basis. None of the
Company's employees are covered by any collective bargaining agreements.
Management believes that its employee relations are good.
INSURANCE
To date, no material product liability claims have been made against the
Company; however, as a distributor of merchandise, including health and beauty
aids, cosmetics, fragrances and household items, the Company could be exposed to
possible liability claims from others for personal injury or property damage due
to design or manufacturing defects or otherwise. The Company maintains a product
liability insurance policy that has a $1,000,000 per occurrence limit and a
$2,000,000 aggregate limit, and a $3,000,000 umbrella liability insurance policy
to cover claims in excess of the limits of its product liability insurance. In
addition, the Company believes that the suppliers from whom it purchases such
merchandise, including the manufacturers thereof, maintain adequate levels of
product liability insurance. The Company also maintains other insurance,
including insurance relating to property and personal injury, which the Company
believes is similar to that maintained by comparable businesses and in amounts
which the Company currently considers adequate. The Company believes that its
insurance coverage, including without limitation its product liability coverage,
is adequate in light of prior experience and future expectations. Nevertheless,
a partially or completely uninsured claim against the Company, if successful and
of sufficient magnitude, could have a material adverse effect on the Company.
LEGAL PROCEEDINGS
The Company, Mr. Markowitz and Mr. Mirsky (collectively, the "Sel-Leb
Defendants") have been named as defendants-in-counterclaim in an action pending
in the Supreme Court of the State of New York, County of New York, entitled
GERSTEN, SAVAGE, KAPLOWITZ & CURTIN, LLP V. PETER Z. ROSNER AND HINDALENE ROSNER
(95/126559). The original action brought by Gersten, Savage, Kaplowitz & Curtin,
LLP ("Plaintiff") alleges nonpayment by the defendants ("Defendants") of certain
fees owed to Plaintiff for legal work performed by it for Defendants in
connection with a civil litigation matter and bankruptcy proceeding involving
Defendants. Defendants have asserted several counterclaims against Plaintiff,
the Sel-Leb Defendants and the Underwriter (collectively, the "Counterclaim
Defendants"). The counterclaims allege, among other things, that Mr. Rosner had
acted as a "finder" in connection with Company's IPO and that he had entered
into an oral agreement with the Company and the Underwriter, which was
represented by Plaintiff in the IPO, pursuant to which he would be compensated
for his services out of the proceeds of the IPO and would receive warrants to
purchase Common Stock. Defendants seek damages in excess of $1.5 million against
the Counterclaim Defendants based on such counterclaims. Discovery is currently
pending in connection with this litigation. The counterclaims brought by the
Defendants have been reviewed by counsel and, based on such review, management
of the Company believes that the counterclaims are without merit. The Sel-Leb
Defendants have filed answers denying the allegations set forth in the
counterclaims brought against them, and such counterclaims will continue to be
vigorously defended by the Sel-Leb Defendants. In addition, counsel for the
Sel-Leb Defendants has been advised by counsel for the other Counterclaim
Defendants that such counsel believes that the counterclaims brought against the
other Counterclaim Defendants are without merit and that such other Counterclaim
Defendants have filed answers denying the allegations set forth therein.
The Company is not a party or subject to any other legal proceedings, other
than claims and lawsuits arising in the ordinary course of business. The Company
does not believe that any such claims or lawsuits will have a material adverse
effect on its financial condition or results of operations.
PROPERTIES
The Company's principal executive offices are located at 1435 51 Street,
North Bergen, New Jersey, 07047. Such premises include approximately 18,000
square feet of office and warehouse space, and are leased on a month-to-month
basis at a monthly rent of $5,833. The Company also leases approximately 10,000
square feet of storage space in Middletown, New York from the contract
28
<PAGE>
manufacturer of certain of the Company's beauty aid and cosmetic products, which
space the Company uses to warehouse materials and finished products. Pursuant to
the Company's written agreement with such lessor, the Company leased such space
during the period from October 1995 to December 1995 at an annual rate of
$30,000 and will continue to lease the space during the three-year period
commencing January 1, 1996 at an annual rent of $35,000. In addition, the
Company leases approximately 500 square feet of office space located in Milford,
Massachusetts on a month-to-month basis at a monthly rent of $700. The Company
also leases public warehouse space from time to time on an as-needed basis for
the storage of inventory.
The Company believes that the space afforded by such properties is adequate
for the current needs of its business.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
Harold Markowitz 55 Chairman of the Board and Director
Paul Sharp 46 President, Chief Executive Officer and Director
Jan Mirsky 55 Executive Vice President -- Finance, Chief Operating Officer and Director
Jorge Lazaro 48 Executive Vice President, Secretary and Director
Jack Koegel 44 Vice Chairman of the Board
Stanley R. Goodman 66 Assistant Secretary and Director
Edward C. Ross 52 Director
L. Douglas Bailey 54 Director
</TABLE>
HAROLD MARKOWITZ, a co-founder of the Company, has been Chairman of the
Board of the Company since December 1994. Prior to such time, he served as
President and a director of the Company from its inception in September 1993 to
December 1994. Mr. Markowitz was also a co-founder of Linette Cosmetics and
served as a director of Linette Cosmetics from its inception in 1985 until the
Linette Merger. In 1986, Mr. Markowitz co-founded Beauty Labs, Inc. ("Beauty
Labs"), a publicly-held company which marketed cosmetics and other accessories
to mass merchandisers, and served as the Chairman of the Board and a director of
Beauty Labs from 1987 to 1991. Since 1979, Mr. Markowitz has served as a
director and President and, together with his wife, as sole shareholders, of
Sela Sales Ltd., a trading company founded by Mr. Markowitz which engaged in
secondary sourcing of merchandise for distribution into major retail outlets
until it ceased conducting such operations in November 1988.
PAUL SHARP has served as Chief Executive Officer of the Company since May
1995 and as President and a director of the Company since December 1994. Mr.
Sharp also served as Secretary and Treasurer and a director of Linette Cosmetics
from 1990 to December 1994. From 1987 to 1989, Mr. Sharp served as Corporate
Vice President of Zayre Corporation, a mass merchandising retailer, where he was
responsible for the fragrance, cosmetic and health and beauty product lines.
Prior to 1987, Mr. Sharp served in various other capacities at Zayre Corporation
and on the Retail Advisory Board of The Gillette Company, a manufacturer of
personal care products, and was engaged as a retail marketing consultant for
Smith-Kline Beecham Company, a manufacturer of health and beauty aids and
pharmaceuticals.
JAN MIRSKY has served as the Chief Operating Officer and Executive Vice
President-Finance of the Company since January 1995 and as a director of the
Company since December 1994. In addition, he acted as a marketing consultant to
the Company from January 1994 to January 1995, at which time he became an
employee of the Company. From 1991 to January 1995, Mr. Mirsky was engaged as an
independent management, marketing and financial consultant. Mr. Mirsky also
served as a director of Builders Transport, Inc., a publicly-held trucking
company, from 1992 to 1995, and from 1984 to 1991 served as the Chief Financial
Officer and a director of Angio-Medical Corporation, a publicly-held bio-
pharmaceutical company co-founded by him which ceased conducting business in
1991.
JORGE LAZARO, a co-founder of the Company, has been Executive Vice President
of the Company since May 1995 and the Secretary and a director of the Company
since its inception in September 1993. Mr. Lazaro also served as the President
of the Company from December 1994 to May 1995 and as Treasurer of the Company
from its inception to December 1994. Mr. Lazaro was also a co-founder of Linette
Cosmetics and served as President and a director of Linette Cosmetics from its
inception in 1985 until the Linette Merger, and has served as the Secretary and
Treasurer and as a director of Lea Cosmetics from its inception in October 1992
until the merger of Lea Cosmetics with and into the Company in August 1995. Mr.
Lazaro has also served, since 1989, as a director and President of
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<PAGE>
H. Howlin International Inc., a trading company founded by Mr. Lazaro and of
which he is the sole shareholder which, until it ceased conducting operations in
March 1993, imported and marketed health and beauty aids to the United States
market. In addition, since 1991 Mr. Lazaro has served as a director and the
Secretary and Treasurer of Lazmar Inc., a company co-founded by him which, until
it ceased conducting its day-to-day business operations in July 1993, acted as a
distributor of health and beauty aids and fragrances.
JACK KOEGEL has served as the Vice Chairman of the Company since September
1995 and as a director of the Company since December 1994. From 1993 until
September 1993, Mr. Koegel served as President of Retail Concepts 2000, Inc., a
retail consulting company founded by him. Mr. Koegel served as President of Twin
Valu Stores (a division of Super Valu Inc.) from 1991 to 1993 and as Executive
Vice President of ShopKo Stores/Twin Valu Stores (a division of Super Valu Inc.)
from 1989 to 1991.
STANLEY R. GOODMAN has served as Assistant Secretary of the Company since
May 1995 and as a director of the Company since December 1994. Since February
1994, Mr. Goodman has been a partner at Goodman Saperstein & Cuneo, a law firm
specializing in statutory and regulatory issues concerning pharmaceuticals,
cosmetics and related consumer products, and from 1989 to February 1994 was a
partner of Goodman & Saperstein, a predecessor to his current firm. He also
served as a director and General Counsel of Beauty Labs from 1987 until the time
of its merger with Robern Industries, Inc. in 1992.
EDWARD C. ROSS has served as a director of the Company since December 1994.
Mr. Ross has been a partner in the accounting firm of Finkle, Ross & Rost since
1975. He has also been involved as a principal in various start-up companies as
well as established operating businesses, ranging in type from manufacturing to
real estate to financial consulting. Mr. Ross is a Certified Public Accountant
in New York and New Jersey, and is a member of the American Institute of
Certified Public Accountants.
L. DOUGLAS BAILEY was appointed as a director of the Company in March 1996.
Beginning in 1996, Mr. Bailey became the President and Chief Executive Officer
of Precision Fixtures and Graphics, a manufacturer of store fixtures, and since
1995 he has served as President of Bailey & Associates, Inc., a consulting firm
for the retail industry. From 1993 to 1995, Mr. Bailey served as President of
Home Shopping Club, Inc., a subsidiary of Home Shopping Network, Inc. and the
operator of Home Shopping Network, a live, customer-interactive retail sales
television network, and from 1970 to 1992 served as the Senior Vice President of
Eckerd Drug Company, a retail drug store chain.
Officers are appointed by the Board of Directors and serve at the discretion
of the Board. All directors hold office for a term of one year until the next
annual meeting of shareholders and the election and qualification of their
successors. Each director who is not an employee of the Company is paid $500 for
each meeting of the Board of Directors attended by such director. The Company
also reimburses each such director for all reasonable expenses incurred by him
in attending meetings. In addition, non-employee directors of the Company are
eligible to participate in the Company's 1995 Nonemployee Directors' Stock
Option Plan (the "Nonemployee Directors' Plan"), pursuant to which each
non-employee director is automatically granted (i) upon becoming a director of
the Company, an option to purchase 5,000 shares of Common Stock and (ii) each
year, on the day of the Company's annual meeting of shareholders, an option to
purchase 5,000 shares of Common Stock. On the effective date of the IPO, the
Company granted to each of Messrs. Goodman, Koegel and Ross, pursuant to the
Nonemployee Directors' Plan, an option to purchase 15,000 shares of Common Stock
at an exercise price of $1.67 per share. At the time of such grant, Mr. Koegel
was not an officer of the Company. Upon becoming a director of the Company in
March 1996, Mr. Bailey was granted, pursuant to the Nonemployee Directors' Plan,
an option to purchase 5,000 shares of Common Stock at an exercise price of $6.50
per share. In connection with the Company's 1996 annual meeting, each of Messrs.
