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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-13856
SEL-LEB MARKETING, INC.
(Exact name of small business issuer in its charter)
New York 11-3180295
(State of incorporation) (I.R.S. Employer Identification No.)
495 River Street, Paterson, New Jersey 07524
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (973) 225-9880
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.01 par value Boston Stock Exchange
Redeemable Warrant to Purchase Common Stock Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Redeemable Warrant to Purchase Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. /X/
The issuer's revenues for its most recent fiscal year were $17,374,041.
The aggregate market value of voting stock held by non-affiliates of the
registrant on March 24, 1998 was approximately $1,719,750. On such date, the
closing price of the issuer's common stock was $.40625 per share. Solely for the
purposes of this calculation, shares beneficially owned by directors, executive
officers and stockholders of the issuer that beneficially own more than 10% of
the issuer's voting stock have been excluded, except such shares, if any, with
respect to which such directors and officers disclaim beneficial ownership. Such
exclusion should not be deemed a determination or admission by the issuer that
such individuals are, in fact, affiliates of the registrant.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on March 24, 1998 was 8,712,727.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement in connection with its Annual Meeting
scheduled to be held on May 27, 1998 are incorporated in Part III. The Company's
Proxy Statement will be filed within 120 days after December 31, 1997.
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SEL-LEB MARKETING, INC.
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 1997
Table of Contents
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Page
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PART I
Item 1. Description of Business 3
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 13
Item 6. Management's Discussion and Analysis or Plan of Operation 14
Item 7. Financial Statements 17
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 18
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial Owners and Management 19
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits and Reports on Form 8-K 19
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PART I
Item 1. Description of Business
General
Sel-Leb Marketing, Inc. (the "Company") is primarily engaged in the
distribution and marketing of consumer merchandise to retail sellers such as
mass merchandisers, discount chain stores and food, drug and electronic
retailers. The Company's business presently consists of the following
activities: (i) 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, (ii) 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, and (iii)
developing, marketing and selling, or otherwise facilitating the development,
marketing or sale of, products to be promoted by celebrity spokespersons and
sold to mass merchandise retailers, as well as products which will "tie in" to
specific television shows and be sold by the Company either on television in
connection with those shows, with the intent to thereafter sell such products to
mass merchandise retailers, or directly 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 in July 1995 an initial public offering (the
"IPO") of units (the "Units"), each Unit consisting of one share of common
stock, par value $.01 per share ("Common Stock"), and one redeemable warrant to
purchase one share of Common Stock (the "Warrants"). Immediately following the
issuance of the Units in the IPO, 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
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.
In September 1997, the Company and RBCJJ Associates, LLC ("RBCJJ"), an
unaffiliated third party, formed Ales Signature, Ltd., a New York corporation
("Ales"), for the purpose of acquiring from SBC Corporation, Inc. ("SBC") a line
of women's cosmetic, corrective and treatment products (e.g., blemish creams and
eye creams) sold under the Signature(R) name. In connection with such formation,
the Company acquired a 90% equity interest in Ales and RBCJJ acquired the
remaining 10% equity interest in Ales. On October 23, 1997, Ales consummated the
acquisition of the Signature(R) line, and in
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connection therewith acquired from SBC, for approximately $670,000, (i) all
rights of SBC in and to certain trademarks (including the Signature
Solutions(TM) mark and the Signature Beauty Care(R), Giraffe(R), Groomer's
Secret(R), Lip Set(R) and Salon Essence(R) registered trademarks) and (ii)
finished products and other inventory (including works in progress and component
parts) related to the product lines bearing the acquired trademarks.
Unless otherwise specified herein, references to the "Company" shall
refer collectively to Sel-Leb Marketing, Inc. and its subsidiary Ales Signature,
Ltd.
Sale of Proprietary Brand Name Products. The Company is currently
engaged in the development, marketing and sale of its own proprietary brand name
budget-line health, beauty aid and cosmetic products. 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(R), Zia(R), Loud Music(TM), Ghoul Tools(TM), Signature
Solutions(TM) and Signature Beauty Care(R) brand names to retail chains and
other mass merchandisers located throughout the United States. All of the
Company's proprietary beauty aid and cosmetic products 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.
During the fiscal year ended December 31, 1997, no such supplier accounted for
more than 10% of such purchases other than Worldwide Packaging, Inc., which
accounted for approximately 10.2% of such purchases. 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, materials purchased by the Company for its proprietary
beauty aid and cosmetic products are delivered by the suppliers to the Company's
warehouse facilities. Thereafter, the Company delivers such materials, on an
as-needed basis, to its contract manufacturers, which are engaged by the Company
to provide filling services and perform quality control with respect to the
finished products. During the fiscal year ended December 31, 1997, one such
contract manufacturer -- LPD Packaging, Inc. -- accounted for approximately 90%
of the Company's filling services. All products are manufactured pursuant to the
Company's specifications on a purchase order basis. Once completed, the products
are delivered to the Company, which packages the products and distributes the
finished products to its customers. Although the Company believes that its
contract manufacturers have 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 its contract manufacturers and that the Company will continue
to obtain its finished beauty aid and cosmetic products from such manufacturers
in the foreseeable future, the Company does not have written contracts with its
manufacturers 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 manufacturers, 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 manufacturers.
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As part of the Company's strategy of taking advantage of the growth in
mass merchandising and value retailing, the Company will seek to expand its
existing proprietary brand name product lines as well as continue to introduce
new 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.
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 in the United States and, to a
very limited extent, in Europe, and sells the merchandise to retail chains and
other mass merchandisers located throughout the United States. During the year
ended December 31, 1997, 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 and McCrory's Stores, which
accounted for approximately 33% and 5%, respectively, of the Company's net
opportunistic sales in 1997. 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.
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
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accounted for more than 10% of the Company's total merchandise purchases for the
year ended December 31, 1997. During the year ended December 31, 1997,
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 Paul Sharp, the
Company's President and Chief Executive Officer, and Jorge Lazaro, the Company's
Executive Vice President, 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. However, in certain cases the Company
purchases merchandise with payment made upon the receipt of goods in order to
enable the Company to obtain favorable prices.
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
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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.
Development of "Celebrity-Endorsed" and Television "Tie-in" Products.
The Company believes that the increasing popularity of consumer products
endorsed by celebrities, as well as products which "tie-in" to specific
television shows, may provide significant future opportunities for the Company.
Accordingly, the Company is seeking to develop products for promotion by
celebrity spokespersons and television "tie-in" products, which products would
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, as well as agreements pursuant to which it will be able to
develop television "tie-in" products which the Company believes will have
consumer appeal.
In 1996, the Company entered into an arrangement with Regis Philbin,
co-host of the television program Live with Regis and Kathie Lee, and Beau
Brummel ("Beau Brummel"), a leading New York City clothier, involving a line of
menswear accessories to be promoted by Mr. Philbin. Pursuant to such
arrangement, the Company provided a portion of the financing required in
connection with Mr. Philbin's live television appearances on QVC Network in
December 1996 and March 1997. The Company and Beau Brummel subsequently
formalized this relationship by forming Beau Brummel Sel-Leb Marketing, Inc.
("BBSLM"), a joint venture, of which each of the Company and Beau Brummel hold a
47.5% equity interest and a third party holds the remaining 5% equity interest.
Pursuant to the terms of an agreement between such parties relating to the
operation of BBSLM, Beau Brummel is responsible for designing the clothing and
accessories line promoted by Mr. Philbin, and the Company is responsible for the
day-to-day operations of BBSLM, including the marketing and promotion of the
product line. BBSLM, in turn, entered into an agreement with each of Mr. Philbin
and QVC, Inc.("QVC"). Under BBSLM's agreement with Mr. Philbin, Mr. Philbin
granted to BBSLM the right to use his name, autograph and likeness in connection
with the promotion and distribution of the menswear products, and agreed to
appear on the QVC Network to promote such products. In consideration therefor,
BBSLM agreed to pay to Mr. Philbin a specified percentage of the proceeds from
the sale of the menswear products. The agreement further provided for Mr.
Philbin to receive specified guaranteed payments from BBSLM following each of
his appearances on QVC and provided that, in the event QVC submitted purchase
orders to BBSLM following any appearance by Mr. Philbin which were not
sufficient to generate the specified royalty payments, BBSLM was entitled to
terminate its agreement with Mr. Philbin. BBSLM's agreement with Mr. Philbin was
for a one-year term which ended in March 1998. Since the termination of such
agreement, BBSLM has been operating pursuant to an informal arrangement with Mr.
Philbin on substantially the same terms as described herein, and is currently in
discussions with Mr. Philbin to renew the formal agreement between them.
However, there can be no assurance that BBSLM and Mr. Philbin will renew their
prior agreement or, if renewed, as to the terms and conditions thereof. BBSLM
has also entered into an agreement with QVC, pursuant to which BBSLM has granted
to QVC the exclusive right to promote the product line through direct response
television and through retail stores operated by QVC and its affiliates, and has
agreed to cause Mr. Philbin to make at least eight appearances on the QVC
Network each year to promote the menswear products. The agreement between BBSLM
and QVC is for an initial term of three years commencing March 1997, and is
subject to automatic renewal for additional three-year periods unless BBSLM
shall notify QVC prior to the expiration of the initial term or any such renewal
period of its desire to terminate the agreement and, during such term, net
purchases of products by QVC shall have been less than a specified minimum
amount. In addition, BBSLM shall have the right
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to terminate the agreement following either the first or second year of the
initial term thereof in the event certain specified minimum net purchase
requirements are not met during such year. Pursuant to BBSLM's agreements with
Mr. Philbin and QVC, Mr. Philbin appeared on the QVC Network on three occasions
during 1997.
In September 1996, the Company entered into an arrangement with ACI,
Inc. ("ACI"), a developer and marketer of cosmetic products, relating to the
distribution and marketing of products endorsed by celebrity spokespersons
through electronic media and other retail channels. Pursuant to this
arrangement, the Company will provide the financing required in connection with
developing, marketing and distributing the products to be promoted by such
celebrities and sold in the retail market. All profits and losses (after giving
effect to any royalty payments required to be made to celebrity spokespersons)
resulting from the sale of such products are to be divided equally between the
Company and ACI. To date, the Company has provided the financing for a line of
cosmetics developed by ACI (including, without limitation, lipsticks, blushes
and other beauty products) which are being promoted by a leading make-up artist
and sold through the electronic media. There can be no assurance that any other
products will be developed by ACI and financed by the Company pursuant to this
agreement or that any such products that are developed will meet with consumer
acceptance or provide significant revenues for the Company.
In October 1996, the Company entered into an agreement with Viacom
Consumer Products, Inc. ("VCP") pursuant to which VCP has granted to the Company
a license to use the designs, trademarks, service marks, logos, visual
representations, characters and characterizations of the television series
Clueless(R) in connection with the manufacture and distribution in the United
States of a Clueless(R) line of cosmetics (including, among others, nail care
products, lip stick products, cologne fragrances, mass market gift sets,
signature gift sets and children's gift sets). Pursuant to the agreement, the
Company has the exclusive right to sell such items in mass market stores,
grocery stores, drug stores, beauty outlets, discount chain stores and wholesale
clubs, and the non-exclusive right to sell such items in toy stores and
department stores; provided, however, that under certain conditions (including
failure to make a timely royalty payment or failure to meet certain sales
targets), the Company's exclusive rights shall become non-exclusive. The Company
is required under the agreement to pay to VCP a specified royalty fee on all
items sold by the Company pursuant to the agreement, and has paid to VCP a
non-returnable advance of $90,000 (subject to reduction in the event certain
episodes of the show are not picked up for broadcast) to be applied against the
Company's royalty payments. In addition, the Company shall be required to pay to
VCP on March 31, 1998 a guarantee of $225,000, less the amount of the
non-returnable advance paid by the Company to VCP and the aggregate amount of
royalties paid by the Company to VCP through such date. Furthermore, the Company
is also required under the agreement to spend a designated amount each year on
advertising for the Clueless(R) cosmetics line. The agreement commenced on
October 15, 1996 and will continue, subject to certain conditions, until October
31, 1999; provided, however, that in the event the Company shall have met
certain royalty targets during the initial term, the Company shall have the
right to extend the agreement for an additional two-year period, subject to
payment of an additional advance and an additional guarantee; and provided
further that, in the event Clueless(R) is not picked up for broadcast under
certain circumstances, the Company shall have the option to terminate the
agreement. During 1997, the Company commenced manufacturing a line of
Clueless(R) lipsticks, nail polishes and mascaras, which line was launched in
March 1997. As in the case of its own proprietary brand name products, the
Company manufactures the Clueless(R) products by acquiring the raw materials
therefor from various suppliers and delivering such materials to its contract
manufacturers, which provide filling services and deliver finished products to
the Company for packaging and delivery to the Company's customers. There can be
no assurance that the Clueless(R) products will continue to meet
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with consumer acceptance or that the Clueless(R) show will continue to be
broadcast during the anticipated term of the agreement.
In January 1997, the Company entered into an agreement with Bell Abbott
Haussmann Inc. ("BAHI") pursuant to which the Company has been granted the
exclusive right to use the trademark "Jabot(R)" in connection with the
production, marketing and distribution of certain cosmetic and fragrance items
(including, without limitation, perfumes, colognes, toilet water, talcum powder,
bath gels and personal deodorants) in the United States and Canada, and has also
been granted the exclusive right to use the trademark "Jabot for the Young and
the Restless Generation(R)" in connection with the marketing and distribution of
such items in Canada. The "Jabot(R)" and "Jabot for the Young and the Restless
Generation(R)" marks were inspired by the fictional name of a cosmetics company
featured on a leading daytime television drama. Pursuant to the agreement, the
Company has the right to sell the cosmetic and fragrance items through various
retail distribution channels, including mass merchandisers, retail stores,
catalogues, electronic media, direct response advertising, mail order,
telemarketing and other similar retail channels. The Company is required under
the agreement to pay to BAHI a specified royalty fee on all items sold by the
Company pursuant to the agreement, and has paid to BAHI a nonrefundable $10,000
advance to be applied against the Company's royalty payments. The agreement is
for a term of five years commencing March 31, 1997, and shall be automatically
extended for an additional term of five years and a second additional term of
ten years, in each case subject to certain minimum royalty payments having been
met during the preceding term, and thereafter to subsequent additional terms of
five years unless either party does not wish to extend the term of the
agreement. As of the date hereof, the Company has developed prototypes of
products to be included in the "Jabot(R)" and "Jabot for the Young and the
Restless Generation(R)" product lines; however, no such products have been sold
by the Company as of the date hereof. There can be no assurance that the Company
will be successful in selling such products or that any such products developed
by the Company will meet with consumer acceptance.
Although the Company is seeking to develop the "celebrity-endorsed" and
"television tie-in" 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.
Inventory
Merchandise acquired by the Company in connection with its
opportunistic purchasing activities for resale to its mass market customers is
generally shipped by the supplier to the Company's warehouse facility, which is
located in Paterson, New Jersey, or, in certain situations, is shipped by the
supplier directly to a customer from whom the Company has received a purchase
order. The Company utilizes its Paterson facility for the centralized receipt of
goods from suppliers, as well as the storage of inventory and the shipment of
inventory to its customers. In addition, value-added services such as
repackaging of goods are also performed at this facility.
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Typically, all raw materials purchased by the Company for its
proprietary beauty aid and cosmetic products, as well as for the products sold
under the Clueless(R) name, are delivered to the Company's warehouse facility.
Thereafter, the Company delivers such materials, on an as-needed basis, to its
contract manufacturers, which provide filling services and perform quality
control with respect to the finished products. Once completed, the products are
delivered to the Company, which packages the products and distributes the
finished goods from its warehouse to its customers.
In 1996, the Company uncovered the theft of certain of its inventory
from its former warehouse facilities located in North Bergen, New Jersey. The
Company believes that the amount of inventory involved was approximately
$103,000. The loss of such inventory during the year ended December 31, 1996 had
an adverse effect on the results of operations of the Company for the fiscal
year ended December 31, 1996. Although the Company has filed a notice of claim
with its insurance carrier with respect to this matter, the Company's current
insurance policy provides coverage for employee theft for only up to $100,000
per incident, with a $10,000 deductible. There can be no assurance that the
Company will be successful in its claim under such insurance policy.
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(R), Zia(R), Loud Music(TM),
Ghoul Tools(TM), Signature Solutions(TM) and Signature Beauty Care(R) 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-endorsed" 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), and that these products, as well as the Clueless(R) line of
cosmetics sold by the Company, will compete with other products sold in the
traditional retail market which relate to characters or themes of television
shows or
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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
Products developed by the Company are sold under the Linette(R),
Zia(R), Signature Solutions(R) and Signature Beauty Care(R) trademarks and the
Loud Music(TM) and Ghoul Tools(TM) marks. The Company has registered the
Linette(R) and Zia(R) trademarks with the United States Patent and Trademark
Office (the "Trademark Office") and, in connection with the acquisition of the
product lines from SBC, Ales acquired all of SBC's rights in and to the
Signature Solutions(R) mark and the Signature Beauty Care(R), Giraffe(R),
Groomer's Secret(R), Lip Set(R) and Salon Essence(R) trademarks. 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 also
applied to the Trademark Office for the registration of the trademarks Loud
Music(TM), Ghoul Tools(TM) and Signature Solutions(R), the trademarks under
which the Company sells certain proprietary cosmetics products. There can be no
assurance that registration of such trademarks will be granted by the Trademark
Office. 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.
Pursuant to the Company's agreement with VCP, the Company has been
granted a license to use the designs, trademarks, service marks, logos, visual
representations, characters and characterizations of the television series
Clueless(R) in connection with the manufacture and distribution in the United
States of a Clueless(R) line of cosmetics (including, among others, nail care
products, lip stick products, cologne fragrances, mass market gift sets,
signature gift sets and children's gift sets). In addition, pursuant to the
Company's agreement with BAHI, the Company has been granted the exclusive right
to use the trademark "Jabot(R)" in connection with the production, marketing and
distribution of certain cosmetic and fragrance items (including, without
limitation, perfumes, colognes, toilet water, talcum powder, bath gels and
personal deodorants) in the United States and Canada, and has also been granted
the exclusive right to use the trademark "Jabot for the Young and the Restless
Generation(R)" in connection with the marketing and distribution of such items
in Canada.
Personnel
The Company currently employs 18 full-time salaried employees and
approximately 45 hourly employees (the exact number of which fluctuates from
time to time based on the Company's needs). The terms of employment of the
Company's hourly employees are governed by a collective bargaining agreement
which commenced on September 1, 1997 and continues for a term of five years.
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
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$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.
Item 2. Description of Property.
The Company's principal executive offices are located at 495 River
Street, Paterson, New Jersey, 07524. Such premises include approximately 50,500
square feet of office and warehouse space. The lease is for a period of five
years commencing April 1, 1997, at a monthly rent (including tax) of $13,120 in
the first two years, $20,666 in the third year and $24,833 in the fourth and
fifth years. In addition, in connection with such lease, the Company purchased
certain machinery and equipment from the lessor at a cost of $110,000. The
Company is also obligated to reimburse the lessor in the third, fourth and fifth
years of the lease for the Company's proportionate share of any increases in
real estate taxes and assessments over the amount of such taxes and assessments
during calendar year 1997.
The Company also leases approximately 10,000 square feet of storage
space in Middletown, New York from LPD Packaging, Inc., one of the contract
manufacturers 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 1997 at an annual rent of $35,000 and will lease the space
during 1998 at the same rate. 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 its properties is
adequate for the current needs of its business.
Item 3. Legal Proceedings.
Except for proceedings in the normal course of business, the Company is
not a party to or involved in any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to the vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1997.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
A. 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 during the fiscal years ended December 31, 1996 and 1997 were
as follows:
High Low
---- ---
Fiscal Year 1996(1)
Quarter Ended:
March 31, 1996....................... $5.375 $4.50
June 30, 1996........................ $8.250 $6.00
September 30, 1996................... $7.750 $5.625
December 31, 1996.................... $7.625 $5.125
Fiscal Year 1997
Quarter Ended:
March 31, 1997....................... $6.75 $5.25
June 30, 1997........................ $5.50 $1.25
September 30, 1997................... $2.75 $1.00
December 31, 1997.................... $2.50 $0.75
- -------------------
(1) All share prices prior to February 29, 1996 have been adjusted to give
effect to a three-for-one stock split which was effected by the Company
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.
The prices set forth above reflect inter dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
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B. Holders.
On March 24, 1998, as reported by the Company's transfer agent, shares
of Common Stock were held by 42 persons, based on the number of record holders,
including several holders who are nominees for an undetermined number of
beneficial owners.
C. Dividends.
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
Harold Markowitz, the Chairman of the Board of the Company, Paul Sharp, the
President and Chief Executive Officer of the Company, and Jorge Lazaro, the
Executive Vice President and Secretary of the Company, 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 a 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 (the "S Corporation Distribution"), such distribution to be payable
following the consummation of the IPO after the amount thereof had been
determined. In September and October of 1995, the Company paid the S Corporation
Distribution to Messrs. Markowitz, Sharp and Lazaro in an aggregate amount of
approximately $156,250.