Goodman, Ross and Bailey were granted, pursuant to the Nonemployee Directors'
Plan, an option to purchase 5,000 shares of Common Stock at an exercise price of
$6.875 per share.
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<PAGE>
The Company has agreed, for a period of three years commencing July 13,
1995, to nominate and use its best efforts to elect a designee of the
Underwriter as a director of the Company, or, at the Underwriter's option, as a
non-voting advisor to the Company's Board of Directors. The Company's officers,
directors and shareholders have agreed to vote their shares of Common Stock in
favor of such designee. The Underwriter has not yet exercised its right to
designate such a person.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding the
compensation in each of the last three fiscal years of the person who served as
the Company's Chief Executive Officer during the fiscal year ended December 31,
1995, and the Company's four most highly compensated officers (other than the
Chief Executive Officer) who were serving as officers at December 31, 1995
(collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION (2) ------------------------- --------
--------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION (1) YEAR SALARY ($) ($) ($) ($) (#)(3) ($) ($)
- ------------------- ------ ----------- ------ ---------------- ---------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul Sharp 1995 125,000 -0- 9,427(4) -0- -0- (5) -0- -0-
President and 1994 -0- -0- 135,333(6)(7) -0- -0- -0- -0-
Chief Executive 1993 -0- -0- 148,272(8)(9) -0- -0- -0- -0-
Officer
Harold Markowitz 1995 125,000 -0- 13,889(10) -0- -0- (5) -0- -0-
Chairman of the 1994 31,250 -0- 100,126(7)(11) -0- -0- -0- -0-
Board 1993 -0- -0- 122,118(9)(12) -0- -0- -0- -0-
Jan S. Mirsky 1995 108,365 -0- 1,388(13) -0- 477,000(14) -0- -0-
Executive Vice 1994 -0- -0- -0- -0- -0- -0- -0-
President -- 1993 -0- -0- -0- -0- -0- -0- -0-
Finance and Chief
Operating Officer
Jorge Lazaro 1995 125,000 -0- 9,600(15) -0- -0- (5) -0- -0-
Executive Vice 1994 125,000 -0- 3,333(7) -0- -0- -0- -0-
President and 1993 125,000 -0- 4,329(9) -0- -0- -0- -0-
Secretary
Jack Koegel 1995 25,000(16) -0- 28,600(17) -0- 390,000(18) -0- -0-
Vice Chairman of 1994 -0- -0- -0- -0- -0- -0- -0-
the Board 1993 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
- ------------------------------
(1) Mr. Mirsky was appointed Executive Vice President - Finance and Chief
Operating Officer of the Company in January 1995 and did not serve as an
officer or employee of the Company in 1994 or 1993. Mr. Koegel was
appointed Vice Chairman of the Board in September 1995, and did not serve
as an officer or employee of the Company in 1995 prior thereto or in 1994
or 1993.
(2) Annual compensation figures for Messrs. Sharp, Markowitz and Lazaro include
compensation paid to such individuals by the Company and Linette Cosmetics
for the period in 1995 prior to the Linette Merger and for the years 1994
and 1993.
(3) All share numbers have been adjusted to give effect to the Share
Distribution.
(4) Represents amounts paid by the Company with respect to an automobile for
use by Mr. Sharp in connection with his services to the Company.
(5) In July 1995, the Company granted to each of Messrs. Sharp, Markowitz and
Lazaro, pursuant to the Stock Option Plan, options to purchase an aggregate
of 67,500 shares of Common Stock. In September 1995, each such individual
agreed to the cancellation of such options by the Company.
(6) Includes $125,000 of sales commissions paid by the Company to Mr. Sharp and
$7,000 for rent related to office use.
(7) Includes $3,333 paid by the Company in 1994 for directors' fees.
(8) Includes $135,543 of sales commissions paid by the Company to Mr. Sharp and
$8,400 for rent related to office use.
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<PAGE>
(9) Includes $4,329 paid by the Company in 1993 for directors' fees.
(10) Includes (i) $10,068 paid by the Company with respect to an automobile for
use by Mr. Markowitz in connection with his services to the Company and (ii)
$3,821 for certain membership fees paid by the Company on behalf of Mr.
Markowitz.
(11) Includes $96,793 of consulting fees paid by Linette Cosmetics to Sela Sales
Ltd., a company founded by Mr. Markowitz and of which he and his wife are
the sole shareholders.
(12) Includes $117,789 of consulting fees paid by Linette Cosmetics to Sela
Sales Ltd.
(13) Represents amounts paid by the Company with respect to an automobile for
use by Mr. Mirsky in connection with his services to the Company.
(14) Includes 477,000 shares underlying options granted to Mr. Mirsky by the
Company in July 1995 pursuant to the Stock Option Plan. In September 1995,
Mr. Mirsky agreed to the cancellation of additional options to purchase
63,000 additional shares of Common Stock granted to him in July 1995 under
the Stock Option Plan.
(15) Represents amounts paid by the Company with respect to an automobile for
use by Mr. Lazaro in connection with his services to the Company.
(16) Represents salary paid to Mr. Koegel pursuant to his employment agreement
for the period from October 1, 1995 to December 31, 1995 following his
appointment as Vice Chairman of the Company.
(17) Includes (i) $25,000 paid by the Company for the construction of an office
for Mr. Koegel in St. Paul, Minnesota, (ii) $1,200 paid by the Company to
Mr. Koegel with respect to medical insurance purchased directly by him and
(iii) $2,400 paid by the Company with respect to an automobile for use by
Mr. Koegel in connection with his services to the Company.
(18) Includes (i) 15,000 shares underlying an option granted to Mr. Koegel by
the Company in July 1995, prior to his becoming Vice Chairman of the
Company, pursuant to the Nonemployee Directors' Plan and (ii) 375,000 shares
underlying an option granted to Mr. Koegel by the Company in September 1995
pursuant to the Stock Option Plan.
OPTION/SAR GRANTS DURING FISCAL 1995
The following table provides information related to options granted to the
Named Executive Officers during fiscal 1995. No stock appreciation rights were
issued by the Company during fiscal 1995.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN
OPTIONS/SARS FISCAL EXERCISE OR BASE EXPIRATION
NAME GRANTED (#)(1) YEAR (2) PRICE ($/SH)(3) DATE
- ------------------ -------------- ------------ ---------------- ----------
<S> <C> <C> <C> <C>
Paul Sharp........ -0-(4) -- -- --
Harold
Markowitz........ -0-(4) -- -- --
Jan S. Mirsky..... 477,000(5) 45.2% $1.67 7/12/05
Jorge Lazaro...... -0-(4) -- -- --
Jack Koegel....... 375,000(6) 35.6% $2.75 9/27/05
</TABLE>
- ------------------------------
(1) All share numbers have been adjusted to give effect to the Share
Distribution.
(2) For purposes of calculating the Percentage of Total Options/SARs Granted to
Employees in Fiscal Year, the number of options granted to employees in
fiscal year 1995 does not include the options granted to Messrs. Sharp,
Markowitz, Mirsky and Lazaro in July 1995 which were subsequently cancelled
in September 1995. See footnotes (4) and (5) below.
(3) All exercise prices have been adjusted to give effect to the Share
Distribution.
(4) In July 1995, the Company granted to each of Messrs. Sharp, Markowitz and
Lazaro, pursuant to the Company's Stock Option Plan, options to purchase an
aggregate of 67,500 shares of Common Stock. In September 1995, each such
individual agreed to the cancellation of such options by the Company.
(5) Does not include 63,000 shares underlying options granted to Mr. Mirsky by
the Company in July 1995 pursuant to the Stock Option Plan, which options
were cancelled in September 1995.
(6) Does not include 15,000 shares underlying options granted to Mr. Koegel by
the Company in July 1995 pursuant to the Nonemployee Directors' Plan and
prior to Mr. Koegel's becoming an officer of the Company.
33
<PAGE>
AGGREGATED OPTION/SAR EXERCISES DURING FISCAL 1995 AND YEAR END OPTION/SAR
VALUES
The following table provides information related to options exercised by the
Named Executive Officers during fiscal 1995 and the number and value of options
and stock appreciation rights held at fiscal year end which are currently
exercisable. No options or stock appreciation rights were exercised during
fiscal 1995.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
SHARES OPTIONS/SARS AT FY-END (1) AT FY-END ($)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul Sharp........ -- -- -- -- -- --
Harold
Markowitz........ -- -- -- -- -- --
Jan S. Mirsky..... -0- -0- 119,250 357,750 422,145 1,266,435
Jorge Lazaro...... -- -- -- -- -- --
Jack Koegel....... -0- -0- 93,750(3) 281,250 230,625 691,875
</TABLE>
- ------------------------------
(1) All share numbers have been adjusted to give effect to the Share
Distribution.
(2) The values of Unexercised In-the-Money Options/SARs represents the
aggregate amount of the excess of $5.21, the closing sales price for a
share of Common Stock (as adjusted to give effect to the Share
Distribution) on December 29, 1995, over the relevant exercise price of all
"in-the-money" options.
(3) Does not include 15,000 shares underlying options granted to Mr. Koegel by
the Company in July 1995 pursuant to the Nonemployee Directors' Plan and
prior to Mr. Koegel's becoming an officer of the Company.
1995 STOCK OPTION PLAN
In order to attract, retain and motivate employees (including officers),
directors, consultants and other persons who perform substantial services for or
on behalf of the Company, the Company adopted the Stock Option Plan, pursuant to
which stock options covering an aggregate of 1,350,000 shares of the Company's
Common Stock may be granted to such persons. Under the Stock Option Plan,
"incentive stock options" ("Incentive Options") within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), may be
granted to employees (including officers), and non-incentive stock options
("Non-incentive Options") may be granted to any such employee and to other
persons (including directors) who perform substantial services for or on behalf
of the Company. Incentive Options and Non-incentive Options are collectively
referred to herein as "Options."
The Stock Option Plan is administered by the Stock Option Committee (the
"Committee"), which is vested with complete authority to administer and
interpret the Stock Option Plan, to determine the terms upon which Options may
be granted, to prescribe, amend and rescind such interpretations and
determinations and to grant Options. The Committee will have the power to
terminate the Stock Option Plan or amend the Stock Option Plan from time to time
in such respects as it deems advisable, except that no termination or amendment
shall materially adversely affect any outstanding Option without the consent of
the grantee, and the approval of the Company's shareholders will be required in
respect of any amendment which would (i) change the total number of shares
subject to the Stock Option Plan or (ii) change the designation or class of
employees or other persons eligible to receive Incentive Options or
Non-incentive Options.
The price at which shares covered by an Option may be purchased pursuant
thereto shall be no less than the par value of such shares and no less than the
fair market value of such shares on the date of grant (the "Fair Market Value").
The Fair Market Value is generally equal to the last sale price quoted for
shares of Common Stock on the Nasdaq SmallCap Market on the date of grant. The
purchase price of shares issuable upon exercise of an Option may be paid in cash
or by delivery of shares with a value equal to the exercise price of the Option.
The Company may also loan the purchase price to the optionee, or guarantee
third-party loans to the optionee, on terms and conditions acceptable to the
Board of Directors. The number of shares covered by an Option is subject to
adjustment for stock splits, mergers, consolidations, combinations of shares,
reorganizations and recapitalizations.