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.
Item 6. 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 and related notes thereto.
Results of Operations
Fiscal Year 1997 Compared to Fiscal Year 1996
Net sales for the year ended December 31, 1997 were $17,283,523
compared to $13,318,088 for the fiscal year ended December 31, 1996,
representing an increase of approximately 30%. This increase in net sales
resulted from increases in sales of the Company's own proprietary brand name
line of beauty aids and cosmetics, increases in sales of merchandise acquired in
connection with the Company's opportunistic purchasing business, and the
introduction of a new line of cosmetics pursuant to the Company's arrangement
with ACI, which line is being sold through the electronic media.
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Commission income decreased for the fiscal year ended December 31, 1997
to $90,518 from $204,658 for the comparable period in 1996. This decrease in
commission income reflects the Company's emphasis on selling its own proprietary
products rather than acting as an agent for the sale of other companies'
products.
Cost of sales increased from $10,601,237 in 1996 to $12,988,952 in
1997. However, the cost of goods sold as a percentage of net sales decreased
from 79.6% in 1996 to 75.2% in 1997. This decrease is due primarily to higher
profit margins generated by sales of the Company's own proprietary brand name
line of cosmetics and reflects the fact that, in 1996, the cost of goods sold
was adversely affected by a theft of inventory which was uncovered by the
Company in the fourth quarter of 1996 and which management believes was in the
amount of approximately $103,000.
Selling, general and administrative ("SG&A") expenses increased by
$1,551,560 from $2,631,839 in 1996 to $4,183,399 in 1997. Generally, the
principal components of the Company's SG&A expenses are payroll, rent,
commission, royalties, insurance, legal, accounting and other fees paid to third
parties and travel and promotional expenses. The increase in SG&A expenses
resulted primarily from (i) increased costs incurred by the Company in
connection with the Company's having hired outside sales representatives and, in
connection therewith, having incurred commission expenses of approximately
$200,000 in 1997 as compared to approximately $75,000 in 1996, (ii) the sale of
product lines on which it incurred royalty expenses of approximately $308,000 in
1997 as compared to $32,000 in 1996, (iii) other SG&A costs associated with the
line of cosmetics being sold pursuant to the ACI agreement of approximately
$190,000, (iv) the Company's having increased its staffing to perform the
selling, distribution and other functions related to existing and new product
lines at a cost of approximately $353,000 and (v) the Company's having increased
its selling, travel, development and advertising expenses for existing and new
product lines by approximately $306,000 from the 1996 amount. In addition, the
Company moved its operations to a new and larger facility in 1997 to support
current and planned increases in sales levels and, as a result, occupancy costs
increased by $76,000 from the 1996 amount.
As a result of the increase in the cost of sales and the increase in
SG&A expenses, total operating expenses increased from $13,233,076 in 1996 to
$17,172,351 in 1997. As a result of these increased operating expenses,
operating income decreased from approximately $290,000 in 1996 to $202,000 in
1997.
The Company's net interest costs increased from $16,475 in 1996 to
$149,278 in 1997 primarily as a result of additional borrowings under the
Company's revolving line of credit and the new term loan.
The Company's provision for income taxes decreased from approximately
$118,000 in 1996 to approximately $24,000 in 1997 resulting from the overall
reduction in income.
As a result of the above, the Company's net income decreased by
approximately $130,000 from approximately $158,000 in 1996 to $28,000 in 1997.
Although the Company has historically incurred operating losses in the
fourth quarter of each fiscal year, the 1997 fourth quarter loss was accentuated
by the fact that a significant amount of sales involved either promotional items
which have lower profit margins or items subject to royalties. In addition, the
Company has built up its infrastructure, as detailed above, to support
anticipated sales growth in 1998, although there can be no assurance that such
anticipated growth will occur. Finally, the Company's earnings were adversely
affected in the fourth quarter by the
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financing costs incurred in connection with the Company's having secured
additional financing arrangements in the latter portion of 1997.
The acquisition of the product lines from SBC in October 1997 did not
have a material impact on the Company's 1997 results of operations.
Liquidity and Capital Resources
During 1997, an aggregate of 444,250 shares of Common Stock were issued
by the Company upon the exercise of warrants and options, resulting in net
proceeds to the Company of $735,789. In addition, during 1997, the Company
borrowed an additional $1,100,000 under its revolving line of credit described
below. The proceeds resulting from the option and warrant exercises and the
additional borrowings were used by the Company primarily for the purchase of
additional inventory, consisting primarily of the Company's proprietary brand
name lines of beauty aids and cosmetics.
At December 31, 1997, the Company had working capital of $7,107,954 and
cash and cash equivalents in the amount of $249,688. The Company's principal
cash requirement is for the acquisition of inventory. In 1997, the Company
increased the amount of its inventory by approximately $2,100,000 to
approximately $5,814,000 at December 31, 1997. A portion of this increase was
financed by increased borrowings under the Company's revolving credit
arrangement and term loan described below.
On November 6, 1995, the Company entered into a Loan and Security
Agreement (the "Original Loan Agreement") with Summit Bank (formerly known as
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 of up to $2,000,000, subject to a borrowing base limitation. The line of
credit bore interest at fluctuating rates per annum based on the "Prevailing
Base Rate" (as defined in the Original Loan Agreement) of the Lender. The Loan
Agreement terminated on July 31, 1997 and, subsequent thereto, the Company
borrowed funds from the Lender pursuant to an informal, non-binding arrangement
on the same terms as the Original Loan Agreement. The Company and the Lender
reinstated the Original Loan Agreement on September 22, 1997. As of September
30, 1997, the Company had outstanding $2,000,000 under this line of credit. Any
funds borrowed by the Company were secured primarily by the inventory and
receivables of the Company.
On October 22, 1997, the Company and Ales entered into a new Loan and
Security Agreement with the Lender (the "Current Loan Agreement"). The Current
Loan Agreement provides for the continuation through May 31, 1998 of the
Company's existing line of credit arrangement providing for borrowings of up to
the lesser of $2,000,000 or prescribed levels of eligible accounts receivable
and inventories on substantially the same terms as under the Original Loan
Agreement. As of December 31, 1997 and March 26, 1998, the Company had
outstanding $1,400,000 and $1,700,000, respectively, under this line of credit.
Although the Company is currently in discussions to extend the maturity of, and
increase the amount available under its line of credit arrangement, there can be
no assurance that such renewal and amendment will be consummated or, if
consummated, as to the timing or terms thereof.
Pursuant to the Current Loan Agreement, the Company and Ales also
obtained from the Lender a three-year, $1 million term loan to finance the
acquisition by Ales of certain assets from SBC, a manufacturer of cosmetics,
skin care and treatment products. The term loan bears interest at the
"Prevailing Base Rate" plus .25%, and the outstanding principal amount of the
loan is payable in installments, with $150,000 payable on each of August 31,
1998 and 1999 and the balance payable on
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August 31, 2000. In connection with the acquisition, which was consummated on
October 23, 1997, Ales acquired, for approximately $670,000, inventory and
certain other assets, as well as trademarks and trade names including Signature
Solutions(TM) and Signature Beauty Care(R). The balance of the proceeds from the
term loan were used for working capital purposes.
On September 26, 1997, in connection with the relocation of its office
and warehouse facilities to Paterson, New Jersey, the Company borrowed $100,000
from the Paterson Restoration Corporation. The loan, which bears interest at 6%
per annum, provides for monthly payments of principal and interest in the amount
of $1,461 through October 1, 2004 and is secured by a second priority lien on
all new machinery and equipment purchased by the Company. The proceeds of the
loan are to be used for the purchase of fixed assets.
The Company anticipates that its working capital, 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 working capital 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 Current
Loan Agreement, which expires on May 31, 1998, 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.
The Company recognizes the need to assure that its operations will not
be adversely impacted by Year 2000 software failures. The impact on operations
is currently being evaluated. In 1998, management will begin to identify the
revisions, if any, needed to be made to ensure that the Company will be able to
process information beyond 1999 without disruption. Software revisions are
expected to be performed by Company employees and the total estimated cost for
achieving Year 2000 compliance is not anticipated to be material to its
financial position or results of operations.
Cautionary Statement
This Annual Report on Form 10-KSB contains certain forward-looking
statements, including statements concerning the adequacy of the Company's
sources of cash to finance its current and future operations. Actual results
could differ materially from those projected as a result of various factors,
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.
Item 7. Financial Statements
The financial statements of the Company are set forth in a separate
section of this Annual Report on Form 10-KSB. See "Item 13. Exhibits and Reports
on Form 8-K" and the Index to Financial Statements on page F-1 of this Annual
Report on Form 10-KSB.
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Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 16, 1997, the Company dismissed Goldstein Golub Kessler &
Company, P.C. (the "Former Accountant") as the Company's independent
accountants. The reports of the Former Accountant on the Company's financial
statements for the fiscal years ended December 31, 1995 and 1996 did not contain
an adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principle. The Company's Audit
Committee and Board of Directors participated in and approved the decision to
change independent accountants. There were no disagreements with the Former
Accountant for the fiscal years ended December 31, 1995 and 1996 or for the
interim periods subsequent to December 31, 1996 through the date of the Former
Accountant's dismissal, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the Former Accountant,
would have caused them to make reference thereto in their reports on the
financial statements for such years. No events of the kind set forth in Item
304(a)(1)(iv)(B) of Regulation S-B occurred during the fiscal years ended
December 31, 1995 and 1996 or during any of the interim periods subsequent to
December 31, 1996 through the date of the Former Accountant's dismissal.
The Former Accountant furnished the Company with a letter addressed to
the Securities and Exchange Commission (the "Commission") stating that it agreed
with the above statements. A copy of this letter was included as an exhibit to
the Company's Current Report on Form 8-K filed with the Commission on December
22, 1997.
Effective December 17, 1997, the Company engaged J.H. Cohn LLP (the
"New Accountant") as its new independent accountants. During the fiscal years
ended December 31, 1995 and 1996 and the interim periods subsequent to December
31, 1996 through the date of the New Accountant's engagement, the Company did
not (i) consult with the New Accountant on the application of accounting
principles to a specified transaction, either completed or proposed, (ii)
consult with the New Accountant on the type of audit opinion that might be
rendered on the Company's financial statements or (iii) receive either written
or oral advice from the New Accountant that was an important factor in reaching
a decision as to an accounting, auditing or financial reporting issue.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
See the section captioned "Election of Directors" included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on May 27, 1998, which section is incorporated herein by reference.
Item 10. Executive Compensation
See the section captioned "Executive Compensation" included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held on May 27, 1998, which section is incorporated herein by reference.
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Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
See the section captioned "Principal Shareholders of the Company"
included in the Company's Proxy Statement in connection with its Annual Meeting
scheduled to be held on May 27, 1998, which section is incorporated herein by
reference.
(b) Security Ownership of Directors and Officers
See the section captioned "Principal Shareholders of the Company"
included in the Company's Proxy Statement in connection with its Annual Meeting
scheduled to be held on May 27, 1998, which section is incorporated herein by
reference.
(c) Changes in Control
The Company knows of no contractual arrangements which may, at a
subsequent date, result in a change of control of the Company.
Item 12. Certain Relationships and Related Transactions
See the section captioned "Certain Transactions" included in the
Company's Proxy Statement in connection with its Annual Meeting scheduled to be
held May 27, 1998, which section is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
(1) The financial statements of the Company and the report thereon
listed on the Index to Financial Statements on page F-1 hereof are
being filed as part of this Annual Report on Form 10-KSB.
(2) The following exhibits are being filed as part of this Annual
Report on Form 10-KSB:
1.1 Underwriting Agreement dated July 13, 1995 between the Company
and Duke & Co., Inc. (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended September 30, 1995).
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2.1 Agreement and Plan of Merger of Lea Cosmetics, Inc. into the
Company dated July 31, 1995, together with Certificate of
Merger filed with the Secretary of State of the State of
Delaware on August 3, 1995 (incorporated by reference to
Exhibit 2.1 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995).
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 1995).
4.1 Form of Certificate for Common Stock (incorporated by
reference to Exhibit 4.1 to Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration
No. 33-88134), as filed with the Securities and Exchange
Commission on June 28, 1995 ("Amendment No. 2")).
4.2 Warrant Agreement dated as of July 20, 1995 between the
Company, Continental Stock Transfer & Trust Company and Duke &
Co., Inc. (incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 1995).
4.3 Form of Warrant Certificate (incorporated by reference to
Exhibit 4.3 to Amendment No. 2).
4.4 Underwriter's Warrant dated July 20, 1995, issued by the
Company to Duke & Co., Inc. (incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 1995).
4.5 Warrant and Registration Agreement dated as of July 20, 1995
between the Company and Jan Mirsky (incorporated by reference
to Exhibit 4.5 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995).
4.6 Registration Rights Agreement dated as of May 19, 1995 between
the Company and Wellington Corporation N.V. (incorporated by
reference to Exhibit 4.7 to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-
88134), as filed with the Securities and Exchange Commission
on May 24, 1995 ("Amendment No. 1")).
4.7 1995 Stock Option Plan of the Registrant (incorporated by
reference to Exhibit 4.3 to the Company's Quarterly Report on
Form 10-QSB for the period ended June 30, 1995).
4.8 1995 Nonemployee Directors' Stock Option Plan of the
Registrant (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-QSB for the period ended
June 30, 1995).
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4.9 Form of Stock Option Agreements under the 1995 Stock Option
Plan (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8, as filed with
the Commission on January 10, 1997).
4.10 Form of Stock Option Agreement under the 1995 Nonemployee
Directors' Stock Option Plan (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on Form
S-8, as filed with the Commission on January 10, 1997).
10.1 Financial Advisory and Investment Banking Agreement, dated as
of July 20, 1995, between the Company and Duke & Co., Inc.
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 1995).
10.2 Employment Agreement dated as of June 30, 1995 between the
Company and Harold Markowitz (incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 1995).
10.3 Employment Agreement dated as of June 30, 1995 between the
Company and Paul Sharp (incorporated by reference to Exhibit
10.8 to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1995).
10.4 Employment Agreement dated as of June 30, 1995 between the
Company and Jan Mirsky (incorporated by reference to Exhibit
10.9 to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1995).
10.5 Employment Agreement dated as of June 30, 1995 between the
Company and Jorge Lazaro (incorporated by reference to Exhibit
10.10 to the Company's Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1995).
10.6 Employment Agreement dated as of September 27, 1995 between
the Company and Jack Koegel (incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995).
10.7 Subscription Agreement executed May 19, 1995 by Wellington
Corporation N.V. (incorporated by reference to Exhibit 10.20
to Amendment No. 2).
10.8 Agreement dated as of July 8, 1995 between Larry H. Pallini
and the Company (incorporated by reference to Exhibit 10.21 to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995).
10.9 Contribution Agreement dated as of July 13, 1996 by and among
the Company and Harold Markowitz, Paul Sharp and Jorge Lazaro
(incorporated by reference to Exhibit 10.13 to the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 1995).
21
<PAGE>
10.10 Debt Conversion Agreement dated as of July 13, 1995 by and
among the Company, Harold Markowitz, Paul Sharp and Jorge
Lazaro (incorporated by reference to Exhibit 10.14 to the
Company's Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 1995).
10.11 Trademark License Agreement dated January 28, 1997 between
Bell Abbott Haussmann Inc. and the Company (incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.12 Letter Agreement between the Company and LPD Packaging, Inc
(incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995).
10.13 Merchandising License Agreement dated as of October 16, 1996
between Viacom Consumer Products, Inc. and the Company
(incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.14 Lease dated as of February 5, 1997 between Bascom Corp. and
the Company (incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.15 Shareholders Agreement dated June 26, 1996 among Sel-Leb
Marketing, Inc., B.B. Associates, LLC, Seth Markowitz and Beau
Brummel Sel-Leb Marketing, Inc. (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997).
10.16 Agreement dated as of January 2, 1997 between QVC, Inc. and
Beau Brummel Sel-Leb Marketing, Inc. (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997).
10.17 Product Promotion Agreement dated as of April 1997 between
Philbin Enterprises and Beau Brummel Sel-Leb Marketing, Inc.
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997).
10.18 Loan and Security Agreement dated October 22, 1997 between
Summit Bank, the Company and Ales (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997).
10.19 Environmental Indemnity Agreement dated October 22, 1997
between the Company, Ales and Summit Bank (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1997).
10.20 Security Agreement dated September 26, 1997 between the
Company and Paterson Restoration Corporation (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1997).
22
<PAGE>
10.21 Stockholder's Agreement between RBCJJ Associates LLC and the
Company (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997).
10.22 Asset Purchase Agreement dated as of September 15, 1997
between SBC Corporation, Inc. and Ales (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1997).
10.23 Collective Bargaining Agreement dated September 1, 1997
between Local 300-S Production Service & Sales District
Council I.U.C. AFL-CIO and the Company.
11.1 Statement re: computation of per share earnings (not required
because the relevant computation can be clearly determined
from material contained in the financial statements).
21 Subsidiaries of the Company.
23.1 Consent of Goldstein Golub Kessler & Company, P.C.
23.2 Consent of J.H. Cohn LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On December 22, 1997, the Company filed a Current Report on
Form 8-K in which the Company disclosed, pursuant to Item 4 thereof, a
change in its certifying accountant.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SEL-LEB MARKETING, INC.
(Registrant)
By: /s/ Harold Markowitz
-------------------------
Harold Markowitz
Chairman of the Board
Date: March 31, 1998
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Harold Markowitz Chairman of the Board and Director March 31, 1998
- -------------------------
Harold Markowitz
/s/ Paul Sharp President, Chief Executive Officer March 31, 1998
- ------------------------- and Director
Paul Sharp (principal executive officer)
/s/ Jan S. Mirsky Executive Vice President - Finance, March 31, 1998
- ------------------------- Chief Operating Officer and Director
Jan S. Mirsky (principal financial and accounting
officer)
/s/ Jack Koegel Vice Chairman of the Board and March 31, 1998
- ------------------------- Director
Jack Koegel
/s/ Jorge Lazaro Executive Vice President, Secretary March 31, 1998
- ------------------------- and Director
Jorge Lazaro
24
<PAGE>
/s/ Stanley R. Goodman Director March 31, 1998
- -------------------------
Stanley R. Goodman
/s/ Edward C. Ross Director March 31, 1998
- -------------------------
Edward C. Ross
/s/ L. Douglas Bailey Director March 31, 1998
- -------------------------
L. Douglas Bailey
25
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Independent Auditor's Report F-3
Consolidated Financial Statements:
Balance Sheet F-4
Statements of Income F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-18
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Sel-Leb Marketing, Inc.
We have audited the accompanying consolidated balance sheet of SEL-LEB
MARKETING, INC. AND SUBSIDIARY as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sel-Leb
Marketing, Inc. and Subsidiary as of December 31, 1997, and their results of
operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles.
We also audited the adjustments described in Note 1 that were applied to
restate basic and diluted earnings per share in the 1996 consolidated
financial statements in accordance with Statement of Financial Accounting
Standards No. 128, Earnings per Share. In our opinion, such adjustments are
appropriate and have been properly applied.
J.H. COHN LLP
Roseland, New Jersey
March 24, 1998
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Sel-Leb Marketing, Inc.
We have audited the accompanying statements of income, stockholders' equity,
and cash flows of Sel-Leb Marketing, Inc. for the year ended December 31,
1996 (prior to the effects on such financial statements of the adoption of
Statement of Financial Accounting Standards No. 128, "Earning per Share" and
the resultant restatement of the Company's earnings per share for the year
ended December 31, 1996 as discussed in Note 1). 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Sel-Leb
Marketing, Inc. for the year ended December 31, 1996 (prior to the effects on
such financial statements of the adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" and the resultant
restatement of the Company's earnings per share for the year ended December
31, 1996 as discussed in Note 1) in conformity with generally accepted
accounting principles.
GOLDSTEIN, GOLUB, KESSLER & COMPANY, P.C.