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Options are generally non-transferable except by will or by the laws of descent
and distribution, and in the case of employees, with certain exceptions, may be
exercised only so long as the optionee continues to be employed by the Company.
If the employee dies or becomes disabled, the right to exercise the Option, to
the extent then vested, continues for specified periods. Non-incentive Options
may be exercised within a period not exceeding 10 years from the date of grant.
The terms of Incentive Options are subject to additional restrictions provided
by the Stock Option Plan.
As of the date hereof, Options to acquire an aggregate of 1,024,500 shares
of Common Stock at exercise prices ranging from $1.67 per share to $2.75 per
share have been granted under the Stock Option Plan to officers and key
employees of the Company, including Options to purchase 477,000 shares of Common
Stock at an exercise price of $1.67 per share granted to Mr. Mirsky in July 1995
and Options to purchase 375,000 shares of Common Stock at an exercise price of
$2.75 per share granted to Mr. Koegel in September 1995. All of the Options
currently outstanding under the Stock Option Plan vest over a three-year period,
with 25% of such Options being exercisable immediately upon grant and an
additional 25% of such Options becoming exercisable in each subsequent
anniversary of the date of grant.
DESCRIPTION OF EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS AND CHANGE OF
CONTROL ARRANGEMENTS
EMPLOYMENT AGREEMENTS WITH MESSRS. MARKOWITZ, SHARP AND LAZARO. On June 30,
1995, the Company entered into identical employment agreements with each of
Messrs. Markowitz, Sharp and Lazaro. Pursuant to such agreements, Messrs.
Markowitz, Sharp and Lazaro are employed as the Chairman of the Board, the
President and Chief Executive Officer, and an Executive Vice President,
respectively, of the Company. The agreements provide that such individuals shall
devote substantially all of their working time and attention to the business of
the Company. Each such agreement has an initial term of five years commencing
July 20, 1995, and shall be automatically renewable for successive one-year
periods unless either the Company or the employee elects not to renew his
employment. The employment agreements provide that each of Messrs. Markowitz,
Sharp and Lazaro will receive an initial annual base salary of $125,000, subject
to such increases as shall be approved by the Board of Directors of the Company.
Pursuant to the employment agreements, each of Messrs. Markowitz, Sharp and
Lazaro will be eligible to participate in any medical insurance, pension, profit
sharing or other employment benefit programs generally made available to senior
executives of the Company.
EMPLOYMENT AGREEMENT WITH JAN MIRSKY. On June 30, 1995, the Company entered
into an employment agreement with Mr. Mirsky, pursuant to which Mr. Mirsky is
employed as the Executive Vice President -- Finance and Chief Operating Officer
of the Company and is to devote substantially all of his working time and
attention to the business of the Company. Such agreement, which became effective
July 13, 1995, has an initial term of eighteen months and is automatically
renewable for successive one-year periods unless either the Company or Mr.
Mirsky elects not to renew his employment. The employment agreement provides
that Mr. Mirsky will receive an initial annual base salary of $115,000, subject
to such increases as shall be approved by the Board of Directors of the Company.
The agreement further provides that Mr. Mirsky will be eligible to participate
in any medical insurance, pension, profit sharing or other employment benefit
programs generally made available to senior executives of the Company.
EMPLOYMENT AGREEMENT WITH JACK KOEGEL. Pursuant to the Company's employment
agreement with Mr. Koegel, which became effective September 27, 1995, Mr. Koegel
is employed by the Company as the Vice Chairman of the Company, and is to devote
substantially all of his working time and
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attention to the business of the Company. The agreement provides that services
performed by Mr. Koegel shall be rendered in the St. Paul, Minnesota
metropolitan area, provided that Mr. Koegel shall be required to travel as
reasonably required by the business of the Company. Such agreement has an
initial term of thirty-six months and is automatically renewable for successive
one-year periods unless either the Company or Mr. Koegel elects not to renew his
employment. The employment agreement provides that Mr. Koegel will receive an
initial annual base salary of $100,000, subject to such increases as shall be
approved by the Board of Directors of the Company. The agreement further
provides that Mr. Koegel will be eligible to participate in any pension, profit
sharing or other employment benefit programs generally made available to senior
executives of the Company other than medical insurance benefits. However, the
agreement provides that the Company will pay Mr. Koegel $400 per month to cover
costs incurred by him in purchasing medical insurance directly. In addition,
pursuant to the agreement, the Company provides Mr. Koegel with a monthly
automobile allowance of $800 and has agreed to pay an aggregate of $25,000 for
the construction of an office for him in St. Paul, Minnesota.
Pursuant to the employment agreement, Mr. Koegel was granted an option in
September 1995 to purchase an aggregate of 375,000 shares of Common Stock at an
exercise price of $2.75 per share. In addition, the agreement provides that, in
the event the Company grants options, either under the Stock Option Plan or any
other stock option plan adopted by the Company, to Messrs. Markowitz, Sharp,
Mirsky and Lazaro during the term of Mr. Koegel's employment, Mr. Koegel shall
be entitled to receive a proportionate amount of additional options on such
terms as may be established by the Board of Directors.
SEVERANCE ARRANGEMENTS. Each of the employment agreements with Messrs.
Markowitz, Sharp, Lazaro, Mirsky and Koegel provides that the employee's
employment shall terminate (i) for "cause" (as defined in each of the respective
agreements), (ii) by reason of the employee's disability, resignation or death,
(iii) upon the expiration of the employment agreement in accordance with its
terms or (iv) in the event the employee is no longer employed by the Company
after a "Change of Control" (as defined below). Each of the agreements further
provides that, in the event the employee's employment terminates for any reason
(other than termination without cause or in connection with a Change of
Control), the employee shall be entitled to receive his annual base salary, and
any expense reimbursements, due and owing to him at the time of such
termination. In the event the employee is terminated without cause, the employee
shall be entitled to receive annual base salary and expense reimbursements then
due and owing to him, as well as a lump-sum severance payment in an amount equal
to his then annual base salary for the balance of the term of the employment
agreement.
CHANGE OF CONTROL ARRANGEMENTS. Each of the employment agreements with
Messrs. Markowitz, Sharp, Lazaro, Mirsky and Koegel provides that, in the event
of a Change of Control of the Company, each such employee will be entitled to
receive a lump-sum severance payment equal to three times his then annual base
salary if he is discharged for any reason (other than for cause) or terminates
his employment for "Good Reason" prior to the first anniversary of such Change
of Control, and shall be entitled to receive a lump-sum payment equal to his
then annual base salary if he voluntarily leaves the employ of the Company for
reasons other than discharge or for Good Reason prior to the first anniversary
of such Change of Control. As used in the employment agreements, the term
"Change of Control" means (a) any transaction or series of transactions
(including, without limitation, a tender offer, merger or consolidation) the
result of which is that any "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Exchange Act), other than Messrs. Markowitz, Sharp,
Mirsky and Lazaro (and, in the case of Mr. Koegel's employment agreement, Mr.
Koegel) or certain related parties and any "person" or "group" solicited by any
of such persons or their related parties, (i) becomes the beneficial owner of
more than 50% of the total aggregate voting power of all classes of the voting
stock of the Company and/or warrants or options to acquire such voting stock,
calculated on a fully diluted basis, (ii) acquires all or substantially all of
the assets of the Company or (iii) enters into a contract with respect to any of
the foregoing, or (b) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Company's Board
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of Directors cease for any reason to constitute a majority of the directors then
in office, unless such majority of the directors then in office has been elected
or nominated by Messrs. Markowitz, Sharp, Mirsky and Lazaro (and, in the case of
Mr. Koegel's employment agreement, Mr. Koegel) or certain related parties. In
addition, as used in the agreements, the term "Good Reason" means (i) a change
in the status or position of the employee which reflects a change from the
status and position(s) as were in effect immediately prior to a Change of
Control, (ii) the assignment to the employee of any duties or responsibilities
which, in the employee's reasonable judgment, are inconsistent with his status
or position(s), (iii) the removal of the employee from his current position or
reduction in his pay or requiring him to relocate or (iv) the removal of the
employee, without his consent, to any location outside of the New York/New
Jersey metropolitan area (or, in the case of Mr. Koegel, the St. Paul, Minnesota
metropolitan area) for a continuous period of more than 30 days.
ELIMINATION OF LIABILITY OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as amended, eliminates the
liability of a director of the Company for monetary damages for breach of duty
as a director, subject to certain exceptions. In addition, the Certificate of
Incorporation, as amended, provides for the Company to indemnify, under certain
conditions, directors and officers of the Company against all expenses,
liabilities and losses reasonably incurred by such persons in connection
therewith. The foregoing provisions may reduce the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from suing directors for breaches of their duty of care, even though
such an action, if successful, might otherwise benefit the Company and its
shareholders.
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PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale by the Company of shares of Common Stock in this
offering, the beneficial ownership of shares of Common Stock by (i) each person
who is known by the Company to own more than 5% of the outstanding shares of
Common Stock, (ii) each Named Officer and (iii) all of the Company's officers
and directors as a group:
<TABLE>
<CAPTION>
AMOUNT AND PERCENT
NATURE OF PERCENT BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNED PRIOR TO OWNED FOLLOWING
BENEFICIAL OWNER (1) OWNERSHIP (2)(3) OFFERING THE OFFERING (4)
- ------------------------------------------------------ -------------------- --------------------- -------------------
<S> <C> <C> <C>
Harold Markowitz...................................... 1,560,000(5) 20.8% 11.3%
Paul Sharp............................................ 1,560,000(6) 20.8% 11.3%
Jorge Lazaro.......................................... 1,560,000(7) 20.8% 11.3%
Jan Mirsky............................................ 609,939(8) 7.6% 4.2%
Jack Koegel........................................... 108,750(9) 1.4% *
Stanley R. Goodman.................................... 20,000(10) * *
Edward C. Ross........................................ 20,000(11) * *
L. Douglas Bailey..................................... 10,000(12) * *
All officers and directors as a group (8 persons)..... 5,448,689(5)-(12) 65.0% 37.2%
</TABLE>
- ------------------------
* Less than 1%
(1) The address for each such person is c/o Sel-Leb Marketing, Inc., 1435 51
Street, North Bergen, New Jersey 07047.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus upon
the exercise of options or warrants. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from the date of this Prospectus have been
exercised. Unless otherwise noted, the Company believes that all persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(3) The number of shares beneficially owned by each individual gives effect to
the Share Distribution.
(4) These percentages assume that all outstanding Warrants (including Warrants
held by certain affiliates of the Company) are exercised and that the
Underwriter exercises all of the Underwriter's Warrants and all of the
Warrants included therein.
(5) Includes 60,000 shares of Common Stock issuable upon exercise of Warrants
(which Warrants constitute a portion of the Selling Security Holders'
Warrants) included in the Conversion Units issued to Mr. Markowitz in
connection with the IPO.
(6) Includes 60,000 shares of Common Stock issuable upon exercise of Warrants
(which Warrants constitute a portion of the Selling Security Holders'
Warrants) included in the Conversion Units issued to Mr. Sharp in connection
with the IPO.
(7) Includes 60,000 shares of Common Stock issuable upon exercise of Warrants
(which Warrants constitute a portion of the Selling Security Holders'
Warrants) included in the Conversion Units issued to Mr. Lazaro in
connection with the IPO.
(8) Includes (i) 490,689 shares of Common Stock issuable upon exercise of a
warrant granted to Mr. Mirsky by the Company and (ii) 119,250 shares of
Common Stock issuable upon exercise of options granted to Mr. Mirsky under
the Company's Stock Option Plan. Does not include 357,750 shares of Common
Stock issuable upon exercise of options granted to Mr. Mirsky under the
Stock Option Plan which are not exercisable within 60 days of the date of
this Prospectus.
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(9) Includes (i) 15,000 shares of Common Stock issuable upon exercise of
options granted to Mr. Koegel under the Nonemployee Directors' Plan and (ii)
93,750 shares of Common Stock issuable upon the exercise of options granted
to Mr. Koegel under the Stock Option Plan. Does not include 281,250 shares
of Common Stock issuable upon exercise of options granted to Mr. Koegel
under the Stock Option Plan which are not exercisable within 60 days of the
date of this Prospectus.
(10) Includes 20,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Goodman under the Nonemployee Directors' Plan.
(11) Includes 20,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Ross under the Nonemployee Directors' Plan.
(12) Includes 10,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Bailey under the Nonemployee Directors' Plan.
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CERTAIN TRANSACTIONS
Immediately prior to the consummation of the IPO in July 1995, Mr.
Markowitz, Mr. Sharp and H. Howlin International Inc. ("Howlin"), a company
founded by Mr. Lazaro and of which he is currently President and sole
shareholder, had outstanding loans to the Company in the amount of $289,667,
$189,667 and $289,667, respectively (collectively, the "Shareholder Loans"). In
connection with the IPO, $100,000 of each of the Shareholder Loans was converted
by the Company into Conversion Units, each Conversion Unit consisting of three
shares of Common Stock and three Warrants, at the rate of $5.00 per Conversion
Unit. Pursuant to this conversion, an aggregate of 60,000 Conversion Units,
consisting of an aggregate of 180,000 shares of Common Stock and 180,000
Warrants (which Warrants constitute the Selling Security Holders' Warrants),
were issued to Messrs. Markowitz, Sharp and Lazaro (as designee of Howlin). The
balance of each of the Shareholder Loans was repaid by the Company in March
1996. In connection with the IPO and at the request of the Underwriter, each of
Messrs. Markowitz, Sharp and Lazaro agreed not to sell or otherwise dispose of
any of their shares of Common Stock (including the 180,000 aggregate shares of
Common Stock issuable upon exercise of the Warrants included in the Conversion
Units) for a period of eighteen months commencing July 13, 1995. The Company and
the Underwriter's have subsequently agreed to allow Messrs. Markowitz, Sharp and
Lazaro to include the 180,000 shares of Common Stock issuable upon exercise of
the Warrants included in the Conversion Units in the Selling Security Holder
Prospectus. See "Concurrent Registration of Securities."
In July 1995, the Company repaid the entire amount outstanding under its
then existing borrowing arrangement with a bank. All amounts borrowed by the
Company pursuant to this arrangement had been jointly and severally guaranteed
by Messrs. Markowitz, Sharp and Lazaro, who had subordinated an aggregate
principal amount of $700,000 of the Shareholder Loans to the bank.
In October 1992, Messrs. Markowitz, Sharp and Lazaro and a fourth individual
founded Lea Cosmetics. In connection with the Lea Acquisition, immediately prior
to the consummation of the IPO in July 1995, each of Messrs. Markowitz, Sharp
and Lazaro contributed to the Company his 20% equity interest in Lea Cosmetics,
and the Company acquired from the additional shareholder his 40% interest in Lea
Cosmetics. As a result, Lea Cosmetics became a wholly-owned subsidiary of the
Company and, in August 1995, was merged with and into the Company. During the
period from January 1, 1995 to the date of the Lea Acquisition and, the
twelve-month period ended December 31, 1994, the Company purchased $532,330 and
$723,615, respectively, of merchandise from Lea Cosmetics, which purchases were
made on an arm's-length basis. During such periods, any products of Lea
Cosmetics which were sold by the Company were purchased from Lea Cosmetics at
the Company's selling price and, accordingly, the Company realized no profits on
the sale of such merchandise.
Prior to the Linette Merger, the Company and Linette Cosmetics were treated
as S Corporations for federal and certain state income tax purposes. As a
result, earnings of such companies during such period were taxed directly to
Messrs. Markowitz, Sharp and Lazaro, who comprised all of the shareholders of
the Company and Linette Cosmetics during such period, rather than to the Company
or Linette Cosmetics, as the case may be. On May 17, 1995, the Company declared
the S Corporation Distribution payable to such shareholders in an amount equal
to the taxes payable on the earnings of the Company during the period from the
date of its formation on September 21, 1993 (and, in the case of Linette
Cosmetics, from January 1, 1994) to the date of the consummation of the Linette
Merger, such distribution to be payable following the consummation of the IPO
after the amount thereof had been determined. In September and October 1995, the
Company paid the S Corporation Distribution to Messrs. Markowitz, Sharp and
Lazaro in an aggregate amount of approximately $156,250.
In January 1994, the Company issued and sold to Jan Mirsky, then a
consultant to the Company and currently the Executive Vice President -- Finance,
Chief Operating Officer and a director of the Company, the Consulting Warrant to
purchase 490,689 shares of Common Stock, in consideration for a $21,000
non-interest bearing promissory note payable to the Company, due March 31, 1995,
and the
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performance by him of services as a marketing consultant to the Company. The
Company subsequently agreed to extend until May 17, 1995 the due date of the
promissory note, and on May 17, 1995 Mr. Mirsky paid the entire $21,000
principal amount thereof. The Consulting Warrant is exercisable at any time
through March 31, 2000 at an aggregate exercise price of $315,000. Pursuant to
the Consulting Warrant, Mr. Mirsky has been granted certain demand and piggyback
registration rights (subject to certain limitations) with respect to the shares
of Common Stock issuable upon exercise of the Warrant. In connection with the
IPO and at the request of the Underwriter, Mr. Mirsky has waived such rights for
a period of eighteen months commencing July 13, 1995, and has agreed not to sell
during such eighteen-month period any shares of Common Stock issuable upon
exercise of the Consulting Warrant other than in connection with certain
transactions. See "Description of Securities -- Registration Rights."
During the year ended December 31, 1994, the Company made approximately
$421,000 of inventory purchases from Linette Cosmetics. Also, Linette Cosmetics
made advances to, or paid expenses on behalf of, the Company of $639,247 during
such period, and the Company made repayments to, and paid expenses on behalf of
Linette Cosmetics, resulting in a balance due to Linette Cosmetics at December
31, 1994 of $46,854. During the period from January 1, 1995 to the date of the
Linette Merger, the Company made no inventory purchases from Linette Cosmetics
and Linette Cosmetics made no advances to, and paid no expenses on behalf of,
the Company. As of the date of the Linette Merger, the Company had a balance due
to Linette Cosmetics of $69,004.
In March 1993, Howlin ceased conducting operations and, in connection
therewith, transferred its inventory to the Company pursuant to a consignment
arrangement whereby the Company sold the inventory on Howlin's behalf, remitted
to Howlin an amount equal to the original cost to Howlin of the goods sold by
the Company and retained for its own account any profits received from the sale
of such goods. During 1995, the Company purchased from Howlin all inventory then
held by the Company pursuant to such arrangement for a purchase price of
approximately $13,800, which amount represented the original cost to Howlin of
such inventory.
In March 1993, Lazmar Inc. ("Lazmar"), a company in which Mr. Lazaro owns
50% of the outstanding stock, delivered inventory to the Company pursuant to a
consignment arrangement similar to the Company's arrangement with Howlin. During
1995, the Company purchased from Lazmar all inventory then held by it pursuant
to such arrangement for a purchase price of approximately $70,000, which amount
represented the original cost to Lazmar of such inventory. At March 31, 1996 and
December 31, 1995, the Company had an account payable to Lazmar of approximately
$69,820 and $80,000, respectively.
The Company will not make any loans to any officers, directors or 5%
shareholders, or any affiliates of any of the foregoing, except in connection
with bona fide business purposes. In addition, all future transactions with
officers, directors and 5% shareholders will be on terms no less favorable than
could be obtained from unaffiliated third parties and will be approved by a
majority of the disinterested directors of the Company.
CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this offering, an aggregate of 180,000 Selling Security
Holders' Warrants held by the Selling Security Holders and 180,000 Selling
Security Holders' Shares issuable upon exercise thereof are being registered by
the Company under the Securities Act pursuant to a Selling Security Holder
Prospectus included within the Registration Statement of which this Prospectus
forms a part. The Company will not receive any of the proceeds from the sale by
the Selling Security Holders of either the Selling Security Holders' Warrants
or, in the event any of such Warrants are exercised by any of the Selling
Security Holders, the the Selling Security Holders' Shares issuable upon
exercise thereof. It is anticipated that such securities will be offered and
sold from time to time in the over-the-counter market, or otherwise, at prices
and terms then prevailing or at prices related to the then-current market price,
or in negotiated transactions; provided, however, that no Selling Security
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<PAGE>
Holders' Warrants or Selling Security Holders' Shares may be sold by any Selling
Security Holder without the prior written consent of the Underwriter during the
period of eighteen months commencing July 13, 1995. See "Shares Eligible for
Future Sale."
DESCRIPTION OF SECURITIES
GENERAL
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 40,000,000 shares of Common Stock, par value $.01 per share,
of which 7,440,000 shares are outstanding. The following description of the
securities of the Company and certain provisions of the Company's Certificate of
Incorporation and By-Laws, each as amended, is a summary and is qualified in its
entirety by the provisions of the Certificate of Incorporation and By-Laws as
currently in effect. As of July 10, 1996, the Company's Common Stock was held of
record by 16 shareholders.
UNITS
Each Unit consists of three (3) shares of Common Stock and three (3)
Warrants. See "-- Common Stock" and "-- Redeemable Warrants." The Common Stock
and Warrants will be separately tradeable or transferable immediately upon the
issuance of the Units.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate of Incorporation,
as amended, does not provide for preemptive rights or for cumulative voting for
the election of directors. Holders of Common Stock will be entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor, and will be entitled
to receive, pro rata, all assets of the Company available for distribution to
such holders upon liquidation. Holders of Common Stock have no preemptive,
subscription or redemption rights. All outstanding shares of Common Stock are,
and the Common Stock offered hereby, upon issuance and sale, will be, fully paid
and nonassessable.
REDEEMABLE WARRANTS
Each Warrant entitles the registered holder thereof (the "Warrant Holders")
to purchase one share of Common Stock at a price of $2.00 subject to adjustment
in certain circumstances, for a period of three years commencing on July 13,
1996 until 5:00 p.m., Eastern Time, on July 12, 1999.
The Warrants are redeemable by the Company at any time commencing on July
13, 1996, upon notice of not less than 30 days, at a price of $.0167 per
Warrant, provided that the closing bid quotation of the Common Stock on NASDAQ
or last sale price if quoted on a national securities exchange has exceeded
$3.33 per share (subject to adjustment) for a period of 20 consecutive trading
days during the period in which the Warrants are exercisable. The Warrant
Holders shall have the right to exercise their Warrants until the close of
business on the date fixed for redemption. The Warrants have been issued (and
any Warrants issued upon exercise of the Underwriter's Warrants will be issued)
in registered form under a warrant agreement by and among the Company,
Continental Stock Transfer & Trust Company, as warrant agent, and the
Underwriter (the "Warrant Agreement"). The exercise price and number of shares
of Common Stock or other securities issuable on exercise of the Warrants are
subject to adjustment in certain circumstances, including in the event of a
stock dividend, recapitalization, reorganization, merger or consolidation of the
Company. In addition, the Warrants are subject to adjustment for issuances of
Common Stock at prices below the market price of a share of Common Stock on
NASDAQ. Reference is made to the Warrant Agreement (which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part) for
a complete description of the terms and conditions therein (the description
herein contained being qualified in its entirety by reference thereto).