New York, New York
March 23, 1997
F-3
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
Current Assets:
<TABLE>
<S> <C>
Cash and cash equivalents $ 249,688
Accounts receivable, less allowance for doubtful accounts of $202,810 2,959,996
Inventory 5,814,673
Due from officer 25,136
Prepaid expenses and other current assets 835,856
Deferred tax asset, net 173,655
-------
Total current assets 10,059,004
Property and equipment - at cost, net of accumulated depreciation and
amortization 474,252
Goodwill, net of accumulated amortization of $59,099 321,669
Other assets 51,655
-------
Total $10,906,580
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable - bank $ 1,400,000
Current portion of long-term debt 161,975
Accounts payable 1,159,203
Accrued expenses and other current liabilities 229,872
-------
Total current liabilities 2,951,050
Long-term debt, net of current portion 933,642
-------
Total liabilities 3,884,692
----------
Commitments and Contingency
Stockholders' Equity:
Common stock - $.01 par value; authorized 40,000,000 shares, issued and
outstanding 8,712,727 shares 87,127
Additional paid-in capital 6,363,859
Retained earnings 615,902
Less receivable in connection with equity transactions (45,000)
--------
Total stockholders' equity 7,021,888
---------
Total Liabilities and Stockholders' Equity $10,906,580
===========
See Notes to Consolidated Financial Statements
</TABLE>
F-4
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
<S> <C> <C>
Revenue:
Net sales $17,283,523 $13,318,088
Commission income 90,518 204,658
------ -------
Total revenue 17,374,041 13,522,746
---------- ----------
Operating expenses:
Cost of sales 12,988,952 10,601,237
Selling, general and administrative expenses 4,183,399 2,631,839
--------- ---------
Total operating expenses 17,172,351 13,233,076
---------- ----------
Operating income 201,690 289,670
Other income (expense):
Interest expense, net of interest income of $2,136 and $11,755 (149,278) (16,475)
Other (1,145) 2,540
------- -----
Income before income taxes 51,267 275,735
Provision for income taxes 23,623 118,000
------ -------
Net income $ 27,644 $ 157,735
========== ===========
Net earnings per share - basic $ - $ .02
========== ===========
Net earnings per share - diluted $ - $ .01
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Receivable
Additional in Connection
Common Stock Paid-In Retained with Equity Stockholders'
Shares Amount Capital Earnings Transactions Equity
------ ------ ------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (A) 7,440,000 $74,400 $4,136,563 $430,523 $4,641,486
Net proceeds from exercise of warrants 813,477 8,135 1,424,198 $(60,000) 1,372,333
Proceeds from exercise of stock options 15,000 150 24,850 25,000
Discounts on loans payable to stockholders 46,901 46,901
Net income 157,735 157,735
--------- --------- --------- -------- ------- ----------
Balance at December 31, 1996 8,268,477 82,685 5,632,512 588,258 (60,000) 6,243,455
Net proceeds from exercise of warrants 293,250 2,932 435,546 438,478
Net proceeds from exercise of stock options 151,000 1,510 295,801 297,311
Payment of receivables in connection with
equity transactions 15,000 15,000
Net income 27,644 27,644
--------- --------- --------- -------- ------- ----------
Balance at December 31, 1997 8,712,727 $87,127 $6,363,859 $615,902 $(45,000) $7,021,888
========= ======== ========== ======== ======= ==========
</TABLE>
(A) Reflects a 3 for 1 stock split in February 1996
See Notes to Consolidated Financial Statements
F-6
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $ 27,644 $ 157,735
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 230,023 136,128
Deferred income tax benefit (78,655) (43,000)
Allowance for doubtful accounts 229,000 175,000
Changes in operating assets and liabilitites:
Accounts receivable 58,816 (1,246,999)
Inventory (1,498,549) (1,276,038)
Prepaid expenses and other current assets (532,921) 48,760
Other assets 8,470 (56,514)
Accounts payable and accrued expenses (31,534) 479,367
Due to affiliate (64,398) (53,912)
Income taxes payable (186,522) (83,003)
--------- --------
Net cash used in operating activities (1,838,626) (1,762,476)
----------- -----------
Investing activities:
Purchase of property and equipment (317,630) (192,916)
Amounts due from officer (23,274)
--------- ---------
Net cash used in investing activities (317,630) (216,190)
--------- ---------
Financing activities:
Net proceeds from note payable - bank 1,100,000 300,000
Net proceeds from long-term debt 430,000 -
Repayment of long-term debt to related parties and others (4,383) (422,099)
Net proceeds from exercise of warrants 438,478 1,372,333
Proceeds from exercise of stock options 297,311 25,000
Collection of receivable in connection with sale of warrant 15,000 -
------- ------
Net cash provided by financing activities 2,276,406 1,275,234
--------- ---------
Net increase (decrease) in cash and cash equivalents 120,150 (703,432)
Cash and cash equivalents at beginning of year 129,538 832,970
------- -------
Cash and cash equivalents at end of year $ 249,688 $ 129,538
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 130,544 $ 31,357
============ ===========
Income taxes $ 400,714 $ 244,003
============ ===========
Supplemental schedule of noncash investing and financing activities:
In March 1996, the Company received a $46,901 discount on its notes payable
to stockholders.
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, The accompanying consolidated financial
AND SIGNIFICANT statements include the accounts of Sel-Leb
ACCOUNTING Marketing, Inc. (a New York corporation) and
POLICIES: Ales Signature, Ltd. ("Ales"), its 90%-owned
subsidiary (collectively, the "Company"). The
Company is primarily engaged in the
manufacturing, distribution and marketing of
cosmetics and consumer products through mass
merchandisers, discount chain stores and
food, drug and electronic retailers. Ales was
formed in September 1997 and commenced
operations on October 23, 1997. All
significant intercompany accounts and
transactions have been eliminated in
consolidation.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect certain
reported amounts and disclosures.
Accordingly, 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.
Property and equipment is stated at cost.
Depreciation of property and equipment is
computed using the straight-line method over
the estimated useful lives of the related
assets. Amortization of leasehold
improvements is provided for over the term of
the lease.
Sales revenue is recognized upon the shipment
of the related product.
Commission income is recognized upon the sale
of the related product.
Product development costs are expensed as
incurred. Such costs amounted to
approximately $69,000 and $134,000 for 1997
and 1996, respectively.
Advertising costs are charged to operations
when incurred. Advertising costs amounted to
approximately $228,000 and $27,000 in 1997 and
1996, respectively.
The Company considers all highly liquid
investments with a maturity of three months
or less when acquired to be cash equivalents.
At December 31, 1997, the Company maintained
its cash and cash equivalents primarily in
money market accounts with high quality
financial institutions. At times, such
investments may exceed federally insured
limits. Management does not believe that
significant credit risk exists at December
31, 1997.
In the opinion of management, the fair values
of cash and cash equivalents and the amount
due from officer approximate the carrying
amounts due to their short-term nature.
In accordance with the provisions of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, the
Company will recognize compensation costs as
a result of the issuance of stock options
based on the excess, if any, of the fair
value of the underlying stock at the date of
grant or award (or at an appropriate
subsequent measurement date) over the amount
the employee must pay to acquire the stock.
Therefore, the Company will not be required
to recognize compensation
F-8
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense as a result of any grants of stock
options at an exercise price that is equivalent
to or greater than fair value. The Company will
also make pro forma disclosures, as required by
Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation,
of net income or loss as if a fair value based
method of accounting for stock options had been
applied if such amounts differ materially from
the historical amounts.
The Company records the excess of cost over the
fair value of net assets acquired as goodwill
and amortizes it using the straight-line method
over periods not exceeding 10 years. The
Company continually reviews goodwill to
evaluate whether changes have occurred that
would suggest goodwill may be impaired based on
the estimated undiscounted cash flows of the
entity acquired over the remaining amortization
period. If this review indicates that the
remaining estimated useful life of goodwill
requires revision or that the goodwill is not
recoverable, the carrying amount of the
goodwill is reduced by the estimated shortfall
of cash flows on a discounted basis.
Effective December 31, 1997, the Company
adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earning
Per Share, which establishes the new standard
for computation and presentation of net
earnings per share. Under the new requirements
both basic and diluted net earnings per share
are presented. All prior period net earnings
per share information has been restated. Prior
to the adoption of Statement 128, the Company
presented primary and, if appropriate, fully
diluted earnings per share. Primary and fully
diluted earnings per share were calculated by
dividing net income by the weighted average
number of common shares outstanding plus the
additional common shares that would have been
outstanding assuming all potentially dilutive
common shares were issued during the reporting
period and the treasury stock method had been
applied. The Company reported primary earnings
per share of $.02 in 1996; it was not required
to present fully diluted earnings per share.
Basic net earnings per common share is
calculated by dividing net income, less
dividends on preferred shares, if any, by the
weighted average common shares outstanding
during the period.
The calculation of diluted net earnings per
share is similar to that of basic net earnings
per share, except that the denominator is
increased to include the number of additional
common shares that would have been outstanding
if all potentially dilutive common shares,
principally those issuable upon exercise of
stock options and warrants under the treasury
stock method, were issued at the beginning of
the reporting period.
In June 1997, the Financial Accounting
Standards Board (the "FASB") issued Statement
No. 130, Reporting Comprehensive Income.
Statement 130 establishes standards for the
reporting and display of comprehensive income
and its components in a full set of general
purpose financial statements. Statement 130
requires that all items that are required to be
recognized under accounting standards as
components of comprehensive income be reported
in a financial statement that is displayed with
the same prominence as other financial
statements. Statement 130 is effective for fis-
F-9
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cal years beginning after December 15, 1997.
The Company does not expect to be
significantly impacted by the adoption of
Statement 130.
In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise
and Related Information. Statement 131
establishes standards for the way that public
business enterprises report information about
operating segments in annual financial
statements and requires that those
enterprises report selected information about
operating segments in interim financial
reports. It also establishes standards for
related disclosures about products and
services, geographic areas and major
customers. Statement 131 is effective for
financial statements for fiscal years
beginning after December 15, 1997 and,
therefore, the Company will adopt the new
requirements retroactively in 1998.
Management has not completed its review of
Statement 131, but anticipates that the
adoption of this Statement will increase the
number of reported segments.
2. ACQUISITION: During September 1997, the Company and an
unrelated third party formed Ales for the
purpose of acquiring the line of cosmetics
and other beauty products from SBC
Corporation, Inc. ("SBC") that manufactures
mid-priced cosmetic, skin care and treatment
products. The Company received a 90% equity
interest in Ales and the third party received
the remaining 10% equity interest. The
Company acquired the beauty products line on
October 23, 1997 for $670,000, which was paid
in cash and funded by a portion of the
proceeds of the Company's term loan (see Note
6) transferred directly to the seller
(accordingly, the payment is not reflected in
the accompanying 1997 consolidated statement
of cash flows).
The acquisition was accounted for as a
purchase and, accordingly, the results of
operations of the acquired product line have
been included in the accompanying 1997
consolidated statement of operations from the
date of acquisition. Costs of acquisition of
approximately $570,000 and $100,000 were
allocated to inventories and goodwill,
respectively. Unaudited pro forma information
giving effect to the acquisition, as if the
acquisition took place on January 1, 1996,
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenue $17,936,552 $14,085,257
Net income 135,825 287,551
Net earnings per share - basic .02 .04
Net earnings per share - diluted - .02
</TABLE>
F-10
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND Property and equipment consists of the following:
EQUIPMENT:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C> <C>
Machinery and equipment $386,913 5 to 7 years
Display fixtures 303,648 2 to 3 years
Computer equipment 84,013 3 to 5 years
Leasehold improvements 51,141 10 years
--------
825,715
Less accumulated depreciation and
amortization 351,463
--------
Total $474,252
========
</TABLE>
Depreciation expense aggregated $199,629 and
$109,073 in 1997 and 1996, respectively.