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The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has filed a current registration statement with the Commission covering the
shares of Common Stock issuable upon exercise of such Warrant and such shares
have been registered or qualified or deemed to be exempt from registration or
qualification under the securities laws of the state of residence of the holder
of such Warrant. The Company will use its reasonable best efforts to have all
such shares so registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the
Warrants, subject to the terms of the Warrant Agreement. While it is the
Company's intention to do so, there can be no assurance that it will be able to
do so.
No fractional shares will be issued upon exercise of the Warrants. However,
if a Warrant Holder exercises all Warrants then owned of record by him, the
Company will pay to such Warrant Holder, in lieu of the issuance of any
fractional share which is otherwise issuable, an amount in cash based on the
market value of the Common Stock on the last trading day prior to the exercise
date.
The Company has agreed to pay to the Underwriter a warrant solicitation fee
(the "Warrant Solicitation Fee") in connection with the exercise of Warrants
under certain circumstances and subject to certain conditions and restrictions.
See "Warrant Solicitation."
DIVIDENDS
Other than the S Corporation Distribution, the Company has not declared or
paid a cash dividend on its Common Stock since its inception. The payment by the
Company of dividends, if any, is within the discretion of the Board of Directors
and will depend on the Company's earnings, if any, its capital requirements and
financial condition, as well as other relevant factors. The Board of Directors
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain earnings, if any, for use in the Company's business
operations.
REGISTRATION RIGHTS
In connection with the IPO, the Company granted to the Underwriter certain
demand and piggyback registration rights with respect to the 240,000 shares of
Common Stock issuable upon exercise of the Underwriter's Warrants and the
240,000 shares of Common Stock and 240,000 Warrants issuable upon the exercise
of the Warrants included in the Underwriter's Warrants. All 480,000 shares of
Common Stock underlying the Underwriter's Warrants have been included in the
Registration Statement of which this Prospectus forms a part. In addition, the
Company has granted to Mr. Mirsky, a director of the Company, certain demand and
piggyback registration rights (subject to certain limitations) with respect to
the shares of Common Stock issuable upon exercise of the Consulting Warrant. In
connection with the IPO and at the request of the Underwriter, Mr. Mirsky waived
such rights for a period of eighteen months commencing July 13, 1995. See
"Certain Transactions."
NASDAQ AND BOSTON STOCK EXCHANGE LISTING
The Common Stock and Warrants are listed on NASDAQ. In order to continue to
be listed on NASDAQ, however, the Company must maintain $2,000,000 in total
assets, a $200,000 market value of the public float and $1,000,000 in total
capital and surplus. In addition, continued inclusion requires two market-makers
and a minimum bid price of $1.00 per share; provided, however, that if the
Company falls below such minimum bid price, it will remain eligible for
continued inclusion in NASDAQ if the market value of the public float is at
least $1,000,000 and the Company has $2,000,000 in capital and surplus. The
failure to meet these maintenance criteria in the future may result in the
delisting of the Company's securities from NASDAQ. In such event, trading, if
any, in the Units, Common Stock and Warrants would thereafter be conducted in
the over-the-counter markets through
43
<PAGE>
the so-called "pink sheets" or the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's securities could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, difficulty in obtaining accurate
quotations as to the market value of the securities and reductions in the
security analysts' and the news media's coverage of the Company. Delisting of
the Company's securities may result in lower prices for the Company's securities
than might otherwise prevail.
The Common Stock and Warrants are also listed on the Boston Stock Exchange.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is Continental Stock Transfer &
Trust Company, 2 Broadway, New York, New York 10004.
REPORTS TO SHAREHOLDERS
The Company has registered the Common Stock and Warrants under the
provisions of Sections 12(b) and 12(g) of the Exchange Act, and has agreed that
it will use its best efforts to continue to maintain such registration for a
minimum of five years from July 13, 1995. Such registration requires the Company
to comply with periodic reporting, proxy solicitation and certain other
requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 13,860,000
shares of Common Stock outstanding, of which 9,000,000 shares of Common Stock
will be freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by an affiliate of the Company
(in general, a person who has a control relationship with the Company), which
shares will be subject to the resale limitations of Rule 144 under the
Securities Act. All of the remaining 4,860,000 shares of Common Stock are deemed
to be "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act, in that such shares were issued and sold
by the Company in private transactions not involving a public offering and in
the future may only be sold pursuant to a registration statement under the
Securities Act, in compliance with the exemption provisions of Rule 144, or
pursuant to another exemption under the Securities Act. Concurrently with this
offering, an aggregate of 180,000 of such restricted shares are being registered
by the Company under the Securities Act pursuant to the Selling Security Holder
Prospectus included within the Registration Statement of which this Prospectus
forms a part. In addition, commencing in October 1995, an aggregate of 4,500,000
of the 4,860,000 restricted shares became eligible for sale under Rule 144,
subject to the volume limitations prescribed by Rule 144 and to the contractual
restrictions described below. The balance of the restricted shares will become
eligible for sale under Rule 144, subject to the volume limitations prescribed
by Rule 144, commencing in July 1997. See "Concurrent Registration of
Securities."
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated), who has owned restricted
shares of Common Stock beneficially for at least two years is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class or, if
the shares of Common Stock are quoted on NASDAQ, the average weekly trading
volume during the four calendar weeks preceding the sale. A person who has not
been an affiliate of the Company for at least the three months immediately
preceding the sale and who has beneficially owned shares of Common Stock for at
least three years is entitled to sell such shares under Rule 144 without regard
to any of the limitations described above.
All of the Company's officers and directors and certain shareholders of the
Company have agreed not to sell or otherwise dispose of their shares of Common
Stock (an aggregate of 4,860,000 shares
44
<PAGE>
(including the 180,000 shares included in the Selling Security Holder
Prospectus)) for a period of eighteen months commencing July 13, 1997 (other
than pursuant to private transfers) without the prior written consent of the
Underwriter.
WARRANT SOLICITATION
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation, to pay to the Underwriter a warrant solicitation fee
of 5% of the exercise price for each Warrant exercised; provided, however, that
the Underwriter will not be entitled to receive such compensation in Warrant
exercise transactions in which (i) the market price of Common Stock at the time
of exercise is lower than the exercise price of the Warrants; (ii) the Warrants
are held in any discretionary account; (iii) disclosure of compensation
arrangements is not made in documents provided to holders of the Warrants at the
time of exercise; (iv) the exercise of Warrants is unsolicited by the
Underwriter; or (v) the solicitation of exercise of the Warrants was in
violation of Rule 10b-6 promulgated under the Exchange Act.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Zimet, Haines, Friedman & Kaplan, New York, New York.
EXPERTS
The financial statements of Sel-Leb Marketing, Inc. as of December 31, 1995
and for the two years in the period ended December 31, 1995 included in this
Prospectus have been included in reliance upon the reports of Goldstein Golub
Kessler & Company, P.C., independent certified public accountants, given upon
the authority of said firm as experts in accounting and auditing.
45
<PAGE>
SEL-LEB MARKETING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENT AT DECEMBER 31, 1995 AND
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Independent Auditor's Report................................................... F-2
Balance Sheet................................................................ F-3
Statement of Income.......................................................... F-4
Statement of Shareholders' Equity............................................ F-5
Statement of Cash Flows...................................................... F-6
Notes to Financial Statements................................................ F-7 - F-13
FINANCIAL STATEMENT AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
Balance Sheet (Unaudited).................................................... F-14
Statement of Income (Unaudited).............................................. F-15
Statement of Shareholders' Equity (Unaudited)................................ F-16
Statement of Cash Flows (Unaudited).......................................... F-17
Notes to Financial Statements (Unaudited).................................... F-18 - F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Sel-Leb Marketing, Inc.
We have audited the accompanying balance sheet of Sel-Leb Marketing, Inc. as
of December 31, 1995 and the related statements of income, shareholders' equity,
and cash flows for each of the two years in the period ended December 31, 1995.
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 audit 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Sel-Leb Marketing, Inc. as
of December 31, 1995 and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the financial statements
of Sel-Leb Marketing, Inc. for the year ended December 31, 1994 have been
restated to include the results of operations of Linette Cosmetics, Inc. and Lea
Cosmetics, Inc., entities which merged with and into Sel-Leb Marketing, Inc. in
1995.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
March 3, 1996, except for the first paragraph of Note 9,
as to which the date is March 12, 1996
F-2
<PAGE>
SEL-LEB MARKETING, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents (Note 1)........................................... $ 832,970
Accounts receivable, less allowance for doubtful accounts of $100,000........ 2,175,813
Inventory (Note 1)........................................................... 2,470,086
Prepaid expenses and other current assets.................................... 353,557
Deferred income tax asset, net of valuation allowance (Note 10).............. 52,000
----------
Total current assets....................................................... 5,884,426
Property and Equipment -- at cost, net of accumulated depreciation (Notes 1 and
3)............................................................................ 270,703
Goodwill (Note 2).............................................................. 280,823
Other Assets................................................................... 3,611
----------
Total Assets............................................................... $6,439,563
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Note 4)............................... $ 941,242
Due to affiliates (Note 9)................................................... 118,310
Income taxes payable (Note 10)............................................... 269,525
----------
Total current liabilities.................................................. 1,329,077
Long-term Debt -- related parties (Note 9)..................................... 469,000
----------
Total liabilities.......................................................... 1,798,077
----------
Commitments and Contingency (Notes 5, 6 and 12)
Shareholders' Equity (Notes 7 and 8)
Common stock -- $.01 par value; authorized 40,000,000 shares, issued and
outstanding 7,440,000 shares................................................ 74,400
Additional paid-in capital................................................... 4,136,563
Retained earnings............................................................ 430,523
----------
Total shareholders' equity................................................. 4,641,486
----------
Total Liabilities and Shareholders' Equity................................. $6,439,563
----------
----------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
SEL-LEB MARKETING, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Revenue:
Net sales (Notes 1 and 11)..................................................... $ 11,286,114 $ 10,401,907
Commission income (Note 1)..................................................... 194,021 392,387
-------------- --------------
Total revenue.................................................................... 11,480,135 10,794,294
-------------- --------------
Operating expenses:
Cost of sales (Note 9)......................................................... 8,868,566 8,314,521
Selling, general and administrative expenses (Note 5).......................... 2,016,412 1,827,899
-------------- --------------
Total operating expenses......................................................... 10,884,978 10,142,420
-------------- --------------
Operating income................................................................. 595,157 651,874
Interest expense, net of interest income of $34,972 in 1995 (Note 9)............. (83,809) (120,471)
Other income (expenses).......................................................... 101,489 (71,392)
-------------- --------------
Income before provision for income taxes and minority interest in earnings of
subsidiary...................................................................... 612,837 460,011
Provision for income taxes (Note 10)............................................. (234,000) (70,000)
-------------- --------------
Income before minority interest in earnings of subsidiary........................ 378,837 390,011
Minority interest in earnings of subsidiary (Note 1)............................. (39,414) (31,574)
-------------- --------------
Net income....................................................................... $ 339,423 $ 358,437
-------------- --------------
-------------- --------------
Pro forma information (unaudited) (Notes 1 and 13):
Net income..................................................................... $ 341,423 $ 253,437
-------------- --------------
-------------- --------------
Primary earnings per share..................................................... $ .05 $ .05
-------------- --------------
-------------- --------------
Fully diluted earnings per share............................................... $ .04 $ .05
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
SEL-LEB MARKETING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(NOTE 1)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
RECEIVABLE IN
CONNECTION
WITH SALE OF
RETAINED COMMON STOCK
COMMON STOCK ADDITIONAL EARNINGS PURCHASE
--------------------- PAID-IN (ACCUMULATED WARRANT AND SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) COMMON STOCK EQUITY
---------- --------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993........ 4,320,000 $ 1,000 $ 52,096 $ (11,982) $ (2,000) $ 39,114
Sale of stock warrants (Note 8)..... -- -- 21,000 -- (21,000) --
Capital contribution of imputed
interest on noninterest bearing
loans (Note 9)..................... -- -- 14,703 -- -- 14,703
Net income.......................... -- -- -- 358,437 -- 358,437
---------- --------- ------------ ------------ -------------- -------------
Balance at December 31, 1994........ 4,320,000 1,000 87,799 346,455 (23,000) 412,254
Adjustment of par value............. -- 42,200 (42,200) -- -- --
Capital contribution of imputed
interest on noninterest bearing
loans (Note 9)..................... -- -- 4,225 -- -- 4,225
Collection of receivable............ -- -- -- -- 21,000 21,000
Issuance of stock warrants (Note
8)................................. -- -- 10,000 -- -- 10,000
Adjustment resulting from
termination of S Corporation status
(Note 10).......................... -- -- 255,355 (255,355) -- --
Issuance of common stock in
connection with acquisition of
subsidiary (Notes 1 and 2)......... 180,000 1,800 380,575 -- 2,000 384,375
Conversion of long-term debt into
common shares (Note 9)............. 180,000 1,800 298,200 -- -- 300,000
Net proceeds from sale of stock
(Note 7)........................... 2,760,000 27,600 3,298,852 -- -- 3,326,452
Distribution to shareholders (Note
10)................................ -- -- (156,243) -- -- (156,243)
Net income.......................... -- -- -- 339,423 -- 339,423
---------- --------- ------------ ------------ -------------- -------------
Balance at December 31, 1995........ 7,440,000 $ 74,400 $ 4,136,563 $ 430,523 -- $ 4,641,486
---------- --------- ------------ ------------ -------------- -------------
---------- --------- ------------ ------------ -------------- -------------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
SEL-LEB MARKETING, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 339,423 $ 358,437
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization...................................................... 25,947 5,490
Deferred income tax benefit........................................................ (52,000) --
Allowance for doubtful accounts.................................................... 40,000 --
Imputed interest contributed to capital............................................ 4,225 14,703
Interest expense related to issuance of warrants................................... 10,000 --
Minority interest in earnings of subsidiary........................................ 39,414 31,574
Changes in operating assets and liabilities:
Increase in accounts receivable.................................................. (400,026) (641,127)
(Increase) decrease in inventory................................................. (1,301,391) 137,873
Increase in due from affiliates.................................................. -- (152,939)
Increase in prepaid expenses and other current assets............................ (220,491) (32,401)
Increase (decrease) in accounts payable and accrued expenses..................... (310,669) 306,068
Increase (decrease) in due to affiliates......................................... (56,630) 1,436
Increase in income taxes payable................................................. 183,877 52,135
------------ -----------
Net cash provided by (used in) operating activities............................ (1,698,321) 81,249
------------ -----------
Cash flows from investing activities:
Repayments from affiliates 122,510 --
Purchase of property and equipment (275,515) (16,000)
------------ -----------
Net cash used in investing activities.......................................... (153,005) (16,000)
------------ -----------
Cash flows from financing activities:
Advances to affiliate................................................................ -- (50,000)
Net proceeds from (repayments of) notes payable -- bank.............................. (800,000) 50,000
Net proceeds from sale of stock and warrants......................................... 3,440,003 --
Distributions to shareholders........................................................ (156,243) --
Collection of receivable in connection with sale of common stock purchase warrant.... 21,000 --
Deferred offering costs.............................................................. -- (113,550)
------------ -----------
Net cash provided by (used in) financing activities............................ 2,504,760 (113,550)
------------ -----------
Net increase (decrease) in cash and cash equivalents................................... 653,434 (48,301)
Cash and cash equivalents at beginning of year......................................... 179,536 227,837
------------ -----------
Cash and cash equivalents at end of year............................................... $ 832,970 $ 179,536
------------ -----------
------------ -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................................... $ 112,568 $ 110,763
------------ -----------
------------ -----------
Income taxes......................................................................... $ 16,475 $ 5,769
------------ -----------
------------ -----------
</TABLE>
Supplemental schedule of noncash investing and financing activities:
In May 1995, the Company issued warrants to purchase 3,000,000 shares of the
Company's common stock and charged operations for $10,000 of interest expense
(Notes 7 and 8).
The Company issued 180,000 shares of the Company's common stock, valued at
$384,375, in connection with the 40% acquisition of Lea (Note 2).
In July 1995, shareholders converted $300,000 of long-term debt into 180,000
shares of the Company's common stock and warrants to purchase 180,000 shares of
the Company's common stock.
See Notes to Finanical Statements
F-6
<PAGE>
SEL-LEB MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, PRESENTATION, PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT
ACCOUNTING POLICIES
Sel-Leb Marketing, Inc. ("Sel-Leb") was incorporated under the laws of the
State of New York on September 21, 1993. On May 18, 1995, Linette Cosmetics,
Inc. ("Linette"), a company having the same ownership as Sel-Leb, merged with
and into Sel-Leb. On July 13, 1995, the shareholders of Sel-Leb contributed
their 60% interest in Lea Cosmetics, Inc. ("Lea") to Sel-Leb and Sel-Leb
purchased the remaining 40% interest (the "40% Interest") (see Note 2). As a
result, Lea became a wholly owned subsidiary of Sel-Leb and was subsequently
merged with and into Sel-Leb. The merger of Linette with and into Sel-Leb and
the contribution of the 60% interest in Lea to Sel-Leb, have been reported at
historical cost in a manner similar to a pooling of interests. The purchase of
the 40% Interest in Lea by Sel-Leb has been accounted for as a purchase. All
significant intercompany transactions and balances among Sel-Leb, Linette and
Lea (collectively the "Company") through the dates of the mergers and the
acquisition of the 40% Interest have been eliminated.
The statement of income for Sel-Leb for the year ended December 31, 1994 has
been restated to include the results of operations of Sel-Leb and Linette for
the 12 months ended December 31, 1994 and the results of operations of Lea for
the 12 months ended September 30, 1994. The effect of the restatement was to
increase net income for the year ended December 31, 1994 by approximately
$211,000. The statement of income for the Company for the year ended December
31, 1995 includes the results of operations of Sel-Leb and Linette for the 12
months ended December 31, 1995 and the results of operations of Lea for the 15
months ended December 31, 1995. The results of operations for Lea for the
3-month period from October 1, 1994 to December 31, 1994, included in the
statement of income for 1995, were not material.
The Company is a secondary sourcer (distributing merchandise on a wholesale
basis outside normal distribution channels to retail merchants) of a broad range
of name-brand and off-brand merchandise. The Company also packages and
wholesales beauty aid and cosmetic products. In addition, the Company develops
marketing programs to sell consumers products through television home-shopping
networks and other electronic media by using celebrity spokespersons. Revenue
from marketing programs for the years ended December 31, 1995 and 1994 were not
significant.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates by management
affecting the reported amounts of assets and liabilities and revenue and
expenses and the disclosure of contingent assets and liabilities. Actual results
could differ from those estimates.
Inventory, consisting primarily of finished goods, is stated at the lower of
cost, determined by the first-in, first-out method, or market.
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the related assets.
Sales revenue is recognized on the date the merchandise is shipped.
Commission income is recognized upon the sale of the related product.
Cash equivalents consist of money market accounts.
Pro forma earnings per share are computed based on the weighted average
number of shares actually outstanding plus the shares that would be outstanding
assuming the exercise of dilutive stock options and warrants, all of which are
considered common stock equivalents, using the modified treasury stock method
for 1995 and the treasury stock method for 1994. For the pro forma fully diluted
computation for 1995, the weighted average number of shares outstanding includes
the
F-7
<PAGE>
SEL-LEB MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
number of shares that would be issued from the exercise of stock options and
warrants reduced by the number of shares which would have been purchased from
the proceeds of such exercise at the market price of the Company's common stock
on December 31, 1995, because those prices were higher than the average market
prices during the year. For the 1994 pro forma earnings per share, the weighted
average number of common shares outstanding has been increased to reflect the
number of shares whose proceeds would have been necessary to fund the
distribution to shareholders paid from the proceeds of the Company's initial
public offering ("IPO") (see Note 7). For the year ended December 31, 1995, the
number of shares used in the computation of primary earnings per share and fully
diluted earnings per share were 8,429,726 and 8,491,491, respectively. For the
year ended December 31, 1994, the number of shares used for both calculations
amounted to 4,969,089.
The Company maintains cash in bank accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses on these
accounts.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," on January 1, 1996. Management believes the effect of the
adoption will not be significant to the financial statements.
The Company intends to elect to continue to measure compensation cost using
Accounting Principles Board Opinion No. 25 as is permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," effective for financial statements with fiscal years beginning
after December 15, 1995.
2. ACQUISITION
In July 1995, Sel-Leb purchased the 40% Interest in Lea in a business
combination accounted for as a purchase. The purchase price was 180,000 shares
of newly issued, unregistered shares of Sel-Leb's common stock, 90,000 of which
were issued in January 1996 upon Lea's achieving certain sales volume for 1995.
The accompanying financial statements reflect the issuance of these shares of
common stock as if they were issued on December 31, 1995. The fair value of the
assets acquired, including approximately $281,000 allocated to goodwill, which
is being amortized over 10 years, amounted to approximately $384,000 and
liabilities assumed amounted to approximately $101,000. Amortization expense
related to goodwill and charged to operations in the year ended December 31,
1995 amounted to $2,445.
The Company reviews the carrying value of goodwill for impairment
periodically and whenever events or changes in circumstances indicate that the
amount may not be recoverable. The review for recoverability includes an
estimate by the Company of the future undiscounted cash flows expected to result
from the use of the assets acquired and their eventual disposition. An
impairment will be recognized if the carrying value of the assets exceeds the
estimated future undiscounted cash flows of those assets.
F-8
<PAGE>
SEL-LEB MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31,
1995:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
--------------
<S> <C> <C>
Machinery and equipment.................................................... $ 114,236 5 to 7 years
Display fixtures........................................................... 182,387 2 to 3 years
Computer equipment......................................................... 18,440 5 years
-----------
315,063
Less accumulated depreciation.............................................. 44,360
-----------
$ 270,703
-----------
-----------
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1995:
<TABLE>
<S> <C>
Trade accounts payable................................................... $ 807,320
Accrued interest......................................................... 3,127
Accrued professional fees................................................ 93,279
Accrued commissions...................................................... 32,320
Accrued payroll.......................................................... 5,196
---------
$ 941,242
---------
---------
</TABLE>
5. COMMITMENTS
The Company leases warehouse and production facilities under a noncancelable
operating lease which expires December 31, 1998.