4. COMMITMENTS: During 1996, the Company entered into a
noncancelable operating lease for office and
warehouse facilities which commenced on April
1, 1997 and expires on March 31, 2002. The
lease also requires payments for real estate
taxes and other operating costs. The Company
leases warehouse and production facilities
from one of its contract manufacturers under
a noncancelable operating lease which expires
on December 31, 1998.
The future minimum rental payments under the
leases are as follows:
Year ending December 31,
1998 $185,000
1999 223,500
2000 285,500
2001 298,000
2002 74,500
--------
Total $1,066,500
==========
F-11
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for 1997 and 1996 amounted to
approximately $212,000 and $141,000,
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:
Year ending December 31,
1998 $565,000
1999 375,000
2000 187,500
-------
Total $1,127,500
==========
The Company has various promotional and
licensing agreements whereby it pays royalty
fees to celebrities and/or licensors based
upon a percentage of net sales attributable
to the celebrities' appearances or sales of
the licensor's products. Royalty fees charged
to operations amounted to approximately
$308,000 and $32,000 for 1997 and 1996,
respectively.
The Company has a license agreement to sell
certain cosmetic products under the
licensor's trademark. The agreement expires
on October 31, 1999 and the Company has the
option to extend the agreement for an
additional two years upon the achievement of
certain sales volume. The agreement requires
the Company to make royalty payments of 10%
of licensed sales, as defined. The Company is
required to pay a minimum royalty of $225,000
by March 31, 1998, of which approximately
$150,000 has been paid as of December 31,
1997, and to commit to minimum advertising
expenditures of $50,000 annually through the
expiration of the agreement.
5. LINE OF CREDIT: Note payable - bank consists of
outstanding borrowings drawn under a
$2,000,000 revolving credit agreement which
expires on May 31, 1998. Borrowings under the
credit agreement bear interest, payable
monthly, at the bank's prevailing base rate
(8.5% at December 31, 1997). The loan is
collateralized by substantially all of the
assets of the Company. In the opinion of
management, the fair value of the note
payable approximates the carrying amount due
to the short-term nature of the instrument.
6. LONG-TERM DEBT: At December 31, 1997, long-term debt
consists of the following loans:
<TABLE>
<S> <C>
Bank term loan (A) $1,000,000
Paterson Restoration Corporation loan (B) 95,617
----------
1,095,617
Less current portion 161,975
----------
Long-term debt $ 933,642
==========
</TABLE>
F-12
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) The loan agreement requires monthly
interest payments at the bank's prevailing
base rate plus .25% (an effective rate of
8.75% at December 31, 1997) and a principal
payment of $150,000 each August until 2000
when the unpaid balance is due. This loan is
secured by substantially all of the assets of
the Company.
(B) The loan was obtained by the Company in
connection with the relocation of its office
and warehouse facilities to Paterson, New
Jersey and was used for the purchase of fixed
assets. The loan bears interest at 6%. The
loan is payable in monthly installments of
$1,461 for principal and interest through
October 1, 2004, at which time the unpaid
balance is due. The loan is secured by a
second lien on the Company's machinery and
equipment.
7. OPTIONS AND The Company has a Stock Option Plan (the
WARRANTS: "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
three years after the date of grant and the
options are exercisable up to 10 years after
the date of the grant.
In addition, the Company has a 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
reelection, each nonemployee director is
granted an option to purchase 5,000 common
shares exercisable upon the date of grant.
A summary of the status of the Company's
options as of December 31, 1997 and 1996 and
changes during the years then ended is
presented below:
F-13
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted- Weighted-
Shares Average Shares Average
or Exercise or Exercise
Price Price Price Price
----- ----- ----- -----
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 1,218,500 $2.52 1,114,500 $2.06
Granted (A) 274,500 1.64 169,000 6.00
Canceled (A) (140,750) 4.60 (50,000) 4.33
Exercised (151,000) 1.97 (15,000) 1.67
-------- ---------
Outstanding at
end of year 1,201,250 $2.14 1,218,500 $2.52
========= ===== ========= =====
Options
exercisable
at year-end 755,000 609,500
======= =======
Weighted-average
fair value of
options granted
during the year $1.29 $2.69
===== =====
</TABLE>
(A) Includes 84,500 options that were
re-priced from $5.63 to $.50 per share in
1997.
The following table summarizes information
about fixed stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$.50 - $1.63 155,500 9.29 $.81 55,875 $.71
$1.67 570,750 7.54 1.67 417,750 1.67
$1.75 $2.75 398,000 8.07 2.63 249,750 2.70
$5.25-$7.00 77,000 8.74 5.86 31,625 5.99
--------- -------
$.50 - $7.00 1,201,250 8.02 2.14 755,000 2.12
============ ========= ==== ==== ======= ====
</TABLE>
F-14
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has elected, in accordance with
the provisions of Statement 123, to apply the
current accounting rules under APB Opinion
No. 25 and related interpretations in
accounting for its stock options and,
accordingly, has presented the
disclosure-only information as required by
Statement 123. Pro forma information as if
the Company had elected to recognize
compensation cost based on the fair value of
the options at the grant date as prescribed
by Statement 123, and the related amounts
reported in the accompanying consolidated
statements of operations are set forth below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income - as reported $ 27,644 $ 157,735
Net loss - pro forma (326,181) (106,211)
Basic earnings per share - as reported - .02
========== =========
Diluted earnings per share - as reported - .01
========== =========
Basic earnings (loss) per share - pro
forma (.04) (.01)
========== =========
Diluted earnings (loss) per share - pro
forma - (.01)
========== =========
</TABLE>
The fair value of each option granted is
estimated on the date of grant using the
Black-Scholes option-pricing model with the
following weighted-average assumptions used
for 1997 and 1996: expected volatility of
40.0%, risk-free interest rate of 6.3%,
expected lives of five years; and no expected
dividends.
At December 31, 1997, the Company has
outstanding warrants to purchase 5,803,968
shares of the Company's common stock. The
warrants are exercisable through March 21,
2000 at exercise prices ranging from $.64 to
$2.00.
Warrants to purchase 293,250 and 813,477
shares of common stock were exercised and net
proceeds to the Company amounted to $438,478
and $1,372,333 in 1997 and 1996,
respectively.
F-15
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, common stock was
reserved for the following reasons:
Exercise of stock options 1,201,250
Exercise of warrants 5,803,968
---------
Total 7,005,218
=========
8. INCOME TAXES: The deferred tax asset is attributable
to temporary differences related
to the following:
Inventory $ 105,000
Allowance for bad debts 80,000
---------
185,000
Other (11,345)
---------
Net deferred tax asset $ 173,655
=========
The net provision for income taxes consists of
the following provisions (credits):
1997 1996
---- ----
Federal:
Current $85,569 $170,000
Deferred (55,155) (43,000)
-------- --------
Totals 30,414 127,000
------ -------
State:
Current 16,709 (9,000)
Deferred (23,500)
------- -------
Totals (6,791) (9,000)
------- -------
Totals $23,623 $118,000
======= ========
The provision for income taxes differs from the
amount computed using the federal statutory
rate of 34% as a result of the following:
F-16
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Tax at federal statutory rate 34% 34%
Increase (decrease):
State income taxes, net of federal income
tax effect (8) 2
Permanent differences 37 7
Sur-tax exemption and other items (18) -
--- ---
Totals 45% 43%
=== ===
</TABLE>
9. SIGNIFICANT During 1997, approximately 33% and 9% of the
CUSTOMERS: Company's sales were to two customers. During
1996, approximately 36% and 10% of the
Company's sales were to two customers. As of
December 31, 1997, approximately 33% of
accounts receivable are due from one customer.
10. LITIGATION: The Company is involved in various
claims and lawsuits incidental to its business.
Management believes that the probable
resolution of such contingencies will not
materially affect the financial position or
results of operations of the Company.
11. EARNINGS PER The following table summarizes the
SHARE: calculation of basic and diluted net earnings
per common share for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Numerator:
Net income $27,644 $157,735
======= ========
Denominators:
Weighted-average shares for basic net
earnings per share 8,667,983 7,659,359
Plus effect of diluted securities -
stock options and warrants 4,617,251
---------- ----------
Weighted average shares
outstanding for diluted net earnings
per share 8,667,983 12,276,610
========== ==========
Net earnings per share - basic $ - $ .02
========== ==========
Net earnings per share - diluted $ - $ .01
========== ==========
</TABLE>
F-17
<PAGE>
SEL-LEB MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 and 1996, there were
7,005,218 and 7,315,712 shares, respectively,
of common stock issuable upon exercise of stock
options and warrants excluded for the
calculation of the effects of dilutive
securities under the treasury stock method
because the exercise prices of the options were
greater than the average market value of the
common shares.
* * *
F-18
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
1. RECOGNITION............................................... 1
2. MANAGEMENT RIGHTS......................................... 2
3. PROBATIONARY PERIOD....................................... 3
4. PART-TIME EMPLOYEES....................................... 4
5. WAGES..................................................... 5
6. UNION SECURITY AND CHECKOFF............................... 5
7. UNION ACCESS TO PLANT..................................... 7
8. OVERTIME, SATURDAYS, SUNDAYS AND HOLIDAYS................. 8
9. HOURS OF WORK............................................. 9
10. SENIORITY................................................. 9
11. ABSENTEEISM - LATENESS.................................... 12
12. LAYOFF AND DISCHARGE...................................... 13
13. HOLIDAYS.................................................. 14
14. VACATIONS................................................. 15
15. GRIEVANCE PROCEDURE AND ARBITRATION....................... 17
16. STRIKES AND LOCKOUTS...................................... 21
17. WAIVER.................................................... 22
18. GENERAL................................................... 23
19. SICK LEAVE................................................ 24
20. TERM OF AGREEMENT......................................... 24
i
<PAGE>
ARTICLE 1. RECOGNITION
Sel-Leb Marketing, Inc. (hereinafter "the Employer" or "the
Company") hereby recognizes Local 300-S Production Service & Sales District
Council I.U.C. AFL-CIO (hereinafter "the Union"), as the exclusive collective
bargaining representative of the following employees: All production and
maintenance employees, warehouse employees, shipping and receiving employees and
drivers employed by the Employer at its 495 River Street, Paterson, New Jersey
facility. Specifically excluded from coverage under this Agreement are all other
persons employed by the Company including, but not limited to, seasonal
employees (defined as working the last month of each of the Company's fiscal
quarters), office clerical employees, professional employees, sales employees,
watchmen, janitors, guards, production supervisors, foremen and supervisors as
defined in the National Labor Relations Act.
ARTICLE 2. MANAGEMENT RIGHTS
This Agreement shall not be construed to infringe on or impair any
of the normal management rights of the Employer. The rights in question include,
but are not limited to: the right to plan, direct and control plant operations;
the right to hire new employees, assign duties to employees and direct the work
force; the right to hire
1
<PAGE>
part-time and seasonal employees; the right to discipline, suspend or discharge
employees; the right to transfer or lay off employees because of lack of work or
other business reasons; the right to determine the size of the work force; the
right to establish and require employees to observe Employer policies, rules and
regulations; the right to plan, direct, control, continue, sell or discontinue
any part of the operations; the right to create, discontinue or modify any bonus
or monetary programs not specifically provided for herein; the right to
determine and change the method and manner of operations and the number of
employees necessary to perform operations; the right to establish and change
working schedules; the right to establish reasonable standards of work
performance for employees; the right to conduct random drug testing; the right
to introduce new or improved methods of production or facilities; the right to
select or change materials, processes, products, equipment and tools; the right
to change existing business practices; the right to move or relocate the plant
as it deems advisable as well as the right to subcontract work as it deems
necessary. This statement of management rights is not intended to exclude other
inherent rights which are not mentioned herein which are vested exclusively in
the Employer unless expressly abridged by some other written portion of this
Agreement.
ARTICLE 3. PROBATIONARY PERIOD
2
<PAGE>
Newly-hired employees shall be deemed, during the first 90 calendar
days of their employment, to be probationary workers. The probation period may
be extended upon request by the Employer for an additional 30 calendar days. The
Union's approval of such extension shall not be unreasonably withheld. During
such period, they shall not accrue seniority. Upon the satisfactory completion
of such probationary employment they shall be deemed regular employees under
this Agreement and their seniority shall be measured from their date of hire.
During the probationary period, the Employer reserves the right to terminate or
discharge such employee at its sole discretion. Such actions by the Employer
shall not be subject to the grievance and arbitration provisions of this
Agreement.
ARTICLE 4. PART-TIME EMPLOYEES
A. It is understood and agreed between the parties that part-time
employees referred to in Articles 1 and 2 herein, are eligible for wage
increases and prorated fringe benefits, including, but not limited to the
vacation, sick leave and holiday provisions of this Agreement.
B. The Company may pay part-time employees any rate other than a
rate higher than provided for herein.
C. Any violation of this provision is subject to the grievance
procedure.
3
<PAGE>
D. Part-time employees are subject to the provisions of Article 6.
ARTICLE 5. WAGES
All persons on the payroll as of August 1, 1997 shall
receive the following wage increases:1
Effective September 1,1997: 15 cents per hour.
Effective September 1, 1998: 22 1/2 cents per hour.
Effective September 1, 1999: 22 1/2 cents per hour.
Effective September 1, 2000: 22 1/2 cents per hour.
Effective September 1, 2001: 22 1/2 cents per hour.
A. ARTICLE 6. UNION SECURITY AND CHECKOFF:
A. Union Security:
This agreement shall apply to wages, hours and all
other terms and conditions of employment for the employees of
the Company covered by this agreement located at the above
mentioned address.
- --------
1 Employees hired subsequent to August 1, 1997, to be eligible for any wage
increase, must be on the payroll for 90 days prior to any effective date
thereof. However, they shall receive a twelve and one half cent ($.0125)
increase on their thirty first (31st) day of employment. There shall be no
pyramiding of such twelve and one half cent ($.0125) increase and the general
wage increases set forth above.
4
<PAGE>
All present employees covered by this agreement, who are
members of the Union, at the time it becomes effective, as a condition of
continued employment, shall maintain membership in good standing in the Union.
All present employees who are not members of the Union, shall be required, as a
condition of continued employment, to become and remain members in good standing
in the Union on or after the thirty-first (31st) day following the execution of
this agreement, or its effective date, or their date of employment, whichever is
later. All employees thereafter hired, shall be required, as a condition of
continued employment, to join and become members of the Union on or after the
thirty-first (31st) day of their hiring, and to maintain membership in good
standing in the Union. "Good standing," for the purpose of this agreement, shall
mean the payment or tender of periodic dues and initiation fees uniformly
required of all Union members.
B. Checkoff:
The Employer agrees to deduct the Union's periodic dues and
initiation fees from the pay of each employee who individually authorizes such
deductions in writing and to remit the amounts so deducted to the Union. Said
deduction authorization shall be in such form as to conform with Section 302(c)
of the Labor Management Relations Act of 1947 as amended. The Employer will then
deduct such dues in the
5
<PAGE>
amount certified to the Employer by the Secretary/Treasurer of the Union.
C. Indemnity:
The Union agrees to indemnify and hold the Employer harmless
against any and all claims, suits or other forms of liability arising out of the
deduction of money for Union initiation fees or dues from the pay of employees,
if such deductions are made pursuant to a written deduction authorization
executed by the employee in question.
ARTICLE 7. UNION ACCESS TO PLANT
A delegate who wishes to enter the plant shall only be permitted to
enter the plant, pursuant to the terms of this clause, upon receiving permission
to enter the premises from the Warehouse Manager or Directors. Permission to
enter the plant for the described purposes shall not unreasonably be withheld.
ARTICLE 8. OVERTIME,
SATURDAYS, SUNDAYS AND HOLIDAYS
A. It is agreed that there are occasions on which work must be
performed on an overtime basis. When such determination has been made by the
Company, those employees within the department who can perform this work must,
in the order of seniority, accept this overtime work unless excused by the
Company. Employees scheduled to work overtime on
6
<PAGE>
weekdays shall be notified at least one hour before the overtime is scheduled to
commence, except in case of emergency. Employees scheduled to work on Saturday
shall be notified before lunch time on Friday, except in case of an emergency.
B. Compensation at the rate of one and one-half times the regular
rate of pay shall be paid for all work performed in excess of 40 hours in a
week. Holidays and vacation will be considered as time worked for the purpose of
this Article. The Company will pay straight time plus holiday pay for all work
performed on holidays. It is agreed that there shall be no pyramiding of
overtime under this Agreement.
ARTICLE 9. HOURS OF WORK
The normal workday is eight (8) hours, excluding a 30 minute unpaid
lunch period on all work days. The daily and weekly work schedules are the hours
employees are expected to work under normal conditions, but not a guarantee of
hours to be worked or a guarantee of pay for hours not worked nor a limit on the
Employer's right to require overtime work.
Each employee shall receive one (1) ten (10) minute rest period in
the morning, and one (1) ten (10) minute rest period in the afternoon each day.
7
<PAGE>
Starting and quitting times are left to the option of management
and may be changed from time to time to meet the varying conditions of business.
ARTICLE 10. SENIORITY
A. Seniority is defined as the length of an employee's continuous
unbroken service with this Company. All regular employees on the active payroll
who have satisfactorily completed their probationary period prior to the
effective date of this Agreement, shall retain their present relative seniority.
Employees presently defined as probationary shall upon satisfactorily completing
their probationary period assume their relative positions on the seniority list
as of their date of hire.
B. Application of seniority: Seniority will be applied on a
plant-wide basis.
1. In layoffs and recalls following layoffs, where among
employees involved the qualifications to perform the available work are
relatively equal, the employee with the greatest seniority shall be entitled to
primary consideration. The Company will be the sole judge of the qualifications
of its employees to perform the available work.
2. All job vacancies will be posted on the bulletin board
for five working days. Any qualified employee may apply for the job by signing
the posting sheet. In
8
<PAGE>
making promotions from one job to another covered by this Agreement,
consideration shall be given first to ability and second to length of service.
It is understood, however, that when such factors are equal between employees,
the employee with the greatest seniority shall receive the position. The Company
shall be, the sole judge of an employee's qualifications. A 30-day period is
needed in order to qualify.
3. The Company and Union agree that those employees hired by
the Company as part-time or seasonal employees as set forth in Article 4 above
shall not acquire seniority on the Company's regular seniority list.
C. Employees shall lose their seniority rights for the following
reasons:
1. If an employee voluntarily quits.
2. If an employee is discharged.
3. If an employee fails to return to work after
having been on layoff, within 48 hours exclusive of Saturdays, Sundays, and
holidays after receipt of the notice of recall to work either by certified mail,
return receipt requested, or telegram. The employee is responsible for keeping
the Company advised at all times of his/her latest phone number and post office
address. An employee who fails to advise the Company within 24 hours after
receipt of a recall notice exclusive of Saturdays, Sundays, and holidays as to
his/her intentions to return to work shall be deemed to
9
<PAGE>
have quit unless the employee is hospitalized or otherwise incapacitated by
illness and can present medical evidence to substantiate such excuse.
4. Layoff for a period of six months.
5. Unauthorized failure to report to work for
three consecutive working days when work is available.
6. Unauthorized leave of absence.
7. Failure to return to work after an approved
leave of absence.
8. Unexcused absence, as set forth in Article 11
herein.
9. Retirement
D. Any employee rehired after losing his/her seniority will be
rehired as a new employee.
ARTICLE 11. ABSENTEEISM - LATENESS
A. An employee prevented from attending his/her assigned work shall
immediately, and before his/her scheduled starting time, notify the plant
office. Any employee who is absent for more than one day shall give advance
notice to the plant office of his/her intention to return to work before the
close of his/her regular shift on the preceding day.
B. Unexcused absence from work or tardiness shall subject an
employee to discipline, up to and including discharge.
10
<PAGE>
C. The Company agrees to excuse absences for which permission is
granted at least seven working days prior to the date of absence and based upon
proof of good cause satisfactory to the Management.
ARTICLE 12. LAYOFF AND DISCHARGE
A. The Company shall have the right to immediately discipline or
discharge employees for reasonable cause. Examples of reasonable cause are the
sale, use or possession of drugs, consumption of alcohol, theft, fighting,
excessive absenteeism, failure to follow directions or disrespect of management
and possession of a firearm during working hours on Company premises. Discipline
shall be subject to the Grievance Procedures set forth herein in Article 15.
B. The Company shall have the right to lay off employees
whenever it determines that economic reasons require such a layoff. The
principle of seniority and ability to do the work, as determined by management,
shall govern and control all cases of layoff or recall of the working force.
ARTICLE 13. HOLIDAYS
A. The Company observes the following legal holidays, which all
eligible employees shall receive off with pay:
New Year's Day (January 1)
Good Friday (The Friday before Easter)
11
<PAGE>
Memorial Day (last Monday in May)
Independence Day (July 4th)
Labor Day (St. Monday in September)
Thanksgiving Day (4th Thursday in November)
Christmas Day (December 25)
B. An eligible employee required to work on the holiday shall be
paid straight time, in addition to a day's pay for the holiday, for all work
performed at the behest of the Company on those days no matter what day of the
week the holiday falls.