The future minimum rental payments under the lease are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996................................................................. $ 35,000
1997................................................................. 35,000
1998................................................................. 35,000
---------
$ 105,000
---------
---------
</TABLE>
The Company leases additional offices and warehouse facilities on a
month-to-month basis.
Rent expense for the years ended December 31, 1995 and 1994 amounted to
$74,207 and $80,450, respectively.
The Company has entered into employment agreements with five officers which
expire at various times through July 2000.
The aggregate minimum commitment for future salaries is as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996............................................................... $ 565,000
1997............................................................... 475,000
1998............................................................... 475,000
1999............................................................... 375,000
2000............................................................... 188,000
----------
$2,078,000
----------
----------
</TABLE>
F-9
<PAGE>
SEL-LEB MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has various promotional agreements whereby it pays royalty fees
to celebrities based upon a percentage of net sales attributable to the
celebrities' appearances.
During the year ended December 31, 1994, the Company charged $300,000 to
operations in connection with an agreement with a celebrity for selling and
promotional activities. The agreement was for one year and expired in March
1995.
6. LINE OF CREDIT
The Company has a line of credit with a bank expiring May 31, 1996 which
provides for borrowings not to exceed the lesser of $2,000,000 or prescribed
levels of eligible accounts receivable and inventory, as defined. Borrowings
under the line of credit bear interest at a bank's prevailing base rates, as
defined in the agreement. As of December 31, 1995, no amounts were outstanding
under the line of credit.
7. SHAREHOLDERS' EQUITY
Accumulated earnings during the period in which the Company was an S
Corporation (see Note 10) have been included in the accompanying financial
statements as additional paid-in capital.
On January 4, 1995, the Company increased its authorized number of shares to
10,000,000 shares of common stock, effected a 17,760.8 for 1 stock split and
changed the par value of its common stock from no par to $.01 par. On May 18,
1995, the Company effected a .810706 reverse stock split. In February 1996, the
Company increased its authorized number of shares to 40,000,000 shares of common
stock and effected a 3 for 1 stock split. The increase in authorized shares and
the stock splits have been given retroactive effect in the accompanying
financial statements.
On July 13, 1995, the Company completed its IPO of 2,760,000 shares of the
Company's common stock and 920,000 warrants. Each warrant entitles the holder to
purchase three shares of the Company's common stock at an exercise price of
$2.00 per share. The net proceeds to the Company were approximately $3,326,000
after deducting underwriters' commissions and expenses of the offering which
totaled approximately $1,274,000.
8. OPTIONS AND WARRANTS
In 1995, the Company adopted the 1995 Stock Option Plan (the "Option Plan")
in which 1,350,000 common shares have been reserved for future issuance. The
Option Plan provides for the issuance of incentive stock options and
nonincentive stock options for the sale of shares of common stock to employees
of the Company at a price not less than the fair market value of the shares on
the date of the option grant, provided that the exercise price of any incentive
stock option granted to an employee owning more than 10% of the outstanding
common shares of the Company may not be less than 110% of the fair market value
of the shares on the date of the incentive stock option grant. The term of each
option and the manner of exercise are determined by the Board of Directors.
Employees are fully vested in the options 3 years after the date of grant and
the options are exercisable up to 10 years after the date of grant. At December
31, 1995, options to purchase 1,054,500 shares of common stock are outstanding
under the Option Plan.
In 1995, the Company adopted the 1995 Nonemployee Directors' Stock Option
Plan (the "Directors' Plan") in which 300,000 common shares have been reserved
for future issuance. The Directors' Plan provides for the sale of shares of
common stock to nonemployee directors of the Company at a price not less than
the fair market value of the shares on the date of the option grant. The term of
each option and the manner of exercise is determined by the Board of Directors,
but in no case can the options be exercisable 10 years beyond the date of grant.
Upon election to the Board of Directors, and after each re-election, each
nonemployee director is granted an option to purchase 15,000 common shares
exercisable upon the date of grant. At December 31, 1995, options to purchase
60,000 shares of common stock are outstanding under the Directors' Plan.
F-10
<PAGE>
SEL-LEB MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Transactions relating to all stock options granted and outstanding are as
follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDER
OPTION PRICE PER SHARE
------------ ---------------
<S> <C> <C>
Granted during the year ended December 31, 1995......................... 1,380,000 $1.67 - $2.75
Canceled................................................................ (265,500) $1.67
------------ ---------------
Balance at December 31, 1995........................................ 1,114,500 $1.67 - $2.75
------------ ---------------
------------ ---------------
</TABLE>
On January 5, 1994, the Company sold a warrant to purchase 490,689 shares of
the Company's common stock for $21,000 to a consultant who became an officer of
the Company. The warrant is exercisable through March 21, 2000 at an exercise
price of $315,000.
In May 1995, the Company borrowed $250,000 from an investor, which was
subsequently repaid out of the proceeds of the IPO (see Note 7). In connection
with this financing, the Company issued the investor 1,000,000 warrants, each of
which entitles the holder to purchase three shares of common stock at a price of
$2.00 per share, exercisable for a three-year period commencing July 13, 1996.
Upon issuance of the warrants the Company charged operations for $10,000 and
increased additional paid-in capital by a corresponding amount.
Upon consummation of the Company's IPO (see Note 7), the Company sold
warrants to purchase up to 240,000 units at an exercise price of $2.50 per unit
to the underwriter and its designees for an aggregate of $10.00. Each unit
consists of one share of common stock and a warrant entitling the holder to
purchase one share of common stock at an exercise price of $2.00 per share.
At December 31, 1995, common stock was reserved for the following reasons:
<TABLE>
<S> <C>
Exercise of common stock options......................................... 1,114,500
Exercise of common stock warrants........................................ 6,910,689
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company had loans payable to its shareholders and/or entities owned by
such shareholders amounting to $769,000 of which $169,000 was noninterest
bearing. Interest on that amount was imputed, charged to operations and treated
as a contribution to capital. Immediately prior to the IPO, $300,000 of such
loans was converted into 60,000 conversion units, each unit consisting of three
shares of common stock and one warrant entitling the holder to purchase three
shares of common stock at an exercise price of $2.00 per share. The balance of
$469,000 at December 31, 1995 now bears interest at an average rate of 8% per
annum and was to be repaid on January 13, 1997 out of available working capital.
On March 12, 1996, the Company agreed to repay the loans. The Company received a
discount of $46,900 on the outstanding balance and increased additional paid-in
capital by a corresponding amount. Interest expense for the years ended December
31, 1995 and 1994 amounted to $49,602 and $66,712, respectively.
In 1993, H. Howlin International, Inc. ("Howlin"), a company owned 100% by a
shareholder of the Company, transferred all of its inventory to the Company
under an arrangement which was being accounted for as a consignment. In 1995,
the Company purchased the consigned inventory from Howlin. Purchases from Howlin
amounted to $13,782 and $107,795 for the years ended December 31, 1995 and 1994,
respectively. At December 31, 1995, there were no amounts due to Howlin.
At December 31, 1994, the Company had goods on consignment from a company
which is 50% owned by a shareholder of the Company. In 1995, the Company
purchased the consigned inventory from this company. Purchases from this company
amounted to $69,768 and $5,560 for the years ended December 31, 1995 and 1994,
respectively. At December 31, 1995, the amount due to this company was $80,065.
F-11
<PAGE>
SEL-LEB MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1994, the Company made sales of
approximately $671,000 to third parties utilizing the names Sela Sales, Ltd.,
and Polvo Distributors, Inc., companies owned 100% by shareholders of the
Company.
During the year ended December 31, 1994, the Company made purchases of
approximately $185,000 from third parties utilizing the name Sela Sales, Ltd.
10. INCOME TAXES
The shareholders of Sel-Leb and Linette had consented that each company be
taxed as a small business corporation (S Corporation) under the provisions of
the federal income tax laws. On May 18, 1995, the merger of Linette with and
into Sel-Leb (see Note 1) terminated the S Corporation status of both entities.
The Company distributed $156,243 to these shareholders following the
consummation of the Company's IPO (see Note 7). This amount represented the
taxes payable on the earnings of Sel-Leb from its inception through the date its
S Corporation status was terminated and on the earnings of Linette from January
1, 1994 through the date its S Corporation status was terminated.
Deferred income tax asset at December 31, 1995 consists of the following:
<TABLE>
<S> <C>
Capital loss carryforward................................................ $ 84,000
Allowance for bad debts.................................................. 40,000
Other.................................................................... 12,000
---------
136,000
Valuation allowance...................................................... (84,000)
---------
Net deferred income tax asset........................................ $ 52,000
---------
---------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994
----------- ---------
<S> <C> <C>
Federal income taxes:
Current...................................................................... $ 222,000 $ 26,000
Deferred..................................................................... (40,000) --
----------- ---------
Total federal income taxes................................................. 182,000 26,000
----------- ---------
State income taxes:
Current...................................................................... 64,000 44,000
Deferred..................................................................... (12,000) --
----------- ---------
Total state income taxes................................................... 52,000 44,000
----------- ---------
Total provision for income taxes........................................... $ 234,000 $ 70,000
----------- ---------
----------- ---------
</TABLE>
The provision for income taxes differs from the amount computed using the
federal statutory rate of 34% as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----- -----------
<S> <C> <C>
Tax at federal statutory rate........................................................... 34% 34%
Flow-through of S Corporation taxable income (loss) to shareholders..................... 1 (34)
State income taxes, net of federal income tax effect.................................... 7 15
Other items, net........................................................................ (4) --
-- --
38% 15%
-- --
-- --
</TABLE>
F-12
<PAGE>
SEL-LEB MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SIGNIFICANT CUSTOMERS
During the year ended December 31, 1995, approximately 26% and 11% of the
Company's sales were to two customers. During the year ended December 31, 1994,
approximately 27% of the Company's sales were to one customer.
12. LITIGATION
The Company, certain of its officers and directors, the underwriter of the
Company's IPO and counsel for the underwriter (collectively the "Counterclaim
Defendants") are included as defendants in a counterclaim to an action not
involving the Company. This counterclaim alleges the existence of an oral
agreement to compensate certain individuals for their efforts in connection with
the Company's IPO. This counterclaim seeks damages in excess of $1,500,000 from
the Counterclaim Defendants. Management and its legal counsel believe that the
litigation has no basis in law or fact, and intend to vigorously defend against
the claim. The financial statements do not include any adjustment related to
this claim.
13. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma net income in the accompanying statement of income for the
years ended December 31, 1995 and 1994 includes a pro forma adjustment for
income taxes on a C Corporation basis as indicated below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Income before provision for income taxes and minority interest in earnings of
subsidiary before pro forma adjustment for income taxes...................... $ 612,837 $ 460,011
----------- -----------
Pro forma provision for income taxes:
Federal..................................................................... 180,000 137,000
State....................................................................... 52,000 38,000
----------- -----------
232,000 175,000
----------- -----------
Income before minority interest in earnings of subsidiary..................... 380,837 285,011
Minority interest in earnings of subsidiary................................... (39,414) (31,574)
----------- -----------
Pro forma net income...................................................... $ 341,423 $ 253,437
----------- -----------
----------- -----------
</TABLE>
The pro forma provision for income taxes differs from the amount of pro
forma income tax determined by applying the applicable federal statutory rates
primarily because of the effect of state and local taxes.
F-13
<PAGE>
SEL-LEB MARKETING, INC.