C. Probationary employees shall not receive holiday pay for
holidays falling within their initial thirty (30) days of employment.
D. An employee must work his/her last one full scheduled workday
before and his/her next one full scheduled workday after a holiday in order to
be eligible for holiday pay.
E. Any holiday which falls on a Saturday or Sunday shall be
celebrated on the preceding Friday or the succeeding Monday at the option of the
Company. The Company will notify the employees of its option by the Friday of
the previous weekend.
ARTICLE 14. VACATIONS
12
<PAGE>
A. All employees are entitled to vacations with pay based on the
length of their employment with the Company. Vacations are granted according
to the following schedule:
Length of Service(2) Length of Vacation
- -------------------- ------------------
After one year
but less than five years One week with pay
After five years
but less than ten years Two weeks with pay
After ten years Three weeks with pay
All vacations with pay shall be figured on the employee's
anniversary year.
B. Employees must choose their vacation in accordance with a
schedule prepared by the Employer by order of seniority.
C. Any employee with one or more years of service, who is eligible
for vacation with pay, must work at least a minimum of one thousand seven
hundred (1700) hours during the previous anniversary year. Any employee eligible
for vacation with pay who works less then one thousand seven hundred (1700)
hours during the previous anniversary year will be granted a pro-rated vacation.
Any employee with one or more years of service, who is eligible for
vacation with pay, who is terminated, shall be paid vacation pay earned, but
unpaid at the time of
- --------
2 Time spent on layoff and personal leave of absence does not count towards
accrual of length of service.
13
<PAGE>
termination. This policy shall not apply to an employee who quits without the
proper notice (five (5) calendar days), or is terminated for cause.
D. Vacation pay will be forty (40) hours at the regular straight
time hourly rate for each week of eligible vacation.
E. In the event a holiday observed by the Employer falls within a
vacation period an additional day will be granted at a time satisfactory to the
Employer, provided such holiday falls on a regular work day.
F. If the Employer decides to take a vacation shutdown period at
any time during the calendar year, eligible employees will take their vacation
during that period.
G. The Company encourages employees to take their vacation time
off. Vacations cannot be accumulated from year to year. Employees shall be
compensated for unused vacation if the employee did not take his or her vacation
at the request of management.
ARTICLE 15. GRIEVANCE PROCEDURE AND ARBITRATION
A. Should any dispute between the Company and the Union or
any employees arise out of the interpretation or application of this
Agreement, that dispute shall be known as a grievance for the purpose of this
Article. There shall be an earnest effort on the part of both parties to settle
same
14
<PAGE>
promptly and through steps hereinafter set forth, it being understood and agreed
that no grievance shall be accepted for consideration unless reduced to writing
and presented in the first step within three working days of the time the
involved employee became aware or should have become aware of the occurrence of
the incident causing the grievance. The time limit for grievance involving
payroll calculations shall be five working days. In both cases, time being of
the essence, an untimely grievance shall not be processed in the grievance
procedure. In the event a grievance is not presented within the herein stated
time limits but is erroneously accepted by the receiving party, it is understood
there is no obligation to respond to said grievance.
Timely grievances shall be processed as follows:
Step 1: By conference with the employee, the shop
steward and supervision.
Step 2: By conference between the Union official and
the Company within five days of the response in
Step 1.
B. In the event the foregoing steps fail to bring
about a settlement of such grievance or dispute, then same may be submitted
for arbitration. Only the Company and/or the Union may submit a grievance
to arbitration. Such arbitration shall be held pursuant to the rules
of the American Arbitration Association. The decision of the arbitrator shall be
final and binding on both parties to this Agreement, as well as the employee(s)
involved.
15
<PAGE>
In the case of discharge or disciplinary grievance, the arbitrator
shall have the power to return the grievant to his employee status with or
without restoration of back pay, or mitigate the penalty as equity suggests
under the facts.
It is further agreed that the above grievancearbitration procedure
shall and the same hereby is the sole method of settling disputes, differences
or controversies arising between the parties hereto or between an employee and
the Employer and it is further agreed that the employees covered hereunder shall
be bound by any decision, determination, agreement or settlement which may be
effectuated pursuant to invoking the grievance-arbitration procedure.
The arbitrator shall have jurisdiction and authority only to
interpret and/or apply the provisions of this agreement, and shall not have any
jurisdictional authority to add to, subtract from, change, alter, or modify in
any way, any of the terms of this agreement.
In all cases, the arbitrator will render a written opinion and
decision, within thirty (30) days after the date of the hearing on the specific
matters submitted to arbitration, which said decision shall be final and binding
upon both parties hereto.
The Union shall have authority to settle or abandon grievances
before or after they are submitted for arbitration. Any grievance not processed
by the parties in
16
<PAGE>
accordance with the time limit established by this contract, shall be deemed
abandoned.
C. The costs of the arbitration, including the arbitrator's fees
and expenses, shall be borne equally by the parties.
D. The arbitrator designated to hear all disputes under this
agreement shall be Richard Adelman.
ARTICLE 16. STRIKES AND LOCKOUTS
A. During the term of this Agreement, no employees shall, and the
Union for itself and its members employed by the Company covenants and agrees
that neither the Union nor its said members shall cause, take part in or
authorize any strike, including sympathy strikes, (whether sit-down, stay- in,
sympathetic, general or any other kind), a slow-down program, walkout,
picketing, stoppage, sick-out or retarding of work or boycott, or any other
interference with the Company's business or the operation or conduct thereof.
In the event of any action forbidden hereinabove, the
Company shall not be required to negotiate on the merits of the dispute which
allegedly gives rise to the stoppage until the stoppage or interference with
production or service has ceased. The Company shall have the right to
discipline, up to and including discharge, any employee who instigates,
participates in, or gives leadership to any activity herein
17
<PAGE>
prohibited, and such discipline shall not be subject to the arbitration
procedure of this Agreement.
B. The Employer agrees that it will take no action against the
Union, its duly constituted officers, executive board or authorized
representatives in the case of an unauthorized strike or work stoppage not
officially approved by the Union and its representatives duly authorized
to call a strike, provided:
1. the Union, immediately after notification by
the Employer or after knowledge by a duly constituted officer or agent of the
Union that a strike or work stoppage exists, publicly disclaims responsibility
or authorization for the strike, and
2. officially orders the striking employee Union members
immediately to return to work.
C. The Union agrees that the Employer shall have the absolute right
to discharge or otherwise discipline the instigators of and participants in such
strike, stoppage of work, or slowdown.
ARTICLE 17. WAIVER
The parties acknowledge that during the negotiations which resulted
in this Agreement, each had the unlimited right and opportunity to make demands
and proposals with respect to any subject or matter not removed by law from the
area of collective bargaining, and that the understandings
18
<PAGE>
and agreements arrived at by the parties after the exercise of that right and
opportunity are set forth in this Agreement. Therefore, the Employer and the
Union, for the life of this Agreement, each voluntarily and unqualifiedly waives
the right, and each agrees that the other shall not be obligated, to bargain
collectively with respect to any subject or matter not specifically referred to
or covered in this Agreement, even though such subjects or matters may not have
been within the knowledge or contemplation of either or both of the parties at
the time they negotiated or signed this Agreement.
ARTICLE 18. GENERAL
The Union understands and agrees that certain employees, outside of
the bargaining unit, have duties and responsibilities which require them to work
with employees covered by the Agreement and perform work which employees covered
by this Agreement may also perform. Further, the Union understands and agrees
that in order to assure effective, efficient and expeditious service to the
Employer's customers, any and/or all of the Employer's employees may be used to
perform services covered hereunder when, in the Employer's opinion, the
efficient operation of the plant mandates their assignment to perform such
services.
ARTICLE 19. SICK LEAVE
19
<PAGE>
Effective January 1, 1998 the Employer agrees to grant two
(2) days paid sick leave, per calendar year. Employees shall be eligible for
such paid sick leave upon completion of six (6) months of employment.
The Employer shall pay for all unused sick leave, on the
first pay day of the new year.
ARTICLE 20. TERM OF AGREEMENT
A. This Agreement shall have a term of five years effective
September 1,1997, and shall remain in full force and effect through August 31,
2002.
B. The Agreement shall automatically be renewed from year to year
thereafter unless either party gives the other notice by certified mail at least
60 days before the date fixed for expiration that this contract shall not be
renewed automatically for the ensuing year, and that it desires to negotiate
modifications thereto. The party so notifying the other of its intent to
negotiate modifications shall send a written proposal containing the desired
modifications to the other party no later than 60 days prior to the expiration
date. Failure to provide the written proposal as specified herein shall operate
to extend the expiration date to a date 60 days after the written proposals are
sent, unless the parties specifically agree in writing to an expiration date
other than that which would result by the operation of this provision.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be signed this 1st day of September,1997.
SEL-LEB MARKETING, INC. LOCAL UNION NO. 300-S SERVICE
& SALES DISTRICT COUNCIL
I.U.C. AFL-CIO
By /s/ Jan S. Mirsky By
------------------------ ---------------------------
Executive V.P.
21
<PAGE>
Subsidiaries of Sel-Leb Marketing, Inc.
Ales Signature, Ltd.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Sel-Leb Marketing, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement (No. 333-19625) on Form S-8 of our report dated March 23, 1997
related to the statements of income, stockholders' equity and cash flows
of Sel-Leb Marketing, Inc. for the year ended December 31, 1996 which report
appears in the December 31, 1997 annual report on Form 10-KSB of Sel-Leb
Marketing, Inc.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
March 30, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Sel-Leb Marketing, Inc.
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-19625) of our report, dated March 24, 1998,
on the consolidated financial statements of Sel-Leb Marketing, Inc. and its
subsidiaries which appear elsewhere in this Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
J.H. COHN LLP
Roseland, New Jersey
March 30, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 249,688
<SECURITIES> 0
<RECEIVABLES> 3,162,806
<ALLOWANCES> 202,810
<INVENTORY> 5,814,673
<CURRENT-ASSETS> 10,059,004
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<DEPRECIATION> 351,463
<TOTAL-ASSETS> 10,906,580
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0
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<COMMON> 87,127
<OTHER-SE> 6,934,761
<TOTAL-LIABILITY-AND-EQUITY> 10,906,580
<SALES> 17,283,523
<TOTAL-REVENUES> 17,374,041
<CGS> 12,988,952
<TOTAL-COSTS> 12,988,952
<OTHER-EXPENSES> 4,184,544
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<INTEREST-EXPENSE> 151,414
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<INCOME-TAX> 23,623
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