UNAUDITED BALANCE SHEET
MARCH 31, 1996
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents.................................................... $ 72,388
Accounts receivable -- net................................................... 2,260,823
Inventory.................................................................... 3,289,298
Prepaid expenses and other current assets.................................... 175,866
Deferred income tax asset, net of valuation allowance........................ 52,000
----------
Total current assets....................................................... 5,850,375
Property and equipment -- net.................................................. 316,872
Goodwill....................................................................... 273,741
Other assets................................................................... 3,611
----------
Total assets............................................................... $6,444,599
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses........................................ $1,343,634
Due to affiliates............................................................ 90,067
Income taxes payable......................................................... 231,968
----------
Total current liabilities and total liabilities............................ 1,665,669
----------
Common Stock -- $.01 par value; authorized 40,000,000 shares, issued and
outstanding 7,440,000 shares (Note 1)......................................... 74,400
Additional paid-in capital..................................................... 4,183,464
Retained earnings.............................................................. 521,066
----------
Shareholders' equity....................................................... 4,778,930
----------
Total Liabilities and Shareholders' Equity................................. $6,444,599
----------
----------
</TABLE>
See Notes to Financial Statements
F-14
<PAGE>
SEL-LEB MARKETING, INC.
UNAUDITED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenue:
Net Sales......................................................................... $ 3,070,765 $ 2,354,848
Operating Expenses:
Cost of sales..................................................................... 2,283,866 1,777,363
Selling, general and administrative expenses...................................... 645,511 432,887
------------- -------------
Total operating expenses........................................................ 2,929,377 2,210,250
Operating income.................................................................... 141,388 144,598
Interest income..................................................................... 9,902 0
Interest expense.................................................................... (12,242) (37,953)
------------- -------------
Income before provision for income taxes and minority interest in earnings of
subsidiary......................................................................... 139,048 106,645
Provision for income taxes (Note 4)................................................. 48,505 14,000
------------- -------------
90,543 92,645
Minority interest in earnings of subsidiary......................................... -- 10,620
------------- -------------
Net income.......................................................................... $ 90,543 $ 82,025
------------- -------------
------------- -------------
Pro forma information
Net income (Note 4)............................................................... $ 90,543 $ 49,100
------------- -------------
------------- -------------
Primary earnings per share.......................................................... $ 0.01 $ 0.01
------------- -------------
------------- -------------
Fully diluted earnings per share.................................................... $ 0.01 $ 0.01
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements
F-15
<PAGE>
SEL-LEB MARKETING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL
---------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- --------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995...................... 7,440,000 $ 74,400 $ 4,136,563 $ 430,523 $ 4,641,486
Discount in connection with repayment of related
party debt....................................... -- 46,901 -- 46,901
Net income........................................ -- -- 90,543 90,543
----------- --------- ------------- ----------- -------------
Balance at March 31, 1996......................... 7,440,000 $ 74,400 $ 4,183,464 $ 521,066 $ 4,778,930
----------- --------- ------------- ----------- -------------
----------- --------- ------------- ----------- -------------
</TABLE>
See Notes to Financial Statements
F-16
<PAGE>
SEL-LEB MARKETING, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1996
------------ 1995
------------
(NOTE 1)
<S> <C> <C>
Cash flow from operating activities:
Net income.......................................................................... $ 90,543 $ 82,025
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Imputed interest on noninterest bearing loans..................................... 0 4,225
Depreciation...................................................................... 25,126 425
Minority interest in earnings of subsidiary....................................... 0 10,620
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...................................... (85,010) 146,926
Increase in inventories......................................................... (819,212) (244,687)
Increase in due from affiliates................................................. 0 (28,226)
Decrease in prepaid expenses and other current assets........................... 177,690 32,141
Increase (decrease) in accounts payable and accrued expenses.................... 354,593 (21,969)
Increase (decrease) in due to affiliates........................................ (18,000) 118,315
------------ ------------
Net cash provided by (used in) operating activities........................... (274,270) 99,795
Cash flow from investing activities:
Net (advances to) repayments from affiliates........................................ (64,213) 60,000
------------ ------------
Cash flow from financing activities:
Net proceeds from notes to bank..................................................... 0 150,000
Net repayment of long term debt to related parties.................................. (422,099) 0
Deferred offering costs paid........................................................ 0 (43,250)
------------ ------------
Net cash provided by (used in) financing activities........................... (422,099) 106,750
------------ ------------
Net increase (decrease) in cash....................................................... $ (760,582) $ 266,545
------------ ------------
------------ ------------
Cash at beginning of period........................................................... $ 832,970 $ 179,536
------------ ------------
------------ ------------
Cash at end of period................................................................. $ 72,388 $ 446,081
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements
F-17
<PAGE>
SEL-LEB MARKETING, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION PERTAINING TO THE THREE MONTH PERIODS ENDING
MARCH 31, 1995 AND 1996 ARE UNAUDITED)
1. BASIS OF PRESENTATION, EVENTS, AND INITIAL PUBLIC OFFERING
The financial statements of Sel-Leb Marketing, Inc., ("the Company")
included herein have been prepared pursuant to generally accepted accounting
principles and have not been examined by independent public accountants. In the
opinion of management all adjustments which are of a normal recurring nature
necessary to present fairly the results of operation have been made. Pursuant to
Securities and Exchange Commission ("SEC") rules and regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted from these statements unless significant changes have taken
place since the end of the most recent fiscal year. The disclosures contained
herein should be read in conjunction with the financial statements and notes
included in the Company's Form 10-KSB filed with the SEC on March 31, 1996. The
results of operations for the three month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
The Company completed its initial public offering ("IPO") in July 1995 of
920,000 units, each unit consisting (after giving effect to a 3-for-1 stock
split effected in the form of a share distribution in February 1996) of three
shares of common stock and one warrant entitling the holder to purchase three
shares of common stock at an exercise price of $2.00 per share. The warrants
will be exercisable for a three year period commencing July 13, 1996. The
Company used a portion of the net proceeds of the IPO to repay bank and bridge
loans outstanding as of the date of the IPO.
On January 4, 1995, the Company increased its authorized number of shares to
10,000,000 shares of common stock, effected a 17,760.8 for 1 stock split and
changed the par value of its common stock from no par to $.01 par. On May 18,
1995, the Company effected a .810706 reverse stock split. In February 1996, the
Company increased its authorized number of shares to 40,000,000 shares of common
stock and consummated a 3 for 1 stock split, which was effected as a share
distribution pursuant to which each holder of a share of common stock received
two additional shares for each share held. The increase in authorized shares and
the stock splits have been given retroactive effect in the accompanying
financial statements.
On May 18, 1995, the Company and Linette Cosmetics, Inc. ("Linette"), two
companies with the same ownership interests, merged, with the Company as the
surviving corporation. In addition, certain shareholders of the Company
contributed their 60% interest in Lea Cosmetics, Inc. ("Lea") to the Company in
connection with the IPO. The Company purchased the remaining 40% interest in Lea
immediately prior to consummation of its IPO and Lea was subsequently merged
into the Company in August 1995. The purchase price for the 40% interest in Lea
consisted of 180,000 shares of common stock, 90,000 of which were issued in
January 1996 upon Lea's achieving certain sales volume for 1995.
The merger of Linette with and into the Company and the contribution of the
60% interest in Lea to the Company, have been reported at historical cost in a
manner similar to a pooling of interests. The purchase of the 40% interest in
Lea by the Company has been accounted for as a purchase.
2. EARNINGS PER SHARE
Earnings per share amounts are computed based on the weighted average
numbers of shares actually outstanding plus the shares that would be outstanding
assuming exercise of dilutive stock options and warrants, all of which are
considered to be common stock equivalents. The number of
F-18
<PAGE>
SEL-LEB MARKETING, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PERTAINING TO THE THREE MONTH PERIODS ENDING
MARCH 31, 1995 AND 1996 ARE UNAUDITED)
shares that would be issued from the exercise of stock options and warrants has
been reduced by the number of shares that could have been purchased from the
proceeds of such exercise at the average market price of the Company's stock.
Pursuant to the modified treasury stock method, the number of shares
purchased has been limited to 20% of the outstanding shares and the balance of
funds has been hypothetically invested in U.S. government securities or
commercial paper with appropriate recognition of any income tax effect.
For the three months ended March 31, 1996, the number of shares used in the
computation of primary earnings per share and fully dilutive earnings per share
were 13,977,189 and 14,154,955, respectively. For the comparable period in 1995
the number of shares used for both calculations amounted to 4,969,089.
3. ACQUISITION
In July 1995, the Company purchased the 40% interest in Lea in a business
combination accounted for as a purchase. The purchase price was 180,000 shares
of newly issued, unregistered shares of the Company's common stock, 90,000 of
which were issued in January 1996 upon Lea's achieving certain sales volume for
1995. The accompanying financial statements reflect the issuance of these shares
of common stock as if they were issued on December 31, 1995. The fair value of
the assets acquired, including approximately $281,000 allocated to goodwill,
which is being amortized over 10 years, amounted to approximately $384,000 and
liabilities assumed amounted to approximately $101,000. Amortization expense
related to goodwill and charged to operations amounted to $7,082 for the three
months ended March 31, 1996.
The Company reviews the carrying value of goodwill for impairment
periodically and whenever events or changes in circumstances indicate that the
amount may not be recoverable. The review for recoverability includes an
estimate by the Company of the future undiscounted cash flows expected to result
from the use of the assets acquired and their eventual disposition. An
impairment will be recognized if the carrying value of the assets exceeds the
estimated future undiscounted cash flows of those assets.
4.PROVISION FOR INCOME TAX
The provision for income tax for the three month period ended March 31, 1996
and the pro forma provision for the three month period ended March 31, 1995
reflects the Company's earnings taxed for Federal and certain State income tax
purposes at statutory rates. Prior to the merger of Linette with and into the
Company, the Company was treated as an S-Corporation, with its earnings taxed
for federal and certain state income tax purposes directly to its shareholders.
F-19
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 14
Certain Market Information..................... 15
Dilution....................................... 15
Capitalization................................. 16
Selected Financial Data........................ 17
Management's Discussion and Analysis or Plan of
Operation..................................... 19
Business....................................... 22
Management..................................... 30
Principal Shareholders......................... 38
Certain Transactions........................... 40
Concurrent Registration of Securities.......... 41
Description of Securities...................... 42
Shares Eligible for Future Sale................ 44
Warrant Solicitation........................... 45
Legal Matters.................................. 45
Experts........................................ 45
Index to Financial Statements.................. F-1
</TABLE>
SEL-LEB
MARKETING, INC.
5,760,000 SHARES OF COMMON STOCK,
ISSUABLE UPON THE EXERCISE
OF REDEEMABLE WARRANTS
180,000 SHARES OF COMMON STOCK,
ISSUABLE UPON THE EXERCISE
OF REDEEMABLE WARRANTS
HELD BY CERTAIN AFFILIATES
OF THE COMPANY
80,000 UNITS, EACH UNIT CONSISTING
OF THREE SHARES OF
COMMON STOCK AND THREE
REDEEMABLE WARRANTS,
240,000 SHARES OF COMMON STOCK
INCLUDED IN SUCH UNITS AND
240,000 SHARES OF COMMON STOCK
ISSUABLE UPON THE EXERCISE OF
REDEEMABLE WARRANTS INCLUDED
IN SUCH UNITS
---------------------
PROSPECTUS
---------------------
JULY 12, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
